<PAGE> 1
1933 Act File No. 2-82592
1940 Act File No. 811-3696
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
-------
Pre-Effective Amendment No.
-------- -------
Post-Effective Amendment No. 30 X
-------- -------
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
-------
Amendment No. 32 X
-------- -------
(Check appropriate box or boxes.)
RESERVE TAX-EXEMPT TRUST
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
810 Seventh Avenue, New York, NY 10019
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (212) 977-9982
-------------------------
MaryKathleen Foynes, Esq., Reserve Tax-Exempt Trust, 810 Seventh Avenue, 17th
Floor,
- --------------------------------------------------------------------------------
New York, NY 10019
- --------------------------------------------------------------------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
Immediately upon filing pursuant to paragraph (b) of Rule 485
--------
X on July 30, 1998 pursuant to paragraph (b) of Rule 485
--------
60 days after filing pursuant to paragraph (a) of Rule 485
--------
on (date) pursuant to paragraph (a) of Rule 485
--------
----------------------------
The Commission is requested to send copies of all communications to:
Paul F. Roye, Esq.
Dechert Price & Rhoads
1775 Eye Street, NW
Washington, DC 20006
Registrant has filed a declaration pursuant to Rule 24f-2 under the Investment
Company Act of 1940 electing to register an indefinite number of shares of
beneficial interest. The notice required by Rule 24f-2 with respect to
Registrant's fiscal year ending May 31, 1998 was filed with the Commission on
July 24, 1998.
This filing contains ___ pages.
<PAGE> 2
RESERVE TAX-EXEMPT TRUST
CROSS REFERENCE SHEET PURSUANT TO RULE 495A(a)
<TABLE>
<CAPTION>
FORM PROSPECTUS AND STATEMENT
N-1A OF ADDITIONAL INFORMATION
ITEM FORM CAPTION CAPTION
- ---- --------------------------------- ---------------------------------------
<S> <C> <C>
1 Cover Page Cover Page
2 Synopsis (omitted)
3 Condensed Financial Information Financial Highlights
4 General Description of Registrant Investment Objective and Policies;
Shares of Beneficial Interest
5 Management of the Fund Management; How to Buy Shares
6 Capital Stock and Other Securities Shares of Beneficial Interest
7 Purchase of Securities Being Offered How to Buy Shares
8 Redemption or Repurchase Redemptions
9 Legal Proceedings (omitted)
10 Cover Page Statement of Additional Information
11 Table of Contents Table of Contents
12 General Information and History (omitted)
13 Investment Objective and Policies Investment Objective and Policies
14 Management of the Registrant Trustees and Executive Officers
15 Control Persons and Principal Trustees and Executive Officers; Shares of Holders of Securities
Beneficial Interest
16 Investment Advisory and Other Investment Management, Distribution,
Service Services and Custodian Agreements
17 Brokerage Allocation Portfolio Turnover, Transaction
Charges and Allocation
18 Capital Stock and Other Securities Shares of Beneficial Interest
19 Purchase, Redemption, and Pricing Purchase, Redemption and Pricing of
Shares; of Securities Being Offered
20 Tax Status Distributions and Taxes
21 Underwriters Investment Management, Distribution,
Service and Custodian Agreements
22 Calculation of Yield Quotations Fund Yield
Of Money Market Funds
23 Financial Statements Financial Statements
</TABLE>
<PAGE> 3
General Information, Purchases and
Redemptions
---------------------------------------
24-Hour Yield and Balance Information
---------------------------------------
Nationwide
800-637-1700 M www.reservefunds.com
TAX-EXEMPT MONEY MARKET FUNDS
FOR RESIDENTS OF
CALIFORNIA, CONNECTICUT, FLORIDA, MASSACHUSETTS,
NEW JERSEY, NEW YORK, OHIO AND PENNSYLVANIA
The NEW YORK TAX-EXEMPT FUND of Reserve New York Tax-Exempt Trust and 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 (each a Fund, together the "Fund(s)") are
money-market funds whose investment objective is to seek as high a level of
short-term interest income exempt from federal income and state and local
personal income and/ or property taxes, if any, for resident holders of the
particular state fund as is consistent with preservation of capital and
liquidity.
The Funds are designed for institutions and individuals as a convenient
alternative to the direct investment of temporary cash balances in short-term
money-market accounts or instruments. The Funds seek to employ idle cash at
yields competitive with yields of other comparable short-term investments, and
are designed to reduce or eliminate for the investor the mechanical problems of
direct investment in money-market instruments such as scheduling maturities,
evaluating the credit of issuers, investing in round lots, safeguarding receipt
and delivery of securities and reinvesting.
Each of the Funds invests principally in high-quality tax-exempt obligations
issued by the specific state and its counties, municipalities, authorities or
other political subdivisions.
SHARES OF THE FUNDS ARE NEITHER GUARANTEED NOR INSURED BY THE U.S.
GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE FUNDS WILL BE ABLE TO MAINTAIN
A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
This Prospectus sets forth the information about the Funds which a
prospective investor should know before investing. A Statement of Additional
Information ("SAI") dated July 31, 1998, providing further details about the
Funds, has been filed with the Securities and Exchange Commission ("SEC") and is
incorporated herein by reference. It may be obtained without charge by writing
or calling the Funds. The SEC maintains a web site (http://www.sec.gov) that
contains the SAI, the Prospectus, material incorporated by reference, and other
information regarding the Funds filed electronically with the SEC.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR OBLIGATIONS
GUARANTEED OR ENDORSED BY ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
Prospectus dated July 31, 1998.
Investors are advised to read and retain this Prospectus for future reference.
<PAGE> 4
SHAREHOLDER EXPENSES
The following tables illustrate all expenses and fees that a shareholder of
each Fund will incur directly or indirectly. The expenses and fees set forth in
the table are for the fiscal year ended May 31, 1998.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
NEW YORK CALIFORNIA CONNECTICUT FLORIDA MASSACHUSETTS NEW JERSEY OHIO
TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT
FUND FUND FUND FUND FUND FUND FUND
---------- ---------- ----------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales Load Imposed on
Purchases............... None None None None None None None
Sales Load Imposed on
Reinvested Dividends.... None None None None None None None
Redemption Fees*.......... None None None None None None None
Exchange Fees............. None None None None None None None
<CAPTION>
PENNSYLVANIA
TAX-EXEMPT
FUND
------------
<S> <C>
Sales Load Imposed on
Purchases............... None
Sales Load Imposed on
Reinvested Dividends.... None
Redemption Fees*.......... None
Exchange Fees............. None
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
NEW YORK CALIFORNIA CONNECTICUT FLORIDA MASSACHUSETTS NEW JERSEY OHIO
TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT
FUND FUND FUND FUND FUND FUND FUND
---------- ---------- ----------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Management Fees........... .50% .50% .50% .50% .50% .50% .50%
12b-1 Fees................ .17% .20% .16% .20% .03% .19% .00%
Other Operating Expenses
Administration and
Operations Expenses... .22% .22% .20% .20% .17% .26% .47%
Equipment............... .03% .03% .02% .03% .03% .03% .01%
Other................... .02% .01% .01% .01% .02% .01% .02%
--- --- --- --- --- --- ----
Total Operating
Expenses................ .94% .96% .89% .94% .75% .99% 1.00%
=== === === === === === ====
<CAPTION>
PENNSYLVANIA
TAX-EXEMPT
FUND
------------
<S> <C>
Management Fees........... .50%
12b-1 Fees................ .20%
Other Operating Expenses
Administration and
Operations Expenses... .26%
Equipment............... .03%
Other................... .01%
----
Total Operating
Expenses................ 1.00%
====
</TABLE>
*A $2 fee will be charged on redemption checks issued by the Funds of less
than $100 and a $10 fee will be charged for wire redemption of less than
$10,000.
The purpose of these tables are to assist the investor in understanding the
costs and expenses that a shareholder in a Fund will bear directly or
indirectly.
The following examples illustrate the expenses that a shareholder would pay
on a $1,000 investment over various time periods assuming: (1) a 5% annual rate
of return and (2) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
New York Tax-Exempt Fund............................ $10 $30 $52 $115
California Tax-Exempt Fund.......................... $10 $31 $53 $118
Connecticut Tax-Exempt Fund......................... $ 9 $28 $49 $110
Florida Tax-Exempt Fund............................. $10 $30 $52 $115
Massachusetts Tax-Exempt Fund....................... $ 8 $24 $42 $ 93
New Jersey Tax-Exempt Fund.......................... $10 $32 $55 $121
Ohio Tax-Exempt Fund................................ $10 $32 $55 $122
Pennsylvania Tax-Exempt Fund........................ $10 $32 $55 $122
</TABLE>
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
2
<PAGE> 5
FINANCIAL HIGHLIGHTS
The following information applies to a share of the Reserve New York
Tax-Exempt Trust -- New York Tax-Exempt Fund and Reserve Tax-Exempt
Trust -- California, Connecticut, Florida, Massachusetts, New Jersey, Ohio and
Pennsylvania Tax-Exempt Funds outstanding throughout each period. It should be
read in conjunction with the financial statements and related notes on page 16.
Such information has been audited by PricewaterhouseCoopers LLP, as indicated in
their report on page 15.
