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THE INTERSTATE TAX-EXEMPT FUND
810 SEVENTH AVENUE, NEW YORK, N.Y. 10019-5868
212-977-9982 - 800-637-1700
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24-HOUR YIELD AND BALANCE INFORMATION:
NATIONWIDE 800-637-1700 - WWW.RESERVEFUNDS.COM
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information ("SAI") describes the Interstate
Tax-Exempt Fund of The Reserve Tax-Exempt Trust (the "Fund"). This Statement is
not a Prospectus, but provides detailed information to supplement the Prospectus
dated July 31, 1998 and should be read in conjunction with it. A copy of the
Prospectus may be obtained without charge by writing or calling the Fund at the
above address or telephone number. The Securities and Exchange Commission
("SEC") maintains a web site (http://www.sec.gov) that contains this SAI, the
prospectus, material incorporated by reference, and other information regarding
the Fund electronically filed with the SEC. This SAI is dated July 31, 1998.
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TABLE OF CONTENTS PAGE
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Investment Objective and Policies.......................................................... 2
Trustees and Executive Officers............................................................ 3
Investment Management, Distribution and Custodian Agreements............................... 5
Portfolio Turnover, Transaction Charges and Allocation..................................... 7
Shares of Beneficial Interest.............................................................. 7
Municipal Obligations...................................................................... 8
Purchase, Redemption and Pricing of Shares................................................. 9
Distributions and Taxes.................................................................... 11
Fund Yield................................................................................. 13
Reserve Cash Performance Account........................................................... 14
Ratings.................................................................................... 14
Financial Statements....................................................................... 16
Report of Independent Accountants.......................................................... 27
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SHARES OF THE FUND ARE NEITHER GUARANTEED NOR INSURED BY THE U.S. GOVERNMENT AND
THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A STABLE NET
ASSET VALUE OF $1.00 PER SHARE.
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INVESTMENT OBJECTIVE AND POLICIES
The Interstate Fund's primary investment objective is to seek as high a
level of short-term interest income exempt from federal income taxes as is
consistent with preservation of capital and liquidity, by investing principally
in obligations issued by states, territories, and possessions of the U.S. and by
their political subdivisions, duly constituted authorities and corporations.
Securities, generally known as "municipal bonds" or "municipal notes"
(hereinafter collectively referred to as "Municipal Obligations"), and the
interest on them is exempt from Federal income tax in the opinion of bond
counsel for the issuers. Municipal Obligations generally include debt
obligations issued to obtain funds for various public purposes, including the
construction of a wide range of public facilities such as airports, bridges,
highways, housing, hospitals, mass transportation, schools, streets and water
and sewer works. Other public purposes for which Municipal Obligations may be
issued include refunding outstanding obligations, obtaining funds for general
operating expenses and lending such funds to other public institutions and
facilities. In addition, certain types of industrial development bonds are
issued by or on behalf of public authorities to obtain funds to provide for the
construction, equipment, repair or improvement of privately operated housing
facilities, sports facilities, convention or trade show facilities, airport,
mass transit, industrial, port or parking facilities, air or water pollution
control facilities and certain local facilities for water supply, gas,
electricity or sewage or solid waste disposal. The interest paid on such
obligations may be exempt from Federal income tax. At least 80% of the Fund's
assets will be invested in Municipal Obligations unless the Fund has adopted a
defensive position.
The 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 rated the equivalent thereof. Municipal
Obligations which are not rated may be purchased provided such securities are
determined, by the Fund's investment adviser pursuant to guidelines adopted by
the Board of Trustees, to be of comparable quality to those rated securities in
which the Fund may invest.
Subsequent to its purchase by the Fund, an issue of rated Municipal
Obligations may cease to be rated or its rating may be reduced below the minimum
required for purchase by the Fund. In the event a Municipal Obligation's rating
falls below the second highest rating category of a nationally recognized
statistical rating agency, the Municipal Obligation will be disposed of within
five Business Days of the date the investment Adviser becomes aware of the new
rating absent a finding by the Board of Trustees that disposal of the Security
would not be in the best interests of the Funds. Should a rated Municipal
Obligation cease to be rated, the investment Adviser will promptly reassess the
credit risk of the Municipal Obligation. The ratings of Moody's and S&P
represent their opinions as to the quality of the Municipal Obligations they
rate. It should be emphasized, however, that ratings are relative and subjective
and are not absolute standards of quality.
From time to time, on a temporary basis other than for temporary defensive
purposes, the 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 and instrumentalities ("U.S. Governments");
deposit-type obligations, acceptances and letters of credit of Federal Deposit
Insurance Corporation member banks; or instruments fully secured or
collateralized by such obligations. The Fund will not invest in foreign
securities or in taxable commercial paper. Interest earned on Taxable
Investments will be taxable income to investors. Unless the Fund has adopted a
temporary defensive position, no more than 20% of its net assets will be
invested in Taxable Investments at any time.
SUPPLEMENTAL INVESTMENT POLICIES. The investment objective, and the following
investment policies may not be changed without the affirmative vote of a
majority of the outstanding shares of the Fund. A majority of the outstanding
shares of the Fund means the vote of the lesser of (i) 67% or more of the shares
of the Fund present at a meeting, if the holders of more than 50% of the
outstanding shares of the Fund are present or represented by proxy, or (ii) more
than 50% of the outstanding shares of the Fund. The Fund cannot:
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(1) invest in any security other than those discussed herein or in the
Prospectus;
(2) borrow money except as a temporary or emergency measure (but not for the
purpose of purchasing investment securities), and not in an amount to
exceed 5% of the value of its total assets;
(3) issue securities senior to its capital stock;
(4) act as an underwriter with respect to the securities of others;
(5) concentrate investments in any particular industry except to the extent
that its investments are concentrated exclusively in Municipal Obligations,
in U.S. governments, or instruments secured by such obligations;
(6) purchase, sell or otherwise invest in real estate or commodities or
commodity contracts; however, the Fund may purchase Municipal Obligations
secured by interests in real estate;
(7) lend more than 33 1/3% of the value of its total assets except to the
extent its investments may be considered loans;
(8) sell any security short or write, sell or purchase any futures contract or
put or call option; provided, however, that the Fund shall have the
authority to purchase Municipal Obligations subject to a stand-by
commitment, at the Fund's option;
(9) invest in voting securities or in companies for the purpose of exercising
control;
(10) invest in the securities of other investment companies except in compliance
with the Investment Company Act of 1940 ("1940 Act");
(11) make investments on a margin basis; and
(12) purchase or sell any securities (other than securities of the Fund) from or
to any officer or Trustee of the Fund, the investment Adviser, or
affiliated person except in compliance with the 1940 Act.
OTHER POLICIES. Certain banks and other municipal securities dealers have
indicated a willingness to sell Municipal Obligations to the Fund accompanied by
a commitment to repurchase the securities, at the Fund's option or on a
specified date, at an agreed-upon price or yield within a specified period prior
to the maturity date of such securities.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS. A repurchase agreement transaction
occurs when the Fund purchases and simultaneously contracts to resell securities
at fixed prices determined by the negotiated yields. The Fund will limit
repurchase agreement transactions to those domestic financial institutions and
securities dealers who are deemed credit-worthy pursuant to guidelines
established by the Fund's Board of Trustees. The investment Adviser will follow
procedures intended to provide that all acquired repurchase agreements are at
least 100% collateralized as to principal and interest. The Fund will make
payment for such instruments only upon their physical delivery to, or evidence
of their book-entry transfer to, the account of the Fund's Custodian. If the
seller defaults on the repurchase obligation, the Fund could incur a loss, and
may incur costs in disposing of the underlying security. The Fund will not hold
more than 10% of its net assets in illiquid securities, including repurchase
agreements with a term greater than seven (7) days.
The Fund may sell securities in a reverse repurchase agreement when it is
considered advantageous, such as to cover net redemptions or to avoid a
premature outright sale of its portfolio securities. In a typical reverse
repurchase agreement transaction, the seller (Fund) retains the right to receive
interest and principal payments on the security, but transfers title to and
possession of it to a second party in return for a percentage of its value. By
paying back to this party the value received plus interest, the seller
repurchases the transferred security. It is the Fund's policy that entering into
a reverse repurchase agreement will be for temporary purposes only and, when
aggregated with other borrowings, may not exceed 5% of the value of the total
assets of the Fund at the time of the transaction.
TRUSTEES AND EXECUTIVE OFFICERS
++BRUCE R. BENT, 61, President, Treasurer and Trustee, 810 Seventh Avenue,
New York, NY 10019-5868.
Mr. Bent is President, Treasurer, and Trustee of The Reserve Funds ("RF"),
Reserve Institutional Trust ("RIT"), Reserve Tax-Exempt Trust ("RTET"), Reserve
New York Tax-Exempt Trust ("RNYTET") and Reserve Private Equity Series ("RPES");
Director, Vice President and Secretary of Reserve Management Company, Inc.
("RMCI") and Reserve Management Corporation ("RMC"); and Chairman and Director
of Resrv Partners, Inc. ("RESRV").
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+EDWIN EHLERT, JR., 67, Trustee, 125 Elm Street, Westfield, NJ 07091.
Mr. Ehlert is President and Director of Ehlert Travel Associates, Inc.
(travel agency) and Ehlert Travel Associates of Florida, Inc. (travel agency),
and Trustee of RF, RIT, RTET, RNYTET and RPES.
+HENRI W. EMMET, 72, Trustee, 1535 Presidential Drive, Apt. 4A, Columbus,
OH 43212.
Mr. Emmet retired as the Managing Director of Servus Associates, Inc. in
1994, and U.S.A. Representative of the First National Bank of Southern Africa in
1996. Since 1995, Mr. Emmet has served as Principal of Global Interaction, which
provides consulting services to international banking interests. He is currently
Trustee of RF, RIT, RTET, RNYTET and RPES.
+DONALD J. HARRINGTON, C.M., 53, Trustee, St. John's University, Jamaica,
NY 11439.
The Reverend Harrington is President of St. John's University, NY, a
Trustee of RF, RIT, RTET, RNYTET and RPES and a Director of Bear Stearns
Companies, Inc. since 1993.
BRUCE R. BENT II, 32, Senior Vice President and Assistant Secretary, 810
Seventh Avenue, New York, NY 10019-5868.
Mr. Bent II joined The Reserve Funds in 1992 and is Senior Vice President
and Assistant Secretary of RF, RIT, RNYTET, RTET and RPES.
MARYKATHLEEN FOYNES, 28, Counsel and Secretary, 810 Seventh Avenue, New
York, NY 10019-5868.
Ms. Foynes is Counsel and Secretary of RF, RIT, RNYTET, RTET and RPES.
Before joining The Reserve Funds in 1998, Ms. Foynes was a staff attorney at
PaineWebber, Inc.
+ Messrs. Ehlert, Emmet and Harrington are members of a Review Committee
which performs the functions of an Audit Committee and reviews compliance
procedures and practices.
++ Interested Trustee within the meaning of the 1940 Act. The members of the
Board of Trustees who are not Interested Trustees, will be paid a stipend
of $3,500 for each joint Board meeting that they attend and an annual fee
of $16,000 for service to all of the trusts in the complex.
Under the Declaration of Trust, the Trustees and officers are entitled to
be indemnified by the Trust to the fullest extent permitted by law against all
liabilities and expenses reasonably incurred by them in connection with any
claim, suit or judgment or other liability or obligation of any kind in which
they become involved by virtue of their service as a Trustee or officer of the
Trust, except liabilities incurred by reason of their willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of their office.
As of May 31, 1998, Trustees and officers directly or indirectly as a group
owned less than 1% of the outstanding shares of the Funds. The Trust does not
pay any pension or retirement benefits.
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COMPENSATION TABLE FOR FISCAL YEAR ENDED MAY 31, 1998
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AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM FUND AND FUND COMPLEX
NAME OF TRUSTEE, POSITION FROM FUNDS (4 ADDITIONAL TRUSTS) PAID TO TRUSTEE
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Bruce R. Bent, President $ 0 $ 0
Edwin Ehlert, Jr., Trustee $ 2,001 $ 30,000
Henri W. Emmet, Trustee $ 2,001 $ 30,000
Rev. Donald J. Harrington, Trustee $ 2,001 $ 30,000
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INVESTMENT MANAGEMENT, DISTRIBUTION, SERVICE AND CUSTODIAN AGREEMENTS
INVESTMENT MANAGEMENT AGREEMENT. Reserve Management Company, Inc. ("RMCI" or
"Adviser"), 14 Locust Place, Manhasset, NY 11030, a registered investment
adviser, manages the Fund and provides it with investment advice. Since November
15, 1971, the Adviser and its affiliates have been advising the Reserve Funds,
which currently has assets in excess of $4.7 million. Under the Investment
Management Agreement, RMCI manages the Fund's investments, including effecting
purchases and sales thereof, in furtherance of its investment objective and
policies, subject to overall control and direction of the Trustees. RMCI also
makes promotional and advertising expenditures related to the sale of Fund
shares (paying for prospectuses distributed to potential investors and for other
sales literature, but not paying for prospectuses distributed to current
shareholders, distribution assistance payments paid by the Fund, or registration
fees and expenses).
For these services, the Fund periodically pays RMCI a management fee at the
annual rate of 0.50% of the first $500 million of average daily net assets,
0.475% of the next $500 million of such assets, 0.45% of the next $500 million
of such assets, 0.425% per annum of the next $500 million of such assets, and
0.40% of such assets in excess of $2 billion. For the fiscal years ended May 31,
1996, 1997 and 1998, RMCI received management fees of $1,602,360, $1,532,970 and
$1,676,809, respectively, from the Fund.
From time to time, RMCI may waive receipt of its fees and/or voluntarily
assume certain expenses of the Fund which would have the effect of lowering the
Fund's expense ratio and increasing yield to investors at the time such amounts
are assumed or waived as the case may be. RMCI may also make such advertising
and promotional expenditures, using its own resources, use it from time to time
deems appropriate.
The Investment Management Agreement for the Fund was duly approved by
shareholders in 1986, and may be renewed annually if specifically approved by
the Board of Trustees and by the vote of a majority of the Trustees who are not
"interested persons" ("disinterested Trustees") cast in person at a meeting
called for the purpose of voting on such renewal. The Agreement terminates
automatically upon its assignment and may be terminated without penalty upon 60
days' written notice by a vote of the Board of Trustees or by vote of a majority
of outstanding voting shares of the Fund or by RMCI.
Pursuant to the Service Agreement (see Service Agreement in the
Prospectus), during the fiscal year ended May 31, 1998 the Fund reimbursed RMCI
$934,265 for expenses. For the fiscal years ended May 31, 1996 and 1997 RMCI was
reimbursed $1,081,664 and $1,083,471 for expenses, respectively.
DISTRIBUTION AGREEMENT. The Fund's Distributors are Pacific Global Fund
Distributors, Incorporated ("PGFDI"), 206 North Jackson Street, Suite 201,
Glendale, CA 91206, and Resrv Partners, Inc. ("RESRV"), 810 Seventh Avenue, New
York, NY 10019-5868. The Fund has authorized the Distributors, in connection
with their sale of Fund shares, to give only such information and to make only
such statements and representations as are contained in the Prospectus. Sales
may be made only by the Prospectus. The Distributors may offer and sell shares
of the Fund pursuant to a separate Prospectus applicable to such Distributor.
The Distributors are "principal underwriters" for the Fund within the meaning of
the Investment Company Act of 1940, and as such, act as agent in arranging for
the continuous offering of Fund shares. The Distributors have the right to enter
into selected dealer agreements with brokers or other persons of their choice
for the sale of Fund shares. Parties to selected dealer agreements may receive
assistance payments, if they qualify for such payments, under the Plan of
Distribution described below. RESRV's and PGFDI's principal business is the
distribution of mutual fund shares. No Distributor
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has retained any underwriting commissions on the sale of Fund shares during the
last three fiscal years. The Distributors do not have the exclusive right to
distribute Fund shares and the Fund may, therefore, continue to distribute its
own shares.
The Distribution Agreements may be renewed annually if specifically
approved by the Board of Trustees and by the vote of a majority of the
disinterested Trustees cast in person at a meeting called for the purpose of
voting on such approval or by the vote of a majority of the outstanding voting
securities of the Fund.
PLAN OF DISTRIBUTION. The Fund maintains a Plan of Distribution ("Plan") and
related agreements, as amended, under Rule 12b-1 of the 1940 Act, which provides
that investment companies may pay distribution expenses, directly or indirectly,
pursuant to a Plan adopted by the investment company's Board and approved by its
shareholders. Under the Plan, the Fund makes assistance payments to brokers,
financial institutions and other financial intermediaries ("Firms") for
shareholder accounts ("qualified accounts") at an annual rate of 0.20% of the
average daily net asset value ("NAV") of all Firms' qualified accounts. Such
distribution assistance may include, but is not limited to, establishment of
shareholder accounts, delivering prospectuses to prospective investors and
processing automatic investment in Fund shares of client account balances.
Substantially all such monies (together with significant amounts from RMCI's own
resources) are paid by RMCI to Firms for their distribution assistance or
administrative services, with any remaining amounts being used to partially
defray other expenses incurred by RMCI in distributing Fund shares. In addition
to the amounts required by the Plan, RMCI may, at its discretion, pay additional
amounts from its resources. The rate of any additional amounts that may be paid
will be based upon RESRV's and RMCI's analysis of the contribution that a Firm
makes to the Fund by increasing assets under management and reducing expense
ratios and the cost to the Fund if such services were provided directly by the
Fund or other authorized persons. RESRV and RMCI will also consider the need to
respond to competitive offers of others, which could result in assets being
withdrawn from the Fund and an increase in the expense ratio for the Fund. RMCI
may elect to retain a portion of the distribution assistance payments to pay for
sales materials or other promotional activities. The Trustees have determined
that there is a reasonable likelihood the Plan will benefit the Fund and its
shareholders.
The Glass-Steagall Act prohibits all entities which receive deposits from
engaging to any extent in the business of issuing, underwriting, selling, or
distributing securities, although national and state chartered banks are
permitted to purchase and sell securities upon the order and for the account of
their customers. Those persons who wish to provide assistance in the form of
activities not primarily intended to result in the sale of Fund shares (such as
administrative and account maintenance services) may include banks, upon advice
of counsel that they are permitted to do so under applicable laws and
regulations, including the Glass-Steagall Act. In such event, no preference will
be given to securities issued by such banks as investments, and the assistance
payments received by such banks under the Plan may or may not compensate the
banks for their administrative and account maintenance services for which the
banks may also receive compensation from the bank accounts they service. It is
Fund management's position that payments to banks pursuant to the Plan for
activities not primarily intended to result in the sale of Fund shares, such as
administrative and account maintenance services, do not violate the
Glass-Steagall Act. However, this is an unsettled area of the law and if a
determination contrary to management's position is made by a bank regulatory
agency or court concerning payments to banks contemplated by the Plan, any such
payments will be terminated and any shares registered in the bank's name, for
its underlying customer, will be registered in the name of that customer.
Financial institutions providing distribution assistance or administrative
services for the Fund may be required to register as securities dealers in
certain states.
Under the Plan, the Fund's Controller or Treasurer reports quarterly the
amounts and purposes of assistance payments. During the continuance of the Plan
the selection and nomination of the disinterested Trustees is at the discretion
of the disinterested Trustees currently in office.
During the fiscal year ended May 31, 1998, $635,544 was paid under the Plan
by the Fund. Any such payments are intended to benefit the Fund by maintaining
or increasing net assets to permit economies of scale in providing services to
shareholders and to contribute to the stability of such shareholder services.
During the fiscal year ended May 31, 1998, substantially all payments made by
the Fund were to brokers or other financial institutions and intermediaries for
share balances in the Fund.
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The Plan and related agreements were duly approved by shareholders and may
be terminated at any time by a vote of a majority of the outstanding voting
securities of the Fund or by vote of the disinterested trustees. The Plan and
related agreements may be renewed from year to year, if approved by a vote of
the majority of the disinterested Trustees cast in person at a meeting called
for the purpose of voting on such renewal. The Plan may not be amended to
increase materially the amount to be spent for distribution without shareholder
approval. All material amendments to the Plan must also be approved by a vote of
the Board of Trustees and of the disinterested Trustees, cast in person at a
meeting called for the purpose of such vote.
CUSTODIAL SERVICES AND INDEPENDENT ACCOUNTANT. The Chase Manhattan Bank, 4 New
York Plaza, New York, NY 10004 is Custodian of the Fund's securities and cash
pursuant to Custodian Agreements. PricewaterhouseCoopers LLP, 1301 Avenue of the
Americas, New York, NY 10019 is the Fund's independent accountant.
PORTFOLIO TURNOVER, TRANSACTION CHARGES AND ALLOCATION
As investment securities transactions made by the Fund are normally
principal transactions at net prices, the Fund does not normally incur brokerage
commissions. Purchases of securities from underwriters involve a commission or
concession paid by the issuer to the underwriter and aftermarket transactions
with dealers involve a spread between the bid and asked prices. During the past
three fiscal years, the Fund has not paid any brokerage commissions.
The Fund's policy of investing in debt securities maturing within 13 months
results in high portfolio turnover. However, because the cost of these
transactions is minimal, high turnover does not have a materially adverse effect
upon the net asset value or yield of the Fund.
Subject to the overall supervision of the officers of the Fund and the
Board of Trustees, RMCI places all orders for the purchase and sale of the
Fund's investment securities. In general, in the purchase and sale of investment
securities, RMCI will seek to obtain prompt and reliable execution of orders at
the most favorable prices and yields. In determining best price and execution,
RMCI may take into account a dealer's operational and financial capabilities,
the type of transaction involved, the dealer's general relationship with RMCI,
and any statistical, research, or other services provided by the dealer to RMCI.
To the extent such non-price factors are taken into account the execution price
paid may be increased, but only in reasonable relation to the benefit of such
non-price factors to the Fund as determined by RMCI. Brokers or dealers who
execute investment securities transactions may also sell shares of the Fund;
however, any such sales will be neither a qualifying nor disqualifying factor in
the selection of brokers or dealers.
When orders to purchase or sell the same security on identical terms are
simultaneously placed for the Fund and other investment companies managed by
RMCI, the transactions are allocated as to amount in accordance with each order
placed for each Fund. However, RMCI may not always be able to purchase or sell
the same security on identical terms for all investment companies affected.
SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trust to issue an unlimited number of
full and fractional shares of beneficial interest, and to divide or combine the
shares into a greater or lesser number of shares without thereby changing the
proportionate beneficial interests in the Fund. If they deem it advisable and in
the best interests of shareholders, the Trustees may classify or reclassify any
unissued shares of the Fund by setting or changing the preferences, conversion
or other rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms and conditions of redemption of the stock. Any changes
would be required to comply with any applicable state and federal securities
laws. These currently require that each class be preferred over all other
classes in respect to assets specifically allocated to such class. It is
anticipated that under most circumstances, the rights of any additional classes
would be comparable, unless otherwise required, to respond to the particular
situation. Upon liquidation of the Trust, shareholders are entitled to share,
pro rata, in the net assets of their respective Funds
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available for distribution to such shareholders. It is possible, although
considered highly unlikely in view of the method of operation of mutual funds,
that should the assets of one class of shares be insufficient to satisfy its
liabilities, the assets of another class could be subject to claims arising from
the operations of the first class of shares. No changes can be made to the
Fund's issued shares without shareholder approval.
Only Interstate Portfolio shares are offered by the Prospectus which
accompanied or preceded this Statement of Additional Information. Each share,
when issued, is fully paid, non-assessable (except as set forth below), and
fully transferable or redeemable at the shareholder's option. Each Fund share
has an equal interest in the net assets of the Fund, equal rights to all
dividends and other distributions, and one vote for all purposes. Shares of all
classes vote together for the election of Trustees and have noncumulative voting
rights, meaning that the holders of more than 50% of the shares voting for the
election of Trustees could elect all Trustees if they so chose, and in such
event the holders of the remaining shares could not elect any person to the
Board of Trustees.
Under Massachusetts law, The shareholders and trustees of a business trust
can be personally liable for the Fund's obligations unless, as in this instance,
the Declaration of Trust provides, in substance, that no shareholder or Trustee
shall be personally liable for the Fund's, and each investment portfolio's,
obligations to third parties, and requires that every written contract made by a
Fund contain a provision to that effect. The Declaration of Trust also requires
the Fund to indemnify its shareholders and Trustees against such liabilities and
any related claims or expenses.
The Declaration of Trust further provides that the trustees will not be
liable for errors of judgment or mistakes of fact or law; but nothing in the
Declaration protects a Trustee against any liability to which he would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his office.
SEC regulations provide that if a class is separately affected by a matter
requiring a vote (election of Trustees, ratification of independent auditor
selection, and approval of an underwriting agreement are not considered to have
such separate effect and may be voted upon by shareholders of the Trust as a
whole), each such class will vote separately on such matters as approval of the
Investment Management Agreement, material amendments to the Plan of
Distribution, and changes in the fundamental policies of the Fund. These items
require approval by a majority of the affected shareholders. For this purpose a
"majority" is constituted by either 50% of all shares voting as a group or 67%
of the shares voted as a group at an annual meeting of shareholders at which at
least 50% of the shares of each group are represented.
As of June 30, 1998, no person was known to own of record or beneficially
5% or more of the outstanding shares of the Fund.
MUNICIPAL OBLIGATIONS
Municipal bonds and municipal notes are the two major classifications of
Municipal Obligations. Such obligations are generally issued to obtain funds for
various public purposes, including the construction of public facilities such as
airports, bridges highways, houses, hospitals, mass transportation, schools,
streets, and water and sewer works. In addition, Municipal Obligations may be
issued to refund outstanding debt and obtain funds for general operating
expenses.
Municipal bonds, which are long-term instruments and generally have
maturities longer than one year when issued, may be either "general obligation"
or "revenue" issues. General obligation bonds are secured by the issuer's pledge
of its full faith, credit, and taxing power for the payment of principal and
interest. Revenue bonds are payable only from the revenues derived from a
particular facility or class of facilities, as, in some cases, from the proceeds
of a special excise tax or other specific revenue source but not from the
general taxing power.
Certain kinds of industrial development bonds ("IDBs") are issued by or on
behalf of public authorities to provide funding for various privately operated
industrial facilities such as warehouse, office, plant, and store facilities.
IDBs are, in most cases, revenue bonds and do not generally constitute the
pledge of the credit of the
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issuer of such bonds. The payment of the principal and interest on IDBs usually
depends solely on the ability of the user of the facilities financed by the
bonds or other guarantor to meet its financial obligations and, in certain
instances, the pledge of real and personal property as security for payment. If
there is no established secondary market for the IDBs, the IDBs or the
participation interests purchased by the Fund will be supported by repurchase
commitments and bank letters of credit or guarantees of banks that meet the
quality criteria of the Fund, and which may be exercised by the Fund to provide
liquidity.
Municipal notes are usually issued to obtain funds in anticipation of
receipt of taxes, receipt of proceeds of issuances of municipal bonds or other
revenue which will provide funds to repay the notes, and generally have
maturities of one year or less.
On April 20, 1988, the U.S. Supreme Court, in South Carolina v. Baker,
overruled an 1895 case, Pollock v. Farmers' Loan & Company which held that
interest on Municipal Obligations was immune from federal taxation. As a result,
proposals may be introduced before the Congress to eliminate or restrict the
federal income tax exemption for interest on certain Municipal Obligations.
The Fund may purchase securities affected by these proposals. If such
proposals are enacted, the availability of Municipal Obligations by the Fund
would be adversely affected. In such event, the Fund would reevaluate its
investment objective and policies and submit possible changes in the structure
of the Fund for the consideration of shareholders. Investors should be aware
that the quantity of Municipal Obligations available for purchase by the Fund
may be limited, and that factor may affect the amount of tax-exempt income which
can be obtained from an investment in the Fund. Substantial reductions in the
availability of tax-exempt securities might also cause a reevaluation of the
Fund's investment objective and policies.
VARIABLE RATE DEMAND INSTRUMENTS. Variable rate demand instruments that the Fund
may purchase are tax-exempt Municipal Obligations or participation interests
therein that provide for periodic adjustments in the interest rate paid on the
instrument and permit the holder to demand payment of the unpaid principal
balance plus accrued interest upon a specified number of days' notice, either
from the issuer or by drawing on a bank letter of credit or guarantee issued
with respect to such instrument. The issuer of the Municipal Obligation may have
a corresponding right to prepay at its discretion the outstanding principal of
the instrument plus accrued interest upon notice comparable to that required for
the holder to demand payment.
The variable rate demand instruments in which the Fund may invest will
comply with Rule 2a-7 under the 1940 Act. The Fund will determine the variable
rate demand instruments it will purchase in accordance with procedures
prescribed by its Board to minimize credit risks. The Fund's investment Adviser
may determine that an unrated variable rate demand instrument meets the Fund's
high-quality criteria if it is backed by a suitable bank letter of credit or
guarantee.
The variable rate demand instruments that the Fund may invest in include
participation interests purchased from banks in variable rate tax-exempt
Municipal Obligations owned by banks or affiliated organizations. A
participation interest gives the Fund an undivided interest in the Municipal
Obligation in the proportion that the Fund's participation interest bears to the
total principal amount of the Municipal Obligation and provides the repurchase
feature described above. Each participation is backed by an irrevocable letter
of credit or guarantee of an appropriately rated bank. The Fund has the right to
sell the instrument back to the bank and draw on the letter of credit on demand,
after seven days' notice, for all or any part of the full principal amount of
the Fund's participation interest in the bond plus accrued interest. Banks
usually retain a service fee, a letter of credit fee and a fee for issuing
repurchase commitments in an amount equal to the excess of the interest paid on
the Municipal Obligations over the negotiated yield at which the instrument was
purchased by the Fund.
PURCHASE, REDEMPTION AND PRICING OF SHARES
PURCHASES AND REDEMPTIONS THROUGH OTHERS. Share purchases and redemptions may
also be made through brokers and financial institutions ("firms"). Firms may
provide varying arrangements for their clients with respect to the purchase and
redemption of Fund shares and may arrange with their clients for other
investments or
9
<PAGE> 10
administrative services. Some of these participate in the Fund's Plan of
Distribution ("Plan"). Under the Plan, payments are made to persons who provide
assistance in distributing Fund shares or other assistance to the Fund.
IF SHARES OF THE FUND ARE PURCHASED BY CHECK OR RESERVE AUTOMATIC TRANSFER
THE FUND MAY DELAY TRANSMITTAL OF REDEMPTION PROCEEDS UNTIL SUCH TIME AS IT HAS
ASSURED ITSELF THAT GOOD PAYMENT HAS BEEN COLLECTED FOR THE PURCHASE OF SUCH
SHARES, WHICH MAY BE UP TO 10 BUSINESS DAYS.
Redemption payments will normally be made by check or wire transfer but the
Fund is authorized to make payment of redemptions partly or wholly in kind (that
is, by delivery of investment securities valued at the same time as the
redemption net asset value is determined). The Fund has elected to permit any
shareholder of record to make redemptions wholly in cash to the extent the
shareholder's redemptions in any 90-day period do not exceed the lesser of
$250,000 or 1% of the net assets of the Fund. The election is irrevocable
pursuant to rules and regulations under the 1940 Act unless withdrawal is
permitted by order of the SEC. Redemptions in kind are further limited by the
Fund's intention to redeem in kind only when necessary to reduce a disparity
between amortized cost and market value. In disposing of such securities, an
investor might incur transaction costs and on the date of disposition might
receive an amount less than the net asset value of the redemption.