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
---------------------------------------------------------------
NEW YORK TAX-EXEMPT FUND 1998 1997 1996 1995 1994 1993
------------------------ -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
year........................ $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- ------- -------
Income from investment
operations.................. .0363 .0352 .0381 .0352 .0249 .0281
Expenses...................... .0095 .0105 .0105 .0099 .0099 .0103
------- ------- ------- ------- ------- -------
Net investment income (1)..... .0268 .0247 .0276 .0253 .0150 .0178
Dividends from net investment
income (1).................. (.0268) (.0247) (.0276) (.0253) (.0150) (.0178)
------- ------- ------- ------- ------- -------
Net asset value, end of
year........................ $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= ======= =======
Total Return.................. 2.68% 2.47% 2.76% 2.53% 1.50% 1.78%
RATIOS/SUPPLEMENTAL DATA
- ------------------------------
Net assets in thousands, end
of year..................... 171,212 153,180 125,454 152,906 148,387 149,785
Ratio of expenses to average
net assets.................. .94% 1.04% 1.04% .98% .98% 1.02%
Ratio of net investment income
to average net assets....... 2.63% 2.43% 2.72% 2.48% 1.48% 1.76%
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
-----------------------------------------
NEW YORK TAX-EXEMPT FUND 1992 1991 1990 1989
------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of
year........................ $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- -------
Income from investment
operations.................. .0421 .0563 .0616 .0600
Expenses...................... .0104 .0105 .0100 .0103
------- ------- ------- -------
Net investment income (1)..... .0317 .0458 .0516 .0497
Dividends from net investment
income (1).................. (.0317) (.0458) (.0516) (.0497)
------- ------- ------- -------
Net asset value, end of
year........................ $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= =======
Total Return.................. 3.17% 4.58% 5.16% 4.97%
RATIOS/SUPPLEMENTAL DATA
- ------------------------------
Net assets in thousands, end
of year..................... 156,567 148,079 120,142 90,378
Ratio of expenses to average
net assets.................. 1.03% 1.01% .98% 1.00%
Ratio of net investment income
to average net assets....... 3.09% 4.43% 5.02% 4.86%
</TABLE>
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31, OCTOBER 17, 1994
------------------------------ (COMMENCEMENT OF OPERATIONS)
CALIFORNIA TAX-EXEMPT FUND 1998 1997 1996 THROUGH MAY 31, 1996
- ----------------------------------------------------- -------- -------- -------- ----------------------------
<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>
3
<PAGE> 6
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
CONNECTICUT TAX-EXEMPT ---------------------------------------------------------------
FUND 1998 1997 1996 1995 1994 1993
- ---------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year.... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- ------- -------
Income from investment
operations........... .0358 .0341 .0368 .0352 .0250 .0269
Expenses............... .0091 .0098 .0102 .0098(3) .0086(3) .0087(3)
------- ------- ------- ------- ------- -------
Net investment income
(1).................. .0267 .0243 .0266 .0254 .0164 .0182
Dividends from net
investment income
(1).................. (.0267) (.0243) (.0266) (.0254) (.0164) (.0182)
------- ------- ------- ------- ------- -------
Net asset value, end of
year................. $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= ======= =======
Total Return........... 2.67% 2.43% 2.66% 2.54% 1.64% 1.82%
RATIOS/SUPPLEMENTAL
DATA
- -----------------------
Net assets in
thousands, end of
year................. 36,787 33,497 34,801 26,626 128,693 157,115
Ratio of expenses to
average net assets... .89% .97% 1.01% .89%(3) .85%(3) .86%(3)
Ratio of net investment
income to average net
assets............... 2.64% 2.39% 2.61% 2.33% 1.62% 1.81%
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
CONNECTICUT TAX-EXEMPT -----------------------------------------
FUND 1992 1991 1990 1989
- ---------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value,
beginning of year.... $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- -------
Income from investment
operations........... .0400 .0534 .0615 .0604
Expenses............... .0091(3) .0086(3) .0083(3) .0086(3)
------- ------- ------- -------
Net investment income
(1).................. .0309 .0448 .0532 .0518
Dividends from net
investment income
(1).................. (.0309) (.0448) (.0532) (.0518)
------- ------- ------- -------
Net asset value, end of
year................. $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= =======
Total Return........... 3.09% 4.48% 5.32% 5.18%
RATIOS/SUPPLEMENTAL
DATA
- -----------------------
Net assets in
thousands, end of
year................. 191,101 241,790 314,489 247,929
Ratio of expenses to
average net assets... .90%(3) .85%(3) .81%(3) .84%(3)
Ratio of net investment
income to average net
assets............... 3.05% 4.41% 5.17% 5.05%
</TABLE>
<TABLE>
<CAPTION>
JUNE 24, 1996
YEAR ENDED (COMMENCEMENT OF OPERATIONS)
FLORIDA TAX-EXEMPT FUND MAY 31, 1998 THROUGH MAY 31, 1997
----------------------- ------------ ----------------------------
<S> <C> <C>
Net asset value, beginning of year.......................... $1.0000 $1.0000
------- -------
Income from investment operations........................... .0366 .0321
Expenses.................................................... .0097 .0093
------- -------
Net investment income (1)................................... .0269 .0228
Dividends from net investment income (1).................... (.0269) (.0228)
------- -------
Net asset value, end of year................................ $1.0000 $1.0000
======= =======
Total Return................................................ 2.69% 2.42%(2)
RATIOS/SUPPLEMENTAL DATA
- ------------------------------------------------------------
Net assets in thousands, end of year........................ 10,817 4,109
Ratio of expenses to average net assets..................... .94% 1.04%(2)
Ratio of net investment income to average net assets........ 2.62% 2.39%(2)
</TABLE>
<TABLE>
<CAPTION>
JANUARY 22, 1990
FOR FISCAL YEARS ENDED MAY 31, (COMMENCEMENT OF
----------------------------------------------------------------------------- OPERATIONS) THROUGH
MASSACHUSETTS TAX-EXEMPT FUND 1998 1997 1996 1995 1994 1993 1992 1991 MAY 31, 1990
- ----------------------------- ------- ------- ------- ------- ------- ------- ------- ------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
year.................. $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $ 1.0000
------- ------- ------- ------- ------- ------- ------- ------- --------
Income from investment
operations............ .0361 .0338 .0362 .0335 .0227 .0257 .0386 .0551 .0209
Expenses............... .0077 .0079(3) .0086(3) .0070(3) .0052(3) .0048(3) .0045(3) .0032(3) .0010
------- ------- ------- ------- ------- ------- ------- ------- --------
Net investment income (1)... .0284 .0259 .0276 .0265 .0175 .0209 .0341 .0519 .0199
Dividends from net investment
income (1)............ (.0284) (.0259) (.0276) (.0285) (.0175) (.0209) (.0341) (.0519) (.0199)(4)
------- ------- ------- ------- ------- ------- ------- ------- --------
Net asset value, end of
year.................. $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $ 1.0000
======= ======= ======= ======= ======= ======= ======= ======= ========
Total Return........... 2.84% 2.59% 2.76% 2.65% 1.75% 2.09% 3.41% 5.19% 5.59%(2)
RATIOS/SUPPLEMENTAL DATA
- -----------------------
Net assets in thousands, end
of year............... 25,383 13,035 8,955 10,169 14,824 13,305 7,186 4,652 2,140
Ratio of expenses to average
net assets............ .75% .79%(3) .84%(3) .69%(3) .61%(3) .46%(3) .44%(3) .30%(3) 29%(2)
Ratio of net investment
income to average net
assets................ 2.78% 2.58% 2.71% 2.80% 1.73% 2.04% 3.28% 4.79% 5.53%(2)
</TABLE>
4
<PAGE> 7
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31, OCTOBER 17, 1994
------------------------------ (COMMENCEMENT OF OPERATIONS)
NEW JERSEY TAX-EXEMPT FUND 1998 1997 1996 THROUGH MAY 31, 1995
-------------------------- -------- -------- -------- ----------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year................... $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- -------
Income from investment operations.................... .0354 .0343 .0369 .0330
Expenses............................................. .0100 .0107 .0106 .0087(3)
------- ------- ------- -------
Net investment income (1)............................ .0254 .0236 .0263 .0243
Dividends from net investment income (1)............. (.0254) (.0236) (.0263) (.0243)
------- ------- ------- -------
Net asset value, end of year......................... $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= =======
Total Return......................................... 2.54% 2.36% 2.63% 2.43%(2)
RATIOS/SUPPLEMENTAL DATA
- -----------------------------------------------------
Net assets in thousands, end of year................. 37,600 39,452 41,026 21,607
Ratio of expenses to average net assets.............. .99% 1.06% 1.04% 1.01%(2)(3)
Ratio of net investment income to average net
assets............................................. 2.50% 2.33% 2.59% 2.82%(2)
</TABLE>
<TABLE>
<CAPTION>
APRIL 1, 1998
(COMMENCEMENT OF OPERATIONS)
OHIO TAX-EXEMPT FUND THROUGH 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>
<TABLE>
<CAPTION>
SEPTEMBER 12, 1997
(COMMENCEMENT OF OPERATIONS)
PENNSYLVANIA TAX-EXEMPT FUND THROUGH MAY 31, 1998
---------------------------- ----------------------------
<S> <C>
Net asset value, beginning of year.......................... $1.0000
-------
Income from investment operations........................... .0261
Expenses.................................................... .0072
-------
Net investment income (1)................................... .0189
Dividends from net investment income (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 0.10% higher and the actual expenses
for the Massachusetts Fund would have been 0.04%, 0.05%, 0.11%, 0.43%,
0.50%, 0.50%, 0.50% and 0.50% higher and 0.01% higher for the New Jersey
Fund.
(4) .01c per share represents distributions of taxable income.
5
<PAGE> 8
YIELD
For the seven calendar days ended May 31, 1998, the current and effective
yields for the Funds were as follows:
<TABLE>
<CAPTION>
CURRENT YIELD EFFECTIVE YIELD
------------- ---------------
<S> <C> <C>
California Tax-Exempt Fund.................................. 2.67% 2.71%
Connecticut Tax-Exempt Fund................................. 2.66% 2.70%
Florida Tax-Exempt Fund..................................... 2.85% 2.89%
Massachusetts Tax-Exempt Fund............................... 2.72% 2.76%
New Jersey Tax-Exempt Fund.................................. 2.66% 2.69%
New York Tax-Exempt Fund.................................... 2.74% 2.78%
Ohio Tax-Exempt Fund........................................ 2.86% 2.90%
Pennsylvania Tax-Exempt Fund................................ 2.75% 2.79%
</TABLE>
Current yield refers to the income generated by an investment in a Fund over
a seven-day period. This income is then annualized, that is, the amount of
income generated by the investment during that week is assumed to be generated
each week over a 52-week period and is shown as a percentage of the investment.