NET ASSET VALUE. Shares are offered at NAV which is calculated at the close of
each Business Day as defined in the Prospectus. The NAV is not calculated on New
Year's Day, Martin Luther King, Jr. Day, President's Day, Good Friday, Memorial
Day (observed), Independence Day, Labor Day, Columbus Day, Veterans Day,
Thanksgiving, Christmas, on other days the New York Stock Exchange is closed for
trading, and on regional banking holidays. The NAV of the Fund is normally
maintained at $1.00 per share. The Fund cannot guarantee that its NAV will
always remain at $1.00 per share.
The NAV per share of the Fund is determined by adding the fair value of all
of the Fund's securities, cash and other assets, subtracting its liabilities,
and dividing the result by the number of its shares outstanding. The Board of
Trustees has determined the most practical method currently available for
valuing portfolio instruments is the amortized cost method. This procedure
values a purchased security at cost at the time of purchase and thereafter
assumes a constant amortization to maturity of any discount or premium and
accrual of interest income, irrespective of intervening changes in interest
rates or security market values.
In order to maintain a $1.00 share price the Fund will utilize the
following practices: maintain a dollar-weighted average portfolio maturity of 90
days or less; purchase only instruments having remaining maturities of 397 days
or less; and invest only in securities determined by the Board of Trustees to be
of high quality with minimal credit risk. To assess whether repurchase agreement
transactions present more than minimal credit risk, the trustees periodically
review RMCI's evaluation of the creditworthiness of all entities, including
banks and broker-dealers, with which the Fund proposes to enter into repurchase
agreements. In addition, the Fund has adopted procedures taking into account
current market conditions and the investment objective of the Fund, to attempt
to maintain the Fund's net asset value as computed for the purpose of sales and
redemptions at $1.00 per share. Such procedures will include review by the
Trustees, at such intervals as they may determine reasonable, to ascertain the
extent of any difference in the net asset value of the Fund from $1.00 a share
determined by valuing its assets at amortized cost as opposed to valuing them
based on market factors. If the deviation exceeds 1/2 of one (1) percent, the
Trustees will promptly consider what action if any should be initiated. If they
believe that the deviation may result in material dilution or other unfair
results to shareholders, the trustees have undertaken to apply appropriate
corrective remedies which may include the sale of the Fund's assets prior to
maturity to realize capital gains or losses or to shorten the average maturity
of the Fund, withholding dividends, redemption of shares of the Fund in kind, or
reverting to valuation based upon market prices and estimates.
EXCHANGE PRIVILEGE. A shareholder of the Fund may exchange shares at NAV with
all Reserve money-market funds. A shareholder of the Interstate Fund may also
exchange shares for shares of portfolios of The Reserve Private Equity Series
and the Pacific Advisors Fund, Inc. This exchange privilege may not be available
to clients of certain firms. A sales load will be charged on such an exchange
unless a waiver of the sales load applies. A shareholder may qualify for waiver
of the sales load if the shares of the Interstate Fund which are being exchanged
10
<PAGE> 11
were acquired: (a) by a previous exchange for shares purchased with a sales
load, or (b) through reinvestment of dividends or distributions paid with
respect to the foregoing category of shares. Similarly, a shareholder of Pacific
Advisors may exchange, shares for shares of the Interstate Fund. Shares to be
acquired in an exchange must be registered for sale in the investor's state. The
Interstate Fund reserves the right to record all exchange requests.
The exchange privilege may be modified or terminated at any time, or from
time to time, upon 60 days' notice to shareholders. Additional information
regarding the exchange privilege is available from the Pacific Advisors Fund
Inc. at 800-282-6693 or any authorized firm. A shareholder considering an
exchange to the Pacific Advisors Fund Inc. should refer to its prospectus for
additional information.
SHAREHOLDER SERVICE POLICIES. The Fund's policies concerning shareholder
services are subject to change from time to time. The Fund reserves the right to
change the $1,000 minimum account size subject to the $5 monthly service charge
or involuntary redemption. The Fund further reserves the right to impose special
service charges for services provided to individual shareholders generally
including, but not limited to, fees for returned checks, stop payment orders on
official checks and shareholder checks, and special research services. The
Fund's standard service charges as described in the Prospectus are also subject
to adjustment from time to time. In addition, the Fund reserves the right to
increase its minimum initial investment amount at any time.
CREDITING OF INVESTMENTS. The Fund will only give credit for investments in the
Fund on the day they become available in federal funds. A Federal Reserve wire
system transfer ("Fed wire") is the only type of wire transfer that is reliably
available in federal funds on the day sent. For a Fed wire to receive same day
credit, the Fund must be notified before 11:00 AM (New York time) of the amount
to be transmitted and the account to be credited. Checks and other items
submitted to the Fund for investment are only accepted when submitted in proper
form, denominated in U.S. dollars, and are credited to shareholder accounts only
upon their conversion into federal funds, which normally takes one or two
Business Days following receipt. Physical items delivered to the Fund after
11:00 AM (New York time) are considered received on the following Business Day.
Checks drawn on foreign banks are normally not accepted by the Fund. In
addition, the Fund does not accept cash investments or travelers checks.
The Fund reserves the right to reject any investment in the Fund for any
reason and may, at any time, suspend all new investment in the Fund.
IF SHARES PURCHASED ARE TO BE PAID FOR BY WIRE AND THE WIRE IS NOT RECEIVED BY
THE FUND OR IF SHARES ARE PURCHASED BY A CHECK, WHICH, AFTER DEPOSIT, IS
RETURNED UNPAID OR PROVES UNCOLLECTABLE, THE PURCHASE MAY BE CANCELED OR
REDEEMED IMMEDIATELY. THE INVESTOR THAT GAVE NOTICE OF THE INTENDED WIRE OR
SUBMITTED THE CHECK WILL BE HELD FULLY RESPONSIBLE FOR ANY LOSSES INCURRED BY
THE FUND, THE INVESTMENT ADVISER OR THE DISTRIBUTOR. THE FUND MAY REDEEM SHARES
FROM ANY ACCOUNT REGISTERED IN THAT PURCHASER'S NAME AND MAY APPLY THE PROCEEDS
THEREFROM TO THE PAYMENT OF ANY AMOUNTS DUE THE FUND, THE INVESTMENT ADVISER OR
THE DISTRIBUTOR. SHARE CERTIFICATES. Share certificates are not issued by the
Fund.
DISTRIBUTIONS AND TAXES
The Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended ("the Code"), so
long as such qualification is in the best interests of shareholders. To qualify
as a regulated investment company, the Fund must, among other things, (a) derive
in each taxable year at least 90% of its gross income from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of stock, securities or foreign currencies or other income derived
with respect to its business of investing in such stock, securities or
currencies; (b) diversify its holdings so that, at the end of each quarter of
the taxable year, (i) at least 50% of the market value of the Fund's assets is
represented by cash and cash items (including receivables), U.S. Government
securities, the securities of other regulated investment companies and other
securities, with such other securities of any one issuer limited for the
purposes of this calculation to an amount
11
<PAGE> 12
not greater than 5% of the value of the Fund's total assets and not greater than
10% of the outstanding voting securities of such issuer, and (ii) not more than
25% of the value of its total assets is invested in the securities of any one
issuer (other than U.S. Government securities or the securities of other
regulated investment companies); and (c) distribute at least 90% of its
investment company taxable income (which includes, among other items, dividends,
interest and net short-term capital gains in excess of net long-term capital
losses) and its net tax-exempt interest income each taxable year.
As a regulated investment company, the Fund generally will not be subject
to U.S. federal income tax on its investment company taxable income and net
capital gains (the excess of net long-term capital gains over net short-term
capital losses), if any, that it distributes to shareholders. The Fund intends
to distribute to its shareholders, at least annually, substantially all of its
investment company taxable income and net capital gains. Amounts, other than
tax-exempt interest, not distributed on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4% excise
tax. To prevent imposition of the excise tax, the Fund must distribute during
each calendar year an amount equal to the sum of (1) at least 98% of its
ordinary income (not taking into account any capital gains or losses) for the
calendar year, (2) at least 98% of its capital gains in excess of its capital
losses for the one-year period ending on October 31 of the calendar year, and
(3) any ordinary income and capital gains for previous years that was not
distributed during those years. A distribution, including an "exempt-interest
dividend," will be treated as paid on December 31 of the current calendar year
if it is declared by the 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 individual shareholders in
the calendar year in which the distributions are declared, rather than the
calendar year in which the distributions are received. To prevent application of
the excise tax, the Fund intends to make its distributions in accordance with
the calendar year distribution requirement.
The Fund intends to qualify under the Code to pay "exempt-interest
dividends" to its shareholders. The Fund will be so qualified if, at the close
of each quarter of its taxable year, at least 50% of the value of its total
assets consists of securities on which the interest payments are exempt from
federal income tax. To the extent that dividends distributed by the Fund to its
shareholders are derived from interest income exempt from federal income tax and
are designated as "exempt-interest dividends" by the Fund, they will be
excludable from the gross incomes of the shareholders for federal income tax
purposes. "Exempt-interest dividends," however, must be taken into account by
shareholders in determining whether their total incomes are large enough to
result in taxation of up to 85% of their social security benefits and certain
railroad retirement benefits. It should also be noted that tax-exempt interest
on private activity bonds in which the Fund may invest generally is treated as a
tax preference item for purposes of the alternative minimum tax for corporate
and individual shareholders. The Fund will inform shareholders annually as to
the portion of the distributions from the Fund which constituted
"exempt-interest dividends."
Dividends paid out of the Fund's investment company taxable income will be
taxable to a U.S. shareholder as ordinary income. Because no portion of the
Fund's income is expected to consist of dividends paid by U.S. corporations, no
portion of the dividends paid by the Fund is expected to be eligible for the
corporate dividends-received deduction. Distributions of net capital gains, if
any, designated as capital gain dividends are taxable to individual shareholders
at the applicable 20% or 28% capital gains rate, regardless of how long the
shareholder has held the Fund's shares, and are not eligible for the
dividends-received deduction. Shareholders receiving distributions in the form
of additional shares, rather than cash, generally will have a cost basis in each
such share equal to the NAV of a share of the Fund on the reinvestment date.
Shareholders will be notified annually as to the U.S. federal tax status of
distributions, and shareholders receiving distributions in the form of
additional shares will receive a report as to the NAV of those shares.
Upon the sale or other disposition of shares of the 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. Any
loss realized on a sale or exchange will be disallowed to the extent the shares
disposed of are replaced (including shares acquired pursuant to a dividend
reinvestment plan) within a period of 61 days beginning 30 days before and
ending 30 days after disposition of the shares. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss. Any loss
12
<PAGE> 13
realized by a shareholder on a disposition of Fund shares held by the
shareholder for six months or less will be treated as a long-term capital loss
to the extent of any distributions of net capital gains received by the
shareholder with respect to such shares. Furthermore, a loss realized by a
shareholder on the redemption, sale or exchange of shares of the Fund with
respect to which exempt-interest dividends have been paid will, to the extent of
such exempt-interest dividends, be disallowed if such shares have been held by
the shareholder for less than six months.
Under the Code, a shareholder may not deduct that portion of interest on
indebtedness incurred or continued to purchase or carry shares of an investment
company paying exempt-interest dividends (such as those of the Fund) which bears
the same ratio to the total of such interest as the exempt-interest dividends
bear to the total dividends (excluding net capital gain dividends) received by
the shareholder. In addition, under rules issued by the Internal Revenue Service
for determining when borrowed funds are considered to be used to purchase or
carry particular assets, the purchase of shares may be considered to have been
made with borrowed funds even though the borrowed funds are not directly
traceable to such purchase.
The tax consequences to a foreign shareholder of an investment in the Fund
may be different from those described herein. Foreign shareholders are advised
to consult their own tax advisers with respect to the particular tax
consequences to them of an investment in the Fund.
Shareholders are advised to consult their own tax advisers with respect to
the particular tax consequences to them of an investment in the Fund. Persons
who may be "substantial users" (or "related persons" of substantial users) of
facilities financed by industrial development bonds should consult their tax
advisers before purchasing shares of the Fund. The term "substantial user"
generally includes any "non-exempt person" who regularly uses in his or her
trade or business a part of a facility financed by industrial development bonds.
Generally, an individual will not be a "related person" of a substantial user
under the Code unless the person or his or her immediate family owns directly or
indirectly in the aggregate more than a 50% equity interest in the substantial
user.
The exemption from federal income tax of dividends derived from interest on
Municipal Obligations does not necessarily result in exemption under the other
tax laws of the U.S. or any state or local taxing authority.
Shareholders are advised to consult with their tax advisers concerning the
application of state and local taxes to an investment or income therefrom in the
Fund which may differ from the Federal income tax consequences described above.
FUND YIELD
The current yield of the Fund may differ from its effective yield and
annualized dividends.
Current yield is calculated by determining the net change (exclusive of
capital changes) in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period, dividing the net change in
account value by the value of the account at the beginning of the base period to
obtain the base period return, and multiplying the base period return by a
fraction having 365 in the numerator and the number of days in the base period
in the denominator. The current yield stated in the prospectus utilizes a seven
day base period. Net change in account value must reflect (i) the value of
additional shares purchased with dividends from the original share and dividends
declared on both the original share and any such additional shares; and (ii) any
recurring fees charged to all shareholder accounts, in proportion to the length
of the base period and the Fund's average or median account size. Net change in
account value must exclude realized gains or losses and unrealized appreciation
or depreciation.
Effective yield is computed by adding one to the current yield, raising the
sum to a power equal to 365 divided by the number of days in the base period
(seven days), and subtracting one from the result according to the following
formula: Effective Yield = [(Base Period Return + 1) 365/7] - 1. Effective
annual yields are a representation of the effective annual rate of return
produced by the monthly compounding of Fund dividends. Taxable equivalent yield
is computed by dividing either current yield or effective yield by a denominator
equal to
13
<PAGE> 14
one minus a stated income tax rate according to the following formula: Taxable
Equivalent Yield = Current or Effective Yield/(1 - Income Tax Rate).
Yield information may be useful in reviewing the performance of the Fund,
but because of fluctuations, it may or may not provide a basis for comparison
with bank deposits, other money-market funds which have fluctuating share
values, or other investments which pay a fixed yield for a stated period of
time, such as Treasury bills, bank certificates of deposit, savings certificates
and NOW accounts. When making comparisons, the investor should also consider the
quality and maturity of the portfolio securities of the various money-market
funds. An investor's principal is not guaranteed by the Fund, nor is it insured
by a governmental agency.
RESERVE CASH PERFORMANCE ACCOUNT
The Reserve Cash Performance Account ("CPA") provides a comprehensive
package of additional services to investors in the Fund. Reserve CPA is a check
arrangement with BankOne, Columbus, NA or the Chase Manhattan Bank whereby
checks are issued to Reserve shareholders which may be used to redeem shares in
the account in any amount. If a bank accepts a check, it will be paid in the
order received by redemption of shares from the investor's Reserve account. Any
check in an amount exceeding the Reserve account balance will be returned to the
payee. Reserve CPA checks can be used in the same manner as any other bank
checks. Paid checks will not be returned but complete information on such paid
checks will be provided monthly.
The VISA Gold Check Card (a debit card) is also available. The VISA card
functions exactly as does a conventional VISA credit card except that the
cardholder's Reserve account is automatically charged for all purchases and cash
advances, thus eliminating the usual monthly finance charges. As with the
checking facility, VISA charges are paid by liquidating shares in the Reserve
Fund account, but any charges that exceed the balance will be rejected. VISA
card issuance is subject to credit approval. Reserve, VISA or the bank may
reject any application for checks or cards and may terminate an account at any
time. Conditions for obtaining a VISA Check Card may be altered or waived by the
Funds either generally or in specific instances. Checks and VISA cards are
intended to provide investors with easy access to their account balances.
There is no charge for CPA but the Funds will charge a non-refundable
annual CPA Plus service fee (currently $60 which may be charged to the account
at the rate of $5 monthly). Participants will be charged for specific costs
incurred in placing stop payment orders, obtaining check copies and in
processing returned checks. These charges may be changed at any time upon 30
days' notice. In addition, broker/dealers or other financial institutions in the
CPA program may charge their own additional service fees.
VISA cardholders may be liable for the unauthorized use of their card up to
the amount set by governing Federal regulations, currently $50 if the Fund or
the bank is not notified of the theft or loss within two (2) Business Days.
Participants should refer to the VISA Account Shareholder Agreement for complete
information regarding responsibilities and liabilities with respect to the VISA
Gold card. If a card is lost or stolen, the cardholder should report the loss
immediately by telephoning the issuing bank, Currently BankOne at 614-248-4242
which can be reached 24 hours a day, seven days a week or the Funds at
800-631-7784 or 212-977-9880 during normal business hours (9:00 A.M. to 5:00
P.M. New York time).
The use of checks and cards by participants will be subject to the terms of
your Reserve CPA Application and VISA Account Shareholder Agreement.
RATINGS
TAX-EXEMPT BOND RATINGS. The highest ratings for municipal bonds are Aaa or Aa
if rated by Moody's Investor Services, Inc. ("Moody's") and AAA or AA if rated
by Standard & Poor's Corporation ("S&P"). Such bonds are judged to be of
high-quality and are not considered speculative. Bonds rated A by Moody's are
considered to possess many favorable investment attributes and are to be
considered as upper-medium grade obligations. Such bonds have factors giving
security to principal and interest that are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future. Debt rated A by S&P is considered to
14
<PAGE> 15
have a strong capacity to pay interest and repay principal although it is more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories.
TAX-EXEMPT PAPER RATINGS. Moody's tax-exempt paper ratings are opinions of the
ability of issuers to repay punctually promissory obligations not having an
original maturity in excess of 12 months. The highest quality obligations are
rated "Prime."
Issuers rated Prime-1 have superior ability for repayment of senior short-term
debt obligations. Issuers rated Prime-2 have a strong ability for repayment of
senior short-term debt obligations. Moody's employs the following two
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated short-term loan issuers: MIG-1/VMIG-1, Best Quality
and MIG-2/VMIG-2, High Quality. The designation of MIG-1/VMIG-1 indicates there
is strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing. The designation
of MIG-2/VMIG-2 indicates margins of protection ample although not so large as
in MIG-1/VMIG-1.
S&P's tax-exempt paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days. The
highest quality obligations are rated "A". Issues assigned "A" ratings are
regarded as having the greatest capacity for timely payment. Issues in this
category are further refined with designations to indicate the relative degree
of safety. The two top such designations are 1 and 2. The "A-1" designation
indicates that the degree of safety regarding timely payment is strong. The
"A-2" designation indicates that capacity for timely payment is satisfactory.
Municipal note ratings by S&P's are preceded by the designation SP. Those issues
determined to possess overwhelming safety characteristics are designated SP-1+.
Municipal notes designated SP-1 are considered to have a very strong or strong
capacity to pay principal and interest. Municipal notes designated SP-2 are
considered to have a satisfactory capacity to pay principal and interest.
15
<PAGE> 16
RESERVE TAX-EXEMPT TRUST - INTERSTATE TAX-EXEMPT FUND
STATEMENT OF NET ASSETS - MAY 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT
DESCRIPTION OF SECURITY DATE (IN THOUSANDS)
- ---------------------------------------------------------------------------------- ---- --------------
<S> <C> <C>
ALABAMA - .14%
Pell City IDA for General Signal Corporation, 3.90% (a) 10/1/2000 $ 500
ARIZONA - 3.41%
Apache IDA for Tucson Electric Power Company Series 83B, 3.90% (a) 12/15/2018 4,900
Apache IDA for Tucson Electric Power Company Series 83A, 3.85% (a) 12/15/2018 2,000
Pima IDA PCR for Tucson Electric Project, 3.85% (a) 10/1/2022 5,100
CALIFORNIA - 7.22%
Alameda School Finance Authority Series D, 3.55% (a) 7/1/2018 4,000
California School District Cash Reserves Program, 4.75% 7/2/1998 2,000
Fremont Public Finance Authority for Family Resource Center, 3.60% (a) 8/1/2028 500
Grand Terrace Community Redevelopment Agency, 4.40% (a) 12/1/2011 5,800
Los Angeles USD TRAN, 4.50% 6/30/1998 4,900
San Bernadino HFR Alta Park Project, 4.40% (a) 5/1/2006 1,400
San Francisco Bayside Village Series 85D, 4.20% (a) 12/1/2005 6,000
Santa Clara HFA for El Camino Hospital District Series A, 3.60% (a) 8/1/2015 500
COLORADO - 3.17%
Englewood HCF for SW Medical Professional Ltd. Series 85, 4.20% (a) 12/1/2010 1,450
Jefferson Country IDR for S.W. Medical Project, 4.20% (a) 11/1/2010 2,350
Eagle Revenue Bonds for Smith Creek Metro District, 3.75% (a) 10/1/2035 6,700
Wheat Ridge IDA for Pearse Electronics Inc. Project, 4.25% (a) 6/1/1999 625
CONNECTICUT - 2.93%
Connecticut DAI for Allen Group Inc., 3.90% (a) 2/1/2013 1,000
Connecticut Develop. Authority HCR for Independent Living Project, 3.70% (a) 7/1/2015 1,200
Connecticut Development Authority PCR for Western Massachusetts
Electric Co. Series 1993A, 3.70% (a) 9/1/2028 900
Connecticut HEF for Yale University Series T, 3.70% (a) 7/1/2029 1,000
Connecticut State GOB Series B, 3.75% (a) 5/15/2014 1,500
Hartford Redevelopment Agency MHR for Underwood Towers Project, 3.75% (a) 6/1/2020 2,000
Sprague BAN, 4.05% 9/4/1998 2,630
DISTRICT OF COLUMBIA - 1.51%
Washington, D.C. American University, 3.95% (a) 10/1/2015 3,065
Washington, D.C. Housing Finance Agency MHR for Chastleton Development Project, 3.90% (a) 7/1/2027 2,200
<CAPTION>
VALUE
DESCRIPTION OF SECURITY (NOTE 1)
- ---------------------------------------------------------------------------------- --------
<S> <C>
ALABAMA - .14%
Pell City IDA for General Signal Corporation, 3.90% (a) $ 503,378
ARIZONA - 3.41%
Apache IDA for Tucson Electric Power Company Series 83B, 3.90% (a) 4,908,921
Apache IDA for Tucson Electric Power Company Series 83A, 3.85% (a) 2,003,641
Pima IDA PCR for Tucson Electric Project, 3.85% (a) 5,117,151
CALIFORNIA - 7.22%
Alameda School Finance Authority Series D, 3.55% (a) 4,024,756
California School District Cash Reserves Program, 4.75% 2,088,403
Fremont Public Finance Authority for Family Resource Center, 3.60% (a) 501,577
Grand Terrace Community Redevelopment Agency, 4.40% (a) 5,818,234
Los Angeles USD TRAN, 4.50% 5,104,805
San Bernadino HFR Alta Park Project, 4.40% (a) 1,405,234
San Francisco Bayside Village Series 85D, 4.20% (a) 6,044,642
Santa Clara HFA for El Camino Hospital District Series A, 3.60% (a) 501,557
COLORADO - 3.17%
Englewood HCF for SW Medical Professional Ltd. Series 85, 4.20% (a) 1,454,171
Jefferson Country IDR for S.W. Medical Project, 4.20% (a) 2,356,760
Eagle Revenue Bonds for Smith Creek Metro District, 3.75% (a) 6,744,128
Wheat Ridge IDA for Pearse Electronics Inc. Project, 4.25% (a) 638,281
CONNECTICUT - 2.93%
Connecticut DAI for Allen Group Inc., 3.90% (a) 1,003,312
Connecticut Develop. Authority HCR for Independent Living Project, 3.70% (a) 1,203,738
Connecticut Development Authority PCR for Western Massachusetts
Electric Co. Series 1993A, 3.70% (a) 902,853
Connecticut HEF for Yale University Series T, 3.70% (a) 1,003,241
Connecticut State GOB Series B, 3.75% (a) 1,504,839
Hartford Redevelopment Agency MHR for Underwood Towers Project, 3.75% (a) 2,006,433
Sprague BAN, 4.05% 2,711,234
DISTRICT OF COLUMBIA - 1.51%
Washington, D.C. American University, 3.95% (a) 3,075,198
Washington, D.C. Housing Finance Agency MHR for Chastleton Development Project, 3.90% (a) 2,235,790
</TABLE>
16
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<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT
DESCRIPTION OF SECURITY DATE (IN THOUSANDS)
- ---------------------------------------------------------------------------------- ---- --------------
<S> <C> <C>
FLORIDA - 4.41%
Boca Raton IDA for Parking Garage Project, 4.075% (a) 12/1/2014 2,200
Broward MHR for Welleby Apartments Project, 3.60% (a) 12/1/2006 400
Dade County Hospital Revenue Bonds, 3.85% (a) 3/1/2025 100
Dade County Hospital Revenue Bonds, 3.90% (a) 9/1/2025 200
Dade County IDA for Dolphin Stadium Project Series B, 3.90% (a) 1/1/2016 4,200
Duval County HFA for Lakes of Mayport Apartment Project, 3.95% (a) 12/1/2009 300
Gulf Breeze Series 85 A Revenue Bonds, 3.70% (a) 12/1/2015 10
Jacksonville Hospital Revenue Bonds for University Medical Center, 4.25% (a) 2/1/2018 2,600
Jacksonville Hospital Revenue Bonds for University Medical Center, 4.25% (a) 2/1/2019 3,400
Martin PCR for Florida Power & Light, 3.95% (a) 9/1/2024 2,000
University of North Florida HEF Capital Improvement Project, 3.75% (a) 11/1/2024 100
GEORGIA - 3.93%
Clayton County DAI for Rivers Edge Development, 3.80% (a) 8/1/2006 3,925
Elbert County Industrial Building Authority Revenue Bonds for
Seaboard Farms of Elberton, 3.90% (a) 7/1/2005 1,800
Hapeville IDA for Hapeville Hotel Partnership Project, 3.95% (a) 11/1/2015 600
Municipal Electric Authority, 3.85% (a) 1/1/2026 7,500
IOWA - 2.73%
Buffalo IDA for Linwood Mining & Materials, 4.20% (a) 1/1/2000 805
Iowa Finance Authority Revenue Bonds for Hospital Health Care Systems Series B, 3.85% (a) 7/1/2020 3,400
Iowa RAW Series A, 4.50% 6/26/1998 5,000
Polk County IDA for Convalescene Center Series 88, 3.95% (a) 1/1/2011 200
ILLINOIS - 0.75%
Chicago O'Hare Airport Revenue Bonds for American Airlines, 4% (a) 12/1/2017 100
Illinois HFA for Community Hospital Center, 3.75% (a) 10/1/2015 900
Streamwood IDA for Olde Church Centre Project, 3.90% (a) 12/1/2014 1,635
INDIANA - 2.94%
Indiana Muni Power Authority Revenue Bonds Series A, 3.95% (a) 1/1/2018 1,600
Tippecanoe County PCR for Caterpillar Inc., 3.90% (a) 11/1/2006 8,750
KANSAS - 1.71%
Olathe GO Temp Notes Series A, 4.125% 6/1/1999 6,000
<CAPTION>
VALUE
DESCRIPTION OF SECURITY (NOTE 1)
- ---------------------------------------------------------------------------------- --------
<S> <C>
FLORIDA - 4.41%
Boca Raton IDA for Parking Garage Project, 4.075% (a) 2,222,325
Broward MHR for Welleby Apartments Project, 3.60% (a) 401,307
Dade County Hospital Revenue Bonds, 3.85% (a) 100,274
Dade County Hospital Revenue Bonds, 3.90% (a) 200,542
Dade County IDA for Dolphin Stadium Project Series B, 3.90% (a) 4,213,946
Duval County HFA for Lakes of Mayport Apartment Project, 3.95% (a) 301,013
Gulf Breeze Series 85 A Revenue Bonds, 3.70% (a) 10,033
Jacksonville Hospital Revenue Bonds for University Medical Center, 4.25% (a) 2,609,996
Jacksonville Hospital Revenue Bonds for University Medical Center, 4.25% (a) 3,413,071
Martin PCR for Florida Power & Light, 3.95% (a) 2,006,370
University of North Florida HEF Capital Improvement Project, 3.75% (a) 100,332
GEORGIA - 3.93%