The effective yield is calculated similarly but, when annualized, the income
earned is assumed to be reinvested. The effective yield will be higher than the
current yield because of this compounding effect.
The Funds may also quote tax equivalent yields, which show the taxable
yields an investor would have to earn before taxes to equal a Fund's tax-free
yield. The tax equivalent yield is calculated by dividing a Fund's current or
effective yield by the result of one minus a stated federal and/or state and
local tax rate.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of each of the Funds is to seek as high a level of
short-term interest income exempt from federal income and state and local
personal income taxes, if any, as is consistent with preservation of capital and
liquidity. However, achievement of this objective cannot be assured. This
investment objective may not be changed without the vote of a majority of the
outstanding shares of a Fund as defined in the Investment Company Act of 1940
("1940 Act").
Each Fund seeks to attain its objective by investing principally in
tax-exempt obligations issued by the state for which it is named and the state's
counties, municipalities, authorities or other political subdivisions. There can
be no assurance that any of the Funds will achieve its investment objective.
These securities are generally known as "municipal bonds" or "municipal
notes" ("Municipal Obligations") and the interest on them is exempt from federal
income tax in the opinion of either bond counsel for the issuers or, in some
instances, the issuer itself. They may be issued to raise money for various
public purposes such as constructing public facilities. Certain types of
Municipal Obligations are issued to obtain funding for privately operated
facilities. General obligation bonds and notes are backed by the taxing power of
the issuer. Revenue bonds and notes are backed by the revenues of a project or
facility such as tolls from a toll road or, in some cases, from the proceeds of
a special excise tax, but not by the general taxing power. Industrial
development revenue bonds and notes are a specific type of revenue bond or note
backed by the credit of a private issuer. Each Fund may invest any portion of
its assets in industrial revenue bonds and notes. Municipal Obligations bear
fixed, variable or floating rates of interest. At least 80% of the value of each
Fund's assets will be invested in Municipal Obligations which are exempt from
federal income and state and, with respect to the New York Tax-Exempt Fund,
local personal income taxes and, with respect to the Florida Tax-Exempt Fund,
the Florida intangibles tax, and with respect to the Pennsylvania Tax-Exempt
Fund, the Pennsylvania county personal property tax, unless it has adopted a
temporary defensive position. In addition, during periods when the Funds'
Investment Adviser believes that Municipal Obligations meeting each respective
Fund's quality standards are not available, a Fund may invest up to 20% of the
value of its assets, or a greater percentage on a temporary basis, in Municipal
Obligations exempt only from federal income taxes.
Each Fund may purchase floating and variable rate demand notes, which are
Municipal Obligations normally having stated maturities in excess of one year,
but which permit the holder to demand payment of principal and accrued interest
at any time, or at specified intervals not exceeding one year, in each case
usually upon not more than seven (7) days' notice. The interest rates on these
floating and variable rate demand notes fluctuate from time to time. Frequently,
such Municipal Obligations are secured by letters of credit or other credit
support arrangements provided by banks. The Funds may invest any portion of
their assets in floating and variable rate demand notes secured by bank letters
of credit or other credit support arrangements. Use of letters of credit or
other credit support arrangements will not adversely affect the tax-exempt
status of these Municipal Obligations. A Fund will not invest more than 10% of
the
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value of its assets in floating or variable rate demand notes for which there is
no secondary market if the demand feature on such Municipal Obligations is
exercisable on more than seven (7) days' notice.
In view of the investment of each of the Funds in industrial revenue
development bonds and notes secured by letters of credit or guarantees of banks,
an investment in a Fund's shares should be made with an understanding of the
characteristics of the banking industry and the risks such an investment may
entail. Banks are subject to extensive government regulations which may limit
both the amounts and types of loans and other financial commitments which may be
made and interest rates and fees which may be charged. The profitability of the
banking industry is largely dependent upon the availability and cost of capital
funds for the purpose of financing lending operations under prevailing
money-market conditions. In addition, general economic conditions play an
important part in the operations of this industry, and exposure to credit losses
arising from possible financial difficulties of borrowers might affect a bank's
ability to meet its obligations under a letter of credit.
Each Fund will purchase tax-exempt securities which are rated MIG-1 or MIG-2
by Moody's Investor Services, Inc. ("Moody's"), SP-1 or SP-2 by Standard &
Poor's Corporation ("S&P") or the equivalent thereof. Municipal Obligations
which are not rated may also be purchased provided such securities are
determined to be of comparable quality by the Fund's Investment Adviser to those
rated securities in which the Funds may invest pursuant to guidelines
established by their Boards of Trustees.
OTHER POLICIES. Certain banks and other municipal securities dealers have
indicated a willingness to sell Municipal Obligations to the Funds accompanied
by a commitment to repurchase the securities at a Fund's option or at a
specified date, at an agreed upon price or yield within a specified period prior
to the maturity date of such securities at the amortized cost thereof. If a bank
or other municipal securities dealer were to default under such standby
commitment and fail to pay the exercise price, a Fund could suffer a potential
loss to the extent that the amount paid by the Fund, if any, for the Municipal
Obligation with a standby commitment exceeded the current value of the
underlying Municipal Obligation. If a bank or other municipal securities dealer
defaults under its standby commitment, the liquidity of the security subject to
such commitment may be adversely affected.
Municipal Obligations are sometimes offered on a "when-issued" or delayed
delivery basis. There is no limit on a Fund's ability to purchase municipal
securities on a when-issued basis. The price of when-issued securities, which is
generally expressed in yield terms, is fixed at the time the commitment to
purchase is made but delivery and payment for the when-issued securities takes
place at a later date. Normally, the settlement date occurs within one month of
the purchase of such Municipal Obligations. During the period between the
purchase and settlement dates, no payment is made by a Fund to the issuer and no
interest accrues to a Fund on such securities. To the extent that assets of a
Fund purchasing such securities are not invested prior to the settlement of a
purchase of securities, a Fund will earn no income, however, it is each Fund's
intent to be as fully invested as is practicable. While when-issued securities
may be sold prior to settlement date, the Funds intend to purchase such
securities with the purpose of actually acquiring them unless a sale appears
desirable for investment reasons. At the time a Fund makes the commitment to
purchase a Municipal Obligation on a when-issued basis, it will record the
transaction and reflect the value of the security in determining its net asset
value ("NAV"). Each Fund will also maintain readily marketable assets at least
equal in value to commitments for when-issued securities specifically for the
settlement of such commitments. The Investment Adviser does not believe that a
Fund's net asset value or income will be adversely affected by the purchase of
Municipal Obligations on a when-issued basis.
The Funds may purchase participation interests in Municipal Obligations from
financial institutions. A participation interest gives a Fund an undivided
interest in the Municipal Obligation in the proportion that the Fund's
participation interest bears to the total principal amount of the Municipal
Obligation. These instruments may have fixed, floating or variable rates of
interest. Frequently, such instruments are secured by letters of credit or other
credit support arrangements provided by banks.
Interest received on certain otherwise tax-exempt securities ("private
activity bonds") is subject to a federal Alternative Minimum Tax ("AMT"). It is
the position of the SEC that in order for a fund to call itself "tax-free", not
more than 20% of its net assets may be invested in municipal securities subject
to the AMT or at least 80% of its income will be tax-exempt. Income received on
such securities is classified as a "tax preference item," which could subject
certain shareholders of each Fund to the AMT. However, as of the date of this
Prospectus, each Fund does not purchase such securities, but reserves the right
to do so depending on market conditions in the future.
Yields on municipal securities depend on a variety of factors, including
general economic and monetary conditions, money-market factors, conditions in
the tax-exempt securities market, size of a particular offering, maturity of the
obligation and rating of the issue. The ability of each Fund to achieve its
investment objective is also dependent on the continuing ability of issuers of
municipal securities to meet their obligations for the payment of interest and
principal when due.
Although it is not the current intention, from time to time a Fund may
invest in taxable short-term investments ("Taxable Investments") consisting of
obligations backed by the full faith and credit of the U.S. government, its
agencies or instrumentalities
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("U.S. Governments"), deposit-type obligations, acceptances, letters of credit
of Federal Deposit Insurance Corporation member banks and instruments fully
collateralized by such obligations. Unless a Fund has adopted a temporary
defensive position, no more than 20% of the net assets of each Fund will be
invested in Taxable Investments at any time. A Fund may enter into repurchase
agreements with regard to the taxable obligations listed above.
The Fund's Investment Adviser uses its reasonable business judgment in
selecting investments in addition to considering the ratings of Moody's and S&P.
This analysis considers, among other things, the financial condition of the
issuer by taking into account present and future liquidity, cash flow and
capacity to meet debt service requirements. Since the market value of debt
obligations fluctuates as an inverse function of changing interest rates, each
Fund seeks to minimize the effect of such fluctuations by investing in
instruments with remaining maturities of 397 days or less and limiting its
average maturity to 90 days or less.
The principal risk factors associated with investment in each Fund are the
risk of fluctuations in short-term interest rates, the risk of default among one
or more issuers of securities which comprise a Fund's assets and the risk of
non-diversification. As a non-diversified investment company, each Fund is
permitted to have all its assets invested in a limited number of issuers.
Accordingly, since a relatively high percentage of a Fund's assets may be
invested in the securities of a limited number of issuers, a Fund's investment
securities may be more susceptible to any single economic, political or
regulatory occurrence than the investment securities of a diversified investment
company. However, each Fund intends to qualify as a "regulated investment
company" for purposes of the Internal Revenue Code. This limits the aggregate
value of all investments (except United States government securities, securities
of other regulated investment companies, cash and cash items) so that, with
respect to at least 50% of its total assets, not more than 5% of such assets are
invested in the securities of a single issuer.
Each Fund's concentration in securities issued by the respective state and
its political subdivisions involves greater risks than a fund broadly invested
across many states and municipalities.
RISK FACTORS OF CONCENTRATING IN CALIFORNIA. You should consider carefully the
special risks inherent in the Fund's investment in California Municipal
Obligations. These risks result from certain amendments to the California
Constitution and other statutes that limit the taxing and spending authority of
California governmental entities, as well as from the general financial
condition of the State of California. From mid-1990 to late 1993, the State
suffered a recession with the worst economic, fiscal and budget conditions since
the 1930s. As a result, the State was plagued by recurring budget deficits. As
of June 30, 1994, according to California's Department of Finance, the State's
special Fund for Economic Uncertainties had an accumulated deficit, on a budget
basis, of approximately $1.8 billion. A further consequence of the large budget
imbalances has been that the State depleted its available cash resources and has
had to use a series of external borrowings to meet its cash needs. As a result
of the deterioration in the State's budget and cash situation, between October
1991 and July 1994, the ratings on the State's general obligation bonds were
reduced by S&P from AAA to A, by Moody's from Aaa to A1 and by Fitch from AAA to
A. These and other factors may have the effect of impairing the ability of the
issuers of California Municipal Obligations to pay interest on or repay
principal of such obligations. However, since 1993 the State's financial and
economic condition suggests that California, following a period of stability, is
in the midst of a recovery. The General Fund GAAP-basis deficit has been reduced
from a peak of $4.6 billion in 1992-93 to $2.1 billion at fiscal 1996. In
addition, the gap between the national and California unemployment rate narrowed
from 3.4% in 1994 to 1.9% at the close of 1996. By June of 1998, the State's
general obligation bonds were rated A1, A+ and AA- by Moody's, S&P and Fitch,
respectively.
RISK FACTORS OF CONCENTRATING IN CONNECTICUT. Specifically, the credit quality
of the Connecticut Tax-Exempt Fund will depend on the continued financial
strength of the State of Connecticut and its political subdivisions.
Connecticut's economy relies in part on activities that may be adversely
affected by cyclical change, and recent declines in defense spending have had a
significant impact on unemployment levels. Connecticut reported deficits from
its General Fund operations for the fiscal years 1988 through 1991. Together
with the deficit carried forward from the State's 1990 fiscal year, the total
General Fund deficit for the 1991 fiscal year was $965.7 million. The total
deficit was funded by the issuance of General Obligations Economic Recovery
Notes. Moreover, as of June 30, 1995 and 1996, the General Fund had cumulative
deficits under GAAP of $576.9 million and $639.9 million, respectively. As a
result of the recurring budgetary problems, S&P downgraded the State's general
obligation bonds from AA+ to AA in April 1990 and to AA- in September 1991. In
April 1990, Moody's downgraded Connecticut's bonds from Aa1 to Aa (since refined
to Aa3 in March 1997). In March 1995, Fitch downgraded Connecticut's bonds from
AA+ to AA.
RISK FACTORS OF CONCENTRATING IN FLORIDA. You should consider carefully the
special risks inherent in the Fund's investment in Florida Municipal
Obligations. The Florida Constitution and Statutes mandate that the State budget
as a whole, and each separate fund within the State budget, be kept in balance
from currently available revenues each fiscal year. Florida's Constitution
permits issuance of Florida Municipal Obligations pledging the full faith and
credit of the State, with a vote of the electors, to finance or refinance fixed
capital outlay projects authorized by the legislature provided that the
outstanding principal does not exceed 50% of the total tax revenues of the State
for the two preceding years. Florida's Constitution also provides that the
legislature shall appropriate monies sufficient to pay debt service on State
bonds pledging the full faith and credit of the State as the same becomes due.
All State tax revenues, other than trust
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funds dedicated by Florida's Constitution for other purposes, would be available
for such an appropriation, if required. Revenue bonds may be issued by the State
or its agencies without a vote of Florida's electors only to finance or
refinance the cost of State fixed capital outlay projects which may be payable
solely from funds derived directly from sources other than State tax revenues.
Fiscal year 1995-96 estimated General Revenue and Working Capital and Budget
Stabilization funds available totaled $15.311 billion, a 3.3% increase over
1994-95, resulting in unencumbered reserves of approximately $502.7 million at
the end of fiscal 1995-96. General Revenue and Working Capital and Budget
Stabilization funds available for fiscal 1996-97 are estimated to total $16.095
billion, a 5.1% increase over 1995-96, resulting in unencumbered reserves of
approximately $518.2 million at the end of fiscal 1996-97.
RISK FACTORS OF CONCENTRATING IN MASSACHUSETTS. Specifically, the credit
quality of the Massachusetts Tax-Exempt Fund will depend on the continued
financial strength of the Commonwealth of Massachusetts and its political
subdivisions. Since 1989, Massachusetts has experienced growth rates
significantly below the national average and an economic recession in 1990 and
1991 caused negative growth rates. Massachusetts' economic and fiscal problems
in the late 1980s and early 1990s caused several rating agencies to lower their
ratings of Massachusetts Municipal Obligations. A return of persistent serious
financial difficulties could adversely affect the market values and
marketability of, or result in default in payment on, outstanding Massachusetts
Municipal Obligations. The State's operating losses in fiscal 1989 and 1990,
which totaled $672 million and $1.25 billion, respectively, were covered
primarily through deficit borrowings and a fiscal 1991 operating loss of $21
million was covered by drawing on the adjusted 1990 fund balance of $258
million. However, Massachusetts ended fiscal years 1992 through 1996 with a
positive fiscal balance in its general operating funds. At present,
Massachusetts' general obligation bonds are rated by S&P, Fitch and Moody's AA-,
AA- and Aa3, respectively.
RISK FACTORS OF CONCENTRATING IN NEW JERSEY. The State's economy performed
strongly for much of the 1980s. Like much of the Northeast in the 1980s, the
State's economy outpaced national trends. However, from 1989 to 1992, the
State's economic performance trailed the rest of the nation. Reflecting the
economic downturn, the State's unemployment rate rose from a low of 3.6% in the
first quarter of 1989 to a peak of 8.5% during 1992. Since then, the State's
unemployment rate fell to an average of 6.4% during 1995 and 6.1% for the
four-month period from May 1996 through August 1996. In July 1991, S&P lowered
its rating for the State's general obligation debt from AAA to AA+. The State's
general obligation debt is rated AA+ and Aa1 by Fitch and Moody's, respectively.
RISK FACTORS OF CONCENTRATING IN NEW YORK. You should consider carefully the
special risks inherent in investing in New York Municipal Obligations. These
risks result from the financial condition of New York State, certain of its
public bodies and municipalities, and New York City. Beginning in early 1975,
New York State, New York City and other State entities faced serious financial
difficulties which jeopardized the credit standing and impaired the borrowing
abilities of such entities and contributed to high-interest rates on, and lower
market prices for, debt obligations issued by them. A recurrence of such
financial difficulties or a failure of certain financial recovery programs could
result in defaults or declines in the market values of various New York
Municipal Obligations in which the Fund may invest. If there should be a default
or other financial crisis relating to New York State, New York City, a State or
City agency, or a State municipality, the market value and marketability of
outstanding New York Municipal Obligations in the Fund's portfolio and the
interest income to the Fund could be adversely affected. Moreover, the national
recession and the significant slowdown in the New York and regional economies in
the early 1990s added substantial uncertainty to estimates of the State's tax
revenues, which, in part, caused the State to incur cash-basis operating
deficits in the General Fund and issue deficit notes during the fiscal years
1989 through 1992. The State's financial operations have improved, however,
during recent fiscal years. For its fiscal years 1993 through 1996, the State
recorded balanced budgets on a cash-basis, with substantial fund balances in the
General Fund in fiscal 1992-93 and 1993-94 and smaller fund balances in fiscal
1994-95 and 1995-96. There can be no assurance that New York will not face
substantial potential budget gaps in future years. In January 1992, Moody's
lowered from A to Baa1 the ratings on certain appropriation-backed debt of New
York State and its agencies. The State's general obligation, State-guaranteed
and New York State Local Government Assistance Corporation bonds continued to be
rated A by Moody's (since refined to A2 in 1997). The State's general obligation
debt is rated A by S&P. At present, the general obligation debt of New York City
is rated A3 by Moody's. The City's debt is rated BBB+ by S&P with a positive
credit watch.
RISK FACTORS OF CONCENTRATING IN OHIO. Specifically, the credit quality of the
Ohio Tax-Exempt Fund will depend on the continued financial strength of the
State of Ohio and its political subdivisions. Ohio is an industrialized state
with a diverse economy. While manufacturing jobs in the state have been
declining steadily, Ohio remains a leading exporter of manufactured goods. In an
effort to minimize the state's exposure to cyclical downturns in the
manufacturing sector, Ohio has diversified. The 1997 operating surplus of the
General Fund was $155 million, down from $548 million in 1996. However, Ohio has
made productivity improvements and has expanded into the high-tech and business
service industries. The estimated cash balance for the biennium ending 1996-97
is $596.7 million. The state's reserves have been restored to levels which now
exceed those seen before the last recession. At present, Ohio's general
obligation bonds are rated Aa1, AA+ and AA+ by Moody's, S&P, and Fitch,
respectively.
RISK FACTORS OF CONCENTRATING IN PENNSYLVANIA. Many different social,
environmental and economic factors may affect the financial condition of
Pennsylvania and its political subdivisions. From time to time, Pennsylvania and
certain of its political subdivisions have
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encountered financial difficulties which have adversely affected their
respective credit standings. For example, the financial condition of the City of
Philadelphia had impaired its ability to borrow and resulted in its obligations
generally being downgraded below investment grade by the major rating services.