Clayton County DAI for Rivers Edge Development, 3.80% (a) 3,938,189
Elbert County Industrial Building Authority Revenue Bonds for
Seaboard Farms of Elberton, 3.90% (a) 1,811,929
Hapeville IDA for Hapeville Hotel Partnership Project, 3.95% (a) 601,904
Municipal Electric Authority, 3.85% (a) 7,520,425
IOWA - 2.73%
Buffalo IDA for Linwood Mining & Materials, 4.20% (a) 807,872
Iowa Finance Authority Revenue Bonds for Hospital Health Care Systems Series B, 3.85% (a) 3,411,267
Iowa RAW Series A, 4.50% 5,211,897
Polk County IDA for Convalescene Center Series 88, 3.95% (a) 200,671
ILLINOIS - 0.75%
Chicago O'Hare Airport Revenue Bonds for American Airlines, 4% (a) 100,321
Illinois HFA for Community Hospital Center, 3.75% (a) 906,010
Streamwood IDA for Olde Church Centre Project, 3.90% (a) 1,640,588
INDIANA - 2.94%
Indiana Muni Power Authority Revenue Bonds Series A, 3.95% (a) 1,605,298
Tippecanoe County PCR for Caterpillar Inc., 3.90% (a) 8,779,498
KANSAS - 1.71%
Olathe GO Temp Notes Series A, 4.125% 6,042,882
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT
DESCRIPTION OF SECURITY DATE (IN THOUSANDS)
- ---------------------------------------------------------------------------------- ---- --------------
<S> <C> <C>
KENTUCKY - 3.04%
Lexington Fayette Residential Facilities Revenue Bonds
for Richmond Place Associate Project, 3.70% (a) 4/1/2015 1,100
Ohio County PCR for Big River Electric Corporation, 4.35% (a) 6/1/2013 4,000
Ohio County PCR for Big River Electric Corporation Project Series 1985, 4.50%(a) 10/1/2015 5,500
LOUISIANA - 0.28%
Louisiana Public Facilities Authority W. Knighton Project, 3.95% (a) 9/1/2025 1,000
MARYLAND - 2.42%
Baltimore IDA for Mayor and City Counsel Project, 4.50% (a) 8/1/2016 1,500
Maryland Health and Higher Education Pooled Project Series 85A, 3.85% (a) 4/1/2035 5,000
Montgomery County IDA for Info Systems and Network Corporation, 3.90% (a) 4/1/2014 500
Prince George County IDA for Frank Parsons Paper Co., 4.05% (a) 1/1/2013 1,500
MASSACHUSETTS - 7.06%
Clinton BAN, 4.25% 11/20/1998 5,000
Cohasset BAN, 4.15% 10/1/1998 2,000
Massachusetts GOB Series B, 3.80% (a) 8/1/2015 1,800
Massachusetts HEF for Harvard University, 3.60% (a) 2/1/2016 600
Massachusetts HEF for Partners Health Care Systems, 3.75% (a) 7/1/2027 1,000
Massachusetts IFA for Gordon College Series 97, 3.70% (a) 12/1/2027 500
Massachusetts IFA for Governor Dummer Academy, 3.70% (a) 7/1/2026 1,200
Massachusetts IFA for Milton Academy, 4% (a) 3/1/2027 1,000
Massachusetts Water Resource Authority, 3.75% (a) 4/1/2028 2,200
Massachusetts Muni Wholesale Electric Co., 3.75% (a) 7/1/2019 700
Natick BAN, 4.25% 8/7/1998 5,000
Ware BAN, 4% 12/18/1998 3,500
MICHIGAN - 2.03%
Grand Rapids Water Supply System, 3.80% (a) 1/1/2020 1,700
Jackson EDC for Thrifty Leoni Inc. Project, 3.825% (a) 12/1/2014 2,700
Michigan Job Development Authority for Mazda Motor, 4.325% (a) 10/1/2008 2,000
Michigan Job Development Authority for Hitachi Metals, 4.10% (a) 1/1/2004 700
MINNESOTA - 2.51%
Eagan MHR for Aspen Woods, 4.50% (a) 1/1/2026 5,480
New Brighton Industrial Development Refunding Revenue Bonds for
Taylor Corporation Series 1988, 5.44% (a) 11/1/1999 321
<CAPTION>
VALUE
DESCRIPTION OF SECURITY (NOTE 1)
- ---------------------------------------------------------------------------------- --------
<S> <C>
KENTUCKY - 3.04%
Lexington Fayette Residential Facilities Revenue Bonds
for Richmond Place Associate Project, 3.70% (a) 1,106,783
Ohio County PCR for Big River Electric Corporation, 4.35% (a) 4,084,745
Ohio County PCR for Big River Electric Corporation Project Series 1985, 4.50%(a) 5,521,247
LOUISIANA - 0.28%
Louisiana Public Facilities Authority W. Knighton Project, 3.95% (a) 1,002,795
MARYLAND - 2.42%
Baltimore IDA for Mayor and City Counsel Project, 4.50% (a) 1,504,736
Maryland Health and Higher Education Pooled Project Series 85A, 3.85% (a) 5,016,555
Montgomery County IDA for Info Systems and Network Corporation, 3.90% (a) 501,656
Prince George County IDA for Frank Parsons Paper Co., 4.05% (a) 1,505,160
MASSACHUSETTS - 7.06%
Clinton BAN, 4.25% 5,120,082
Cohasset BAN, 4.15% 2,056,987
Massachusetts GOB Series B, 3.80% (a) 1,805,938
Massachusetts HEF for Harvard University, 3.60% (a) 601,899
Massachusetts HEF for Partners Health Care Systems, 3.75% (a) 1,003,205
Massachusetts IFA for Gordon College Series 97, 3.70% (a) 501,262
Massachusetts IFA for Governor Dummer Academy, 3.70% (a) 1,203,018
Massachusetts IFA for Milton Academy, 4% (a) 1,003,397
Massachusetts Water Resource Authority, 3.75% (a) 2,207,052
Massachusetts Muni Wholesale Electric Co., 3.75% (a) 702,244
Natick BAN, 4.25% 5,175,994
Ware BAN, 4% 3,546,250
MICHIGAN - 2.03%
Grand Rapids Water Supply System, 3.80% (a) 1,724,308
Jackson EDC for Thrifty Leoni Inc. Project, 3.825% (a) 2,726,055
Michigan Job Development Authority for Mazda Motor, 4.325% (a) 2,007,718
Michigan Job Development Authority for Hitachi Metals, 4.10% (a) 702,438
MINNESOTA - 2.51%
Eagan MHR for Aspen Woods, 4.50% (a) 5,501,349
New Brighton Industrial Development Refunding Revenue Bonds for
Taylor Corporation Series 1988, 5.44% (a) 322,027
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT
DESCRIPTION OF SECURITY DATE (IN THOUSANDS)
- ---------------------------------------------------------------------------------- ---- --------------
<S> <C> <C>
MINNESOTA - (CONTINUED)
New Hope Commercial Development Revenue Bonds for
National Beauty Project Series 1994, 4.10% (a) 5/1/2010 775
New Ulm Commercial Development Authority for Rob H. Bradley Project, 4.10% (a) 10/1/2011 2,250
MISSOURI - 1.62%
Cole IDA for Modine Manufacturing Series 85, 4% (a) 12/1/2015 2,000
Kansas IDA Hospital Revenue for Baptist Health Series 88A, 3.75% (a) 8/1/2018
Missouri State Environmental Improvement and Energy Resources
Authority Pollution Control RAW Series A, 3.95% (a) 6/1/2014
MONTANA - .16%
Great Falls Commercial Development Revenue Bonds for Liberty
Development Partners Project, 4.05% (a) 12/1/2007 570
NEBRASKA - 3.58%
Nebraska EFA for Creighton University Project, 3.85% (a) 12/15/2012 7,500
Nuckolls IDA for Agrex Inc Project, 4.40%, (a) 2/1/2015 5,100
NEW JERSEY - 3.82%
Atlantic City IDA for Improvement Loan Program, 3.65% (a) 7/1/2026 500
Jersey City School Promissory Note, 4.125% 3/5/1999 4,000
New Jersey EDA for Stolthaven Perth Amboy, 3.80% (a) 1/15/2018 500
New Jersey EDA for Public Service Electric and Gas Series A, 3.75% (a) 9/1/2012 200
New Jersey EDA for Volvo of America Corp., 4.246% (a) 12/1/2004 1,300
New Jersey Sports Expo Authority Series C, 3.65% (a) 9/1/2024 1,600
New Jersey Turnpike Authority Series D, 3.75% (a) 1/1/2018 800
North Arlington BAN, 4.25% 9/11/1998 2,000
Rutgers University GOB, 7% (a) 5/1/2019 1,350
Trenton School Temporary Note, 3.70% 3/10/1999 1,000
NEW YORK - 8.22%
Brentwood USD TAN, 4.25% 6/30/1998 4,000
New York City GOB Series A, 3.95% (a) 8/1/2023 1,000
New York City GOB Series E5, 4% (a) 8/1/2015 2,700
New York City GOB Series E5, 4% (a) 8/1/2017 1,100
New York City GOB Series E5, 4% (a) 8/1/2019 1,100
New York City GOB Series E2, 4% (a) 8/1/2020 6,550
New York City GOB Series E2, 4% (a) 8/1/2021 1,100
<CAPTION>
VALUE
DESCRIPTION OF SECURITY (NOTE 1)
- ---------------------------------------------------------------------------------- --------
<S> <C>
MINNESOTA - (CONTINUED)
New Hope Commercial Development Revenue Bonds for
National Beauty Project Series 1994, 4.10% (a) 777,744
New Ulm Commercial Development Authority for Rob H. Bradley Project, 4.10% (a) 2,257,967
MISSOURI - 1.62%
Cole IDA for Modine Manufacturing Series 85, 4% (a) 2,014,008
Kansas IDA Hospital Revenue for Baptist Health Series 88A, 3.75% (a)
Missouri State Environmental Improvement and Energy Resources
Authority Pollution Control RAW Series A, 3.95% (a)
MONTANA - .16%
Great Falls Commercial Development Revenue Bonds for Liberty
Development Partners Project, 4.05% (a) 572,015
NEBRASKA - 3.58%
Nebraska EFA for Creighton University Project, 3.85% (a) 7,520,712
Nuckolls IDA for Agrex Inc Project, 4.40%, (a) 5,119,233
NEW JERSEY - 3.82%
Atlantic City IDA for Improvement Loan Program, 3.65% (a) 501,546
Jersey City School Promissory Note, 4.125% 4,054,699
New Jersey EDA for Stolthaven Perth Amboy, 3.80% (a) 501,529
New Jersey EDA for Public Service Electric and Gas Series A, 3.75% (a) 200,634
New Jersey EDA for Volvo of America Corp., 4.246% (a) 1,313,131
New Jersey Sports Expo Authority Series C, 3.65% (a) 1,614,058
New Jersey Turnpike Authority Series D, 3.75% (a) 810,615
North Arlington BAN, 4.25% 2,041,677
Rutgers University GOB, 7% (a) 1,423,973
Trenton School Temporary Note, 3.70% 1,009,302
NEW YORK - 8.22%
Brentwood USD TAN, 4.25% 4,152,845
New York City GOB Series A, 3.95% (a) 1,003,185
New York City GOB Series E5, 4% (a) 2,708,644
New York City GOB Series E5, 4% (a) 1,103,522
New York City GOB Series E5, 4% (a) 1,103,522
New York City GOB Series E2, 4% (a) 6,570,969
New York City GOB Series E2, 4% (a) 1,103,522
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT
DESCRIPTION OF SECURITY DATE (IN THOUSANDS)
- ---------------------------------------------------------------------------------- ---- --------------
<S> <C> <C>
NEW YORK - (CONTINUED)
North Hempstead BAN, 4.10% 10/29/1998 3,487
Oyster Bay BAN, 4% 4/30/1999 2,642
Rochester BAN, 3.75% 3/9/1999 5,000
NORTH DAKOTA - .17%
Minot IDR for Finance Project, 4.20% (a) 12/1/2002 600
OHIO - 5.38%
Brunswick IDA for Kinder-Care Learning Centers Project Series A, 4.05% (a) 6/1/2002 325
Claremont Hospital Facilities Revenue for Mercy Health Systems, 3.85% (a) 12/1/2021 900
Columbus ERD Electric Systems Revenue Bonds, 3.75% (a) 9/1/2009 800
Cuyahoga IDA for Allen Group Project, 3.85% (a) 12/1/2015 900
Cuyahoga Hospital Facilities Revenue for Cleveland Clinic, 3.90% (a) 1/1/2016 3,400
Cuyahoga IDA for Edgecomb Metals Co., 3.70% (a) 9/1/2009 900
Franklin County Industrial Development Refunding Revenue Bonds for Kinder-Care
Learning Centers Project Series A, 4.05% (a) 6/1/2002 1,080
Franklin County Hospital Revenue for US Health Corp Series A, 3.90% (a) 12/1/2021 3,500
Lucas County HFR for Lutheran Homes Society Project, 3.90% (a) 11/1/2019 900
Mohoning Hospital Facilities Revenue for Forum Health Group Series B, 3.90% (a) 12/1/2028 2,800
Port Authority of Cincinnati and Hamilton Counties for Kenwood
Office Association, 3.95% (a) 9/1/2025 1,000
Sharonville IDA for Edgecomb Metals Inc., 3.70% (a) 11/1/2009 1,610
Toledo Special Obligation Assessment Notes, 3.90% 12/1/1998 800
OKLAHOMA - 1.00%
Oklahoma IDA for Christian College, 4.625% (a) 7/1/2015 3,500
OREGON - 1.14%
Medford HFA for Rogue Valley Health Services, 3.95% (a) 10/1/2016 100
Portland MFR for South Park Project, 3.60% (a) 12/1/2011 3,900
PENNSYLVANIA - 12.61%
Allegheny Hospital Development Authority for Allegheny General Hospital Series B, 3.90% (a) 9/1/2010 5,500
Allegheny University Project Series 85, 3.60% (a) 7/1/2015 400
Allegheny Hospital Development Authority for St. Francis Health Systems, 3.90% (a) 11/1/2027 500
Bucks IDA for Edgecomb Metals Co., 3.70% (a) 10/1/2009 530
Chartier Valley Industrial and Commercial Development
Authority Revenue Bonds for 1133 Penn Ave Associates Project Series A, 3.90% (a) 8/1/2007 1,564
Chester IDA for Archdiocese of Philadelphia, 4% (a) 7/1/2027 1,400
<CAPTION>
VALUE
DESCRIPTION OF SECURITY (NOTE 1)
- ---------------------------------------------------------------------------------- --------
<S> <C>
NEW YORK - (CONTINUED)
North Hempstead BAN, 4.10% 3,573,791
Oyster Bay BAN, 4% 2,658,637
Rochester BAN, 3.75% 5,049,313
NORTH DAKOTA - .17%
Minot IDR for Finance Project, 4.20% (a) 602,140
OHIO - 5.38%
Brunswick IDA for Kinder-Care Learning Centers Project Series A, 4.05% (a) 326,122
Claremont Hospital Facilities Revenue for Mercy Health Systems, 3.85% (a) 902,974
Columbus ERD Electric Systems Revenue Bonds, 3.75% (a) 802,548
Cuyahoga IDA for Allen Group Project, 3.85% (a) 902,460
Cuyahoga Hospital Facilities Revenue for Cleveland Clinic, 3.90% (a) 3,411,248
Cuyahoga IDA for Edgecomb Metals Co., 3.70% (a) 908,282
Franklin County Industrial Development Refunding Revenue Bonds for Kinder-Care
Learning Centers Project Series A, 4.05% (a) 1,083,728
Franklin County Hospital Revenue for US Health Corp Series A, 3.90% (a) 3,511,574
Lucas County HFR for Lutheran Homes Society Project, 3.90% (a) 902,992
Mohoning Hospital Facilities Revenue for Forum Health Group Series B, 3.90% (a) 2,809,259
Port Authority of Cincinnati and Hamilton Counties for Kenwood
Office Association, 3.95% (a) 1,003,192
Sharonville IDA for Edgecomb Metals Inc., 3.70% (a) 1,615,427
Toledo Special Obligation Assessment Notes, 3.90% 802,645
OKLAHOMA - 1.00%
Oklahoma IDA for Christian College, 4.625% (a) 3,526,118
OREGON - 1.14%
Medford HFA for Rogue Valley Health Services, 3.95% (a) 100,318
Portland MFR for South Park Project, 3.60% (a) 3,912,683
PENNSYLVANIA - 12.61%
Allegheny Hospital Development Authority for Allegheny General Hospital Series B, 3.90% (a) 5,518,248
Allegheny University Project Series 85, 3.60% (a) 402,534
Allegheny Hospital Development Authority for St. Francis Health Systems, 3.90% (a) 501,658
Bucks IDA for Edgecomb Metals Co., 3.70% (a) 533,494
Chartier Valley Industrial and Commercial Development
Authority Revenue Bonds for 1133 Penn Ave Associates Project Series A, 3.90% (a) 1,569,228
Chester IDA for Archdiocese of Philadelphia, 4% (a) 1,404,444
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT
DESCRIPTION OF SECURITY DATE (IN THOUSANDS)
- ---------------------------------------------------------------------------------- ---- --------------
<S> <C> <C>
PENNSYLVANIA - (CONTINUED)
Clarion County IDA for Special Development Revenue Bonds for
Meritcare Project Series A, 3.90% (a) 12/1/2012 2,000
Dallastown Area School District GOB, 3.93% (a) 2/1/2018 2,000
Dauphin General Authority Revenue Bonds, 3.93% (a) 11/1/2017 100
Delaware IDA PCR for Philadelphia Electric Company, 3.95% (a) 8/1/2016 600
Delaware Valley Regional Finance Authority Revenue Bonds Series 85D, 3.90%(a) 12/1/2020 4,750
Emmans GOB Local Government Revenue Bonds, 3.95% (a) 3/1/2024 2,400
Emmans GOB Local Government Revenue Bonds, 3.80% (a) 12/1/2028 5,000
Mercersburg General Purpose Authority, 3.85% (a) 11/1/2027 955
Northeastern HEF Wyoming Valley HCS Revenue Bonds, 3.85% (a) 1/1/2024 500
Pennsylvania COP, 4.25% 7/1/1998 1,000
Pennsylvania Higher Education for Kings College Series B4, 4.50% (a) 11/1/2002 3,800
Philadelphia MHR for Harbor View Tower Project, 4.50% (a) 11/1/2027 3,500
Philadelphia Hospital Authority for Children's Hospital, 4% (a) 3/1/2027 300
Philadelphia TRAN, 4.50% 6/30/1998 1,500
Philadelphia School District TRAN, 4.50% 6/30/1998 1,500
Philadelphia Redevelopment Authority for Multifamily Court Project, 3.75% (a) 6/1/2025 4,425
PUERTO RICO - 0.29%
Puerto Rico Electric Power Authority Series 11, 3.85% (a) 7/1/2022 1,000
SOUTH CAROLINA - 0.65%
South Carolina HFA for Waverly Place Project, 3.80% (a) 11/1/2007 2,270
TENNESSEE -1.92%
Chattanooga IDA for Baylor School Project, 3.90% (a) 11/1/2016 375
Chattanooga IDA for Erlanger Medical Center, 4% (a) 10/1/2017 500
Clarksville Public Building Authority for Muni Bond Fund, 3.90% (a) 11/1/2027 5,000
Franklin HEF for Franklin Health Care Center, 4.40% (a) 6/1/2005 865
TEXAS - 1.54%
Harris HCF for Greater Houston Project, 3.85% (a) 11/1/2025 2,700
Texas Small Business IDC Public Access Project, 3.95% (a) 7/1/2026 2,700
UTAH - 1.56%
Salt Lake City IDR for Parkview Plaza Project, 3.95% (a) 12/1/2014 5,475
WASHINGTON - 0.77%
Port of Seattle DAI for Douglas Management Corporation, 3.95% (a) 12/1/2005 2,700
<CAPTION>
VALUE
DESCRIPTION OF SECURITY (NOTE 1)
- ---------------------------------------------------------------------------------- --------
<S> <C>
PENNSYLVANIA - (CONTINUED)
Clarion County IDA for Special Development Revenue Bonds for
Meritcare Project Series A, 3.90% (a) 2,006,685
Dallastown Area School District GOB, 3.93% (a) 2,006,708
Dauphin General Authority Revenue Bonds, 3.93% (a) 100,335
Delaware IDA PCR for Philadelphia Electric Company, 3.95% (a) 601,896
Delaware Valley Regional Finance Authority Revenue Bonds Series 85D, 3.90%(a) 4,765,571
Emmans GOB Local Government Revenue Bonds, 3.95% (a) 2,408,002
Emmans GOB Local Government Revenue Bonds, 3.80% (a) 5,016,486
Mercersburg General Purpose Authority, 3.85% (a) 957,656
Northeastern HEF Wyoming Valley HCS Revenue Bonds, 3.85% (a) 501,652
Pennsylvania COP, 4.25% 1,017,728
Pennsylvania Higher Education for Kings College Series B4, 4.50% (a) 3,824,033
Philadelphia MHR for Harbor View Tower Project, 4.50% (a) 3,512,835
Philadelphia Hospital Authority for Children's Hospital, 4% (a) 300,960
Philadelphia TRAN, 4.50% 1,562,340
Philadelphia School District TRAN, 4.50% 1,562,340
Philadelphia Redevelopment Authority for Multifamily Court Project, 3.75% (a) 4,439,439
PUERTO RICO - 0.29%
Puerto Rico Electric Power Authority Series 11, 3.85% (a) 1,014,325
SOUTH CAROLINA - 0.65%
South Carolina HFA for Waverly Place Project, 3.80% (a) 2,277,608
TENNESSEE -1.92%
Chattanooga IDA for Baylor School Project, 3.90% (a) 376,244
Chattanooga IDA for Erlanger Medical Center, 4% (a) 501,605
Clarksville Public Building Authority for Muni Bond Fund, 3.90% (a) 5,016,630
Franklin HEF for Franklin Health Care Center, 4.40% (a) 868,232
TEXAS - 1.54%
Harris HCF for Greater Houston Project, 3.85% (a) 2,709,080
Texas Small Business IDC Public Access Project, 3.95% (a) 2,707,468
UTAH - 1.56%
Salt Lake City IDR for Parkview Plaza Project, 3.95% (a) 5,490,269
WASHINGTON - 0.77%
Port of Seattle DAI for Douglas Management Corporation, 3.95% (a) 2,709,239
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT
DESCRIPTION OF SECURITY DATE (IN THOUSANDS)
- ---------------------------------------------------------------------------------- ---- --------------
<S> <C> <C>
WISCONSIN - 2.80%
Green Bay IDA for St. Mary Cement Company Ltd., 4% (a) 11/1/2000 3,500
Mukwonago School District TRAN, 4.12% 8/28/1998 5,150
Wisconsin GOB, 6.50% 5/1/1999 1,000
WYOMING - 0.51%
Sweetwater IDA for Pacific Corp Project Series A, 3.60% (a) 7/1/2015 1,800
Total Interstate Tax-Exempt Fund Fund Investments (99.93%) (Cost $349,665,603)
Other assets, less liabilities(0.07%)
NET ASSETS (100%) equivalent to $1.00 Q net asset value, offering
and redemption prices per share on 352,868,857 shares of
beneficial interest of $.001 par value outstanding.
<CAPTION>
VALUE
DESCRIPTION OF SECURITY (NOTE 1)
- ---------------------------------------------------------------------------------- --------
<S> <C>
WISCONSIN - 2.80%
Green Bay IDA for St. Mary Cement Company Ltd., 4% (a) 3,509,939
Mukwonago School District TRAN, 4.12% 5,316,563
Wisconsin GOB, 6.50% 1,039,882
WYOMING - 0.51%
Sweetwater IDA for Pacific Corp Project Series A, 3.60% (a) 1,805,817
-----------
Total Interstate Tax-Exempt Fund Fund Investments (99.93%) (Cost $349,665,603) 352,605,237
Other assets, less liabilities(0.07%) 263,620
-----------
NET ASSETS (100%) equivalent to $1.00 Q net asset value, offering
and redemption prices per share on 352,868,857 shares of
beneficial interest of $.001 par value outstanding. 352,868,857
===========
</TABLE>
(a) The interest rate is subject to change periodically. The rates shown were
in effect at May 31, 1998. Securities payable on demand are collateralized
by bank letters of credit or other bank credit agreements.
SECURITY TYPE ABBREVIATIONS:
BAN - Bond Anticipation Notes
COP - Certificates of Participation
DAI - Development Authority Industrial Development Refunding Bonds
EDA - Economic Development Authority Revenue Bonds
EDC - Economic Development Corporation
EFA - Economic Finance Authority
ERD - Energy Research and Development Authority
GOB - General Obligation Bonds
HCF - Health Care Facility
HCR - Housing Corporation Revenue Bonds
HEF - Health and Educational Facilities Revenue Bonds
HFA - Health Facilities Authority Revenue Bonds
HFR - Health Facilities Revenue Bonds
IDA - Industrial Development Authority Revenue Bonds
IDR - Industrial Development Agency Revenue Bonds
IFA - Industrial Finance Agency Revenue Bonds
MHR - Multifamily Housing Revenue Bonds
PCR - Pollution Control Revenue Bonds
TAN - Tax Anticipation Notes
TRAN- Tax & Revenue Anticipation Notes
RAN - Revenue Anticipation Notes
RAW - Revenue Anticipation Warrants
USD - Unified School District Bonds
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE> 23
RESERVE TAX-EXEMPT TRUST-INTERSTATE TAX-EXEMPT FUND STATEMENT OF OPERATIONS
<TABLE>
<S> <C>
INTEREST INCOME (Note 1) $12,517,551
-----------
EXPENSES (Note 2)
Management fee 1,676,899
Shareholder servicing, administration and general office expenses 622,342
Distribution assistance (Note 3) 635,544
Equipment expense 91,486
Professional fees 68,720
Occupancy costs 32,031
Stationery, printing and supplies 52,699
Trustee fees 5,582
Other expenses 81,405
-----------
Total Expenses 3,266,708
-----------
NET INVESTMENT INCOME $ 9,250,843
===========
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MAY 31, 1998 MAY 31, 1997
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM INVESTMENT OPERATIONS:
Net investment income paid to Shareholders as dividends (Note 1)
$ (9,250,843) $ (7,762,495)
-------------- --------------
FROM CAPITAL SHARE TRANSACTIONS (at net asset value of $1 per share):
Net proceeds from sale of shares 1,583,012,502 1,254,673,650
Net asset value of shares issued on reinvestment of dividends 9,250,843 7,762,495
-------------- --------------
Subtotal 1,592,263,345 1,262,436,145
Cost of shares redeemed (1,545,546,354) (1,248,351,729)
-------------- --------------
Net increase in net assets derived from capital share
transactions and from investment operations 46,716,991 14,084,416
NET ASSETS:
Beginning of year 306,151,866 292,067,450
-------------- --------------
End of year $ 352,868,857 $ 306,151,866
============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE> 24
RESERVE TAX EXEMPT TRUST-INTERSTATE TAX-EXEMPT FUND ("TRUST")
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
The Trust is registered under the Investment Company Act of 1940 as a
nondiversified, open-end investment company. The policies summarized below are
consistently followed in the preparation of its financial statements in
conformity with generally accepted accounting principles.
A. The Trust's shares of beneficial interest authorized are unlimited and
divided into eight series, California, Connecticut, Florida,
Interstate, Massachusetts, New Jersey, Ohio and Pennsylvania Funds.
These financial statements and notes apply only to the Interstate Fund
("Fund").
B. Securities are stated at value which represents cost plus interest
accrued to date. Under Securities and Exchange Commission Rule 2a-7, the
Trust uses amortized cost to value the Fund, by which investments are
valued at cost and the difference between the cost of each instrument
and its value at maturity is accrued into income on a straight line
basis over the days to maturity, irrespective of intervening changes in
interest rates or market value of investments. The maturity of floating
or variable rate instruments in which the Trust may invest will be
deemed to be, for floating rate instruments (1) following, and for
variable rate instruments the longer of (1) or (2) following: (1) the
notice period required before the Fund is entitled to receive payment of
the principal amount of the instrument; (2) the period remaining until
the instrument's next rate adjustment, for purposes of Rule 2a-7 and for
computing the portfolio's average weighted life to maturity.
C. It is the Trust's policy to comply with the requirements of Subchapter M
of the Internal Revenue Code and to distribute all income to its
shareholders. Accordingly, no Federal income tax provision is required.
D. Investments are recorded as of the date of their purchase and sale.
Interest income is determined on the basis of interest accrued, premium
amortized, and discount accreted.
E. Net investment income on investments is distributed to shareholders
daily and automatically reinvested in additional shares.
F. The Fund is charged only for its direct or allocated (in proportion to
net assets or number of shareholder accounts) share of expenses.
2. MANAGEMENT FEE, SHAREHOLDER SERVICING COSTS AND TRANSACTIONS WITH
AFFILIATES:
Reserve Management Company, Inc. ("RMCI") manages the Interstate
portfolio's investments, as well as the investments of the California,
Connecticut, Florida, Massachusetts, New Jersey, Ohio and Pennsylvania
Funds of the Reserve Tax-Exempt Trust, effects purchases and sales thereof,
and absorbs certain promotional expenses. For such services RMCI receives
management fees at an annual rate of .50% of the first $500 million, .475%
of the next $500 million, .45% of the next $500 million, .425% of the next
$500 million, and .40% of any excess over $2 billion of the average daily
closing net assets of each Fund. Also, under the current Service Agreement,
RMCI was reimbursed $954,265 during the year ended May 31, 1998 for
expenditures made on behalf of the Fund for personnel, office space and
equipment and shareholder accounting and administrative services, to
conduct the Fund's business. At May 31, 1998, the Fund had accrued expenses
of $28,996 due to RMCI.
24
<PAGE> 25
3. DISTRIBUTION ASSISTANCE:
Pursuant to a Distribution Plan, the Trust will make payments of up to .20%
per annum of the average net asset value of the Trust's qualified
shareholder accounts as to which the payee or RMCI has rendered assistance
in distributing its shares.
4. INVESTMENT CONCENTRATION
The Interstate Fund invests substantially all of its assets in a portfolio
of tax-exempt debt obligations primarily consisting of issuers of various
states. The issuers' abilities to meet their obligations may be affected by
economic, regional or political developments. In order to reduce the credit
risk associated with such factors, 76.26% of the Interstate Funds
investments were backed by letters of credit, bond insurance of financial
institutions and financial guaranty assurance agencies.
5. MANAGEMENT'S USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the dates of the financial statements and the reported amounts of income
and expenses during the reporting periods. Actual results could differ from
those estimates.
6. COMPONENTS OF NET ASSETS
At May 31, 1998, the Interstate Fund's net assets consisted of $352,869
par-value and $352,515,988 paid-in-capital.
FEDERAL TAX INFORMATION - (UNAUDITED)
The dividends distributed by the Interstate Tax-Exempt Fund are exempt interest
dividends for Federal tax purposes.
25
<PAGE> 26
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
-------------------------------------------------------
INTERSTATE TAX-EXEMPT FUND 1998 1997 1996 1995 1994
- -------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year $1.0000 $1.0000 $1.0000 1.0000 $1.0000
------- ------- ------- ------ -------
Income from investment
operations .0378 .0361 .0390 .0368 .0268
Expenses .0099 .0105 .0105 .0103 .0103
----- --------- --------- ---------
Net investment income (1) .0279 .0256 .0285 .0265 .0165
Dividends from net investment
income (1) (.0279) (.0256) (.0285) (.0265) (.0165)
-------- ------- --------- --------- --------
Net asset value, end of year $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= =======
Total return 2.79% 2.56% 2.85% 2.65% 1.65%
RATIOS/SUPPLEMENTAL DATA
Net assets in thousands, end of
year 352,869 306,152 292,067 315,232 352,594
Ratio of expenses to average
net assets .97% 1.04% 1.04% 1.00% 1.02%
Ratio of net investment income
to average net assets 2.75% 2.52% 2.80% 2.59% 1.63%
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
----------------------------------------------------
INTERSTATE TAX-EXEMPT FUND 1993 1992 1991 1990 1989
- -------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- -------
Income from investment
operations .0312 .0455 .0599 .0663 .0650
Expenses .0104 .0106 .0105 .0104 .0104
------- ------- ------- ------- -------
Net investment income (1) .0208 .0349 .0494 .0559 .0546
Dividends from net investment
income (1) (.0208) (.0349) (.0494) (.0559) (.0546)
------- ------- ------- ------- -------
Net asset value, end of year $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= =======
Total return 2.08% 3.49% 4.94% 5.59% 5.46%
RATIOS/SUPPLEMENTAL DATA
Net assets in thousands, end of
year 366,383 358,101 333,321 306,153 312,239
Ratio of expenses to average
net assets 1.03% 1.03% 1.03% 1.01% 1.01%
Ratio of net investment income
to average net assets 2.06% 3.41% 4.81% 5.43% 5.29%
</TABLE>
- ----------
(1) Based on compounding of daily dividend. Not indicative of future results.
26
<PAGE> 27
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Trustees of Reserve New York Tax-Exempt
Trust - New York Tax-Exempt Fund and Reserve Tax-Exempt Trust - California,
Connecticut, Florida, Massachusetts and New Jersey, Ohio and Pennsylvania
Tax-Exempt Funds:
In our opinion, the accompanying statement of net assets and the related
statement of operations and the statements of changes in net assets and
financial highlights present fairly, in all material respects, the financial
position of Reserve New York Tax-Exempt Trust - New York Tax-Exempt Fund and the
California, Connecticut, Florida, Massachusetts, New Jersey, Ohio and
Pennsylvania Tax-Exempt Funds, (seven of the eight series constituting Reserve
Tax-Exempt Trust) at May 31, 1998, the results of their operations for the
periods then ended, the changes in its net assets for each of the periods then
ended and the financial highlights for each of the periods presented in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Trusts management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at May 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
NEW YORK, NY JULY 28, 1998
27
<PAGE> 28
RESERVE TAX-EXEMPT TRUST
CALIFORNIA TAX-EXEMPT FUND
CONNECTICUT TAX-EXEMPT FUND
FLORIDA TAX-EXEMPT TRUST
MASSACHUSETTS TAX-EXEMPT FUND
NEW JERSEY TAX-EXEMPT FUND
OHIO TAX-EXEMPT FUND
PENNSYLVANIA TAX-EXEMPT FUND
RESERVE NEW YORK TAX-EXEMPT TRUST
NEW YORK TAX-EXEMPT FUND
810 SEVENTH AVENUE, NEW YORK, NY 10019
800-637-1700 - 212-977-9982
24-HOUR YIELD AND BALANCE INFORMATION
NATIONWIDE 800-637-1700 - WWW.RESERVEFUNDS.COM
-------------------
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information describes the California
Tax-Exempt, Connecticut Tax-Exempt, Florida Tax-Exempt, Massachusetts
Tax-Exempt, New Jersey Tax-Exempt, Ohio Tax-Exempt and Pennsylvania Tax-Exempt
Funds of Reserve Tax-Exempt Trust and the New York Tax-Exempt Fund of Reserve
New York Tax-Exempt Trust (each a fund, together the "Funds"). This Statement
is not a Prospectus, but provides detailed information to supplement the
Prospectus dated July 31, 1998 and should be read in conjunction with it. A
copy of the Prospectus may be obtained by writing or calling the Funds at the
above address or telephone number. The Securities and Exchange Commission
("SEC") maintains a web site (http://www.sec.gov) that contains this Statement
and other information regarding the Funds electronically filed with the SEC.