Other factors which may negatively affect economic conditions in Pennsylvania
include adverse changes in employment rates, Federal revenue sharing or laws
governing tax-exempt financing. Currently, Pennsylvania's general obligation
bonds are rated AA-, AA and Aa3 by S&P, Fitch and Moody's, respectively. The
Adviser does not believe that the current economic conditions in Pennsylvania
will have a significant adverse effect on the Fund's ability to invest in
high-quality Pennsylvania Municipal Obligations.
The SAI further discusses risk factors in concentrating in securities issued
by the respective states and their political subdivisions for each Fund.
MANAGEMENT
INVESTMENT MANAGEMENT AGREEMENT. Since November 15, 1971, Reserve Management
Company, Inc. ("Adviser") and its affiliates have provided investment advice to
The Reserve Funds which currently has assets of over $4.7 billion. Under the
Investment Management Agreement, the Adviser manages the Funds and invests in
furtherance of its objectives and policies subject to the overall control and
direction of the Funds' Board of Trustees.
As compensation for these services, the Adviser receives a management fee
which is a percentage of the average daily net assets of each Fund, calculated
as follows: (i) 0.50% per annum of the first $500 million of average daily net
assets, (ii) 0.475% per annum of the next $500 million of such assets; (iii)
0.45% per annum of the next $500 million of such assets; (iv) 0.425% per annum
of the next $500 million of such assets; and (v) 0.40% per annum of such assets
in excess of $2 billion. For the fiscal year ended May 31, 1998, the Adviser
received management fees of 0.50% of the average net assets of the New York,
California, Connecticut, Florida, Massachusetts, New Jersey, Ohio and
Pennsylvania Tax-Exempt Funds. The Investment Management Agreement provides that
the Adviser shall not be liable for any error of judgment or mistake of law or
for any loss suffered by a Fund in connection with the matters as to which the
Agreement relates, except a loss resulting from the willful misfeasance, bad
faith or gross negligence on the part of the Adviser.
SERVICE AGREEMENTS. The Adviser furnishes to each Fund pursuant to a Service
Agreement, at cost, all personnel required for the operations of each Fund such
as executive, administrative, clerical, recordkeeping, bookkeeping, shareholder
accounting and servicing, as well as suitable office space and necessary
equipment and supplies used by such personnel in performing these functions.
Operating costs for which each Fund reimburses the Adviser includes salaries and
other personnel expense, rent, depreciation of equipment and facilities,
interest and amortization on loans which finance equipment used by the Funds,
and all other expenses for the conduct of each Fund's affairs. Affiliates of the
Adviser may provide some of these services. Each Fund also reimburses the
Adviser for: brokerage fees and commissions, interest charges and taxes, the
cost of registering for sale, issuing and redeeming the Fund's shares and of
printing and mailing all prospectuses, proxy statements and shareholder reports
furnished to current shareholders, and the fees and expenses of the Funds'
custodians, auditors, lawyers and disinterested Trustees.
The Adviser has agreed to repay each Fund promptly any amount which a
majority of disinterested Trustees reasonably determines in its discretion is in
excess of or not properly attributable to the cost of operations or expenses of
the Funds. The Service Agreements are nonassignable and continue until
terminated by either party on 120 days' notice.
YEAR 2000. The Trust could be adversely affected if the computer systems and
other service providers that interface with it are unable to process data from
January 1, 2000 and after. However, steps are being taken to reasonably address
this issue and to obtain assurance that comparable effort is being made by
service providers. There can be no assurance that these steps will be sufficient
to avoid any adverse impact to the Trust.
TRUSTEES. The Trustees serve indefinite terms (subject to certain removal
procedures) and they appoint their own successors, provided that at least a
majority of the Trustees have been elected by shareholders. A Trustee may be
removed at any meeting of shareholders by a vote of a majority of the
shareholders of Reserve Tax-Exempt Trust or Reserve New York Tax-Exempt Trust.
TRANSFER AGENT AND DIVIDEND-PAYING AGENT. Reserve Tax-Exempt Trust and Reserve
New York Tax-Exempt Trust act as their own transfer agent and dividend paying
agent.
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HOW TO BUY SHARES
METHOD OF PAYMENT. The minimum initial investment is $1,000 with no minimum
subsequent investments (denominated in U.S. dollars). An initial purchase must
be accompanied by an Application or equivalent information. For clients of
certain broker-dealers and financial institutions, shares may be purchased
directly through such Firm. You can buy shares of the Funds each Business Day at
the net asset value ("NAV") determined after receipt by the Funds of a properly
completed order and payment in Federal Funds (member bank deposits with the
Federal Reserve Bank System). Payments must be made:
- By check (drawn on a U.S. bank) payable to The Reserve Funds, 810
Seventh Avenue, New York, NY 10019-5868. You must include your account
number (or Taxpayer Identification Number) on the "pay to the order
of" line for each check-made payable to The Reserve Funds or within
the endorsement for each check endorsed to The Reserve Funds.
- By wire -- Prior to calling your bank, call the Funds for specific
instructions at 800-637-1700 or the broker-dealer or financial
institution ("Firm") from which you received this Prospectus.
Checks and wires which do not correctly identify the Fund and account to be
credited may be returned or delay the purchase of shares. Because each Fund must
pay for its securities purchases on the same day in Federal Funds, only Federal
Funds wires and checks drawn on the Fund's bank are eligible for entry as of the
Business Day received. For Federal Funds wires to be eligible for same-day order
entry, a Fund must be notified before 11:00 AM (New York time) of the amount to
be transmitted and the account to be credited. Payment by check not immediately
convertible into Federal Funds will be entered as of the business day when
covering Federal Funds are received or bank checks are converted into Federal
Funds. This usually occurs within two (2) business days, but may take longer.
Checks delivered to the Fund's offices after 11:00 AM will be considered
received until the next Business Day. A fee will be charged if any check used
for investment in your account does not clear.
Any monies which cannot be credited to an account by the end of the business
day following that on which Federal Funds become available will be returned as
promptly as possible to the sender or, if this cannot be readily determined, to
the bank from which they came or were drawn. The Funds reserve the right, with
respect to any person or class of persons, under certain circumstances to waive
investment minimums and redemption requirements. The Funds also reserve the
right to suspend the offering of shares from time to time and to reject any
purchase order for any reason. The Funds will only accept purchase checks in
excess of $100 which are payable to The Reserve Funds or payable to the
shareholder/payee of the check and endorsed to The Reserve Funds. The Funds do
not accept travelers checks.
RESERVE AUTOMATIC ASSET-BUILDER PLAN. If you have an account balance of $5,000
or more, you may purchase shares of a Fund ($25 minimum) from a checking, NOW,
or bank money-market deposit account or from a U.S. government distribution ($25
minimum) such as Social Security, federal salary, or certain veterans' benefits,
or other payments from the federal government. Call the Funds at 800-637-1700
for an application.
NET ASSET VALUE. Shares are sold to the public at NAV which is calculated at
the close of each Business Day (normally 4:00 PM New York time) by taking the
sum of the value of each Fund's investments (amortized cost value is used for
this purpose) and any cash or other assets, subtracting liabilities and dividing
by the total number of shares outstanding. A "business day" is Monday through
Friday exclusive of days the New York Stock Exchange ("NYSE") is closed for
trading and bank holidays in New York State. It is the policy of each Fund to
seek to maintain a stable NAV of $1.00 per share although this share price is
not guaranteed.
DISTRIBUTOR. The Distributor of the Funds is Resrv Partners, Inc., 810 Seventh
Avenue, New York, NY 10019-5868, which is a wholly-owned subsidiary of the
Adviser.
EXCHANGE PRIVILEGE. The shares offered by this Prospectus may be exchanged for
shares in other Reserve money-market funds at NAV. Shares to be acquired in an
exchange must be registered for sale in the investor's state. The exchange
privilege described under this heading may not be available to clients of some
Firms and some Firms may impose conditions on their clients which are different
from those described in this Prospectus. In addition, this exchange privilege
may be modified or terminated at any time, or from time to time, upon sixty (60)
days' notice to shareholders.
DISTRIBUTION AND SERVICE PLAN. Accounts may be opened through brokers,
financial intermediaries and institutions ("Firms"), some of which participate
in each Fund's Plan of Distribution ("Plan"). Under Rule 12b-1 of the 1940 Act,
each Fund makes assistance payments at an annual rate of 0.20% of net assets,
substantially all of which are paid to those Firms for distribution assistance
and administrative services provided to the Funds. The Adviser is required by
the Plan to pay an equivalent amount and may, at its discretion, pay additional
amounts based upon assets committed to the Funds by such Firms. The Plan does
not permit the carrying over of payments from year to year. The Adviser also
reimburses Firms for a portion of their costs for advertising and marketing of a
Fund. All such arrangements are designed to facilitate the sale of a Fund's
shares.
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CLIENTS OF FIRMS. Firms provide varying arrangements for their clients with
respect to the purchase and redemption of a Fund's shares and may arrange with
their clients for other investment or administrative services. Firms are
responsible for the prompt transmission of purchase and redemption orders. Some
Firms may independently establish and charge additional fees for their services,
which would reduce their clients' yield or return. Firms may also hold a Fund's
shares in nominee or street name on behalf of their clients. In such instances,
the Fund's transfer agent will have no information with respect to or control
over the accounts of specific shareholders. Such shareholders may obtain access
to their accounts and information about their accounts only from their Firm.
Some Firms may receive compensation for recordkeeping and other services
relating to these nominee accounts. In addition, certain privileges with respect
to the purchase and redemption of shares (such as check writing redemptions) or
the reinvestment of dividends may not be available through such Firm or may only
be available subject to certain conditions and limitations. Some Firms may
participate in a program allowing them access to their clients' accounts for
servicing including, without limitation, changes of registration and
dividend-payees, and may perform functions such as generation of confirmations
and periodic statements and disbursement of cash dividends. The Prospectus
should be read in connection with such Firm's material regarding its fees and
services.
SHARES OF BENEFICIAL INTEREST
Reserve Tax-Exempt Trust and Reserve New York Tax-Exempt Trust were
organized as Massachusetts business trusts on January 25, 1983, and July 12,
1983, respectively, and are open-end management investment companies commonly
known as mutual funds. At the date of this Prospectus, there were eight (8)
separate series of Reserve Tax-Exempt Trust authorized and outstanding and one
separate series of Reserve New York Tax-Exempt Trust ("Trust(s)") authorized and
outstanding. Additional series may be added in the future by each Trust's Board
of Trustees. Each Trust is authorized to issue an unlimited number of shares of
beneficial interest which may be issued in any number of series. Shares issued
will be fully paid and non-assessable and will have no preemptive rights. The
shareholders of each Trust are entitled to a full vote for each full share held
(and fractional votes for fractional shares) and have equal rights with respect
to earnings, dividends, redemption and in the net assets of their respective
series upon liquidation. The Trustees do not intend to hold annual meetings but
will call such special meetings of shareholders as may be required under the
1940 Act (e.g. to approve a new investment advisory agreement or changing the
fundamental investment policies of a Fund) or by a Declaration of Trust.
Under Massachusetts law, the shareholders and trustees of a business trust
may, in certain circumstances, be personally liable for the trust's obligations
to third parties. However, the Declaration of Trust of Reserve Tax-Exempt Trust
and Reserve New York Tax-Exempt Trust provides, in substance, that no
shareholder or a Trustee shall be personally liable for a Trust's, and each
separate investment portfolio's obligations to third parties, and that every
written contract made by the Trust or a Fund shall contain a provision to that
effect. Each Declaration of Trust also requires a Trust to indemnify
shareholders and Trustees against such liabilities and any related claims or
expenses.
DAILY DIVIDENDS
Each Fund declares dividends each Business Day. Dividends are distributed
daily as additional shares to shareholder accounts except for shareholders who
elect in writing to receive cash dividends, in which case monthly dividend
checks are sent to the shareholder.
TAXES
To maintain its regulated investment company status for federal income tax
purposes, each Fund intends to satisfy certain requirements imposed by the
Internal Revenue Code, so as to avoid any federal income or excise tax
liability. Dividends derived from the interest earned on Municipal Obligations
and designated by a fund as "exempt interest dividends" and are not subject to
federal income taxes. To the extent a Fund invests in Municipal Obligations
issued by its respective state or political subdivision thereof, exempt-
interest dividends derived from the interest thereon generally is not subject to
state and, with respect to the New York Tax-Exempt Fund, local personal income
taxes.
Shareholders of the Florida Tax-Exempt Fund that are subject to the Florida
intangibles tax will not be required to include the value of their Fund shares
in their taxable intangible property if all of the Fund's investments on the
annual assessment date are obligations that would be exempt from such tax if
held directly by such shareholders, such as Florida and U.S. government
obligations. As described earlier, the Fund will normally attempt to invest
substantially all of its assets in securities which are exempt from the Florida
intangibles tax. If the portfolio consists of any assets which are not so exempt
on the annual assessment date, only the portion of the shares of the Fund which
relate to securities issued by the United States and its possessions and
territories will be exempt from the
12
<PAGE> 15
Florida intangibles tax, and the remaining portions of those shares will be
fully subject to the intangibles tax, even if they partly relate to Florida
tax-exempt securities.
Shareholders are advised to retain all statements to maintain accurate
records of their investments. If any dividends are not exempt from federal,
state or local income taxes, shareholders will be advised of the percentage by
February of the following year. Shareholders should consult their tax advisers
regarding specific questions as to federal, state or local taxes.
Further information relating to tax consequences is contained in the SAI.
REDEMPTIONS
TIME AND METHOD OF REDEMPTION. Shares of each Fund are redeemed at their net
asset value determined after receipt by the Fund of a request in proper form.
Each Fund usually transmits payment the same day when requests are received
before 11:00 AM (New York time) and the next day for requests received after the
specified time to enable shareholders to receive additional dividends. This is
not always possible, and transmission of redemption proceeds may be delayed.
Payment will normally be made by check or bank transfer. Shares do not earn
dividends on the day a redemption is effected, regardless of what time the order
is received.
WRITTEN AND TELEPHONE REDEMPTION REQUESTS. The Funds strongly suggest (but do
not require) that each redemption, written or by telephone, be at least $1,000,
except for redemptions which are intended to liquidate the account. A
shareholder will be charged $2 for redemption checks issued for less than $100.
The Funds assume no responsibility for delays in the receipt of wired or mailed
funds. The use of a predesignated financial institution, such as a savings bank,
credit union or savings and loan association, which is not a member of the
Federal Reserve wire system could cause such a delay. If a Fund has previously
been advised in writing of your brokerage or bank account, telephone requests
will be accepted by calling 800-637-1700. A Fund may be liable for any losses
caused by its failure to employ reasonable procedures. To reduce the risk of
loss, proceeds of telephone redemptions may be sent only to (1) the bank or
brokerage account designated by the shareholder on the Application or in a
letter with the signature(s) guaranteed; or (2) to the address of record if all
the conditions listed below are met. To change the designated brokerage or bank
account it is necessary to contact the Firm through which shares of a Fund were
purchased or, if purchased directly from a Fund it is necessary to send a
written request to the Fund with signature(s) guaranteed as described below.
Other redemption orders must be in writing with the necessary signature(s)
guaranteed by a domestic commercial bank; a domestic trust company; a domestic
savings bank, credit union or savings association or a member firm of a national
securities exchange. Guarantees from notaries public are unacceptable. The Funds
will waive the signature guarantee requirement on a redemption request once
every thirty (30) days if all of the following conditions apply: if the
redemption check is (1) for $5,000 or less; (2) payable to the shareholder(s) of
record; and (3) mailed to the shareholder(s) at the address of record. The
requirement of a guaranteed signature protects against an unauthorized person
redeeming shares and obtaining the redemption proceeds. Redemption instructions
and election of the plans described below may be made when your account is
opened. Subsequent elections and changes in instructions must be in writing with
the signature(s) guaranteed. Changes in registration or authorized signatories
may require additional documentation.
The Fund reserves the right to refuse a telephone redemption if it believes
it is advisable to do so. Procedures for telephone redemptions may be modified
or terminated by the Fund at any time. During times of drastic economic or
market conditions shareholders may experience difficulty in contacting the Funds
by telephone to request a redemption or exchange of a Fund's shares. In such
cases shareholders should consider using another method of redemption, such as a
written request or a redemption by check.
CHECKING, VISA AND ATM ACCESS. The Funds offer a comprehensive package of
services which enhance access to your account. By completing the Application or
a signature card (for existing accounts) and certain other documentation if the
owner of record is a fiduciary, corporation, partnership, trust or other
organization, you can write checks in any amount against your account.
Redemptions by check lengthen the time your money earns dividends, since
redemptions are not made until the check is processed by the Funds. Because of
this, you cannot write a check to completely liquidate your account, nor may a
check be presented for certification or immediate payment, otherwise, you may
use your Reserve checking account as you would any checking account. Your checks
will be returned (bounced) and a fee charged if they are postdated, contain an
irregularity in the signature, amount or otherwise, or are written against
accounts with insufficient funds. All transaction activity, including check
redemptions, will be reported on your account statement. A fee will be charged
for providing check copies. Upon proper notice, the Funds may choose to impose a
fee if it deems a shareholder's actions to be burdensome. Checking may not be
available to clients of some Firms and a Firm may establish its own minimum
check amount. Reserve VISA cards provide access to your Reserve balances and
margin line for worldwide purchasing power and cash at over 250,000 ATMs. For
more information, call 800-637-1700.
STOP PAYMENTS. The Funds will honor stop payment requests on unpaid shareholder
checks provided they are advised of the correct check number, payee, check
amount, and date. Stop payment requests received by the Funds by 2:00 PM (New
York time) in proper
13
<PAGE> 16
form will be effective the next business day. Oral stop payment requests are
effective for fourteen (14) calendar days, at which time they will be canceled
unless confirmed in writing. Written stop payment requests will remain in effect
for one year. A fee will be charged for this service.
AUTOMATIC WITHDRAWAL PLANS. If you have an account with a balance of at least
$5,000, you may, upon written notice, participate in either of the following:
(i) an Income Distribution Plan providing for monthly, quarterly or annual
payments by redemption of shares from reinvested dividends or distributions paid
to your account during the preceding period; or (ii) a Fixed Amount Withdrawal
Plan providing for the automatic redemption of a sufficient number of shares
from your account to make a specified monthly, quarterly or annual payment of a
fixed amount. In order for such payments to continue under either Plan, there
must be a minimum of $25 available from reinvested dividends or distributions.
Payments can be made to you or your designee. An application for the Automatic
Withdrawal Plans can be obtained from the Funds. The amount, frequency and
recipient of the payments may be changed by giving proper written notice to the
Fund. The Funds may impose a charge, modify or terminate any Automatic
Withdrawal Plan at any time after the participant has been duly notified. This
privilege may not be available to clients of some Firms or may be available
subject to conditions or limitations.
AUTOMATIC TRANSFER PLANS. You may redeem shares of a Fund by telephone (minimum
$100) if you have filed a separate Reserve Automatic Transfer application with
the Fund. The proceeds will be transferred between your Fund account and the
checking, NOW or bank money-market deposit account (as permitted) designated in
the application. Only such an account maintained in a domestic financial
institution which is an Automated Clearing House member may be so designated.
Redemption proceeds will be on deposit in your account at the Automated Clearing
House member bank ordinarily two (2) business days after receipt of the
redemption request. The Funds may, in the future, impose a charge, modify or
terminate this privilege at any time after the participant has been duly
notified. This privilege may not be available to clients of some Firms or may be
available subject to conditions or limitations.