This SAI is dated July 31, 1998.
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
----------------- ----
<S> <C>
Investment Objective and Policies............... 2
Trustees and Executive Officers................. 3
Investment Management, Distribution,
Service and Custodian Agreements.............. 5
Portfolio Turnover, Transaction Charges
and Allocation................................ 7
Shares of Beneficial Interest................... 7
Purchase, Redemption and Pricing of Shares...... 8
Distributions and Taxes......................... 10
Fund Yield...................................... 12
Reserve Cash Performance Account................ 12
Municipal Obligations........................... 13
Ratings......................................... 14
Risk Factors of Concentrating in California..... 15
Risk Factors of Concentrating in Connecticut.... 18
Risk Factors of Concentrating in Florida........ 20
Risk Factors of Concentrating in
Massachusetts................................. 21
Risk Factors of Concentrating in New Jersey..... 22
Risk Factors of Concentrating in New York....... 23
Risk Factors of Concentrating in Ohio........... 26
Risk Factors of Concentrating in
Pennsylvania.................................. 26
Financial Statements............................ 28
Report of Independent Accountants............... 56
</TABLE>
<PAGE> 29
INVESTMENT OBJECTIVE AND POLICIES
The following information provides additional details about the Funds'
investment objectives and policies.
Each Fund's investment objective is to seek as high a level of short-term
interest income exempt from federal, state, and, with respect to the New York
Portfolio, local income taxes, and with respect to Florida Tax-Exempt Fund, the
Florida intangibles tax, and with respect to the Pennsylvania Tax-Exempt Fund,
the Pennsylvania county personal property tax, as is consistent with
preservation of capital and liquidity, by investing principally in municipal
securities.
These securities are generally known as "municipal bonds" or "municipal
notes" ("Municipal Obligations") and the interest on them is exempt from
federal income tax in the opinion of bond counsel for the issuers. Municipal
Obligations generally include debt obligations issued to obtain funds for
various public purposes, including the construction of a wide range of public
facilities such as airports, bridges, highways, housing, hospitals, mass
transportation, school streets, and water and sewer works. Other public
purposes for which Municipal Obligations may be issued include refunding
outstanding obligations, obtaining funds for general operating expenses and
lending such funds to other public institutions and facilities. In addition,
certain types of industrial development bonds are issued by or on behalf of
public authorities to obtain funds to provide for the construction, equipment,
repair or improvement of privately operated housing facilities, sports
facilities, convention or trade show facilities, airport, mass transit,
industrial, port or parking facilities, air or water pollution control
facilities and certain local facilities for water supply, gas, electricity or
sewage or solid waste disposal; the interest paid on such obligations may be
exempt from federal income tax. At least 80% of each Fund's assets will be
invested in Municipal Obligations exempt from federal, state, and with respect
to the New York Tax-Exempt Fund, local personal income taxes, and with respect
to Florida Tax-Exempt Fund, the Florida intangibles tax, and with respect to
the Pennsylvania Tax-Exempt Fund, the Pennsylvania county personal property
tax, unless the Fund has adopted a defensive position. During periods when a
state's Municipal Obligations meeting a Fund's quality standards are not
available, a Fund may invest up to 20% of its assets, or a greater percentage
on a temporary basis, in Municipal Obligations exempt only from federal income
taxes.
The Funds will purchase tax-exempt securities which are rated MIG-1 or MIG-2
by Moody's Investor Services, Inc. ("Moody's"); SP-1 or SP-2 by Standard &
Poor's Corporation ("S&P") or the equivalent thereof. Municipal Obligations
which are not rated may be purchased provided such securities are determined to
be of comparable quality by the Fund's investment adviser pursuant to
guidelines adopted by the Board of Trustees to those rated securities in which
a Fund may invest.
Subsequent to its purchase by a Fund, an issue of rated Municipal
Obligations may cease to be rated or its rating may be reduced below the
minimum required for purchase by the Fund. In the event a Municipal
Obligation's rating falls below the second highest rating category of any
nationally recognized statistical rating agency, the Municipal Obligation will
be disposed of within five Business Days of the date the investment adviser
becomes aware of the new rating absent a determination by the Board of Trustees
that the sale of the security would not be in the best interest of the Fund.
Should a rated Municipal Obligation cease to be rated, the investment adviser
will promptly reassess the quality and credit risk of the Municipal Obligation.
The ratings of Moody's and S&P represent their opinions as to the quality of
the Municipal Obligations which they rate. It should be emphasized, however,
that ratings are relative and subjective and are not absolute standards of
quality.
From time to time, on a temporary basis other than for temporary defensive
purposes, the Funds may invest in taxable short term investments ("Taxable
Investments") consisting of obligations backed by the full faith and credit of
the U.S. Government, its agencies and instrumentalities ("U.S. Governments");
deposit-type obligations, acceptances, and letters of credit of Federal Deposit
Insurance Corporation member banks; or instruments fully secured or
collateralized by such obligations. The Funds will not invest in foreign
securities or in taxable commercial paper. Interest earned on Taxable
Investments will be taxable income to investors. Unless a Fund has adopted a
temporary defensive position, no more than 20% of the net assets of a Fund will
be invested in Taxable Investments at any time.
SUPPLEMENTAL INVESTMENT POLICIES. The Funds' investment objective, and the
following supplemental policies may not be changed without the affirmative vote
of a majority of the outstanding shares of a Fund. A majority of the
outstanding shares of a Fund means the vote of the lesser of (i) 67% or more of
the shares of the Fund present at
2
<PAGE> 30
a meeting, if the holders of more than 50% of the outstanding shares of the Fund
are present or represented by proxy, or (ii) more than 50% of the outstanding
shares of a Fund. A Fund cannot:
(1) invest in any security other than those discussed herein or in the
Prospectus;
(2) borrow money except as a temporary or emergency measure (but not for the
purpose of purchasing investment securities), and not in an amount to
exceed 5% of the value of its total assets;
(3) issue securities senior to its capital stock;
(4) act as an underwriter with respect to the securities of others;
(5) concentrate investments in any particular industry except to the extent
that its investments are concentrated exclusively in Municipal
Obligations, U.S. Governments or instruments secured by such obligations;
(6) purchase, sell or otherwise invest in real estate or commodities or
commodity contracts; however, a Fund may purchase Municipal Obligations
secured by interests in real estate;
(7) lend more than 33 1/3% of the value of its total assets except to the
extent its investments are considered loans;
(8) sell any security short or write, sell or purchase any futures contract
or put or call option; provided, however, a Fund shall have the authority
to purchase Municipal Obligations subject to a stand-by commitment, at
the Fund's option;
(9) invest in voting securities or in companies for the purpose of exercising
control;
(10) invest in the securities of other investment companies except in
compliance with the Investment Company Act of 1940 ("1940 Act");
(11) make investments on a margin basis; and
(12) purchase or sell any securities (other than securities of the Fund) from
or to any officer or Trustee of a Fund, the investment adviser or
affiliated person except in compliance with the 1940 Act.
OTHER POLICIES. Certain banks and other municipal securities dealers have
indicated a willingness to sell Municipal Obligations to the Funds accompanied
by a stand-by commitment to repurchase the securities, at a Fund's option or on
a specified date, at an agreed-upon price or yield within a specified period
prior to the maturity date of such securities.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS. A repurchase agreement
transaction occurs when a Fund purchases and simultaneously contracts to resell
securities at fixed prices determined by the yields negotiated. Each Fund will
limit repurchase agreement transactions to those financial institutions and
securities dealers who are deemed credit-worthy pursuant to guidelines
established by each Fund's Board of Trustees. The investment adviser will
follow procedures intended to provide that all acquired repurchase agreements
are at least 100% collateralized as to principal and interest. A Fund will make
payment for such instruments only upon their physical delivery to, or evidence
of their book-entry transfer to, the account of a Fund's custodian. If the
seller defaults on the repurchase obligation, a Fund could incur a loss, and
may incur costs in disposing of the underlying security. The Funds will not
hold more than 10% of their net assets in illiquid securities, including
repurchase agreements with a term greater than seven days.
The Funds may sell securities in a reverse repurchase agreement when it is
considered advantageous, such as to cover net redemptions or to avoid a
premature outright sale of its portfolio securities. In a typical reverse
repurchase agreement transaction, the seller (Fund) retains the right to
receive interest and principal payments on the security, but transfers title to
and possession of the security to a second party in return for a percentage of
its value. By paying back to this party the value received plus interest, a
Fund repurchases the transferred security. It is the Funds' policy that
entering into a reverse repurchase agreement will be for temporary purposes
only, and, when aggregated with other borrowing, may not exceed 5% of the value
of the total assets of a Fund at the time of the transaction.
TRUSTEES AND EXECUTIVE OFFICERS
*BRUCE R. BENT, 61, President, Treasurer and Trustee, 810 Seventh Avenue,
New York, NY 10019.
Mr. Bent is President, Treasurer, and Trustee of The Reserve Funds ("RF"),
Reserve Institutional Trust ("RIT"), Reserve Tax-Exempt Trust ("RTET"), Reserve
New York Tax-Exempt Trust ("RNYTET") and Reserve Private Equity Series
("RPES"); Director, Vice President and Secretary of Reserve Management Company,
Inc. ("RMCI") and Reserve Management Corporation ("RMC") ; and Chairman and
Director of Resrv Partners, Inc. ("RESRV").
3
<PAGE> 31
+EDWIN EHLERT, JR., 67, Trustee, 125 Elm Street, Westfield, NJ 07091.
Mr. Ehlert is President and Director of Ehlert Travel Associates, Inc.
(travel agency) and Ehlert Travel Associates of Florida, Inc. (travel agency),
and Trustee of RF, RIT, RNYTET, RTET and RPES.
+HENRI W. EMMET, 72, Trustee, 1535 Presidential Drive, Apt. 4A, Columbus, OH
43212.
Mr. Emmet retired as the Managing Director of Servus Associates, Inc. in
1994 and U.S.A. Representative of the First National Bank of Southern Africa in
1996. He is currently Trustee of RF, RIT, RNYTET, RTET and RPES.
+DONALD J. HARRINGTON, C.M., 52, Trustee, St. John's University, Jamaica, NY
11439.
The Reverend Harrington is President of St. John's University (NY), a
Trustee of RF, RIT, RNYTET, RTET and RPES and a Director of Bear Stearns
Companies since 1993.
BRUCE R. BENT II, 32, Senior Vice President and Assistant Secretary, 810
Seventh Avenue, New York, NY 10019.
Mr. Bent II joined The Reserve Funds in 1992 and is Senior Vice President
and Assistant Secretary of RF, RIT, RNYTET, RTET and RPES.
MARYKATHLEEN FOYNES, 28, Counsel and Secretary, 810 Seventh Avenue, New
York, NY 10019.
Ms. Foynes is Counsel and Secretary of RF, RIT, RNYTET, RTET and RPES.
Before joining The Reserve Funds in 1998, Ms. Foynes was a staff attorney for
PaineWebber, Inc.
- -------
+ Messrs. Ehlert, Emmet and Harrington are members of a Review Committee which
performs the functions of an Audit Committee and reviews compliance
procedures and practices. During the year ended May 31, 1998, each Fund held
four Board meetings and one Review Committee meeting
* Interested Trustee within the meaning of the 1940 Act. The members of the
Board of Trustees, who are not interested trustees, will be paid a stipend
of $3,500 for each joint Board meeting that they attend and an annual fee of
$16,000 for service to all of the trusts in the complex.
As of May 31, 1998, Trustees and officers as a group owned less than 1%
of the outstanding shares of the 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.
COMPENSATION TABLE
FOR FISCAL YEAR ENDING MAY 31, 1998
<TABLE>
<CAPTION>
TOTAL COMPENSATION
AGGREGATE FROM FUND AND FUND COMPLEX
COMPENSATION (4 ADDITIONAL TRUSTS) PAID TO
NAME OF TRUSTEE FROM FUND TRUSTEE
--------------- --------- -------
<S> <C> <C>
Bruce R. Bent, President &
Trustee $ 0 $ 0
Edwin Ehlert, Jr., Trustee $3987 $30,000
Henri W. Emmet, Trustee $3987 $30,000
Rev. Donald J. Harrington,
Trustee $3987 $30,000
</TABLE>
4
<PAGE> 32
INVESTMENT MANAGEMENT, DISTRIBUTION, SERVICE AND CUSTODIAN AGREEMENTS
THE ADVISER. Reserve Management Company, Inc. ("RMCI" or "Adviser"), 14
Locust Place, Manhasset, NY, 11030, a registered investment adviser, manages
the Fund and provides it with investment advice. Under the Investment
Management Agreement, RMCI manages each Fund's investments, including effecting
purchases and sales thereof, in furtherance of its investment objective and
policies, subject to overall control and direction of the Trustees. RMCI also
pays the promotional expenses related to the sale of each Fund's shares (paying
for prospectuses distributed to potential investors and for other sales
literature, but not paying for prospectuses distributed to current
shareholders, distribution assistance payments paid by a Fund, or registration
fees and expenses).
Each of the Funds periodically pays RMCI a management fee at the annual rate
of 0.50% of the first $500 million of average daily net assets, 0.475% of the
next $500 million of such assets, 0.45% of the next $500 million of such
assets, 0.425% of the next $500 million of such assets, and 0.40% of such
assets in excess of $2 billion. For the fiscal years ended May 31, 1996, 1997
and 1998, RMCI received management fees of $155,027, $166,430 and $185,719
respectively from the Connecticut Fund; $48,113, $51,006 and $91,116 from the
Massachusetts Fund; $775,398, $786,904 and $889,437 from the New York Fund; for
the fiscal years ending May 31, 1996, 1997 and 1998. RMCI received $50,807,
$103,607 and $246,741 respectively in management fees from the California Fund;
for the fiscal years ending May 31, 1996, 1997 and 1998. RMCI received
$154,727, $194,595 and $197,592 respectively in management fees from the New
Jersey Tax-Exempt Fund; for the period of June 24, 1996 to May 31, 1997 and
1998, RMCI received $19,304 and $50,776, respectively in management fees from
the Florida Fund. RMCI received $45,755 in management fees from the
Pennsylvania Fund for the period September 15, 1997 to May 31, 1998; and $1,915
in management fees from the Ohio Fund for the period April 1, 1998 to May 31,
1998.
From time to time, RMCI may waive receipt of its fees and/or voluntarily
assume certain expenses of the Fund which would have the effect of lowering the
Fund's expense ratio and increasing yield to investors at the time such amounts
are assumed or waived, as the case may be.
The Investment Management Agreement was approved by Shareholders in 1986 and
may be renewed annually if specifically approved by the Board of Trustees and
by the vote of a majority of the Trustees who are not "interested persons"
("disinterested Trustees") cast in person at a meeting called for the purpose
of voting on such renewal. The agreement terminates automatically upon their
assignment and may be terminated without penalty upon 60 days' written notice
by a vote of the Board of Trustees of the Fund or by vote of a majority of
outstanding voting shares of the Fund or by RMCI.
SERVICE AGREEMENT. Under a Service Agreement, RMCI furnishes to each Fund
all personnel required for administrative, clerical, recordkeeping,
bookkeeping, shareholder accounting, and shareholder servicing functions. In
addition, RMCI provides, at cost, office space, office equipment (including
computers), office supplies and direct expenditures which include brokerage
fees and commissions, interest, taxes, issuing and redemption costs,
registration fees, disinterested Trustees' fees, custodial fees, extraordinary
legal expenses, costs of preparing and printing prospectuses and statements of
additional information for regulatory purposes and for distribution to existing
shareholders, costs of shareholder reports and meetings, and independent
accountants' fees. For all of these items, each portfolio reimburses RMCI for
its costs. However, RMCI has agreed to repay promptly any amount reimbursed
which a majority of the disinterested Trustees reasonably determines is in
excess of, or not properly attributable to, the cost of operations or expenses
of the Fund. The Service Agreement is nonassignable and continues until
terminated by either party on 120 days' written notice. Reserve Management
Corporation, an affiliate of RMCI, may provide some of these services.
Pursuant to the Service Agreement (see Service Agreement in the Prospectus),
during the fiscal year ended May 31, 1998, the Funds reimbursed RMCI $914,100
for expenses. For the fiscal years ended May 31, 1996 and 1997 RMCI was
reimbursed $1,081,664 and $934,359 for expenses, respectively.
DISTRIBUTION AGREEMENT. The Funds' Distributors are Pacific Global Fund
Distributors, Incorporated ("PGFDI"), 206 North Jackson Street, Suite 201,
Glendale, CA 91206; and Resrv Partners, Inc. ("RESRV"), 810 Seventh Avenue, New
York, NY 10019-5868. The Funds have authorized the Distributors, in connection
with their sale
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<PAGE> 33
of Fund shares, to give only such information and to make only such statements
and representations as are contained in the Prospectus. Sales may be made only
by the Prospectus.
The Distributors may offer and sell shares of the Funds pursuant to a separate
Prospectus applicable to such Distributor. The Distributors are "principal
underwriters" for the Funds within the meaning of 1940 Act, and as such act as
agent in arranging for the continuous offering of Fund shares. The Distributors
have the right to enter into selected dealer agreements with brokers or other
persons of its choice for the sale of the Funds' shares. Parties to selected
dealer agreements may receive assistance payments, if they qualify for such
payments, under the Distribution Plan described below. RESRV's and PGFDI's
principal business is the distribution of mutual fund shares. No Distributor
has retained any underwriting commissions on the sale of Fund shares during the
last three fiscal years. The Distributors do not have the exclusive right to
distribute Fund shares and the Funds may, therefore, continue to distribute
their own shares.
The Distribution Agreements may be renewed annually if specifically approved
by the Board of Trustees and by the vote of a majority of the disinterested
Trustees cast in person at a meeting called for the purpose of voting on such
approval or by the vote of a majority of the outstanding voting securities of
the Funds.
PLAN OF DISTRIBUTION. Each Fund maintains a Plan of Distribution ("Plan")
and related agreements, as amended, under Rule 12b-1 of 1940 Act, which
provides that investment companies may pay distribution expenses, directly or
indirectly, pursuant to a Plan adopted by the investment company's Board and
approved by its shareholders. Under the Plan, the Fund makes assistance
payments to brokers, financial institutions and other financial intermediaries
("payee(s)") for shareholder accounts ("qualified accounts") as to which the
payee has rendered distribution assistance services at an annual rate of 0.20%
of the average net asset value of qualified accounts. Such distribution
assistance may include, but is not limited to, establishment of shareholder
accounts, delivering prospectuses to prospective investors and processing
automatic investment in Fund shares of client account balances. Substantially
all such monies (together with significant amounts from RMCI's own resources)
are paid by RMCI to payees for their distribution assistance or administrative
services with any remaining amounts being used by RMCI to partially defray
other expenses incurred by RMCI in distributing Fund shares. In addition to the
amounts required by the Plan, RMCI may, at its discretion, pay additional
amounts. The rate of any additional amounts that may be paid will be based upon
RESRV's and RMCI's analysis of the contribution that the payee makes to the
Fund by increasing assets under management, reducing expense ratios and the
cost to the Fund if such services were provided directly by the Fund or other
authorized persons. RMCI and RESRV will also consider the need to respond to
competitive offers of others, which could result in assets being withdrawn from
the Fund and an increase in the expense ratio for the Fund. RMCI may elect to
retain a portion of the distribution assistance payments to pay for sales
materials or other promotional activities. The Trustees have determined that
there is a reasonable likelihood the Plan will benefit each Fund and its
shareholders.
The Glass-Steagall Act prohibits all entities which receive deposits from
engaging to any extent in the business of issuing, underwriting, selling, or
distributing securities, although national and state chartered banks are
permitted to purchase and sell securities upon the order and for the account of
their customers. Those persons who wish to provide assistance in the form of
activities not primarily intended to result in the sale of Fund shares (such as
administrative and account maintenance services) may include banks, upon advice
of counsel that they are permitted to do so under applicable laws and
regulations, including the Glass-Steagall Act. In such event, no preference
will be given to securities issued by such banks as investment and the
assistance payments received by such banks under the Plan may or may not
compensate the banks for their administrative and account maintenance services
for which the banks may also receive compensation from the bank accounts they
service. It is Fund management's position that payments to banks pursuant to
the Plan for activities not primarily intended to result in the sale of a
Fund's shares, such as administrative and account maintenance services, do not
violate the Glass-Steagall Act. However, this is an unsettled area of the law
and if a determination contrary to management's position is made by a bank
regulatory agency or court concerning payments to banks contemplated by the
Plan, any such payments will be terminated and any shares registered in the
bank's name, for its underlying customer, will be registered in the name of
that customer. Financial institutions providing distribution assistance or
administrative services for the Fund may be required to register as securities
dealers in certain states.
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Under the Plan, the Funds' Controller or Treasurer reports quarterly the
amounts and purposes of assistance payments. During the continuance of the Plan
the selection and nomination of the disinterested Trustees is at the discretion
of the disinterested Trustees currently in office.
During the fiscal year ended May 31, 1998, $580,881 was paid under the Plan
by the Funds. Any such payments are intended to benefit a Fund by maintaining
or increasing net assets to permit economies of scale in providing services to
shareholders and to contribute to the stability of shareholder services. During
the fiscal year ended May 31, 1998, substantially all payments made by the
Funds were to brokers or other financial institutions and intermediaries for
share balances in the Funds.
The Plan and related agreements were duly approved by shareholders and as to
any Fund may be terminated at any time by a vote of a majority of the
outstanding voting securities of such Fund or by vote of the disinterested
Trustees. The Plan and related agreements may be renewed from year to year, if
approved by a vote of a majority of the Board of Trustees, and by the vote of
the disinterested Trustees cast in person at a meeting called for the purpose
of voting on such renewal. The Plan may not be amended to increase materially
the amount to be spent for distribution without shareholder approval. All
material amendments to the Plan must be approved by a vote of the Board of
Trustees and of the disinterested Trustees, cast in person at a meeting called
for the purpose of such vote.
CUSTODIAL SERVICES AND INDEPENDENT ACCOUNTANT. The Chase Manhattan Bank, 4
New York Plaza, New York, NY 10004 and Bankers Trust Company, One Bankers Trust
Plaza, New York, NY 10015 are Custodians of the Fund's securities and cash
pursuant to Custodian Agreements. PricewaterhouseCoopers LLP, 1301 Avenue of
the Americas, New York, NY 10019 is the Funds' independent accountant.
PORTFOLIO TURNOVER, TRANSACTION CHARGES AND ALLOCATION
As investment securities transactions made by each Fund are normally
principal transactions at net prices, the Funds do not normally incur brokerage
commissions. Purchases of securities from underwriters involve a commission or
concession paid by the issuer to the underwriter and aftermarket transactions
with dealers involve a spread between the bid and asked prices. During the past
three fiscal years the Funds have not paid any brokerage commissions.
The Funds' policy of investing in debt securities maturing within one year
results in high portfolio turnover. However, because the cost of these
transactions is minimal, high turnover does not have a materially adverse
effect upon the net asset value or yield of a Fund.
Subject to the overall supervision of each Fund's officers and the Boards of
Trustees, RMCI places all orders for the purchase and sale of a Fund's
investment securities. In general, in the purchase and sale of investment
securities, RMCI will seek to obtain prompt and reliable execution of orders at
the most favorable prices or yields. In determining best price and execution,
RMCI may take into account a dealer's operational and financial capabilities,
the type of transaction involved, the dealer's general relationship with RMCI,
and any statistical, research, or other services provided by the dealer to
RMCI. To the extent such non-price factors are taken into account, the
execution price paid may be increased, but only in reasonable relation to the
benefit of such non-price factors to the Funds as determined in good faith by
RMCI. Brokers or dealers who execute investment securities transactions may
also sell shares of a Fund; however, any such sales will not be either a
qualifying or disqualifying factor in the selection of brokers or dealers.
When orders to purchase or sell the same security on identical terms are
simultaneously placed for the Funds and other portfolios managed by RMCI, the
transactions are allocated as to amount in accordance with each order placed
for each portfolio. However, RMCI may not always be able to purchase or sell
the same security on identical terms for all portfolios affected.
SHARES OF BENEFICIAL INTEREST
The Declaration of Trusts permit the Trust to issue an unlimited number of
full and fractional shares of beneficial interest and to divide or combine the
shares into a greater or lesser number of shares without thereby changing the
proportionate beneficial interests in a Fund. If they deem it advisable and in
the best interests of shareholders, the
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Trustees may classify or reclassify any unissued shares of each Fund by setting
or changing the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, or terms and
conditions of redemption of the stock. Any changes would be required to comply
with any applicable state and federal securities laws. These currently require
that each class be preferred over all other classes with respect to assets
specifically allocated to such class. It is anticipated that under most
circumstances, the rights of any additional class would be comparable, unless
otherwise required, to respond to the particular situation. Upon liquidation of
a Fund, shareholders are entitled to share, pro rata, in its net assets of their
respective Funds available for distribution to such shareholders. It is
possible, although considered highly unlikely in view of the method of operation
of mutual funds, that should assets of one class of shares be insufficient to
satisfy its liabilities, the assets of another class could be subjected to
claims arising from the operations of the first class of shares. No changes can
be made to a Fund's issued shares without shareholder approval.
Each Fund share, when issued, is fully paid, non-assessable (except as set
forth below), and fully transferable or redeemable at the shareholder's option.
Each Fund share has an equal interest in the net assets of its portfolio, equal
rights to all dividends and other distributions from its portfolio, and one
vote for all purposes. Shares of all classes vote together for the election of
Trustees, and have noncumulative voting rights, meaning that the holders of
more than 50% of the shares voting for the election of Trustee could elect all
Trustees if they so chose, and in such event the holders of the remaining
shares could not elect any person to the Board of Trustees.
Under Massachusetts law, the shareholders and trustees of a business trust
can be personally liable for the Funds' obligations unless, as in this
instance, the Declaration of Trust provides, in substance, that no shareholder
or trustee shall be personally liable for the Fund's, and each investment
portfolio's, obligations to third parties, and requires that every written
contract made by a Fund contain a provision to that effect. The Declaration of
Trust also requires the Fund to indemnify its shareholders and Trustees against
such liabilities and any related claims or expenses.
The Declaration of Trusts further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law; but nothing in the
Declarations protect a Trustee against any liability to which he would
otherwise be subject to by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
Regulations of the Securities and Exchange Commission provide that if a
class is separately affected by a matter requiring shareholder vote (election
of Trustees, ratification of independent auditor selection and approval of an
underwriting agreement are not considered to have such separate effect and may
be voted upon by the Fund as a whole), each class will vote separately. Each
class votes separately on such matters as approval of the Investment Management
Agreement, material amendments to the Plan of Distribution, and changes in the
fundamental policies of the Fund. These items require approval by a majority of
the affected shareholders. For this purpose a "majority" is constituted by
either 50 percent of all shares voting as a group or 67 percent of the shares
voted at an annual meeting of shareholders at which at least 50 percent of the
shares of each group are represented.
As of June 30, 1998, no persons owned beneficially or of record 5 percent of
the California Tax-Exempt Fund, Connecticut Tax-Exempt Fund, Florida Tax-Exempt
Fund, Massachusetts Tax-Exempt Fund, New Jersey Tax-Exempt Fund, Ohio
Tax-Exempt Fund or the New York Tax-Exempt Fund.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Redemption payments will normally be made by check or wire transfer but each
Fund is authorized to make payment of redemptions partly or wholly in kind
(that is, by delivery of investment securities valued at the same time as the
redemption net asset value ("NAV") is determined). The Funds have elected to
permit any shareholder of record to make redemptions wholly in cash to the
extent the shareholder's redemptions in any 90-day period do not exceed the
lesser of $250,000 or 1% of the net assets of the Fund. The election is
irrevocable pursuant to rules and regulations under 1940 Act unless withdrawal
is permitted by order of the SEC. Redemptions in kind are further limited by
the Funds' intention to redeem in kind only when necessary to reduce a
disparity between amortized cost and market value. In disposing of such
securities, an investor might incur transaction costs and on the date of
disposition might receive an amount less than the net asset value of the
redemption.
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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 BE UP TO 10 BUSINESS DAYS.
PURCHASES AND REDEMPTIONS THROUGH OTHERS. Share purchases and redemptions
may also be made through brokers and financial institutions ("firms"). Firms
may provide varying arrangements for their clients with respect to the purchase
and redemption of Fund shares and may arrange with their clients for other
investment or administrative services. Some of these firms participate in the
Funds' Plans of Distribution ("Plans"). Under the Plans, payments are made to
persons who provide assistance in distributing Fund shares or other assistance
to a Fund.
NET ASSET VALUE. Shares of each Fund are offered at NAV which is calculated
at the close of each Business Day as defined in the Prospectus. The net asset
value is not calculated on New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day (observed), Independence Day, Labor
Day, Thanksgiving Day, Christmas Day, days the New York Stock Exchange is
closed for trading and on regional banking holidays. The NAV of each Fund is
normally maintained at $1.00 per share. The Funds cannot guarantee that their
net asset value will always remain at $1.00 per share.
The NAV per share of each Fund is determined by adding the value of all of
its securities, cash and other assets, subtracting its liabilities, and
dividing the results by the number of its shares outstanding. The Boards of
Trustees have determined the most practical method currently available for
valuing investment securities is the amortized cost method. This procedure
values a purchased security at cost at the time of purchase and thereafter
assumes a constant amortization to maturity of any discount or premium and
accrual of interest income, irrespective of intervening changes in interest
rates or security market values.
In order to maintain a $1.00 share price the Funds will utilize the
following practices: maintain a dollar-weighted average portfolio maturity of
90 days or less; purchase only instruments having remaining maturities of 397
days or less; and invest only in securities determined by the Boards of
Trustees to be of high quality with minimal credit risk. To assess whether
repurchase agreement transactions present more than minimal credit risk, the
Trustees have established guidelines and monitor the creditworthiness of all
entities, including banks and broker-dealers, with which a Fund proposes to
enter into repurchase agreements. In addition, the Funds have adopted
procedures, taking into account current market conditions and the investment
objective, to attempt to maintain its net asset value as computed for the
purpose of sales and redemptions at $1.00 per share. Such procedures will
include review by the Trustees at such intervals as they may determine
reasonable, to ascertain the extent of any difference in the net asset value of
a Fund from $1.00 a share determined by valuing its assets at amortized cost as
opposed to valuing them based on market factors. If the deviation exceeds 1/2
of one percent, the Trustees will promptly consider what action if any should
be initiated. If they believe that the deviation may result in material
dilution or other unfair results to shareholders, the Trustees have undertaken
to apply appropriate corrective remedies which may include the sale of a Fund's
assets prior to maturity to realize capital gains or losses or to shorten the
average maturity of a Fund, withholding dividends, redemption of shares of a
Fund in kind, or reverting to valuation based upon market prices and estimates.