RESTRICTIONS. The right of redemption may be suspended or the date of payment
postponed for more than seven (7) days only (a) when the NYSE is closed (other
than for customary closings), (b) when, as determined by the SEC, trading on the
Exchange is restricted or an emergency exists making it not reasonably
practicable to dispose of securities owned by a Fund or for it to determine
fairly the value of its net assets, or (c) for such periods as the SEC may
permit. If shares of a Fund are purchased by check or Reserve Automatic
Transfer, the Fund may delay transmittal of redemption proceeds until such time
as it has assured itself that good payment has been collected for the purchase
of such shares, which may generally take up to ten (10) business days.
Shareholder checks written against funds which are not yet considered collected
will be returned and a fee charged against the account. When a purchase is made
by wire and subsequently redeemed, the proceeds from such redemption normally
will not be transmitted until two (2) business days after the purchase.
GENERAL INFORMATION
JOINT OWNERSHIP. When an account is registered in the name of one person and
another, for example a husband and wife, either person is entitled to redeem
shares in the account. The Application provides that persons so registering
their account indemnify and hold the Funds harmless for actions taken by either
party.
USE OF JOINT PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION. Although each
Fund is offering only its own shares, it is possible that a Fund might become
liable for any misstatement in the Prospectus and SAI about the other Funds.
However, each Fund has acknowledged that it, and not any of the other Funds, is
liable for any material misstatement or omission about it in the Prospectus or
SAI.
REPORTS AND STATEMENTS. Shareholders receive an annual report containing
audited financial statements and an unaudited semi-annual report. A statement is
sent to each shareholder at least quarterly. Shareholders who are clients of
some Firms will receive a statement combining transactions in Fund shares with
statements covering other brokerage or mutual fund accounts.
SMALL BALANCES. Because of the expense of maintaining accounts with small
balances (less than $1,000), the Funds may either levy a monthly charge
(currently $5) or redeem the account and remit the proceeds. Some Firms may
establish variations of minimum balances and fee amounts if those variations are
approved by the Funds.
RESERVE EASY ACCESS. Easy Access is The Reserve Funds' 24-hour toll-free
telephone service that lets customers use a touch-tone phone to obtain yields
and account balances. To use it, call 800-637-1700 and follow the instructions.
Clients may also access full account activity for the previous six months on the
Internet at www.reservefunds.com.
INQUIRIES. Shareholders should direct their inquiries to the Firm from which
they received this Prospectus or to the Funds.
14
<PAGE> 17
SPECIAL SERVICES. The Funds reserve the right to charge shareholder accounts
for specific costs incurred in processing unusual transactions for shareholders.
Such transactions include, but are not limited to, stop payment requests, copies
of Fund redemption or shareholder checks and special research services.
PERFORMANCE. The Funds may compare its performance to other income producing
alternatives such as (i) money-market funds (based on yields cited by IBC's
Money Fund Report and other industry publications); and (ii) various bank
products (based on average rates of bank and thrift institution certificates of
deposit, money-market deposit accounts and NOW accounts as reported by the Bank
Rate Monitor and other industry publications). An investment in shares of any
Fund is not insured by the Federal Deposit Insurance Corporation.
Yield information is useful in reviewing each Fund's performance relative to
other funds that hold investments of similar quality. Because yields will
fluctuate, yield information may not provide a basis for comparison with bank
and thrift certificates of deposit which normally pay a fixed rate for a fixed
term and are subject to a penalty for withdrawals prior to maturity which will
reduce their return.
------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
------------------------
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
statements of operations and 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 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, New York
July 28, 1998
15
<PAGE> 18
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
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
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE> 19
RESERVE NEW YORK TAX-EXEMPT TRUST-- NEW YORK TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1998--(CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
----------------------- -------- -------------- --------
<S> <C> <C> <C>
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>
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 USD 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
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE> 20
RESERVE TAX-EXEMPT TRUST--CALIFORNIA TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1998 -- (CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
----------------------- -------- -------------- --------
<S> <C> <C> <C>
Orange County Apartment Development Revenue Bonds Issue A of
1991, the Lakes Project 3.70%, 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
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 and redemption prices per share on 66,932,712
shares of Beneficial interest of $.001 par value
outstanding............................................... $66,932,712
===========
</TABLE>
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
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE> 21
RESERVE TAX-EXEMPT TRUST--CONNECTICUT TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1998 -- (CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
----------------------- -------- -------------- --------
<S> <C> <C> <C>
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
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 and redemption prices per share on 36,786,677
shares of Beneficial interest of $.001 par value
outstanding............................................... $36,786,677
===========
</TABLE>
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
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE> 22
RESERVE TAX-EXEMPT TRUST--FLORIDA TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1998 -- (CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
----------------------- -------- -------------- --------
<S> <C> <C> <C>
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
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>
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
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE> 23
RESERVE TAX-EXEMPT TRUST--MASSACHUSETTS TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1998 -- (CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
----------------------- -------- -------------- --------
<S> <C> <C> <C>
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
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 and redemption prices per share on 25,382,988
shares of beneficial interest of $.001 par value
outstanding............................................... $25,382,988
===========
</TABLE>
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
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE> 24
RESERVE TAX-EXEMPT TRUST--NEW JERSEY TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1998 -- (CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
----------------------- -------- -------------- --------
<S> <C> <C> <C>
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
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>
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
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE> 25
RESERVE TAX-EXEMPT TRUST--OHIO TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1998 -- (CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
----------------------- --------- -------------- ----------
<S> <C> <C> <C>
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>
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>
- ---------------
(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.
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE> 26
RESERVE TAX-EXEMPT TRUST--PENNSYLVANIA TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1998 -- (CONTINUED)
SECURITY TYPE ABBREVIATIONS:
<TABLE>
<S> <C> <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>
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>
<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.
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE> 27
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
RESERVE NEW YORK
TAX-EXEMPT TRUST RESERVE TAX-EXEMPT TRUST
----------------------------- -------------------------------------------------------------
NEW YORK FUND CALIFORNIA FUND CONNECTICUT FUND
----------------------------- ----------------------------- -----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, 1998 MAY 31, 1997 MAY 31, 1998 MAY 31, 1997 MAY 31, 1998 MAY 31, 1997
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS FROM INVESTMENT
OPERATIONS:
Net investment income paid
to shareholders as
dividends (Note 1)........ $ (4,696,211) $ (3,838,918) $ (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.................... 748,322,717 676,647,327 332,373,143 153,856,260 141,307,597 104,926,291
Net asset value of shares
issued on reinvestment of
dividends................. 4,696,211 3,838,918 1,260,626 498,099 981,381 797,967
------------- ------------- ------------- ------------- ------------- -------------
Subtotal.................. 753,018,928 680,486,245 333,633,769 154,354,359 142,288,978 105,724,258
Cost of shares redeemed... (734,986,773) (652,760,567) (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................ 18,032,155 27,725,678 35,980,316 18,340,427 3,290,174 (1,304,801)
NET ASSETS:
Beginning of year........... 153,180,084 125,454,406 30,952,396 12,611,969 33,496,503 34,801,304
------------- ------------- ------------- ------------- ------------- -------------
End of year................. $ 171,212,239 $ 153,180,084 $ 66,932,712 $ 30,952,396 $ 36,786,677 $ 33,496,503
============= ============= ============= ============= ============= =============
</TABLE>
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>
SEE NOTES TO FINANCIAL STATEMENTS.
25
<PAGE> 28
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
RESERVE TAX-EXEMPT TRUST
----------------------------------------------------------------------
NEW JERSEY FUND OHIO FUND PENNSYLVANIA FUND
----------------------------- ---------------- -------------------
APRIL 1, 1998
(COMMENCEMENT OF SEPTEMBER 12, 1997
OPERATIONS) (COMMENCEMENT OF
YEAR ENDED YEAR ENDED 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>
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.
26
<PAGE> 29
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)
F. Each Fund is charged only for its direct or allocated (in proportion to
net assets or number of shareholder accounts) share of expenses.
2. MANAGEMENT FEE, SHAREHOLDER SERVICING COSTS AND TRANSACTIONS WITH AFFILIATES:
Reserve Management Company, Inc. ("RMCI") manages the Trusts' investments,
effects purchases and sales thereof, and absorbs certain promotional
expenses. For such services RMCI receives management fees from each Fund at
an annual rate of .50% of the first $500 million, .475% of the next $500
million, .45% of the next $500 million, .425% of the next $500 million and
.40% of any excess over $2 billion of the average daily closing net assets.
Also, under the current Service Agreement, RMCI was reimbursed $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 period 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.
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
============ =========== =========== ===========
MASSACHUSETTS NEW JERSEY OHIO PENNSYLVANIA
------------ ----------- ----------- -----------
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.
---------------------
27
<PAGE> 30
[CAPTION]
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
PAGE
---
Shareholder Expenses............................ 2
Financial Highlights............................ 3
Yield........................................... 6
Investment Objective and Policies............... 6
Management...................................... 10
How to Buy Shares............................... 11
Shares of Beneficial Interest................... 12
Daily Dividends................................. 12
Taxes........................................... 12
Redemptions..................................... 13
General Information............................. 14
Report of Independent Accountants............... 15
Financial Statements............................ 16
</TABLE>
Investors are advised to read and retain
this Prospectus for future reference.
Founders of
"America's First
Money Fund"
810 Seventh Avenue, New York, NY 10019-5868
GENERAL INFORMATION AND 24 HOUR YIELD AND BALANCE INFORMATION
800-637-1700 M www.reservefunds.com
Distributor -- Resrv Partners, Inc.
07/98
LOGO Founders of
"America's First
Money Fund"
-------------------------------------------------------------------------
----------
-------------------------------------------------------------------------
----------
NEW YORK TAX-EXEMPT FUND
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
PENNSYLVANIA TAX-EXEMPT FUND
<PAGE> 31
General Information, Purchases and
Redemptions
---------------------------------------
24 Hour Yield and Balance Information
---------------------------------------
Nationwide
800-637-1700 M www.reservefunds.com
THE INTERSTATE TAX-EXEMPT FUND
The INTERSTATE TAX-EXEMPT FUND of Reserve Tax-Exempt Trust (the "Fund") is
a no-load money market fund whose 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. The Fund invests
principally in short-term obligations issued by the states, territories and
possessions of the United States and their political subdivisions, duly
constituted authorities and corporations. The average maturity of the Fund is
limited to 90 days or less.