SHAREHOLDER SERVICE POLICIES. The Funds' policies concerning shareholder
services are subject to change from time to time. The Funds reserve the right
to change the $1,000 minimum account size subject to the $5 monthly service
charge or involuntary redemption. The Funds further reserve the right to impose
special service charges for services provided to individual shareholders
generally including, but not limited to, fees for returned checks, stop payment
orders on official checks and shareholder checks, and special research
services. The Funds' standard service charges as described in the Prospectus
are also subject to adjustment from time to time. In addition, the Funds
reserve the right to increase their minimum initial investment amount at any
time.
CREDITING OF INVESTMENTS. The Funds will only give credit investments on the
day they become available in federal funds. A Federal Reserve wire system
transfer ("Fed wire") is the only type of wire transfer that is reliably
available in federal funds on the day sent. For a Fed wire to receive same day
credit, the Fund must be notified before 11:00 AM (New York time) of the amount
to be transmitted and the account to be credited. Checks and other items
submitted to the Funds for investment are only accepted when submitted in
proper form, denominated in U.S. dollars,
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and are credited to shareholder accounts only upon their conversion into federal
funds, which normally takes one or two Business Days following receipt. Checks
delivered to the Funds after 11:00 AM (New York time) are considered received on
the following Business Day.
Checks drawn on foreign banks are normally not accepted by the Funds. In
addition, the Funds do not accept cash investments.
The Funds reserve the right to reject any investment in them for any reason
and may, at any time, suspend all new investment.
IF SHARES PURCHASED ARE TO BE PAID FOR BY WIRE AND THE WIRE IS NOT RECEIVED
BY A FUND OR IF SHARES ARE PURCHASED BY A CHECK WHICH, AFTER DEPOSIT, IS
RETURNED UNPAID OR PROVES UNCOLLECTABLE, THE PURCHASE MAY BE CANCELED OR
REDEEMED IMMEDIATELY. THE INVESTOR THAT GAVE NOTICE OF THE INTENDED WIRE OR
SUBMITTED THE CHECK WILL BE HELD FULLY RESPONSIBLE FOR ANY LOSSES INCURRED BY
THE FUND, THE INVESTMENT ADVISER OR THE DISTRIBUTOR. THE FUND MAY REDEEM SHARES
FROM ANY ACCOUNT REGISTERED IN THAT PURCHASER'S NAME AND MAY APPLY THE PROCEEDS
THEREFROM TO THE PAYMENT OF ANY AMOUNTS OWED THE FUND, THE INVESTMENT ADVISER
OR THE DISTRIBUTOR.
SHARE CERTIFICATES. Share certificates are not issued by the Funds.
DISTRIBUTIONS AND TAXES
Each Fund intends to qualify as a regulated investment company under the
Internal Revenue Code of 1986, as amended ("Code"), so long as such
qualification is in the best interests of their shareholders. To qualify as a
regulated investment company, the Fund must, among other things, (a) derive in
each taxable year at least 90% of its gross income from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of stock, securities or foreign currencies or other income derived
with respect to its business of investing in such stock, securities or
currencies; (b) diversify its holdings so that, at the end of each quarter of
the taxable year, (i) at least 50% of the market value of the Fund's assets is
represented by cash and cash items (including receivables), U.S. Government
securities, the securities of other regulated investment companies and other
securities, with such other securities of any one issuer limited for the
purposes of this calculation to an amount not greater than 5% of the value of
the Fund's total assets and not greater than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
assets is invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other regulated investment
companies); and (c) distribute at least 90% of its investment company taxable
income (which includes, among other items, dividends, interest and net
short-term capital gains in excess of net long-term capital losses) and its net
tax-exempt interest income each taxable year.
As a regulated investment company, the Fund generally will not be subject to
U.S. federal income tax on its investment company taxable income and net
capital gains (the excess of net long-term capital gains over net short-term
capital losses), if any, that it distributes to shareholders. The Fund intends
to distribute to its shareholders, at least annually, substantially all of its
investment company taxable income and net capital gains. Amounts, other than
tax-exempt interest, not distributed on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4% excise
tax. To prevent imposition of the excise tax, the Fund must distribute during
each calendar year an amount equal to the sum of (1) at least 98% of its
ordinary income (not taking into account any capital gains or losses) for the
calendar year, (2) at least 98% of its capital gains in excess of its capital
losses for the one-year period ending on October 31 of the calendar year, and
(3) any ordinary income and capital gains for previous years that was not
distributed during those years. A distribution, including an "exempt-interest
dividend," will be treated as paid on December 31 of the current calendar year
if it is declared by the 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. To prevent application of the
excise tax, the Fund intends to make its distributions in accordance with the
calendar year distribution requirement.
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The Fund intends to qualify under the Code to pay "exempt-interest
dividends" to its shareholders. The Fund will be so qualified if, at the close
of each quarter of its taxable year, at least 50% of the value of its total
assets consists of securities on which the interest payments are exempt from
federal income tax. To the extent that dividends distributed by the Fund to its
shareholders are derived from interest income exempt from federal income tax
and are designated as "exempt-interest dividends" by the Fund, they will be
excludable from the gross incomes of the shareholders for federal income tax
purposes. "Exempt-interest dividends," however, must be taken into account by
shareholders in determining whether their total incomes are large enough to
result in taxation of up to 85 percent of their social security benefits and
certain railroad retirement benefits. It should also be noted that tax-exempt
interest on private activity bonds in which the Fund may invest generally is
treated as a tax preference item for purposes of the alternative minimum tax
for corporate and individual shareholders. The Fund will inform shareholders
annually as to the portion of the distributions from the Fund which constituted
"exempt-interest dividends."
Dividends paid out of the Fund's investment company taxable income will be
taxable to a U.S. shareholder as ordinary income. Because no portion of the
Fund's income is expected to consist of dividends paid by U.S. corporations, no
portion of the dividends paid by the Fund is expected to be eligible for the
corporate dividends-received deduction. Distributions of net capital gains, if
any, designated as capital gain dividends are taxable to individual
shareholders at the applicable 20% or 28% capital gains rate, regardless of how
long the shareholder has held the Fund's shares, and are not eligible for the
dividends-received deduction. Shareholders receiving distributions in the form
of additional shares, rather than cash, generally will have a cost basis in
each such share equal to the net asset value of a share of the Fund on the
reinvestment date. Shareholders will be notified annually as to the U.S.
federal tax status of distributions, and shareholders receiving distributions
in the form of additional shares will receive a report as to the net asset
value of those shares.
Upon the sale or other disposition of shares of the 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. Any
loss realized on a sale or exchange will be disallowed to the extent the shares
disposed of are replaced (including shares acquired pursuant to a dividend
reinvestment plan) within a period of 61 days beginning 30 days before and
ending 30 days after disposition of the shares. In such a case, the basis of
the shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized by a shareholder on a disposition of Fund shares held by the
shareholder for six months or less will be treated as a long-term capital loss
to the extent of any distributions of net capital gains received by the
shareholder with respect to such shares. Furthermore, a loss realized by a
shareholder on the redemption, sale or exchange of shares of the Fund with
respect to which exempt-interest dividends have been paid will, to the extent
of such exempt-interest dividends, be disallowed if such shares have been held
by the shareholder for less than six months.
Under the Code, a shareholder may not deduct that portion of interest on
indebtedness incurred or continued to purchase or carry shares of an investment
company paying exempt-interest dividends (such as those of the Fund) which
bears the same ratio to the total of such interest as the exempt-interest
dividends bear to the total dividends (excluding net capital gain dividends)
received by the shareholder. In addition, under rules issued by the Internal
Revenue Service for determining when borrowed funds are considered to be used
to purchase or carry particular assets, the purchase of shares may be
considered to have been made with borrowed funds even though the borrowed funds
are not directly traceable to such purchase.
The tax consequences to a foreign shareholder of an investment in the Fund
may be different from those described herein. Foreign shareholders are advised
to consult their own tax advisers with respect to the particular tax
consequences to them of an investment in the Fund.
Shareholders are advised to consult their own tax advisers with respect to
the particular tax consequences to them of an investment in the Fund. Persons
who may be "substantial users" (or "related persons" of substantial users) of
facilities financed by industrial development bonds should consult their tax
advisers before purchasing shares of the Fund. The term "substantial user"
generally includes any "non-exempt person" who regularly uses in his or her
trade or business a part of a facility financed by industrial development
bonds. Generally, an individual will not be a "related person" of a substantial
user under the Code unless the person or his or her immediate family owns
directly or indirectly in the aggregate more than a 50% equity interest in the
substantial user.
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The exemption from federal income tax of dividends derived from interest on
Municipal Obligations does not necessarily result in exemption under the tax
laws of any state or local taxing authority.
Shareholders are advised to consult with their tax advisers regarding the
applicability of state and local taxes to an investment or income therefrom in
a Fund which may differ from the federal income tax consequences described
above.
FUND YIELD
The current yield of a Fund may differ from the Fund's effective yield and
annualized dividends.
Current yield is calculated by determining the net change (exclusive of
capital changes) in the value of a hypothetical preexisting account having a
balance of one share at the beginning of the period, dividing the net change in
account value by the value of the account at the beginning of the base period
to obtain the base period return, and multiplying the base period return by a
fraction having 365 in the numerator and the number of days in the base period
in the denominator. The current yield stated in the prospectus utilizes a seven
day base period. Net change in account value must reflect (i) the value of
additional shares purchased with dividends from the original share and
dividends declared on by the original share and any such additional shares; and
(ii) any recurring fees charged to all shareholder accounts, in proportion to
the length of the base period and the Fund's average or median account size.
Net change in account value must exclude realized gains or losses and
unrealized appreciation or depreciation.
Effective yield is computed by adding one to the current yield, raising the
sum to a power equal to 365 divided by the number of days in the base period
(seven days), and subtracting one from the result according to the following
formula: Effective Yield = [(Base Period Return + 1)] 365/7 - 1. Effective
annual yields are a representative of the effective annual rate of return
produced by the monthly compounding of Fund dividends.
Taxable equivalent yield is computed by dividing either current yield or
effective yield by a denominator equal to one minus a stated income tax rate
according to the following formula: Taxable Equivalent Yield = Current or
Effective Yield/(1 - Income Tax Rate).
Yield information may be useful in reviewing the performance of a Fund, but
because of fluctuations, it may or may not provide a basis for comparison with
bank deposits, other money investments which pay a fixed yield for a stated
period of time, such as Treasury bills, bank certificates of deposit, savings
certificates and NOW accounts. When making comparisons, the investor should
also consider the quality and maturity of the portfolio securities of the
various money-market funds. An investor's principal is not guaranteed by the
Fund, nor is it insured by a governmental agency.
RESERVE CASH PERFORMANCE ACCOUNT
The Reserve Cash Performance ("CPA") and Reserve "CPA" Plus accounts provide
a comprehensive package of additional services to investors in the Funds.
Reserve CPA and CPA Plus offers a check arrangement whereby checks are issued
to Reserve shareholders which may be used to redeem shares in the account in
any amount. If a bank accepts a check, it will be paid in the order received by
redemption of shares from the investor's Reserve account. Any check in an
amount exceeding the Reserve account balance will be returned to the payee.
Reserve CPA checks can be used in the same manner as any other bank checks.
Paid checks will not be returned but complete statements on such paid checks
will be provided monthly.
A VISA Gold Check Card (a debit card) is also available. The VISA card
functions exactly as does a conventional VISA credit card except that the
cardholder's Reserve account is automatically charged for all purchases and
cash advances, thus eliminating the usual monthly finance charges. As with the
checking facility, VISA charges are paid by liquidating shares in the Reserve
Fund account, but any changes that exceed the balance will be rejected. VISA
card issuance is subject to credit approval. Reserve, VISA or the bank may
reject any application for checks or cards and may terminate an account at any
time. Conditions for obtaining a VISA Check Card may be altered or waived by
the Funds either generally or in specific instances. The checks and VISA cards
are intended to provide investors with easy access to their account balances.
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Each Fund will charge a non-refundable annual CPA Plus service fee
(currently $60 which may be charged to the account at the rate of $5 monthly).
Participants will also be charged for specific costs incurred in placing stop
payment orders, obtaining check copies and in processing returned checks. The
annual service fee and other charges may be changed at any time upon 30 days
notice. In addition, broker/dealers or other financial institutions in the CPA
Program may charge their own service fees in addition to the annual fee.
VISA cardholders may be liable for the unauthorized use of their card up to
the amount set by the governing Federal regulations which is currently $500 if
the Fund or the bank is not notified of the theft or loss within 2 Business
Days. Participants should refer to the VISA Account Shareholder Agreement for
complete information regarding responsibilities and liabilities with respect to
the VISA Gold card. If a card is lost or stolen, the cardholder should report
the loss immediately by telephoning the issuing bank, currently BankOne at
614-248-4242 which can be reached 24 hours a day, seven days a week or the
Funds at 800-631-7784 or 212-977-9880 during normal business hours (9:00 A.M.
to 5:00 P.M., New York time).
The use of checks and cards by participants will be subject to the terms of
your Reserve CPA Account Application and VISA Account Shareholder Agreement.
MUNICIPAL OBLIGATIONS
Municipal bonds and municipal notes are the two major classifications of
Municipal Obligations. Such obligations are generally issued to obtain funds
for various public purposes, including the construction of public facilities
such as airports, bridges, highways, houses, hospitals, mass transportation,
schools, streets, and water and sewer works. In addition, Municipal Obligations
may be issued to refund outstanding debt and obtain funds for general operating
expenses.
Municipal bonds, which are long term instruments and generally have
maturities longer than one year when issued, may be either "general obligation"
or "revenue" issues. General obligation bonds are secured by the issuer's
pledge of its full faith, credit, and taxing power for the payment of principal
and interest. Revenue bonds are payable only from the revenues derived from a
particular facility or class of facilities, in some cases, from the proceeds of
a special excise tax or other specific revenue source but not from the general
taxing power.
Certain kinds of industrial development bonds ("IDBs") are issued by or on
behalf of public authorities to provide funding for various privately operated
industrial facilities such as warehouse, office, plant, and store facilities.
IDBs are, in most cases, revenue bonds and do not generally constitute the
pledge of the credit of the issuer of such bonds. The payment of the principal
and interest on IDBs usually depends solely on the ability of the user of the
facilities financed by the bonds or other guarantor to meet its financial
obligations and, in certain instances, the pledge of real and personal property
as security for payment. If there is no established secondary market for the
IDBs, the IDBs or the participation interests purchased by a Fund will be
supported by repurchase commitments and bank letters of credit or guarantees of
banks that meet the quality criteria of the Fund and which may be exercised by
the Fund to provide liquidity.
Municipal notes are usually issued to obtain funds in anticipation of
receipt of taxes, receipt of proceeds of issuances of municipal bonds, or other
revenue which will provide funds to repay the notes, and generally have
maturities of one year or less.
On April 20, 1988, the U.S. Supreme Court in South Carolina v. Baker,
overruled an 1895 case, Pollock v. Farmers' Loan & Trust Company which held
that interest on Municipal Obligations was immune from Federal taxation. As a
result, proposals may be introduced before the Congress to eliminate or
restrict the Federal income tax exemption for interest on certain Municipal
Obligations.
The Funds may purchase securities affected by these proposals. If such
proposals are enacted, the availability of Municipal Obligations by the Funds
would be adversely affected. In such event, the Funds would reevaluate their
investment objective and policies and submit possible changes in the structure
of the Funds for the consideration of shareholders. Investors should be aware
that the quantity of Municipal Obligations available for purchase by the Funds
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may be limited, and that factor may affect the amount of tax-exempt income
which can be obtained from an investment in them. Substantial reductions in the
availability of tax-exempt securities might also cause a reevaluation of a
Fund's investment objective and policies.
VARIABLE RATE DEMAND INSTRUMENTS. Variable rate demand instruments that the
Funds may purchase are tax-exempt Municipal Obligations or participation
interests therein that provide for periodic adjustments in the interest rate
paid on the instrument and permit the holder to demand payment of the unpaid
principal balance plus accrued interest upon a specified number of days notice
either from the issuer or by drawing on a bank letter of credit or guarantee
issued with respect to such instrument. The issuer of the Municipal Obligation
may have a corresponding right to prepay in its discretion the outstanding
principal of the instrument plus accrued interest upon notice comparable to the
required for the holder to demand payment.
The variable rate demand instruments in which the Funds may invest will
comply with Rule 2a-7 under the Investment Company Act of 1940. The Funds will
determine the variable rate demand instruments it will purchase in accordance
with procedures prescribed by its Board to minimize credit risks. The Fund's
investment adviser may determine that an unrated variable rate demand
instrument meets the Fund's investment high quality criteria if it is backed by
a suitable bank letter of credit or guarantee.
The variable rate demand instruments that the Funds may invest in include
participation interests purchased from banks in variable rate tax exempt
Municipal Obligations owned by banks or affiliated organizations. A
participation interest gives the Fund an undivided interest in the Municipal
Obligation in the proportion that the Fund's participation interest bears to
the total principal amount of the Municipal Obligation and provides the
repurchase feature described above. Each participation is backed by an
irrevocable letter of credit or guarantee of an appropriately rated bank. The
Fund has the right to sell the instrument back to the bank and draw on the
letter of credit on demand, after seven days' notice, for all or any part of
the full principal amount of the Fund's participation interest in the bond plus
accrued interest. Banks usually retain a service fee, a letter of credit fee
and a fee for issuing repurchase commitments in an amount equal to the excess
of the interest paid on the Municipal Obligations over the negotiated yield at
which the instrument was purchased by the Fund.
RATINGS
TAX-EXEMPT BOND RATINGS. The highest ratings for municipal bonds are Aaa or
Aa if rated by Moody's Investor Services, Inc. ("Moody's") and AAA or AA if
rated by Standard & Poor's Corporation ("S&P"). Such bonds are judged to be of
high quality and are not considered speculative. Bonds rated A by Moody's are
considered to possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Such bonds have factors giving
security to principal and interest that are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future. Debt rated A by S&P is considered to have a strong capacity to pay
interest and repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt
in higher-rated categories.
TAX-EXEMPT PAPER RATINGS. Moody's tax-exempt paper rating are opinions of
the ability of issuers to repay punctually promissory obligations not having an
original maturity in excess of twelve months. The highest quality obligations
are rated "Prime." Issuers rated Prime-1 have superior ability for repayment of
senior short-term debt obligations. Issuers rated Prime-2 have a strong ability
for repayment of senior short-term debt obligations. Moody's employs the
following two designations, all judged to be investment grade, to indicate the
relative repayment capacity of rated short-term issuers: MIG-1/VMIG-1, Best
Quality and MIG-2/VMIG-2, High Quality. The designation of MIG-1/VMIG-1
indicates there is strong protection by established cash flows, superior
liquidity support, or demonstrated broad-based access to the market for
refinancing. The designation of MIG-2/VMIG-2 indicates margins of protection
ample although not so large as in MIG-1/VMIG-1.
S&P's tax-exempt paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more that 365 days.
The highest quality obligations are rated "A". Issues assigned A rating for
regarded as having the greatest capacity for timely payment. Issues in this
category are further refined with designations to indicate the relative degree
of safety. The two top such designations are 1 and 2. The "A-1" designation
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indicates that the degree of safety regarding timely payment is strong. The
"A-2" designation indicates that capacity for timely payment is satisfactory.
Municipal note ratings by Standard & Poor's are preceded by the designation SP.
Those issues determined to possess overwhelming safety characteristics are
designated SP-1+. Municipal notes designated SP-1 are considered to have a very
strong or strong capacity to pay principal and interest. Municipal notes
designated SP-2 are considered to have a satisfactory capacity to pay principal
and interest.
RISK FACTORS OF CONCENTRATING IN CALIFORNIA
The following discusses the risks of concentrating investments in
obligations of the State of California ("State") and its political
subdivisions, duly constituted authorities and corporations.
Since the start of the State's 1990-91 fiscal year, the State has faced the
worst economic, fiscal, and budget conditions since the 1930's. The State of
California's tax revenue experience in the past few years clearly reflects
sharp declines in employment, income and retail sales on a scale not seen in
over 50 years. However, the 1995-96 Governor's Budget, released January 10,
1995 (the "Governor's Budget"), indicates the State has embarked on a steady
economic recovery since late 1993, somewhat sooner than predicted in the May
1994 Revision of the 1994-95 Governor's Budget.
The recession seriously affected state tax revenues, which basically mirror
economic conditions. It also caused increased expenditures for health and
welfare programs. The State has also been facing a structural imbalance in its
budget with the largest programs supported by the General Fund - K-12 schools
and community colleges, health, welfare and corrections - growing at rates
significantly higher than the growth rates for the principal revenue sources of
the General Fund. As a result, the State has experienced recurring budget
deficits; the State Controller reports that expenditures exceeded revenues for
four of the last five completed fiscal years ending with 1991-92; the State had
an operating surplus of about $109 million in 1992-93 and $836 million in
1993-94. However, at June 30, 1994, according to the Department of Finance, the
State's Special Fund for Economic Uncertainties still had an accumulated
deficit, on a budget basis, of approximately $1.8 billion.
A further consequence of the large budget imbalance over two fiscal years
was that the State used up all of its available cash resources. In late June,
1992 the State was required to issue $475 million of short-term revenue
anticipation warrants to cover obligations coming due on June 30. Because the
1992-93 Budget Act was not adopted until September 2, 1992, the State was
delayed in carrying out its usual cash flow borrowing for the fiscal year. The
shortfall of cash forced the State Controller, after July 1, 1992, to issue
approximately $3.8 billion of interest-bearing "registered warrants" in lieu of
regular warrants which are redeemable for cash to many State vendors, suppliers
and employees and to local government agencies to pay valid obligations from
the prior fiscal year, and to pay continuing obligations after July 1 based on
special appropriations or court orders. Certain constitutionally mandated
obligations, such as debt service on bonds and revenue anticipation warrants,
were paid with available cash. Registered warrants had not been issued by the
State in the 1930s.
The 1992-93 Budget Act closed a "gap" of about $7.9 billion, but budgeted a
reserve at June 30, 1993 of only $28 million. However, the Governor's Budget
for 1993-94, released January 8, 1993 (the "1993-94 Governor's Budget"),
predicted revenues in the 1992-93 fiscal year will be $2.5 billion below
1992-93 Budget Act projections, and projected the State will have a $2.1
billion budget deficit at June 30, 1993. This however, assumed favorable
legislative action by March 1993 on certain proposals to reduce health and
welfare payments and eliminate a renters' tax credit, which combined would have
saved $475 million by June 30, 1993. The Legislature has failed to enact these
proposals. This, combined with the impact of the State Franchise Tax Board's
February 4, 1993 order to release the renters' tax credit refunds, will require
at least another $475 million in budget reductions in addition to those
proposed in the 1993-94 Government's Budget. The 1993-94 Governor's Budget also
projects that cash resources will be depleted during May 1993, necessitating
additional cash flow borrowing. Actual performance for the balance of the
1992-93 fiscal year will depend on many factors, including economic conditions
in the State and the nation. As result of the deterioration in the State's
budget and cash situation in fiscal years 1991-92, and 1992-93, rating agencies
reduced the State's credit ratings. Between November 1991 and October 1992 the
rating on the State's general obligation bonds was reduced by S&P from AAA to
AA+, by Moody's from Aaa to Aa, and by Fitch from AAA to AA.
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The accumulated budget deficits over the past several years, together with
expenditures for school funding which have not been reflected in the budget,
and reduction of available internal borrowable funds, have combined to
significantly deplete the State's cash resources to pay its ongoing expenses.
In order to meet its cash needs, the State has had to rely for several years on
a series of external borrowings, including borrowings past the end of a fiscal
year. Such borrowings are expected to continue in future fiscal years. To meet
its cash flow needs in the 1994-95 fiscal year, the State has issued, in July
and August, 1994, $4.0 billion of revenue anticipation warrants which mature on
April 25, 1996, and $3.0 billion of revenue anticipation notes maturing on June
28, 1995.
On July 15, 1994, all three of the rating agencies rating the State's
long-term debt lowered their ratings of the State's general obligation bonds,
Moody's Investors Service lowered its rating from Aa to A1, Standard & Poor's
Ratings Group lowered its rating from A+ to A and termed its outlook as
"stable," and Fitch Investors Service lowered its rating from AA to A. By June
1998, the State's long-term debt rating stood at A+ and AA- by Standard &
Poor's and Fitch, respectively.
The California personal income tax, which in 1990-91 contributed about 45%
of General Fund revenues, is closely modeled after the federal income tax law.
It is imposed on net taxable income (gross income less exclusions and
deductions). The tax is progressive with rates ranging from 1% to 11%.
Personal, dependent, and other credits are allowed against the gross tax
liability. In addition, taxpayers may be subject to an alternative minimum tax
(AMT) which is much like the Federal AMT. This is designed to ensure that
excessive use of tax preferences does not reduce taxpayers' liabilities below
some minimum level. Legislation enacted in July 1991 added two new marginal tax
rates, at 10% and 11% effective for tax years 1991 through 1995. After 1995,
the maximum personal income tax rate is scheduled to return to 9.3%, and the
AMT rate is scheduled to drop from 8.5% to 7%.
The personal income tax is adjusted annually by the change in the consumer
price index to prevent taxpayers from being pushed into higher tax brackets
without a real increase in income.
The sales tax is imposed upon retailers for the privilege of selling
tangible personal property in California. Most retail sales and leases are
subject to the tax. However, exemptions have been provided for certain
essentials such as food for home consumption, prescription drugs, gas,
electricity and water. Sales tax accounted for about 39% of General Fund
revenue in 1991-92. Bank and corporation tax revenues comprised about 11% of
General Fund revenue in 1991-92. In 1989, Proposition 99 added a 25 cents per
pack excise tax on cigarettes, and a new equivalent excise tax on other tobacco
products.
The 1995-96 Governor's Budget, issued January 10, 1995, contains a
reforecast of revenues and expenditures for the 1994-95 fiscal year. The
Department of Finance Bulletin for April 1995 reports that General Fund
revenues for March 1995 were $28 million, or 1.1 percent, below forecast, and
that year-to-date General Fund revenues were $110 million, or 0.4 percent,
below forecast. The largest component of the decrease is attributable to
personal income tax receipts, which were $134 million, or 1.1 percent, below
the year-to-date forecast. In addition, sales and use tax receipts were $117
million, or 1.1 percent, below the year-to-date forecast. The sales and
year-to-date bank and corporation tax receipts were as forecast, and that
miscellaneous revenues were $141 million above the year-to-date forecast. This
gain is mostly attributable to revenues such as those relating to trial courts,
state lands, and unclaimed property. The Department of Finance believes the
gain in unclaimed property revenues ($40 million above forecast) to be real,
and expects it to grow slightly by the end of the fiscal year.
Revised employment data indicate that California's recession ended in 1993,
and following a period of stability, a recovery is now underway. The State's
unemployment rate fell in 1995, from 10.1 percent in January to 7.7 percent in
October and November. The gap between the national and California jobless rates
narrowed from 3.4 percentage points at the beginning of 1994 to an average of 2
percentage points in October and November. In 1996, job growth is projected to
exceed 300,000, with gains in all major sectors of the State's economy, again
led by services and construction.
The Department of Finance Bulletin for April 1995 reports on the State's
continued economic recovery. Despite wet weather, nonfarm employment in the
State increased by 17,000 in March and was up 127,500, or 1.1 percent, from
March 1994. Due to heavy rainstorms, construction employment decreased by 6,900
jobs in March after increasing by
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more than 35,000 in February. Even so, 22,500 new construction jobs were added
since March 1994, a gain of almost 5 percent. Most other major private industry
groups posted gains for March, with services gaining 18,500 jobs and durable
goods factories adding 2,800, despite a drop of 700 jobs in aerospace
industries. The State's unemployment rate rose slightly in March to 7.6 percent
from 7.3 percent in February, but was down from 8.8 percent in March 1994. Other
indicators, including retail sales, homebuilding activity, existing home sales
and bank lending volume all confirm the State's recovery.
Pursuant to the Budget Adjustment Law (the "Law," Government Code Section
12467), the State Controller was required to make a report by November 15, 1994
on whether the projected cash resources for the General Fund as of June 30,
1995 would decrease more than $430 million from the amount projected by the
State in its Official Statement in July, 1994 for the sale of $4,000,000,000 of
Revenue Anticipation Warrants. On November 15, 1994, the State Controller
issued the report on the State's cash position required by the Budget
Adjustment Law. The report indicated that the cash position of the General Fund
on June 30, 1995 would be $581 million better than was estimated in the July,
1994 cash flow projections and therefore, no budget adjustment procedures will
be invoked for the 1994-95 fiscal year. As explained earlier, the Law would
only be implemented if the State Controller estimated that borrowable resources
on June 30, 1995 would be at least $430 million lower than projected.
The 1995-96 Budget will be subject to the Budget Adjustment or "Trigger"
legislation enacted in June 1994. The Proposed Budget contains a cash flow
projection (based on all the assumptions described above) which shows about $1
billion of unused borrowable resources at June 30, 1996, providing this amount
of "cushion" before the budget "trigger" would have to be invoked.
However, a report issued by the Legislative Analyst in February 1995 notes
that the Proposed Budget (and hence the margin of cushion under the "trigger")
is subject to a number of major risks, including receipt of the expected
federal immigration aid and other federal actions to allow health and welfare
cuts, and the outcome of several lawsuits concerning previous budget actions
which the State has lost at the trial court level, and which are under appeal.
This Analyst's Report also estimates that, despite more favorable revenues, the
two-year budget estimates made in July 1994 are about $2 billion out of
balance, principally because federal immigration aid appears likely to be much
lower than previously estimated. This shortfall is much smaller than the State
has faced in recent years, and has been addressed in the Governor's Budget.
The state has taken significant steps to restructure its budget, reduce its
accumulated deficit, and is in the fifth year of holding expenditures equal to,
or below, revenues. Continued spending pressures for education, corrections,
and, until recently, health and welfare have made it difficult for the State to
accumulate any significant contingency reserves. The State now projects a very
modest ending reserve for fiscal 1997, and has budgeted about a 1% reserve for
fiscal 1998. Overall, 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.
The Governor's proposed 1997-98 budget provides for moderate expenditure
growth of about 3.9%. Revenue growth is projected at 4.7%, including the
effects of a proposed 5% cut in the bank and corporate tax rate. Spending
levels continue to be driven by constitutional spending requirements of
Proposition 98, which requires about 40% of the general fund to be dedicated to
K-14 education. Overall funding for K-14 education is proposed to increase by
7.6% over fiscal 1997 levels, outpacing other spending categories.
On December 6, 1994, Orange County, California (the "County"), together with
its pooled investment funds (the "Funds") filed for bankruptcy protection under
Chapter 9, causing a liquidity crisis for the Funds and the County. More than
180 other public entities, most of which, but not all, are located in the
County, were also depositors in the Funds. As of mid-January, 1995, following a
restructuring of most of the Funds' assets to increase their liquidity and
reduce their exposure to interest rate increases, the County estimated the
Funds' loss at about $1.69 billion, or about 23% of their initial deposits of
approximately $7.5 billion. Many of the entities which deposited monies in the
Funds, including the County, are facing cash flow difficulties because of the
bankruptcy filing and may be required to reduce programs or capital projects.
This may also affect their ability to meet their outstanding obligations.
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The State has no existing obligation with respect to any outstanding
obligations or securities of the County or any of the other participating
entities. However, in the event the County is unable to maintain county
administered State programs because of insufficient resources, it may be
necessary for the State to intervene, but the State cannot presently predict
what, if any, action may occur. As of mid-January, it appeared that school
districts may have collectively lost up to $230 million from the amounts they
had on deposit in the Funds.
On May 2, 1995, the U.S. Bankruptcy Court approved the Comprehensive
Settlement Agreement re Orange County Investment Pools. The agreement resulted
in school participants in the Funds receiving a cash distribution totaling
approximately 90 percent of the schools' investment balances.
Under existing legal precedent, the State is obligated to intervene when a
school district's fiscal problems would otherwise deny its students basic
educational equality. The State is not presently able to predict whether any
school districts will face insolvency because of their participation in the
Funds, and if so, the potential amount or form of aid which the State may have
to provide.
RISK FACTORS OF CONCENTRATING IN CONNECTICUT
The following concerns the risks of concentrating investments in obligations
of the State of Connecticut ("State") and its political subdivisions, duly
constituted authorities and corporations.
Connecticut's economy is diverse, with manufacturing, services and trade
accounting for approximately 70% of total nonagricultural employment.
Manufacturing employment has been on a downward trend since 1984 while
nonmanufacturing employment has risen significantly. From 1970 to 1992,
manufacturing employment has declined 30.8% while the number of persons
employed in service-related industries, such as trade, government, health,
education, recreation, utilities, finance, insurance, transportation, and real
estate increased 60.8%. Although agriculture remains significant to
Connecticut, the amount of land devoted to farming has declined over time.
These trends are expected to continue in the future. Tourism and summer
residency are also economic factors.
Manufacturing has traditionally been of prime economic importance to
Connecticut and remains the State's single most important economic activity.
The manufacturing industry is diversified, with transportation equipment
(primarily commercial and defense related) the dominant industry, followed by
fabricated metal products, non-electrical machinery and electrical machinery.
Defense-related business plays an important role in the Connecticut economy.
Economic activity has been affected by the volume of defense contracts awarded
to Connecticut firms. In the past ten years Connecticut has generally ranked
from 6th to 11th among all states in total defense contracts awards, receiving
2.8% of all such contracts in 1992. On a per capita basis, defense awards to
Connecticut have been among the highest in the nation. In recent years, the
federal government has reduced defense-related spending and this trend is
expected to continue. Both United Technologies Corporation and General Dynamics
Corporation's Electric Boat Division have announced substantial labor force
reduction. Any further decline in the federal defense budget could have a
detrimental affect on the Connecticut economy.
The industrial activity of the State is concentrated in two regions. The
first, the Naugatuck Valley, extends from Bridgeport north through Ansonia and
Waterbury to Torrington, and has a high proportion of heavy industry. The
second, a belt extending from Hartford southwest through New Britain, Middleton
and Meriden to New Haven, is typified by highly skilled precision metal
products manufacturing. In addition, certain large submarine building activity
and chemical production exist in the Groton area.
Hartford, the capital of Connecticut, is a center of the insurance industry
and a major service center for business and commerce. The southwestern portion
of the State benefits from its proximity to New York City, with a substantial
amount of suburban commutation to New York. An important factor in
Connecticut's overall economic and employment picture is the influx of major
business organizations that are relocating corporate headquarters or executive
offices in Connecticut. Major employers in Connecticut include United
Technologies Corporation, General Dynamics Corporation, Aetna Life and Casualty
Company, The Travelers Insurance Company and Yale University.
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General Fund budgets for the biennium ending June 30, 1997, were adopted in
1995 anticipating expenditures of $8,987,907,123 and revenues of $8,988,180,000
for the 1995-96 fiscal year and anticipating expenditures of $9,311,125,170 and
revenues of $9,311,700,000 for the 1996-97 fiscal year.
The primary method for financing capital projects by the State is through
the sale of the general obligation bonds of the State. These bonds are backed
by the full faith and credit of the State. As of March 1, 1995, there was a
total legislatively authorized bond indebtedness of $10,194,811,925, of which
$8,673,257,677 had been approved for issuance by the State Bond Commission and
$7,334,468,663 had been issued.
To meet the need for reconstructing, repairing, rehabilitating and improving
the State transportation system (except Bradley International Airport), the
State adopted legislation which provides for, among other things, the issuance
of special tax obligation ("STO") bonds, the proceeds of which will be used to
pay for improvements to the State's transportation system. The STO bonds are
special tax obligations of the State payable solely from specified motor fuel
taxes, motor vehicle receipts, and license, permit and fee revenues pledged
therefor and deposited in the special transportation fund. The cost of the
infrastructure program for the twelve years beginning in 1984, to be met from
federal, state, and local funds, was recently estimated at $9.4 billion. To
finance a portion of the State's $4.1 billion share of such cost, the State
expects to issue $3.7 billion of STO bonds over the twelve-year period.
As of March 1, 1995, the General Assembly has authorized STO bonds for the
program in the aggregate amount of $3,794,938,104, of which $3,144,650,752 had
been issued. It is anticipated that additional STO bonds will be authorized by
the General Assembly annually in an amount of equal rank with the outstanding
bonds provided certain pledged revenue coverage requirements of the STO
indenture controlling the issuance of such bonds are met. The State expects to
continue to offer bonds for this program.
On November 3, 1992, Connecticut voters approved a constitutional amendment
which requires a balanced budget for each year and imposes a cap on the growth
of expenditures. The General Assembly is required by the constitutional
amendment to adopt by three-fifths vote certain spending cap definitions, which
has not yet occurred. Accordingly, the adopted budget complies with the current
statutory spending cap definitions enacted in 1991. Expenditures for the
payment of bonds, notes and other evidences of indebtedness are excluded from
the constitutional statutory definitions of general budget expenditures.
In order to promote economic stability and provide a positive business
climate, several tax changes were adopted during the 1993 legislative session.
Among the most significant changes was a four year gradual rate reduction to
the Corporation Business Tax based on income. Additionally, the interest rate
for late payment of the Corporation Business Tax was reduced and additional tax
credits, including a research and development tax credit, were created. In
addition, several Sales Tax exemptions were added which include, among others,
amusements and recreation, certain tax preparation services and car washes.
Although the State recorded General Fund surpluses in its fiscal years 1985
through 1987, Connecticut reported deficits from its General Fund operations
for the fiscal years 1988 through 1991. Together with the deficit carried
forward from the State's 1990 fiscal year, the total General Fund deficit for
the 1991 fiscal year was $965.7 million. The total deficit was funded by the
issuance of General Obligation Economic Recovery Notes. The Comptroller's
annual reports for the fiscal years ended June 30, 1992, 1993 and 1994
reflected General Fund operating surpluses of $110 million, $113.5 million, and
$19.7 million, respectively. The Comptroller's monthly report for the period
ended August 31, 1994 stated that on a GAAP basis the cumulative deficit is
$531 million for fiscal 1994-95. The deficit continued to narrow in fiscal 1996
from $496 million to $399 million. As of June 1998, S&P, Moody's and Fitch
rated Connecticut's bonds AA-, Aa3 and AA, respectively.
While the enacted budget for fiscal 1997 relied on non-recurring measures to
achieve balance, the State has chosen to defer some $100 million of these
measures, a decision made possible by better-than-expected revenue performance
which began in the final quarter of fiscal 1996 and has continued to date in
1997.
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There can be no assurance that general economic difficulties or the
financial circumstances of Connecticut or its towns and cities will not
adversely affect the ability of Connecticut issuers or obligors of State,
municipal and public authority debt obligations to meet their obligations
thereunder.
RISK FACTORS OF CONCENTRATING IN FLORIDA
The Fund invests in obligations of Florida issuers which results in the
Fund's performance being subject to the risks associated with the overall
conditions present within the state. The following information is a brief
summary of the recent prevailing economic conditions and a general summary of
the state's financial status. This information is based on official statements
relating to securities that have been offered by Florida issuers and from other
sources believed to be reliable but should not be relied upon as a complete
description of all relevant information.
Florida is the twenty-second largest state with an area of 54,136 square
miles and a water area of 4,424 square miles. The state is 447 miles long and
361 miles wide with a tidal shoreline of almost 2,300 miles. According to the
U.S. Census Bureau, Florida moved past Illinois in 1986 to become the fourth
most populous state, and as of 1990, had an estimated population of 13.2
million. The State's debt reflects its rapid population growth, which has
created sustained spending pressure for basic governmental infrastructure and
services. Management restraint and budgetary control have enabled the State to
balance its budget through periods of economic weakness while meeting the needs
of this growing population.
Services and trade continue to be the largest components of the Florida
economy, reflecting the importance of tourism as well as the need to serve
Florida's rapidly growing population. Agriculture is also an important part of
the economy, particularly citrus fruits. Oranges have been the principal crop,
accounting for 70% of the nation's output. Manufacturing, although of less
significance, is a rapidly growing component of the economy. The economy also
has substantial insurance, banking, and export participation. Unemployment
rates have historically been below national averages, but have recently risen
above the national rate.
Section 215.32, Florida Statutes, provides that financial operations of the
State of Florida covering all receipts and expenditures must be maintained
through the use of three funds--the General Revenue Fund, the Trust Fund, and
the Working Capital Fund. The General Revenue Fund receives the majority of
State tax revenues. The Working Capital Fund receives revenues in excess of
appropriations and its balances are freely transferred to the General Revenue
Fund as necessary. In November, 1992, Florida voters approved a constitutional
amendment requiring the state to fund a Budget Stabilization Fund to 5% of
general revenues, with funding to be phased in over five years beginning in
fiscal 1995. The Working Capital Fund will become the Budget Stabilization
Fund. Major sources of tax revenues to the General Revenue Fund are the sale
and use tax, corporate income tax and beverage tax.
The over-dependence on the sensitive sales tax creates vulnerability to
recession. Accordingly, financial operations have been strained during the past
few years, but the state has responded in a timely manner to maintain budgetary
control.
Florida's debt structure is complex. Most state debt is payable from
specified taxes and additionally secured by the full faith and credit of the
state. Under the general obligation pledge, to the extent specified taxes are
insufficient, the state is unconditionally required to make payment on bonds
from all non-dedicated taxes.
Currently, the state's general obligation bonds are rated Aa2, AA+ and AA by
Moody's, S&P and Fitch, respectively.
The Fund's concentration in securities issued by the state and its political
subdivisions provides a greater level of risk than a fund which is diversified
across numerous states and municipal entities. The ability of the state or its
municipalities to meet their obligations will depend on the availability of tax
and other revenues; economic, political, and demographic conditions within the
state; and the underlying condition of the state, and its municipalities.
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RISK FACTORS OF CONCENTRATING IN MASSACHUSETTS
The following concerns the risks of concentrating investments in obligations
of the Commonwealth of Massachusetts and its political subdivisions, duly
constituted authorities and corporations.
There has been a significant improvement in the Massachusetts unemployment
rate since 1975 when it was 12 percent. The state has recovered well from the
decline of the apparel, textile and leather industries. Its employment mix is
now particularly strong in high technology, military contractors, financial
services, and education. In 1992, 33% of the work force was in the service
sector.
Boston is the transportation and commercial center for New England. It has
an improving seaport and extensive railroad and trucking facilities, and its
Logan International Airport is the tenth busiest airport in the U.S. Boston is
also a substantial world financial center, the home of major banking,
insurance, mutual fund and investment institutions. The concentration of
educational institutions in Boston, and Massachusetts generally, has
contributed greatly to the growing strength of the Massachusetts economy.
Between 1991 and 1992, the state has lost 22,900 manufacturing jobs, from
485,000 to 462,100 (4.7%), and the unemployment rate in January 1994 was 7.2%
while the U.S. unemployment rate was 6.7%. Increasing unemployment claims have
also caused a deficit in the unemployment compensation trust fund of $120
million as of December 31, 1993. Between January 1993 and November 1993, 2,547
businesses failed; a slight decrease of 273 (9.68%) from the same period in
1992. Further, it is estimated by the Defense Budget Project that civilian
defense related employment will decline to 90,000 in 1993 from 107,000 in 1990.
As of June, 1995, however, the Commonwealth's unemployment rate was 5.6% as
compared to a national average of 5.6%. Per capita personal income in the
Commonwealth is currently higher than the national average, but, however,
growing at a rate lower than the national average. As of January 1997, the
unemployment rate was 4%.
Commonwealth spending exceeded revenues in each of the five fiscal years
commencing fiscal 1987 and the Commonwealth's tax revenues during this period
repeatedly failed to meet official forecasts. During the period, fund balances
in the budgeted operating funds declined from an operating balance of $1.072
billion in fiscal 1987 to an ending balance of negative $1.104 billion for
fiscal 1990. For fiscal 1991, these funds attained positive ending balances of
$237.1 million. Fiscal 1992 ended with positive fund balances of $549.4
million, after carrying forward the fund balances from fiscal 1991. Fiscal 1993
ended with positive fund balances of $562.5 million.
In fiscal 1994, which ended June 30, 1994, the total revenues of the
budgeted operating funds of the Commonwealth during such fiscal year increased
by approximately 5.7% over the prior fiscal year, to $15.550 billion.
Expenditures increased by 5.6% over the prior year, to $15.523 billion. As a
result, the Commonwealth ended fiscal 1994 with a positive closing fund balance
of $589.3 million.
The Commonwealth's audited financial report for fiscal 1996 indicates a
continued trend of balanced financial operations and continued fund balance
surpluses. The undesignated General Fund balance (GAAP-basis) rose to $123
million in fiscal 1996, up from a $25 million deficit at the end of fiscal
1995, while the Budgeted Operating Funds balance (GAAP-basis) increased to $709
million, up from $287 million in fiscal 1995.
The current ratings of the Commonwealth's general obligation bonds are Aa3,
AA- and AA- by Moody's, S&P and Fitch respectively.
There can be no assurance that general economic difficulties or the
financial circumstances of Massachusetts or its political subdivisions will not
adversely affect the ability of Massachusetts issuers or obligors of State,
municipal and public authority obligations to meet those obligations.
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RISK FACTORS OF CONCENTRATING IN NEW JERSEY
The following discusses the risks of concentrating investments in
obligations of the State of New Jersey ("State") and its political
subdivisions, duly constituted authorities and corporations.
New Jersey is the ninth largest state in population and fifth smallest in
land area. With an average of 1,050 persons per square mile, it is the most
densely populated of all the states. The State's economy is diversified
consisting of a variety of manufacturing, construction and service industries,
supplemented by rural areas with selective commercial agriculture.
After enjoying an extraordinary boom during the mid-1980s, New Jersey as
well as the rest of the Northeast slipped into an economic slowdown well before
the onset of the national recession which officially began in 1990 (according
to the National Bureau of Economic Research). Initially, this slowdown was an
expected response to the State's tight labor market and the fewer number of
young persons from the "baby bust" generation born in the late 1960s and early
1970s, entering the labor force.
By the beginning of the national recession, construction activity had
already been declining in New Jersey for nearly two years. As the rapid
acceleration of real estate prices forced many would-be homeowners out of the
market and high non-residential vacancy rates reduced new commitments for
offices and commercial facilities, construction employment began to decline;
also growth had tapered off markedly in the services sectors and the long-term
downtrend of factory employment had accelerated, partly because of a leveling
off of industrial demand nationally. The onset of recession caused an
acceleration of New Jersey's job losses in construction and manufacturing, as
well as an employment downturn in such previously growing sectors as wholesale
trade, retail trade, finance, utilities and trucking. Reflecting the downturn,
the rate of unemployment in the State rose from a peace time low of 3.6% during
the first quarter of 1989 to an estimated 6.6% in 1991. In 1992 the State's
unemployment rate moved ahead of the nation's for the first time in a decade to
an annual average of 8.4% versus 7.4% in the U.S.
Unemployment in the State has been declining since July 1992, when it peaked
at 9.6% according to U.S. Bureau of Labor Statistics estimates based on the
federal government's monthly household survey. The same survey shows
joblessness dropping to an average of 8.4% during the fourth quarter of 1992,
to an average of 7.8% in the first quarter of 1993 before declining to 6.9% in
June 1993. Since then, the unemployment rate fell to 6.9% during the first
quarter of 1995.
Effective January 1, 1994, personal income tax rates in the State of New
Jersey (the "State") were cut by 5% for all taxpayers. Effective January 1,
1995, the personal income tax rates were cut by an additional 10% for most
taxpayers. By a bill signed into law on July 4, 1995, New Jersey personal
income tax rates have been further reduced so that coupled with the prior rate
reductions, beginning with tax year 1996, personal income tax rates will be,
depending on a taxpayer's level of income and filing status, 30%, 15% or 9%
lower than 1993 rates.
The State ended fiscal 1996 with estimated undesignated balances of $873
million, down from the prior year's $950.2 million. Fiscal 1997 appropriations
total $15.978 billion, down $211 million or 1.3% from the prior year. The 1997
budget will accommodate the final stage of the State's $1.25 billion multi-year
personal income tax cut, which rolled back nearly half of $2.8 billion in sales
and income tax increases enacted in fiscal 1991. At present, there is no
evident threat to the stability of this budget.
Currently, the State's general obligation bonds are rated AA+, Aa1 and AA+
by S&P, Moody's and Fitch, respectively.
Prospects for New Jersey are favorable, although a return to pace of the
1980s is highly unlikely. Although growth is expected to be slower than in the
nation, the local advantages that have served the State well for many years
will remain. Structural changes that have been going on for years can be
expected to continue, with job creation primarily in the services sector.
Evidence of the State's improving economy can be found in increased
homebuilding, and other areas of construction activity, rising consumer
spending for new cars and light trucks and the decline in the unemployment
rate.
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RISK FACTORS OF CONCENTRATING IN NEW YORK
The following concerns the risks of concentrating investments in obligations
of New York and its political subdivisions, duly constituted authorities and
corporations.
The financial condition of New York State ("State") may be affected by
various financial, social, economic and political factors. Those factors can be
complex, may vary from fiscal year, and are frequently the result of actions
taken not only by the State and its agencies and instrumentalities but also by
entities that are not under the control of the State. The information set forth
below concerns the financing activities of the State, the activities of the
State's authorities and public benefit corporations (the "Authorities"), the
financial condition and projections of the Metropolitan Transit Authority
("MTA"), the financial condition of The City of New York (the "City"), and
certain information relating to the State's other localities. Adverse
developments affecting the State's financing activities, the Authorities, the
MTA, the City or other localities could adversely affect the State's financial
condition.
There are a number of methods by which the State may incur debt. In addition
to tax and revenue anticipation notes, the State may issue general obligation
bonds and notes in anticipation of such bonds. Except for certain general
obligation bonds that may be issued for specifically enumerated emergency
purposes, all general obligation bonds must be authorized by the voters. The
State may also, pursuant to specific constitutional authorization, directly
guarantee certain Authority obligations. Payments of debt service on State
general obligation and State-guaranteed bonds and notes are legally enforceable
obligations of the State.
The State also employs two other types of long-term financing mechanisms
which are State-supported but are not general obligations of the State: moral
obligation and lease-purchase or contractual-obligation financing. Moral
obligation financing generally involves the issuance of debt by an Authority to
finance a revenue-producing project or other activity. The Authority's debt is
secured by project revenues and statutory provisions for the State, subject to
appropriation by the Legislature, to make up any deficiencies which may occur
in the issuer's debt service reserve fund. Under lease-purchase or
contractual-obligation financial arrangements, Authorities and certain
municipalities have issued obligations to finance the construction and
rehabilitation of facilities or the acquisition and rehabilitation of equipment
and expect to cover debt service and amortization of the obligations through
the receipt of rental or other contract payments made by the State. State
lease-purchase or contractual-obligation financing arrangements involve a
contractual undertaking to make payments to an authority, municipality, or
other entity, but the State's obligation to make such payments is generally
expressly made subject to appropriation by the Legislature and the actual
availability of money to the State for making the payments.
The State also participates in the issuance of certificates of participation
in a pool of leases entered into by the State's Office of General Service on
behalf of several State departments and agencies and in the issuance of
certificates of participation which represent proportionate interests in lease
payments to be paid by the State, acting by and through the Commissioner of the
Commissioner of the Office of Mental Health of the State of New York.
Payments for principal and interest due on general obligation bonds,
interest due on tax and revenue anticipation notes, and contractual-obligation
and lease-purchase payments are estimated to be $2.167 billion in the aggregate
for the State's 1993-94 fiscal year and are projected to be $2.459 billion in
the aggregate for the 1994-95 fiscal year. These figures do not include
interest payable on State General Obligation Refunding Bonds issued in July
1992, to the extent that such interest is to be paid from an escrow fund
established with proceeds of such Refunding Bonds, or the State's installment
payments relating to the issuance of certificates of participation.
The State has never defaulted on any of its general obligation indebtedness
or its obligations under lease-purchase or contractual-obligation financing
arrangements and has never been called upon to make any direct payments
pursuant to its guarantees. There has never been a default on any moral
obligation debt of any Authority.
In addition to the arrangements described above, State law provides for
State municipal assistance corporations, which are Authorities authorized to
aid financially troubled localities. The Municipal Assistance Corporation for
The City of New York, ("MAC"), created to provide financing assistance to New
York City, is the only municipal assistance corporation created to date. To
enable MAC to pay debt service on its obligations, MAC receives, subject to
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annual appropriation by the Legislature, receipts from the 4% New York Sales
Tax for the Benefits of New York City, the State-imposed Stock Transfer Tax
and, subject to certain prior liens, local assistance payments otherwise
payable to the City.
The national economy began the current expansion in 1991 and has added over
7 million jobs since early 1992. Although the State has added approximately
185,000 jobs since November 1992, employment growth in the State has been
hindered during recent years by significant cutbacks in the computer and
instrument manufacturing, utility, defense and banking industries.
The State's budget for the 1995-96 fiscal year (April 1, 1995-March 31,
1996) was enacted by the State Legislature on June 7, 1995, more than two
months after the start of the fiscal year. Prior to adoption of the budget, the
Legislature enacted appropriations for disbursements considered to be necessary
for State operations and other purposes, including all necessary appropriations
for debt service. The 1995-96 fiscal year budget includes a planned three-year
20% reduction of the State's personal income tax and is the first budget in
over 50 years which projects a decline in General Fund disbursements and
spending on State operations.
Audited financial statements for fiscal 1996 indicate that New York's
accumulated deficit was not reduced in fiscal 1996, despite the State's ending
cash balance of $445 million. Accounting treatment of other actions in the
fiscal 1996 budget offset the positive effect of the cash surplus, showing that
the State made no progress in reducing this sizable accrued liability.
In January, the State projected that the fiscal 1997 budget would end with a
cash surplus of $1.3 billion and a GAAP-basis operating surplus of $886
million. However, the benefit of this improvement is lost due to the drawdown
of the surplus for fiscal 1998, with the State projecting a fiscal 1998 deficit
at about the same level as the close of fiscal 1996.
Currently, Moody's, Standard & Poor's and Fitch rate New York State's
outstanding general obligation bonds A2, A and A+, respectively. Ratings
reflect only the respective views of such organizations, and explanation of the
significance of such ratings must be obtained from the rating agency furnishing
the same. There is no assurance that a particular rating will continue for any
given period of time or that any such rating will not be revised downward or
withdrawn entirely if, in the judgment of the agency originally establishing
the rating, circumstances so warrant. A downward revision or withdrawal of such
ratings, or either of them, may have an effect on the market price of the State
Municipal Securities in which the New York Fund invests.
THE CITY OF NEW YORK
The fiscal health of the State is closely related to the fiscal health of
its localities, particularly the City, which has required and continues to
require significant financial assistance from the State. The City's
independently audited operating results for each of its 1981 through 1993
fiscal years, which end on June 30, show a General Fund surplus reported in
accordance with GAAP. In addition, the City's financial statements for the 1993
fiscal year received an unqualified opinion from the City's independent
auditors, the eleventh consecutive year the City has received such an opinion.
However, there can be no assurance that the City will not have a sizable
deficit in the future.
In response to the City's fiscal crisis in 1975, the State took a number of
steps to assist the City in returning to fiscal stability. Among these actions,
the State created MAC to provide financing assistance to the City. The State
also enacted the New York State Financial Emergency Act for The City of New
York (the "Financial Emergency Act") which, among other things, established the
New York State Financial Control Board (the "Control Board") to oversee the
City's financial affairs. The State also established the Office of the State
Deputy Comptroller of the City of New York ("OSDC") to assist the Control Board
in exercising its powers and responsibilities.
The City operates under a four-year financial plan which is prepared
annually and is periodically updated. On June 30, 1986, the Control Board's
powers of approval over the City's financial plan were suspended pursuant to
the Financial Emergency Act. However, the Control Board, MAC and OSDC continue
to exercise various monitoring
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functions relating to the City's financial position. The City submits its
financial plans as well as the periodic updates to the Control Board for its
review.
Estimates of the City's revenues and expenditures are based on numerous
assumptions and are subject to various uncertainties. If expected federal or
State aid is not forthcoming, if unforeseen developments in the economy
significantly reduce revenues derived from economically sensitive taxes or
necessitate increased expenditures for public assistance, if the City should
negotiate wage increases for its employees greater than the amounts provided
for the City's financial plan or if other uncertainties materialized that
reduce expected revenues or increase projected expenditures, then, to avoid
operating deficits, the City may be required to implement additional actions,
including increases in taxes and reductions in essential City services. The
City might also seek additional assistance from the State.
More than any other municipality, the fiscal health of the City has a
significant effect on the fiscal health of the State. The national economic
downturn which began in July 1990 adversely affected the local economy, which
had been declining since late 1989. As a result, the City experienced job
losses in 1990 and 1991 and real Gross City Product ("GCP") fell in those two
years. Beginning in calendar year 1992, the improvement in the national economy
helped stabilize conditions in the City. Employment losses moderated toward
year-end and real GCP increased, boosted by strong wage gains. In 1993 and
1994, the City experienced job gains of 2,000 and 21,000, respectively. The
City now projects, and its current four-year financial plan assumes, that
economic growth will slow in calendar years 1995 and from one year to the next
and the City budget for fiscal year 1996 reduces City-funded spending for the
second consecutive year. There can be no assurance that the City will continue
to maintain a balanced budget as required by State law without additional
reductions in City services or entitlement programs or tax or other revenue
increases which could adversely affect the City's economic base.
In July 1995, the City published the City Financial Plan for the 1996-1999
fiscal years. The 1996-1999 Financial Plan projects revenues and expenditures
for the 1996 fiscal year (July 1, 1995-June 30, 1996) balanced in accordance
with GAAP. The City Financial Plan sets forth proposed actions to close a
previously projected budget gap of approximately $3.1 billion for the 1996
fiscal year. Such gap-closing actions for the 1996 fiscal year include, among
others, substantial reductions in entitlement programs, City service and
personnel reductions, saving initiatives related to labor and pension costs,
increases in federal and State aid, the sale of certain City assets and
increases in certain lease and fee payments due the City.
The City Financial Plan also sets forth projections for the 1997 through
1999 fiscal years and outlines a proposed gap-closing program to close
projected budget gaps of $888 million, $1.46 billion and $1.44 billion for the
1997 through 1999 fiscal years, respectively, after the successful
implementation of the $3.1 billion gap-closing program for the 1996 fiscal
year. Proposed gap-closing actions for the 1997 through 1999 fiscal years
include additional service and expenditure reductions, labor productivity gains
and fee initiatives.
Implementation of the City Financial Plan is also dependent upon the City's
ability to market its securities successfully in the public credit markets. The
City's financing program for fiscal years 1996 through 1999 contemplates the
issuance of $9.3 billion of general obligation bonds primarily to reconstruct
and rehabilitate the City's infrastructure and physical assets and to make
capital investments. In addition, the City issues revenue notes and tax
anticipation notes to finance its seasonal working capital requirements. The
success of projected public sales of City bonds and notes will be subject to
prevailing market conditions. If the City were unable to sell its general
obligation bonds and notes, it would be prevented from meeting its planned
operating and capital expenditures.
As of March 22, 1995, Moody's Investors Services, Inc. ("Moody's") rated the
City's general obligation bonds Baa1 and Fitch Investors Service, Inc.
("Fitch") rated such bonds A-. On July 10, 1995, Standard & Poor's revised
downward its rating on City general obligation bonds from A- to BBB+. Standard
& Poor's stated that the downgrade was a reflection of the City's inability to
eliminate a structural budget imbalance due to persistent softness in the
City's economy, weak job growth, a trend of using nonrecurring budget devices,
optimistic projections of State and federal aid and high levels of debt
service. There is no assurance that such ratings will continue for any given
period of time or that they will not be revised downward or withdrawn entirely.
Any such downward revision or withdrawal could have an
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adverse effect on the market prices of City bonds. By June of 1998, Moody's had
upgraded the City's general obligation debt to a rating of A3.
RISK FACTORS OF CONCENTRATING IN OHIO
Financial Operations continued to show improvement in fiscal year 1996. The
state achieved an operating surplus as total operating revenue grew more
rapidly than total expenditures. The state ended the biennium with an estimated
general revenue fund balance of $597.6 million. The state's reserves have been
restored to levels which now exceed those seen before the last recession.
General revenue spending increased in 1997, with increases in most major
spending categories except health and human services, which decreased 0.2%.
Revenues and expenditures met target levels for the first six months of fiscal
1996.
The state's current direct debt levels are relatively moderate,
representing, on a per capita basis, $592 or 2.5% of personal income. Debt
service payments to cover general obligations and lease obligations constitute
approximately 5% of the state's budget.
Over the past ten years, employment and earnings in Ohio have grown steadily
and become more diversified. Although manufacturing still provides 21% of the
employment in the state, employment growth in the services and trade sectors
has created a more stable economy. Statewide employment was up 3% from
1990-1995, and employment gains in 1994 and 1995 were enough to offset losses
in recession years. Although manufacturing employment decreased 1.2% in the
year ending August 1997, growth in the services, trade and construction
industries should continue to produce strong economic growth.
The rate of personal income growth, however, has declined as lower-paying
service jobs have replaced those lost in manufacturing, with income levels
currently slightly below the national average. Personal income per capita,
which nearly equaled that of the U.S. in 1970, was 96% of the U.S. figure in
1996.
Currently, Ohio's general obligation bonds are rated Aa1, AA+ and AA+ by
Moody's, S&P and Fitch, respectively.
RISK FACTORS OF CONCENTRATING IN PENNSYLVANIA
Pennsylvania may incur debt to rehabilitate areas affected by disaster, debt
approved by the electorate, debt for certain capital projects (such as
highways, public improvements, transportation assistance, flood control,
redevelopment assistance, site development and industrial development) and tax
anticipation debt payable in the fiscal year of issuance. Pennsylvania had
outstanding general obligation debt of $5.2 billion on June 30, 19`96.
Pennsylvania is not permitted to fund deficits between fiscal years with any
form of debt. All year-end deficit balances must be funded within the
succeeding fiscal year's budget. Pennsylvania's general obligation bonds are
rated Aa3, AA- and AA by Moody's, S&P and Fitch respectively. There can be no
assurance that the current ratings will remain in effect in the future. The
Fund assumes no obligation to update this rating information. Over the
five-year period ending June 30, 2000, Pennsylvania has projected that it will
issue bonds totaling $2.1 billion and retire bonded debt in the principal
amount of $2.3 billion. Certain agencies created by Pennsylvania have statutory
authorization to incur debt for which Pennsylvania appropriations to pay debt
service thereon is not required. As of June 30, 1996, total combined debt
outstanding for these agencies was $3.6 billion. The debt of these agencies is
supported by assets of, or revenues derived from, the various projects financed
and is not an obligation of Pennsylvania. Some of these agencies, however, are
indirectly dependent on Pennsylvania appropriations. The only obligations of
agencies in Pennsylvania that bear a moral obligation of Pennsylvania are those
issued by the Pennsylvania Housing Finance Agency ("PHFA"), a state-created
agency which provides housing for lower and moderate income families, and The
Hospitals and Higher Education Facilities Authority of Philadelphia (the
"Hospital Authority"), an agency created by the City of Philadelphia to acquire
and prepare various sites for use as intermediate care facilities for the
mentally retarded. As of June 30, 1996, PHFA had $2.3 billion of revenue bonds
and notes outstanding.
Numerous local government units in Pennsylvania issue general obligation
debt, including counties, cities, boroughs, townships and school districts.
School district obligations are supported indirectly by Pennsylvania. The
issuance of non-electoral general obligation debt is limited by constitutional
and statutory provision. Electoral debt, i.e.,
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that approved by the voters, is unlimited. In addition, local government units
and municipal and other authorities may issue revenue obligations that are
supported by the revenues generated from particular projects or enterprises.
Examples include municipal authorities (frequently operating water and sewer
systems), municipal authorities formed to issue obligations benefiting hospitals
and educational institutions, and industrial development authorities, whose
obligations benefit industrial or commercial occupants. In some cases, sewer or
water revenue obligations are guaranteed by taxing bodies. The major new sources
of growth are in the service sector, including trade, medical and health
services, education and financial institutions. Manufacturing has fallen behind
both the services sector and the trade sector as the largest single source of
employment in Pennsylvania.
Since 1985 employment in Pennsylvania has grown by approximately 10%, while
employment for the Middle Atlantic region and for the U.S. for the same period
has grown by approximately 4% and 17%, respectively. Pennsylvania's average
annual unemployment rate for the years 1988, 1989 and 1990 remained slightly
below the nation's annual average unemployment rate, and Pennsylvania's average
annual unemployment rate for the years 1992, 1993 and 1994 remained slightly
above the nation's annual average unemployment rate. The seasonally adjusted
unemployment rate for Pennsylvania for January, 1996 was 6.1% compared to 5.3%
for the U.S. The unadjusted unemployment rate for Pennsylvania and the U.S. for
January, 1996 was 6.7% and 6.3%, respectively. The population of Pennsylvania,
12,052 million people as of July 1, 1994, according to the U.S. Bureau of the
Census, represents an increase from the July 1, 1985 estimate of 11,772
million. Per capita income in Pennsylvania for calendar 1994 of $22,196 was
higher than the per capita income of the U.S. of $21,699. As of June 30, 1996,
Pennsylvania's Tax Stabilization Reserve Fund (GAAP Basis) had a surplus of
$183.6 million.
Pennsylvania is currently involved in certain litigation where adverse
decisions could have an adverse impact on its ability to pay debt service. In
Baby Neal v. Commonwealth of Pennsylvania, the American Civil Liberties Union
filed a lawsuit against the Commonwealth seeking an order that would require
the Commonwealth to provide additional funding for child welfare services.
County Of Allegheny v. Commonwealth of Pennsylvania involves litigation
regarding the state constitutionality of the statutory scheme for county
funding of the judicial system. In Pennsylvania Association of Rural and Small
Schools v. Casey, the constitutionality of Pennsylvania's system for funding
local school districts has been challenged. No estimates for the amount of
these claims are available.
27
<PAGE> 55
RESERVE NEW YORK TAX-EXEMPT TRUST-- NEW YORK TAX-EXEMPT FUND
STATEMENT OF NET ASSETS -- MAY 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ----------------------- ---- -------------- --------
<S> <C> <C> <C>
Bleecker HDC Terrace Apt Project S85, 3.70% (a) 7/1/2015 $ 2,470 $ 2,486,285
Brentwood UFSD TAN, 4.25% 6/30/1998 2,600 2,699,349
Buffalo GOB Series A, 3.70% 2/1/1999 800 809,814
Buffalo RAN, 4.40% 8/5/1998 1,500 1,536,484
Connetquot CSD TAN, 4% 6/25/1998 2,000 2,061,372
Eagle Tax-Exempt Trust NYS Med Care, 3.97% (a) 8/15/2024 3,000 3,032,375
Erie County RAN, 4.50% 6/25/1998 1,000 1,042,359
Falconer CSD GOB, 4.55% 6/15/1998 490 500,408
Guilderland IDA for North Eastern Industrial Park Series 1993 A, 4% (a) 12/1/2008 3,500 3,511,852
Jefferson IDA for Watertown Carthage Project, 3.75% (a) 12/1/2012 3,500 3,511,147
Leroy CSD RAN, 4% 6/26/1998 3,705 3,843,415
Massapequa UFSD BAN, 4.25% 10/29/1998 1,000 1,026,534
Montgomery County IDA for Service Merchandise Co., 3.75% (a) 12/31/2024 1,600 1,602,795
New York City COP, 3.55% 9/22/1998 5,000 5,032,582
New York City COP, 3.50% (a) 8/1/2021 4,000 4,028,384
New York City GOB Custodial Receipts Series A31, 4% (a) 7/2/2000 4,000 4,047,660
New York City GOB Series A7, 4% (a) 8/1/2020 1,000 1,003,205
New York City GOB Series A8, 4% (a) 8/1/2018 700 702,228
New York City GOB Fiscal 1993 Series E2, 4% (a) 8/1/2021 1,000 1,003,201
New York City GOB Fiscal 1993 Series E4, 4% (a) 8/1/2021 1,000 1,003,201
New York City GOB Series B1, 3.85% (a) 8/15/2024 17,275 17,329,996
New York City GOB Series B4, 4% (a) 8/15/2023 2,000 2,006,364
New York City GOB Series C, 4% (a) 10/1/2023 500 501,606
New York City GOB Series D, 3.90% (a) 2/1/2020 300 300,988
New York City GOB Series D, 3.85% (a) 2/1/2022 3,000 3,009,748
New York City GOB Series E4, 4% (a) 8/1/2022 2,100 2,106,662
New York City GOB Series E5, 4% (a) 8/1/2019 2,200 2,207,052
New York City HDC Multifamily Mortgage for James Tower Project, 3.60% (a) 7/1/2005 5,900 5,919,042
New York City HDC for Parkgate Tower, 3.55% (a) 12/1/2007 475 476,518
New York City IDA for Goodwill Project, 3.85% (a) 3/1/2000 1,045 1,047,816
New York City IDA for Stroheim & Romann, 3.80% (a) 12/1/2015 1,500 1,513,237
New York State Dormitory Authority for Public Library Revenue Bonds Series
1992B, 3.75% (a) 7/1/2022 1,000 1,003,125
New York State ERD for Brooklyn Union Gas, 3.60% (a) 12/1/2020 2,000 2,005,301
New York State ERD/PCR for LILCO Project Series A, 3.58% (a) 3/1/2016 3,000 3,026,756
</TABLE>
28
<PAGE> 56
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ----------------------- ---- -------------- --------
<S> <C> <C> <C>
New York State HFA for Service Contract Obligation Revenue Bonds Series
A, 3.85% (a) 3/15/2027 7,000 7,012,303
New York State HFA for Hormandie Court Series 91, 3.90% (a) 5/15/2015 7,400 7,423,852
New York State HFA Mt. Sinai School, 3.75% (a) 11/1/2014 1,800 1,805,868
New York State HFA SUNY Pre-Refunded, 8% (a) 11/1/2006 700 730,833
New York State Job Development Authority Series D, 3.75% 3/1/1999 1,055 1,058,360
New York State Job Development Authority Series F, 3.75% 3/1/1999 1,355 1,359,316
New York State Job Development Authority Series 84E, 3.75% 3/1/1999 2,485 2,492,915
New York State Local Government Assistance 1993A, 3.85% (a) 4/1/2022 9,500 9,530,244
New York State Local Government Assistance Series B, 3.80% (a) 4/1/2025 3,900 3,912,427
North Hempstead BAN, 4.10% 10/29/1998 3,000 3,074,669
Onondaga County IDR for Edgecomb Metals Project, 3.70% (a) 11/1/2009 1,100 1,103,708
Onondaga County IDR for McLane Co. Project, 4.20% (a) 11/1/2004 3,200 3,212,164
Oyster Bay BAN, 4% 4/30/1999 3,000 3,018,891
Penfield CSD BAN, 3.90% 5/19/1999 3,050 3,058,766
Queensbury, UFSD, BAN, 4.25% 8/7/1998 4,000 4,141,475
Rochester BAN, 3.75% 3/9/1999 5,000 5,049,313
Rotterdam-Mononassen CSD GOB, 4.75% 6/15/1998 1,185 1,239,487
Suffolk County IDR for Target Rock Corporation Revenue Bonds, 3.60% (a) 2/1/2007 4,000 4,012,455
Suffolk County IDR for Satellite Transmission Systems, Inc., 3.90% (a) 11/1/2007 1,530 1,535,076
Syracuse IDA for General Accident Insurance Co. Project, 3.80% (a) 12/1/2003 4,550 4,636,174
Triboro Bridge and Tunnel Authority Special Obligation Series 1994, 3.90% (a) 1/1/2024 4,800 4,815,485
West Hampton Beach UFSD TAN, 4.25% 6/29/1998 2,000 2,066,759
Yonkers IDR Civic Revenue Bonds for Consumers Union, 3.90% (a) 7/1/2019 1,400 1,403,769
Yonkers IDR for Consumers Union Facility, 3.90% (a) 7/1/2021 4,500 4,512,114
------------
Total New York Fund Investments (98.79%) (Cost $167,800,886) 169,145,284
Other assets, less liabilities (1.21%) 2,066,955
------------
NET ASSETS (100%) equivalent to $1.00 net asset value, offering
and redemption prices per share on 171,212,239 shares of
beneficial interest of $.001 par value outstanding $171,212,239
============
</TABLE>
29
<PAGE> 57
RESERVE TAX-EXEMPT TRUST-- CALIFORNIA TAX-EXEMPT FUND
STATEMENT OF NET ASSETS -- MAY 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ----------------------- ---- -------------- --------
<S> <C> <C> <C>
Alameda Contra Costa School Finance Authority Series B, 3.55% (a) 7/1/2023 $ 2,000 $ 2,012,378
Alameda Contra Costa School Finance Authority Series C, 3.55% (a) 7/1/2025 1,000 1,006,149
Anaheim COP, 3.70% (a) 8/1/2019 250 252,701
California Community Development Authority Series A3, 4% (a) 5/15/2025 2,300 2,303,935
California Community Development Authority Series, 3.80% (a) 6/1/2026 3,500 3,510,558
California EDA for ISO Corp Series A, 3.75% (a) 4/1/2008 1,000 1,002,582
California RAN, 4.50% 6/30/1998 500 516,576
California School District Cash Reserve Program Series A, 4.75% 7/2/1998 1,000 1,044,201
California Modesto Santa Clara Redding Public Power, 3.65% (a) 7/1/2022 300 300,945
East Bay Municipal Water and Sewer Utility, 6% 6/1/1998 500 515,000
Foothill/Eastern Transportation Toll Road Revenue Bonds Series 95C, 3.70% (a) 1/2/2035 1,000 1,003,179
Foothill/Eastern Transportation Toll Road Revenue Bonds, 3.75% (a) 1/2/2035 500 501,611
Fremont Public Finance Authority for Family Resource Center, 3.60% (a) 8/1/2028 1,000 1,003,155
Grand Terrace HFA for Community Redevelopment Agency, 4.40% (a) 12/1/2011 600 601,886
Hemet MHR for Sunwest Resort Village, 3.70% (a) 7/1/2006 1,500 1,509,579
Irvine Improvement Bond Assessment District 85, 3.55% (a) 9/2/2011 1,900 1,905,880
Irvine Public Finance Authority for Infrastructure Project, 3.55% (a) 11/1/2010 2,000 2,006,189
Irvine Ranch PCR for Water District Election #282, 3.75% (a) 10/1/2009 1,300 1,303,891
Kern USP TRAN, 4.50% 8/20/1998 1,000 1,036,320
Lancaster MHR for Westwood Park Apartments 1985, 3.45% (a) 12/1/2007 500 501,521
Los Angeles Community Redevelopment Agency for Baldwin Hills, 3.65% (a) 12/1/2014 400 401,052
Los Angeles Community Redevelopment for Promenade Towers Series 1989,
3.60% (a) 4/1/2009 3,135 3,155,003
Los Angeles Custodial Receipts, 3.90% (a) 7/1/2005 1,890 1,917,610
Los Angeles Department of Water, 3.40% 7/13/1998 3,500 3,531,625
Los Angeles IDA for International Airport Authority, 4% (a) 12/1/2025 1,000 1,003,209
Los Angeles IDA for Wastewater Project, 7% (a) 6/1/2021 1,000 1,085,778
Los Angeles Transportation, 7.20% (a) 7/1/2000 1,000 1,052,713
Los Angeles USD TRAN, 4.50% 6/30/1998 2,800 2,917,369
Oakland USD TRAN, 4.25% 10/28/1998 1,000 1,026,606
Orange County Apartment Development Revenue Bonds Issue A of 1991, the
Lakes Project 3.70%, Letter of Credit with Citibank (a) 12/1/2006 1,000 1,003,230
Orange County HFA for Lantern Pines Apartments, 3.45% (a) 12/1/2027 500 504,357
Orange County HFA for Lantern Pines Apartments, 3.50% (a) 12/1/2027 1,000 1,008,721
</TABLE>
30
<PAGE> 58
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ----------------------- ---- -------------- --------
<S> <C> <C> <C>
Orange County Sanitation District Capital Improvement Program 1990-92,
3.70% Letter of Credit with National Westminster (a) 8/1/2015 200 200,605
Pasadena COP for Rose Bowl Improvement Project, 3.75% (a) 12/1/2011 600 601,917
Pico Rivera Community Redevelopment Agency for Rainer Fund Crossroads
Plaza Project, 3.50% (a) 12/1/2010 700 701,906
Puerto Rico GOB, 3.60% 9/4/1998 4,608 4,628,906
Redlands COP, 4.50% (a) 9/1/2015 965 968,109
Redondo Beach Redevelopment Authority, 3.80% (a) 12/1/2025 2,000 2,006,466
Sacramento GOB, 4% 2/1/1999 1,000 1,016,646
San Bernadino HFR for Alta Park Project, 4.40% (a) 5/1/2006 2,600 2,609,720
San Bernadino IDA for Gate City, 4.45% (a) 3/1/2005 200 202,103
San Francisco Bayside Village Series 85D, 4.20% (a) 12/1/2005 2,900 2,921,577
San Francisco HFR for Yerba Buena Gardens, 3.60% (a) 9/1/2006 900 902,806
San Jose HFR Redevelopment Agency, 3.55% (a) 7/1/2026 3,000 3,009,284
Santa Clara Electric Revenue Bonds Series 85C, 3.75% (a) 7/1/2010 300 300,967
Santa Clara El Cammino Hospital District, 3.60% (a) 8/1/2015 200 200,623
Turlock Irrigation District Series 88A, 3.55% (a) 1/1/2014 925 927,862
Union City MHR for Skylark Apartments, 4.40% (a) 11/1/2007 2,200 2,204,460
Upland MHR Community Redevelopment Bonds Series B for Northwood
Project, 3.65% (a) 3/1/2014 250 252,179
Vista MHR for Shadow Ridge Apartments Project, 3.75% (a) 5/1/2005 800 802,565
-----------
Total California Fund Investments (99.96%) (Cost $66,353,252) 66,904,210
Other assets, less liabilities (.04%) 28,502
-----------
NET ASSETS (100%) equivalent to $1.00 net asset value, offering $66,932,712
and redemption prices per share on 66,932,712 shares of ===========
Beneficial interest of $.001 par value outstanding
</TABLE>
31
<PAGE> 59
RESERVE TAX-EXEMPT TRUST-- CONNECTICUT TAX-EXEMPT FUND
STATEMENT OF NET ASSETS -- MAY 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ----------------------- ---- -------------- --------
<S> <C> <C> <C>
Connecticut DAI for Allen Group Inc., 3.90% (a) 2/1/2013 $ 400 $ 401,325
Connecticut DAI for Conco Medical Co. Project Series 85, 3.50% (a) 11/1/2005 700 701,718
Connecticut DAI for General Accident Insurance Co., 3.80% (a) 12/1/2013 1,700 1,732,189
Connecticut DAI for Regional YMCA Project, 4.20% (a) 6/1/2008 512 513,325
Connecticut DAI for Trudy Corporation Project, 3.85% (a) 9/1/2009 500 501,635
Connecticut DAI for Zotos International Project, 4.35% (a) 12/1/2004 1,450 1,455,357
Connecticut Development Authority Health Care Revenue Bonds for
Independent Living Project, 3.70% (a) 7/1/2015 945 947,944
Connecticut Development Authority PCR for Central Vermont Public Service,
3.65% (a) 12/1/2015 1,400 1,404,340
Connecticut Development Authority PCR for Connecticut Light and Power
Project Series 1993, 3.80% (a) 9/1/2028 1,300 1,304,265
Connecticut Development Authority PCR for Western Massachusetts Electric
Co. Series 1993A, 3.70% (a) 9/1/2028 800 802,536
Connecticut HEF for Bradley Health Care Series B, 3.65% (a) 7/1/2029 1,000 1,002,610
Connecticut HEF for Charlotte Hospital Series B, 3.70% (a) 7/1/2010 500 501,564
Connecticut HEF for Kingswood Oxford School Issue Series A, 4.20% (a) 2/1/2009 420 421,498
Connecticut HEF for New Haven Hospital RAW Series E, 3.80% (a) 6/1/2012 500 509,500
Connecticut HEF for Pomfret School Issue Series A, 3.70% (a) 7/1/2024 1,300 1,303,476
Connecticut HEF for Sharon Hospital Issue Series A, 3.60% (a) 7/1/2027 1,000 1,002,466
Connecticut HEF for Yale University Series T2, 3.70% (a) 7/1/2029 1,000 1,003,241
Connecticut HFA BDS Project, 3.70%, (a) 5/15/2018 1,400 1,402,409
Connecticut State GOB, 4.50% 10/1/1998 1,500 1,515,430
Connecticut State GOB Series 97B, 3.75% (a) 5/15/2014 1,000 1,003,226
Connecticut State Special Assessment Unemployment Compensation RAW
Series C, 3.90% (a) 11/15/2001 1,500 1,524,402
Connecticut State Special Assessment Unemployment Compensation RAW
Series, 4.25% 11/15/1998 500 502,534
Connecticut State Special Tax Transportation Infrastructure Second Lien
Revenue Bonds, 3.75% (a) 12/1/2010 1,470 1,474,795
Darien GOB, 6.25% 8/15/1998 400 409,278
Hamden BAN, 4% 8/14/1998 1,000 1,032,170
Hartford Redevelopment Agency MHR for Underwood Towers Project, 3.75% (a) 6/1/2020 1,500 1,504,825
</TABLE>
32
<PAGE> 60
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ----------------------- ---- -------------- --------
<S> <C> <C> <C>
Ledyard BAN, 4% 2/4/1999 1,500 1,508,170
Norwich BAN, 4% 11/10/1998 2,000 2,045,665
Puerto Rico Electric Power Authority, 3.85% (a) 7/1/2022 700 710,027
Puerto Rico Industrial, Medical, and Environmental RAW for Reynolds Metals,
3.80% (a) 9/1/2013 1,200 1,211,400
Puerto Rico University RAW, 4.55% 6/1/1998 500 511,375
Shelton BAN, 3.75% 12/8/1998 1,000 1,016,303
Shelton HFA for Crosby Commons Project, 4.25% (a) 1/1/2031 500 501,805
Sprague BAN, 4.05% 9/4/1998 2,000 2,061,774
Thompson BAN, 4% 7/17/1998 998 1,005,515
-----------
Total Connecticut Fund Investments (99.09%) (Cost $36,130,734) 36,450,092
Other assets, less liabilities (.91%) 336,585
-----------
NET ASSETS (100%) equivalent to $1.00 net asset value, offering $36,786,677
and redemption prices per share on 36,786,677 shares of ===========
</TABLE>
33
<PAGE> 61
RESERVE TAX-EXEMPT TRUST-- FLORIDA TAX-EXEMPT FUND
STATEMENT OF NET ASSETS -- MAY 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ----------------------- ---- -------------- --------
<S> <C> <C> <C>
FLORIDA - 58.97%
Boca Raton IDA for Parking Garage Project, 4.075% (a) 12/1/2014 $ 300 $ 303,044
Broward MHR for Welleby Apartment Project Series 1984, 3.60% (a) 12/1/2006 400 401,307
Collier IDA for Retirement Rental Housing Revenue Bonds HFA, 3.90% (a) 12/1/2015 300 300,995
Dade IDA for Aviation Authority Facilities Series 84A, 3.90% (a) 10/1/2009 100 100,273
Dade IDA for Dolphin Stadium Project, 3.90% (a) 1/1/2016 300 300,996
Dade HFA for Hospital Revenue Bonds for Miami Children's Hospital Project,
3.85% (a) 9/1/2025 200 200,548
Duval HFA for Lakes of Mayport Apartment Project, 3.95% (a) 12/1/2009 600 602,026
Florida General Service Division GOB, 7.75% (a) 9/1/2003 305 319,825
Florida Gulf Coast GOB Series 97, 3.70% (a) 8/1/2027 100 100,328
Florida Inland GOB, 4.25% 1/1/1999 500 510,704
Gulf Breeze IDA Revenue Bonds Series 85, 3.70% (a) 12/1/2015 390 391,274
Jacksonville IDR for Coastal Islands Project, 4.05% (a) 8/1/2008 155 155,503
Jacksonville IDR for University Medical Center, 4.25% (a) 2/1/2019 500 501,896
Manatee PCR for Florida Power and Light, 3.95% (a) 9/1/2024 100 100,319
Ocala GOB, 5.40% 10/1/1998 250 253,557
Palm Beach PCR for Water and Sewer Project, 4.50% (a) 10/1/2011 500 501,811
Putnam PCR for Florida Power and Light, 3.95% (a) 9/1/2024 100 100,319
Port St. Lucie PCR for Florida Power and Light, 3.95% (a) 1/1/2011 200 200,671
Sea Coast RAW, 7.25% (a) 3/1/2009 500 531,549
Tampa Occupational License Tax Bonds, 3.90% (a) 5/1/2018 200 200,545
University of North Florida Capital Improvement Project, 3.75% (a) 11/1/2024 300 300,995
ILLINOIS - 4.65%
Illinois HFC for Community Hospital, 3.75% (a) 10/1/2015 500 503,293
MASSACHUSETTS - 9.27%
Boston Water and Sewer Commission Revenue Bonds, 3.80% (a) 11/1/2024 500 501,588
Massachusetts Muni Wholesale Electric, 3.75% (a) 7/1/2019 500 501,603
</TABLE>
34
<PAGE> 62
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ----------------------- ---- -------------- --------
<S> <C> <C> <C>
MARYLAND - 4.64%
Baltimore IDA for Mayor and City Counsel Project, 4.50% (a) 8/1/2016 500 501,579
MISSOURI - 4.09%
Cole IDA for Mobine Manufacturing Series 85, 4% (a) 12/1/2015 440 443,082
NEW JERSEY - 4.67%
New Jersey EDA for Volvo of America Corp., 4.246% (a) 12/1/2004 500 505,050
PENNSYLVANIA - 13.00%
Emmaus General Authority Revenue Bonds, 3.95% (a) 3/1/2024 900 903,001
University of Pittsburgh HEF for Capital Project Bonds, 3.60% (a) 1/1/2019 500 503,167
-----------
Total Florida Fund Investments (99.29%) (Cost $10,686,508) 10,740,848
Other assets, less liabilities (.71%) 76,391
NET ASSETS (100%) equivalent to $1.00 net asset value, offering -----------
and redemption prices per share on 10,817,239 shares of
beneficial interest of $.001 par value outstanding $10,817,239
===========
</TABLE>
35
<PAGE> 63
RESERVE TAX-EXEMPT TRUST - MASSACHUSETTS TAX-EXEMPT FUND
STATEMENT OF NET ASSETS -- MAY 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ----------------------- ---- -------------- --------
<S> <C> <C> <C>
Central Berkshire Regional School District, 3.70% 6/1/1998 $ 435 $ 439,024
Dighton-Rehoboth Regional School District GOB, 6.50% 6/1/1998 190 196,244
Framingham IDA for Perrini Corp., 4% (a) 9/30/2005 300 301,021
Massachusetts, Municipal Wholesale Electric Series 1994 C, 3.75% (a) 7/1/2019 300 300,962
Massachusetts GOB, 7.50% (a) 4/1/2009 4,215 4,485,918
Massachusetts GOB Series 97, 3.80% (a) 8/1/2015 200 200,660
Massachusetts HEF for Endicott College Series A, 3.80% (a) 10/1/2018 500 500,937
Massachusetts HEF for Clark University, 3.75% (a) 12/1/2004 100 100,325
Massachusetts HEF for Boston University Series H, 3.70% (a) 12/1/2015 1,000 1,002,737
Massachusetts HEF for Hallmark Health Systems, 3.75% (a) 7/1/2027 500 501,612
Massachusetts HEF for Brigham and Women's Hospital, 3.95% (a) 7/1/2017 1,400 1,403,966
Massachusetts HEF for Eastern Nazarene College Series 97, 3.60% (a) 10/1/2027 1,000 1,002,466
Massachusetts HEF for Harvard University, 3.60% (a) 2/1/2016 987 990,123
Massachusetts HEF for Harvard University, 3.60% (a) 8/1/2017 200 200,633
Massachusetts HEF Capital Assistance Program Series G-1, 3.75% (a) 1/1/2019 300 300,787
Massachusetts HEF Capital Asset Series D, 3.70% (a) 1/1/2035 400 401,213
Massachusetts HEF for Williams College Series E, 3.50% (a) 8/1/2014 400 401,230
Massachusetts HEF for Wellesley College Series B, 3.50% (a) 7/1/2022 400 401,216
Massachusetts IDA for KRH Rolls Inc. Project Series 1988, 4.20% (a) 5/1/2006 400 402,881
Massachusetts IFA for Composite Easy Day, 3.75% (a) 7/1/2006 150 150,384
Massachusetts IFA for Emerson College, 3.75% (a) 11/1/2025 500 501,612
Massachusetts IFA for Governor Dummer Academy, 3.70% (a) 7/1/2026 300 300,755
Massachusetts IFA for Griffin Realty Series B, 3.80% (a) 7/1/2008 625 626,621
Massachusetts IFA for Groton School, 3.90% (a) 6/1/2019 200 200,662
Massachusetts IFA for Holyoke Water Power Project, 3.75% (a) 5/1/2022 300 300,950
Massachusetts IFA for Quamco Series B, 3.60% (a) 9/1/2001 1,200 1,203,733
Massachusetts IFA for Whitehead Bio-Medical, 3.75% (a) 7/1/2026 1,000 1,002,690
Massachusetts Showa Women's Institute of Boston, 3.95% (a) 3/15/2004 100 100,319
Massachusetts Water Resource Authority, 3.75% (a) 4/1/2028 1,300 1,304,167
Millford GOB, 6.20% 11/1/1998 135 136,924
Millis GOB, 5% 7/1/1998 260 266,741
Natick BAN, 4.25% 8/7/1998 500 517,599
Needham GOB, 5% 6/15/1998 835 854,627
Puerto Rico COP, 3.75% 6/8/1998 1,500 1,503,082
</TABLE>
36
<PAGE> 64
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ----------------------- ---- -------------- --------
<S> <C> <C> <C>
Puerto Rico Industrial, Medical, Higher Education and Environmental Bonds for
PCR Facility Authority, 4.40% (a) 12/1/2015 200 $ 200,732
Quincy GOB, 6% 3/1/1999 1,040 1,073,943
Tewksbury GOB, 6% 3/15/1999 $ 475 489,767
Ware BAN, 4% 12/18/1998 500 506,606
Total Massachusetts Fund Investments (97.61%) (Cost $24,656,892) 24,775,869
Other assets, less liabilities (2.39%) 607,119
NET ASSETS (100%) equivalent to $1.00 net asset value, offering $25,382,988
And redemption prices per share on 25,382,988 shares of beneficial
interest of $.001 par value outstanding
</TABLE>
- -----------------
SEE NOTES TO FINANCIAL STATEMENTS
37
<PAGE> 65
RESERVE TAX-EXEMPT TRUST-- NEW JERSEY TAX-EXEMPT FUND
STATEMENT OF NET ASSETS -- MAY 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ----------------------- ---- -------------- --------
<S> <C> <C> <C>
Atlantic City Pooled Loan Program, 3.65% (a) 7/1/2026 $ 1,500 $ 1,504,638
Berkley GOB, 4.40% 4/1/1999 277 280,491
East Rutherford GOB, 4.20% 1/15/1999 420 427,565
Essex County Improvement Authority, 3.80% (a) 12/01/2025 2,000 2,006,485
Haddenfield Board of Education Temp Notes, 4.30% 7/3/1998 950 987,588
Jersey City School Promissory Note, 4.375% 9/18/1998 2,000 2,062,310
Millville Board of Education School Board Reserve Account BAN, 4.10% 7/8/1998 1,319 1,354,227
Monmouth BAN, 3.55% (a) 8/1/2016 100 100,308
New Brunswick School Temporary Note, 4% 7/31/1998 2,000 2,021,409
New Jersey EDA for Bayonne IMTT Docking Revenue Bonds Series C, 3.85% (a) 12/1/2027 500 501,497
New Jersey EDA for Bayonne IMTT Docking Revenue Bonds, 3.90% (a) 12/1/2027 600 601,822
New Jersey EDA for Bayonne IMTT Docking Revenue Bonds, 3.90% (a) 12/1/2027 700 702,126
New Jersey EDA for Economic Growth Bond Series F, 3.55% (a) 8/1/2014 740 742,303
New Jersey EDA for Lawrenceville School Series B, 3.70% (a) 7/1/2026 1,000 1,003,111
New Jersey EDA for Natural Gas Project Series A, 3.70% (a) 1/1/2028 1,000 1,002,588
New Jersey EDA for PCR Series 95, 3.75% (a) 9/1/2012 800 802,538
New Jersey EDA for Series CC, 3.70% (a) 12/1/2009 900 902,863
New Jersey EDA for St. James Preparatory School, 3.30% (a) 12/1/2027 900 902,522
New Jersey EDA for St. Peters School Series 1995, 3.70 (a) 1/1/2010 1,125 1,128,581
New Jersey EDA for St. Peters Preparatory School, 3.80% (a) 1/15/2018 1,500 1,504,588
New Jersey EDA for Trailer Marine Corps Project, 3.75% (a) 2/1/2002 400 401,274
New Jersey EDA for Volvo of American Corp, 4.246% (a) 12/1/2004 3,000 3,030,249
New Jersey EDA for RJB Associate Project, 3.90% (a) 8/1/2008 900 902,970
New Jersey GOB Series C, 6.50% 1/15/2005 1,000 1,056,253
New Jersey HCF Hospital Capital Asset, 3.70% (a) 7/01/2035 400 401,259
New Jersey Sports Expo Authority Series C, 3.65% (a) 9/01/2024 1,300 1,311,422
New Jersey Turnpike Authority General Series 91D, 3.75% (a) 1/01/2018 2,900 2,938,479
North Arlington BAN, 4.25% 9/11/1998 1,000 1,020,835
Port Authority of New York and New Jersey Special Versatile Structure
Obligation, 3.85% (a) 5/1/2019 2,200 2,206,853
Rutgers University GOB, 7% 5/1/1999 500 527,398
Sayerville GOB, 4.45% 12/15/1998 400 409,368
</TABLE>
38
<PAGE> 66
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ----------------------- ---- -------------- -----------
<S> <C> <C> <C>
Trenton School Temp Notes, 3.70% 3/10/1999 1,675 1,690,580
-----------
Total New Jersey Fund Investments (96.90%) (Cost $36,095,124) 36,436,500
Other assets, less liabilities (3.10%) 1,163,940
NET ASSETS (100%) equivalent to $1.00 net asset value, offering -----------
and redemption prices per share on 37,600,440 shares of
beneficial interest of $.001 par value outstanding $37,600,440
===========
</TABLE>
- -----------------
SEE NOTES TO FINANCIAL STATEMENTS
39
<PAGE> 67
RESERVE TAX-EXEMPT TRUST -- OHIO TAX-EXEMPT FUND
STATEMENT OF NET ASSETS -- MAY 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ----------------------- ---- -------------- --------
<S> <C> <C> <C>
Brunswick IDA for Kinder-Care Learning Centers Project Series A, 4.05% (a) 6/1/2002 $ 100 $ 100,345
Claremont HEF for Mercy Health Systems, 3.85% (a) 12/1/2021 100 100,330
Columbus ERD Electric Systems Revenue Bonds, 3.75% (a) 9/1/2009 200 200,637
Cuyahoga IDA for Allen Group Project, 3.85% (a) 12/1/2015 100 100,273
Cuyahoga HFA for Cleveland Clinic Series A, 3.90% (a) 1/1/2016 100 100,331
Cuyahoga IDA for Edgecomb Metals Co., 3.70% (a) 9/1/2009 100 100,920
Franklin County Industrial Development Refunding Revenue Bonds for
Kinder-Care Learning Centers Project Series 96A, 3.90% (a) 12/1/2021 200 200,662
Lucas County EDA for Lutheran Home's Project, 3.90% (a) 11/1/2019 100 100,333
Mahoning County Forum Health Obligation Group, 3.90% (a) 12/1/2028 200 200,662
Port Authority of Cincinnati and Hamilton Counties for Kenwood Office
Association, 3.95% (a) 9/1/2025 200 200,638
Puerto Rico Industrial, Medical, Environmental Pollution Control Bond, 4.40% (a) 12/1/2015 200 200,732
Toledo Special Obligation Assessment Notes, 3.90% 12/1/1998 200 200,663
United States Treasury Bill, 4.40% 6/4/1998 700 699,743
Total Ohio Fund Investments (99.99%) (Cost $2,499,487) 2,506,269
Other assets, less liabilities (0.01%) 336
NET ASSETS (100%) equivalent to $1.00 net asset value, offering
and redemption prices per share on 2,506,605 shares of
beneficial interest of $.001 par value outstanding $2,506,605
</TABLE>
- -----------------
SEE NOTES TO FINANCIAL STATEMENTS
40
<PAGE> 68
RESERVE TAX-EXEMPT TRUST -- PENNSYLVANIA TAX-EXEMPT FUND
STATEMENT OF NET ASSETS -- MAY 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ----------------------- ---- -------------- --------
<S> <C> <C> <C>
Allegheny GOB for Presbyterian Hospital, 4.35% 4/1/1999 $ 210 $ 212,621
Allegheny IDA for Longwood at Oakmont, 4% (a) 7/1/2027 600 601,907
Allegheny IDA for St. Francis Health Systems, 3.90% (a) 11/1/2027 500 501,658
Allegheny University of Pittsburgh Project Series 85, 3.80% (a) 3/1/2013 700 702,324
Allegheny University Project Series 85, 3.60% (a) 7/1/2015 100 100,634
Allegheny University Project Series 85, 4.075% (a) 7/1/2015 400 402,550
Beaver COP, 3.80% 8/14/1998 1,000 1,004,164
Bucks IDA for Edgecomb Metals Co., 3.70% (a) 10/1/2009 500 503,251
Butler IDA for Lutheran Welfare, 3.80% (a) 11/1/2016 500 501,601
Dauphin General Authority Revenue Bonds, 3.93% (a) 11/1/2017 400 401,342
Delaware COP, 3.70% 8/10/1998 1,000 1,002,534
Delaware Finance Authority Series 85, 3.90% (a) 12/1/2020 600 601,967
Delaware PCR for Philadelphia Electric Co., 3.95% (a) 8/1/2016 400 401,264
Emmaus GOB Local Government Revenue Bonds, 3.95% (a) 3/1/2024 700 702,334
Mercersburg General Purpose Authority Series 97, 3.85% (a) 11/1/2027 300 300,834
Montgomery COP, 3.75% 8/14/1998 1,000 1,004,110
Philadelphia Higher Education for Kings College, 4.50% (a) 11/1/2002 200 201,265
Philadelphia Higher Education for Temple University, 4% (a) 10/1/2009 600 601,897
Philadelphia Hospital Authority for Children's Hospital, 4% (a) 3/1/2027 700 702,240
Philadelphia MHR for Harbor View Tower Project, 4.50% (a) 11/1/2027 425 426,559
Philadelphia TRAN, 4.50% 6/30/1998 500 520,814
Philadelphia School District TRAN, 4.50% 6/30/1998 500 520,814
Puerto Rico Industrial, Medical Environmental Pollution Control Authority,
4.40% (a) 12/1/2015 300 301,098
Western Wayne School District GOB, 5% 10/15/1998 100 101,004
York General Pooled Finance Authority, 3.85% (a) 9/1/2026 500 501,673
-----------
Total Pennsylvania Fund Investments (97.23%) (Cost $12,741,817) 12,822,459
Other assets, less liabilities (2.77%) 364,679
NET ASSETS (100%) equivalent to $1.00 net asset value, offering -----------
and redemption prices per share on 13,187,138 shares of
beneficial interest of $.001 par value outstanding $13,187,138
===========
</TABLE>
41
<PAGE> 69
(a) THE INTEREST RATE IS SUBJECT TO CHANGE PERIODICALLY. THE RATES SHOWN WERE IN
EFFECT AT MAY 31, 1998. SECURITIES PAYABLE ON DEMAND ARE COLLATERALIZED BY
BANK LETTERS OF CREDIT OR OTHER BANK CREDIT AGREEMENTS.
<TABLE>
<CAPTION>
SECURITY TYPE ABBREVIATIONS:
- ----------------------------
<S> <C>
BAN - Bond Anticipation Notes
COP - Certificate of Participation
CSD - Central School District
EDA - Economic Development Authority Revenue Bonds
ERD - Energy Research and Development Authority
GOB - General Obligation Bonds
HCF - Health Care Facilities Revenue Bonds
HDC - Housing Development Corporation Bonds
HEF - Health and Educational Facilities Revenue Bonds
HFA - Health Facilities Authority Revenue Bonds
HFR - Housing Finance Revenue Bonds
IDA - Industrial Development Authority Revenue Bonds
IDR - Industrial Development Agency Revenue Bonds
IFA - Industrial Finance Authority
MHR - Multifamily Housing Revenue Bonds
PCR - Pollution Control Revenue Bonds
RAN - Revenue Anticipation Notes
RAW - Revenue Anticipation Warrants
TAN - Tax Anticipation Notes
TRAN - Tax & Revenue Anticipation Notes
UFSD - Union Free School District
USD - Unified School District
</TABLE>
42
<PAGE> 70
STATEMENTS OF OPERATIONS
YEAR ENDED MAY 31, 1998
<TABLE>
<CAPTION>
RESERVE NEW
YORK TAX-EXEMPT TRUST RESERVE TAX-EXEMPT TRUST
--------------------- ---------------------------------------------
NEW YORK CALIFORNIA CONNECTICUT FLORIDA
FUND FUND FUND FUND
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME (NOTE 1) $6,371,261 $1,735,780 $1,313,617 $ 362,174
---------- ---------- ---------- ----------
EXPENSES (NOTE 2)
Management fee 889,437 246,741 185,719 50,766
Shareholder servicing,
Administration and general
Office expenses 320,388 85,859 59,478 16,774
Distribution assistance (Note 3) 308,367 97,966 57,157 19,813
Equipment expense 44,073 14,643 8,903 2,996
Professional fees 31,486 11,009 7,287 1,707
Occupancy costs 15,028 4,649 3,100 871
Stationery, printing and supplies 36,194 6,917 5,112 1,312
Trustee fees 2,617 831 545 153
Other expenses 27,460 6,539 4,935 1,087
---------- ---------- ---------- ----------
Total Expenses 1,675,050 475,154 332,236 95,479
---------- ---------- ---------- ----------
NET INVESTMENT INCOME $4,696,211 $1,260,626 $ 981,381 $ 266,695
========== ========== ========== ==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
43
<PAGE> 71
STATEMENTS OF OPERATIONS
YEAR ENDED MAY 31, 1998
<TABLE>
<CAPTION>
RESERVE TAX-EXEMPT TRUST
-----------------------------------------------------------------------------------------
MASSACHUSETTS NEW JERSEY OHIO PENNSYLVANIA
FUND FUND FUND* FUND*
---- ---- ----- -----
<S> <C> <C> <C> <C>
INTEREST INCOME (NOTE 1) $645,025 $1,384,900 $14,779 $331,243
-------- ---------- ------- --------
EXPENSES (NOTE 2)
Management fee 91,116 197,592 1,915 45,755
Shareholder servicing,
Administration and general
Office expenses 26,792 83,119 654 17,536
Distribution assistance (Note 3) 4,536 74,739 27 18,276
Equipment expense 4,851 10,977 38 2,811
Professional fees 3,480 8,963 66 2,259
Occupancy costs 1,493 3,831 33 901
Stationery, printing and supplies 2,161 8,408 36 1,370
Trustee fees 276 669 4 160
Other expenses 2,777 4,983 1,057 2,442
----- ----- ----- -----
Total Expenses 137,482 393,281 3,830 91,510
------- ------- ----- ------
NET INVESTMENT INCOME $507,543 $991,619 $10,949 $239,733
======== ======== ======= ========
</TABLE>
* The Pennsylvania and Ohio Tax-Exempt Funds commenced operations on
September 12, 1997 and April 1, 1998, respectively.
44
<PAGE> 72
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
RESERVE NEW YORK TAX-EXEMPT TRUST
NEW YORK FUND
-----------------------------
YEAR ENDED YEAR ENDED
MAY 31, 1998 MAY 31, 1997
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM INVESTMENT OPERATIONS:
Net investment income paid to
shareholders as dividends (Note 1) $ (4,696,211) $ (3,838,918)
------------- -------------
FROM CAPITAL SHARE TRANSACTIONS
(at net asset value of $1 per share):
Net proceeds from sale of shares 748,322,717 676,647,327
Net asset value of shares issued
on reinvestment of dividends 4,696,211 3,838,918
------------- -------------
Subtotal 753,018,928 680,486,245
Cost of shares redeemed (734,986,773) (652,760,567)
------------- -------------
Net increase (decrease) in net assets
derived from capital share transactions
and from investment operations 18,032,155 27,725,678
NET ASSETS:
Beginning of year 153,180,084 125,454,406
------------- -------------
End of year $ 171,212,239 $ 153,180,084
============= =============
<CAPTION>
RESERVE TAX-EXEMPT TRUST
--------------------------------------------------------------
CALIFORNIA FUND CONNECTICUT FUND
----------------------------- -----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, 1998 MAY 31, 1997 MAY 31, 1998 MAY 31, 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM INVESTMENT OPERATIONS:
Net investment income paid to
shareholders as dividends (Note 1) $ (1,260,626) $ (498,099) $ (981,381) $ (797,967)
------------- ------------- ------------- -------------
FROM CAPITAL SHARE TRANSACTIONS
(at net asset value of $1 per share):
Net proceeds from sale of shares 332,373,143 153,856,260 141,307,597 104,926,291
Net asset value of shares issued
on reinvestment of dividends 1,260,626 498,099 981,381 797,967
------------- ------------- ------------- -------------
Subtotal 333,633,769 154,354,359 142,288,978 105,724,258
Cost of shares redeemed (297,653,453) (136,013,932) (138,998,804) (107,029,059)
------------- ------------- ------------- -------------
Net increase (decrease) in net assets
derived from capital share transactions
and from investment operations 35,980,316 18,340,427 3,290,174 (1,304,801)
NET ASSETS:
Beginning of year 30,952,396 12,611,969 33,496,503 34,801,304
------------- ------------- ------------- -------------
End of year $ 66,932,712 $ 30,952,396 $ 36,786,677 $ 33,496,503
============= ============= ============= =============
</TABLE>
45
<PAGE> 73
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
RESERVE TAX-EXEMPT TRUST
--------------------------------------------------------------------
FLORIDA FUND MASSACHUSETTS FUND
--------------------------------------------------------------------
JUNE 24, 1996
(COMMENCEMENT OF
YEAR ENDED OPERATIONS) THROUGH YEAR ENDED YEAR ENDED
MAY 31, 1998 MAY 31, 1997 MAY 31, 1998 MAY 31, 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET
FROM INVESTMENT OPERATIONS:
Net investment income paid to
shareholders as dividends (Note 1) $ (266,695) $ (92,773) $ (507,543) $ (285,186)
---------- ---------- ----------- -----------
FROM CAPITAL SHARE TRANSACTIONS
(at net asset value of $1 per share):
Net proceeds from sale of shares 99,350,457 38,626,682 72,967,159 52,472,123
Net asset value of shares issued
on reinvestment of dividends 266,695 92,773 507,543 285,186
---------- ---------- ----------- -----------
Subtotal 99,617,152 38,719,455 73,474,702 52,757,309
Cost of shares redeemed (92,909,297) (34,610,071) (61,126,323) (48,678,063)
----------- ----------- ----------- -----------
Net increase in net assets
derived from capital share transactions
and from investment operations 6,707,855 4,109,384 12,348,379 4,079,246
NET ASSETS:
Beginning of year 4,109,384 0 13,034,609 8,955,363
---------- ---------- ----------- -----------
End of year $10,817,239 $4,109,384 $25,382,988 $13,034,609
=========== ========== =========== ===========
</TABLE>
46
<PAGE> 74
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
RESERVE TAX-EXEMPT TRUST
--------------------------------------------------------------------------
NEW JERSEY FUND OHIO FUND PENNSYLVANIA FUND
---------------------------------------------------- ------------------
APRIL 1, 1998 SEPTEMBER 12, 1997
(COMMENCEMENT OF (COMMENCEMENT OF
YEAR ENDED YEAR ENDED OPERATIONS THROUGH OPERATIONS THROUGH
MAY 31, 1998 MAY 31, 1997 MAY 31, 1998 MAY 31, 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET
FROM INVESTMENT OPERATIONS:
Net investment income paid to
shareholders as dividends (Note 1) $ (991,619) $ (909,418) $ (10,949) $ (239,733)
------------- ------------- ------------- -------------
FROM CAPITAL SHARE TRANSACTIONS
(at net asset value of $1 per share):
Net proceeds from sale of shares 234,261,239 223,428,579 4,357,301 56,580,287
Net asset value of shares issued
on reinvestment of dividends 991,619 909,418 10,949 239,733
------------- ------------- ------------- -------------
Subtotal 235,252,858 224,337,997 4,368,250 56,820,020
Cost of shares redeemed (237,104,518) (225,911,698) (1,861,645) (43,632,882)
------------- ------------- ------------- -------------
Net increase (decrease) in net assets
derived from capital share transactions
and from investment operations (1,851,660) (1,573,701) 2,506,605 13,187,138
NET ASSETS:
Beginning of year 39,452,100 41,025,801 0 0
------------- ------------- ------------- -------------
End of year $ 37,600,440 $ 39,452,100 $ 2,506,605 $ 13,187,138
============= ============= ============= =============
</TABLE>
47
<PAGE> 75
RESERVE NEW YORK TAX-EXEMPT TRUST ("NY TRUST")
RESERVE TAX-EXEMPT TRUST (CALIFORNIA, CONNECTICUT, FLORIDA,
MASSACHUSETTS, NEW JERSEY, OHIO AND PENNSYLVANIA FUNDS) ("TRUST")
(THE NY TRUST AND TRUST ARE COLLECTIVELY REFERRED TO AS "TRUSTS")
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
The Trusts are registered under the Investment Company Act of 1940 as
nondiversified, open-end management investment companies. The policies
summarized below are consistently followed in the preparation of their
financial statements in conformity with generally accepted accounting
principles.
A. The Trust and NY Trust shares of beneficial interest authorized are
unlimited. The Trust's shares are divided into eight series,
California Fund, Connecticut Fund, Florida Fund, Interstate Fund,
Massachusetts Fund, New Jersey Fund, Ohio Fund and Pennsylvania
Fund. These financial statements and notes apply only to the
California, Connecticut, Florida, Massachusetts, New Jersey, Ohio
and Pennsylvania Funds of Reserve Tax-Exempt Trust and to the New
York Fund of Reserve New York Tax-Exempt Trust.
B. Securities are stated at value which represents cost plus interest
accrued to date. Under Securities and Exchange Commission Rule 2a-7,
the Trusts use amortized cost to value each Fund, by which
investments are valued at cost and the difference between the cost
of each instrument and its value at maturity is accrued into income
on a straight line basis over the number of days to maturity,
irrespective of intervening changes in interest rates or market
values of investments. The maturity of floating or variable rate
instruments in which the Trusts may invest will be deemed to be, for
floating rate instruments (1) following, and for variable rate
instruments the longer of (1) or (2) following: (1) the notice
period required before the Fund is entitled to receive payment of
the principal amount of the instrument; (2) the period remaining
until the instrument's next rate adjustment, for purposes of Rule
2a-7 and for computing each portfolio's average weighted life to
maturity.
C. It is the Trusts' policy to comply with the requirements of
Subchapter M of the Internal Revenue Code and to distribute all
income to its shareholders. Accordingly, no Federal income tax
provision is required.
D. Investments are recorded as of the date of their purchase and sale.
Interest income is determined on the basis of interest accrued,
premium amortized, and discount accreted.
E. Net investment income on investments is distributed to shareholders
daily and automatically reinvested in additional shares.
F. Each Fund is charged only for its direct or allocated (in proportion
to net assets or number of shareholder accounts) share of expenses.
48
<PAGE> 76
RESERVE NEW YORK TAX-EXEMPT TRUST ("NY TRUST")
RESERVE TAX-EXEMPT TRUST (CALIFORNIA, CONNECTICUT, FLORIDA,
MASSACHUSETTS, NEW JERSEY, OHIO AND PENNSYLVANIA FUNDS) ("TRUST")
(THE NY TRUST AND TRUST ARE COLLECTIVELY REFERRED TO AS "TRUSTS")
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
2. MANAGEMENT FEE, SHAREHOLDER SERVICING COSTS AND TRANSACTIONS WITH
AFFILIATES:
Reserve Management Company, Inc. ("RMCI") manages the Trusts' investments,
effects purchases and sales thereof, and absorbs certain promotional
expenses. For such services RMCI receives management fees from each Fund
at an annual rate of .50% of the first $500 million, .475% of the next
$500 million, .45% of the next $500 million, .425% of the next $500
million and .40% of any excess over $2 billion of the average daily
closing net assets.
Also, under the current Service Agreement, RMCI was reimbursed $477,246
(New York Fund), $130,447 (California Fund), $89,360 (Connecticut Fund),
$24,900 (Florida Fund), $41,830 (Massachusetts Fund), $120,950 (New Jersey
Fund), $1,888 (Ohio Fund) and $27,479 (Pennsylvania Fund) during the year
ended May 31, 1998 for expenditures made on behalf of the Trusts for
personnel, office space and equipment and shareholder accounting and
administrative services, to conduct the Trusts' business. On May 31, 1998,
the New York, California, Connecticut, Florida, Massachusetts, New Jersey,
Ohio and Pennsylvania Funds had accrued expenses of $14,069, $5,500,
$3,023, $889, $2,086, $3,090, $206 and $1,084, respectively, due to RMCI.
3. DISTRIBUTION ASSISTANCE:
Pursuant to a Distribution Plan, each Trust will make payments of up to
.20% per annum of the average daily net assets of the Trust qualified
shareholder accounts as to which the payee or RMCI has rendered assistance
in distributing its shares.
4. MANAGEMENT'S USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities on
the dates of the financial statements and the reported amounts of income
and expenses during the reporting periods. Actual results could differ
from those estimates.
5. INVESTMENT CONCENTRATION:
The New York, California, Connecticut, Florida, Massachusetts, New Jersey,
Ohio and Pennsylvania Tax-Exempt Funds invest substantially all of their
assets in portfolios of tax-exempt debt obligations primarily consisting
of issuers of each of the respective states. The issuers' abilities to
meet their obligations may be affected by economic, regional or political
developments. In order to reduce the credit risk associated with such
factors, 67.80%, 72.18%, 53.81%, 83.99%, 52.25%, 65.07%, 71.81% and 58.58%
of the New York, California, Connecticut, Florida, Massachusetts, New
Jersey, Ohio and Pennsylvania Funds' investments, respectively, were
backed by letters of credit, bond insurance of financial institutions and
financial guaranty assurance agencies.
RESERVE NEW YORK TAX-EXEMPT TRUST ("NY TRUST")
RESERVE TAX-EXEMPT TRUST (CALIFORNIA, CONNECTICUT, FLORIDA,
MASSACHUSETTS, NEW JERSEY, OHIO AND PENNSYLVANIA FUNDS) ("TRUST")
(THE NY TRUST AND TRUST ARE COLLECTIVELY REFERRED TO AS "TRUSTS")
49
<PAGE> 77
6. COMPONENTS OF NET ASSETS
At May 31, 1998 the following funds had these components of net assets:
<TABLE>
<CAPTION>
NEW YORK CALIFORNIA CONNECTICUT FLORIDA
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Par Value $ 171,212 $ 66,933 $ 36,787 $ 10,817
Paid-in-Capital 171,041,027 66,865,779 36,749,890 10,806,422
------------ ----------- ----------- -----------
Net Assets $171,212,239 $66,932,712 $36,786,677 $10,817,239
============ =========== =========== ===========
<CAPTION>
MASSACHUSETTS NEW JERSEY OHIO PENNSYLVANIA
------------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Par Value $ 25,383 $ 37,600 $ 2,507 $ 13,187
Paid-in-Capital 25,357,605 37,562,840 2,504,098 13,173,951
----------- ----------- ----------- -----------
Net Assets $25,382,988 $37,600,440 $ 2,506,605 $13,187,138
=========== =========== =========== ===========
</TABLE>
---------------------
FEDERAL TAX INFORMATION - (UNAUDITED)
The dividends distributed by each Fund are exempt interest dividends for Federal
tax purposes.
---------------------
50
<PAGE> 78
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
---------------------------------------------------------------------------------------
NEW YORK TAX-EXEMPT FUND 1998 1997 1996 1995 1994
- ------------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
------------- ------------- ------------- ------------- -------------
Income from investment
operations .0363 .0352 .0381 .0352 .0249
Expenses .0095 .0105 .0105 .0099 .0099
------------- ------------- ------------- ------------- -------------
Net investment income (1) .0268 .0247 .0276 .0253 .0150
Dividends from net investment
income (1) (.0268) (.0247) (.0276) (.0253) (.0150)
------------- ------------- ------------- ------------- -------------
Net asset value, end of year $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
============= ============= ============= ============= =============
Total Return 2.68% 2.47% 2.76% 2.53% 1.50%
RATIOS/SUPPLEMENTAL DATA
Net assets in thousands,
end of year 171,212 153,180 125,454 152,906 148,387
Ratio of expenses to average
net assets .94% 1.04% 1.04% .98% .98%
Ratio of net investment income
to average net assets 2.63% 2.43% 2.72% 2.48% 1.48%
</TABLE>
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
---------------------------------------------------------------------------------------
NEW YORK TAX-EXEMPT FUND 1993 1992 1991 1990 1989
- ------------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
------------- ------------- ------------- ------------- -------------
Income from investment
operations .0281 .0421 .0563 .0616 .0600
Expenses .0103 .0104 .0105 .0100 .0103
------------- ------------- ------------- ------------- -------------
Net investment income (1) .0178 .0317 .0458 .0516 .0497
Dividends from net investment
income (1) (.0178) (.0317) (.0458) (.0516) (.0497)
------------- ------------- ------------- ------------- -------------
Net asset value, end of year $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
============= ============= ============= ============= =============
Total Return 1.78% 3.17% 4.58% 5.16% 4.97%
RATIOS/SUPPLEMENTAL DATA
Net assets in thousands,
end of year 149,785 156,567 148,079 120,142 90,378
Ratio of expenses to average
net assets 1.02% 1.03% 1.01% .98% 1.00%
Ratio of net investment income
to average net assets 1.76% 3.09% 4.43% 5.02% 4.86%
</TABLE>
51
<PAGE> 79
<TABLE>
<CAPTION>
OCTOBER 17, 1994
(COMMENCEMENT OF
YEAR ENDED YEAR ENDED YEAR ENDED OPERATIONS) THROUGH
CALIFORNIA TAX-EXEMPT FUND MAY 31, 1998 MAY 31, 1997 MAY 31, 1996 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
- --------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- -------
Income from investment
operations .0358 .0341 .0368 .0352 .0250
Expenses .0091 .0098 .0102 .0098 (3) .0086 (3)
------- ------- ------- ------- -------
Net investment income (1) .0267 .0243 .0266 .0254 .0164
Dividends from net investment
income (1) (.0267) (.0243) (.0266) (.0254) (.0164)
------ ------ ------ ------ ------
Net asset value, end of year $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= =======
Total Return 2.67% 2.43% 2.66% 2.54% 1.64%
RATIOS/SUPPLEMENTAL DATA
Net assets in thousands, end
of year 36,787 33,497 34,801 26,626 128,693
Ratio of expenses to average
net assets .89% 0.97% 1.01% .89%(3) .85%(3)
Ratio of net investment income
to average net assets 2.64% 2.39% 2.61% 2.33% 1.62%
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
--------------------------------------------------------------------
CONNECTICUT TAX-EXEMPT FUND 1993 1992 1991 1990 1989
- --------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- -------
Income from investment
operations .0269 .0400 .0534 .0615 .0604
Expenses .0087 (3) .0091 (3) .0086 (3) .0083 (3) .0086 (3)
------- ------- ------- ------- -------
Net investment income (1) .0182 .0309 .0448 .0532 .0518
Dividends from net investment
income (1) (.0182) (.0309) (.0448) (.0532) (.0518)
----- -------- --------- ------- -------
Net asset value, end of year $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
====== ======= ======= ======= =======
Total Return 1.82% 3.09% 4.48% 5.32% 5.18%
RATIOS/SUPPLEMENTAL DATA
Net assets in thousands, end
of year 157,115 191,101 241,790 314,489 247,929
Ratio of expenses to average
net assets .86%(3) .90% (3) .85% (3) .81% (3) .84% (3)
Ratio of net investment income
to average net assets 1.81% 3.05% 4.41% 5.17% 5.05%
</TABLE>
52
<PAGE> 80
<TABLE>
<CAPTION>
JUNE 24, 1996
(COMMENCEMENT OF
YEAR END OPERATIONS) THROUGH
FLORIDA TAX-EXEMPT FUND MAY 31, 1998 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
- ----------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- -------
Income from investment
operations .0361 .0338 .0362 .0335 .0227
Expenses .0077 .0079 (3) .0086 (3) .0070 (3) .0052 (3)
------- ------- ------- ------- -------
Net investment income (1) .0284 .0259 .0276 .0265 .0175
Dividends from net investment
income (1) (.0284) (.0259) (.0276) (.0265) (.0175)
------- ------- ------- ------- -------
Net asset value, end of year $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= =======
Total Return 2.84% 2.59% 2.76% 2.65% 1.75%
RATIOS/SUPPLEMENTAL DATA
Net assets in thousands, end
of year 25,383 13,035 8,955 10,169 14,824
Ratio of expenses to average
net assets .75% .79%(3) .84% (3) .69% (3) .51% (3)
Ratio of net investment
income to average net assets 2.78% 2.58% 2.71% 2.60% 1.73%
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
------------------------------------------------------------
JANUARY 22, 1990
(COMMENCEMENT OF
OPERATIONS) THROUGH
MASSACHUSETTS TAX-EXEMPT FUND 1993 1992 1991 MAY 31, 1990
- ----------------------------- ---- ---- ---- ------------
<S> <C> <C> <C> <C>
Net asset value, beginning of
year $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- -------
Income from investment
operations .0257 .0386 .0551 .0209
Expenses .0048 (3) .0045 (3) .0032 (3) .0010
------- -------- -------- --------
Net investment income (1) .0209 .0341 .0519 .0199
Dividends from net investment
income (1) (.0209) (.0341) (.0519) (.0199)(4)
------- -------- -------- --------
Net asset value, end of year $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= =======
Total Return 2.09% 3.41% 5.19% 5.59%(2)
RATIOS/SUPPLEMENTAL DATA
Net assets in thousands, end
of year 13,305 7,186 4,652 2,140
Ratio of expenses to average
net assets .46% (3) .44% (3) .30% (3) .29%(2)
Ratio of net investment
income to average net assets 2.04% 3.28% 4.79% 5.53%(2)
</TABLE>
53
<PAGE> 81
<TABLE>
<CAPTION>
OCTOBER 17, 1994
(COMMENCEMENT OF
YEAR ENDED YEAR ENDED YEAR ENDED OPERATIONS) THROUGH
NEW JERSEY TAX-EXEMPT FUND MAY 31, 1998 MAY 31, 1997 MAY 31, 1996 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)
<CAPTION>
APRIL 1, 1998
(COMMENCEMENT OF
OPERATIONS) THROUGH
OHIO TAX-EXEMPT FUND MAY 31, 1998
- -------------------- ------------
<S> <C>
Net asset value, beginning of
year $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 2.87% (2)
=======
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net assets in thousands, end
of year 2,507
Ratio of expenses to average
net assets 1.00% (2)
Ratio of net investment income
to average net assets 2.86% (2)
</TABLE>
54
<PAGE> 82
<TABLE>
<CAPTION>
SEPTEMBER 12, 1997
(COMMENCEMENT OF
OPERATIONS) THROUGH
PENNSYLVANIA TAX-EXEMPT FUND 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 (1) (.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 all or a portion of fees and
expenses. If there were no reductions in expenses, the actual expenses for
the Connecticut Fund would have been .10% higher and the actual expenses
for the Massachusetts Fund from inception through May 31, 1997, would have
been .83% for these periods and .01% higher for the New Jersey Fund.
(4) .01(cent) per share represents distributions of taxable income.
55
<PAGE> 83
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Trustees of Reserve Tax-Exempt Trust -
Interstate Tax-Exempt Fund:
In our opinion, the accompanying statement of net assets and the related
statement of operations and the statements of changes in net assets and
financial highlights present fairly, in all material respects, the financial
position of Interstate Tax Exempt Fund (one of the eight series constituting
Reserve Tax-Exempt Trust) at May 31, 1998, the results of its operations for the
year then ended , the changes in each of its net assets for each of the 2 years
then ended and the financial highlights for each of the periods presented in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at May 31,
1998 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
NEW YORK,
NY JULY 24, 1998