The Fund is designed for institutions and individuals as a convenient
alternative to the direct investment of temporary cash balances in short-term
money market accounts or instruments. The Fund seeks to employ idle cash at
yields competitive with yields of other comparable short-term investments, and
is designed to reduce or eliminate for the investor the mechanical problems of
direct investment in money market instruments such as scheduling maturities,
evaluating the credit of issuers, investing in round lots, safeguarding receipt
and delivery of securities and reinvesting.
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.
This Prospectus sets forth the information about the Fund which a
prospective investor should know before investing. A Statement of Additional
Information ("SAI") dated July 31, 1998, has been filed with the Securities and
Exchange Commission ("SEC") and is herein incorporated by reference. It may be
obtained without charge by writing or calling the Fund at 800-637-1700. The SEC
maintains a web site (http://www.sec.gov) that contains the SAI, material
incorporated by reference, and other information regarding the Fund
electronically filed with the SEC.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
Prospectus dated July 31, 1998.
Investors are advised to read and retain this Prospectus for future reference.
<PAGE> 32
SHAREHOLDER EXPENSES
The following tables illustrate all expenses and fees that a shareholder of
the Fund will incur directly or indirectly. The expenses and fees set forth in
the tables are for the fiscal year ended May 31, 1998.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Load Imposed on Purchases............................. None
Sales Load Imposed on Reinvested Dividends.................. None
Redemption Fees*............................................ None
Exchange Fees............................................... None
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<S> <C>
Management Fee.............................................. .50%
12b-1 Fees.................................................. .19%
Other Operating Expenses
Administration and Operations Expenses.................... .23%
Equipment................................................. .03%
Other..................................................... .02%
-----
Total Operating Expenses.................................... .97%
=====
</TABLE>
*A $2 fee will be charged on redemption checks issued by the Fund of less
than $100 and a $10 fee will be charged for wire redemptions of less than
$10,000.
The purpose of these tables is to assist the investor in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly.
The following example illustrates the expenses that a shareholder would pay
on a $1,000 investment over various time periods assuming: (1) a 5% annual rate
of return and (2) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$10 $31 $54 $119
</TABLE>
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
2
<PAGE> 33
FINANCIAL HIGHLIGHTS
The following information applies to a share of the Interstate Tax-Exempt
Fund of the Reserve Tax-Exempt Trust outstanding throughout each period. It
should be read in conjunction with the financial statements and related notes on
page 12. Such information has been audited by PricewaterhouseCoopers LLP, as
indicated on their report on page 11.
<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 dividends. Not indicative of future results.
YIELD
For the seven calendar days ended May 31, 1998, the current and effective
yields of the Fund were 2.90% and 2.94%, respectively.
Current yield refers to the income generated by an investment in the Fund
over a seven-day period. This income is then annualized, that is, the amount of
income generated by the investment during that week is assumed to be generated
each week over a 52-week period and is shown as a percentage of the investment.
The effective yield is calculated similarly but, when annualized, the income
earned is assumed to be reinvested. The effective yield will be higher than the
current yield because of this compounding effect.
The Fund may also quote its tax-equivalent yield, which shows the taxable
yield an investor would have to earn before taxes to equal the Fund's tax-free
yield. The tax-equivalent yield is calculated by dividing the Fund's current or
effective yield by the result of one minus a stated federal tax rate.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek as high a level of
short-term interest income exempt from federal income taxes as is consistent
with preservation of capital and liquidity. The Fund seeks to attain this
objective by investing principally in obligations issued by states, territories,
and possessions of the United States and their subdivisions, duly constituted
authorities and corporations, or participation interests in such obligations.
However, achievement of this objective cannot be assured. This investment
objective cannot be changed without the vote of a majority of the outstanding
shares of the Fund as defined in the Investment Company Act of 1940 ("1940
Act").
These securities are generally known as municipal bonds or notes ("Municipal
Obligations") and the interest on them is exempt from federal income tax in the
opinion of either bond counsel for the issuers or the issuer itself. They are
issued to raise money for various public purposes such as constructing public or
private facilities. General obligation bonds and notes are backed by the taxing
power of the issuer. Revenue bonds and notes are backed by the revenues of a
project or facility such as a toll road or, in some cases, from the proceeds of
a special excise tax, but not by the general taxing power. Industrial
development revenue bonds and notes are backed by the credit of a private
issuer. The Fund may invest any portion of its assets in such bonds and notes.
Municipal Obligations bear fixed, variable or floating rates of interest. At
least 80% of the value of the Fund's assets will be invested in Municipal
Obligations unless the Fund has adopted a temporary defensive position.
3
<PAGE> 34
The Fund may purchase floating and variable rate demand notes, which are
Municipal Obligations normally having stated maturities in excess of one year,
but which permit the Fund to demand payment of principal and accrued interest at
any time, or at specified intervals not exceeding one year, usually upon not
more than seven (7) days' notice. Frequently, these Obligations are secured by
letters of credit or other credit support arrangements provided by banks. The
Fund will not invest more than 10% of the value of its assets in Obligations for
which there is no secondary market.
In view of the investment of the Fund in industrial revenue development
bonds and notes secured by letters of credit or guarantees of banks, an
investment in Fund shares should be made with an understanding of the
characteristics of the banking industry and the risks such an investment may
entail. In addition, general economic conditions play an important part in the
operations of banks, and exposure to credit losses arising from possible
financial difficulties of borrowers might affect a bank's ability to meet its
obligations under a letter of credit.
The Fund will purchase tax-exempt securities which are rated MIG-1 or MIG-2
by Moody's Investor Services, Inc. ("Moody's"), SP-1 or SP-2 by Standard &
Poor's Corporation ("S&P") or the equivalent thereof and non-rated securities
which are determined to be of comparable quality by the Fund's Investment
Adviser pursuant to guidelines established by the Board of Trustees.
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 at a specified
date, at an agreed upon price. If a bank or other municipal securities dealer
defaults under its stand-by commitment, the liquidity of the security subject to
such commitment may be adversely affected.
There is no limit on the Fund's ability to purchase Municipal Obligations on
a when-issued or delayed-delivery basis. The price of these securities is fixed
at the time the commitment to purchase is made but delivery and payment takes
place at a later date, normally within one month, and no interest accrues in the
interim. Commitments to purchase when-issued securities will be reflected in
determining the Fund's net asset value ("NAV") and readily marketable assets of
at least equal value will be maintained. The Investment Adviser does not believe
that the Fund's NAV or income will be adversely affected by purchases on a
when-issued or delayed-delivery basis.
The Fund may purchase participation interests in Municipal Obligations from
financial institutions which give the Fund a proportionate undivided interest in
the security. These instruments may have fixed, floating or variable rates of
interest and may be secured by bank credit support arrangements.
Interest received on certain otherwise tax-exempt securities ("private
activity bonds") is subject to a federal Alternative Minimum Tax ("AMT"). It is
the position of the SEC that in order for a fund to call itself "tax-free" not
more than 20% of its net assets may be invested in municipal securities subject
to the AMT or at least 80% of its income must be tax-exempt. Income received on
such securities is classified as a "tax preference item" which could subject
certain shareholders of the Fund to the AMT. However, as of the date of this
Prospectus, the Fund does not purchase such securities, but reserves the right
to do so depending on market conditions in the future.
Yields on municipal securities depend on a variety of factors, including
general economic and monetary conditions, money market factors, conditions in
the tax-exempt securities market, size of a particular offering, maturity of the
obligation and rating of the issue. The ability of the Fund to achieve its
investment objective is also dependent on the continuing ability of issuers of
municipal securities to meet their obligations for the payment of interest and
principal when due.
Although there is no current intention to do so, from time to time the Fund
may invest in taxable short-term investments ("Taxable Investments") consisting
of obligations backed by the full faith and credit of the United States
government, its agencies or instrumentalities, deposit-type obligations,
acceptances, letters of credit of Federal Deposit Insurance Corporation member
banks and instruments fully collateralized by such obligations outright or
subject to repurchase agreements. Unless the Fund has adopted a temporary
defensive position, no more than 20% of the net assets of the Fund will be
invested in Taxable Investments at any time.
The Fund's Investment Adviser uses its reasonable business judgment in
selecting investments in addition to considering the ratings of Moody's and S&P.
This analysis considers, among other things, the financial condition of the
issuer by taking into account present and future liquidity, cash flow and
capacity to meet debt service requirements. Since the market value of debt
obligations fluctuates as an inverse function of changing interest rates, the
Fund seeks to minimize the effect of such fluctuations by investing in
instruments with remaining maturities of 397 days or less and limiting its
average maturity to 90 days or less.
The principal risk factors associated with investment in the Fund are
fluctuations in short-term interest rates, default of one or more issuers of
securities held and non-diversification. As a non-diversified investment
company, the Fund is permitted to have all its assets invested in a limited
number of issuers. Accordingly, since a relatively high percentage of the Fund's
assets may be invested in the
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securities of a limited number of issuers, the Fund's investment securities may
be more susceptible to any single economic, political or regulatory occurrence
than the investment securities of a diversified investment company. However, the
Fund intends to qualify as a "regulated investment company" for purposes of the
Internal Revenue Code. This limits the aggregate value of all investments
(except U.S. government securities, securities of other regulated investment
companies, cash and cash items) so that, with respect to at least 50% of its
total assets, not more than 5% of such assets are invested in the securities of
a single issuer.
MANAGEMENT
INVESTMENT MANAGEMENT AGREEMENT. Since November 15, 1971, Reserve Management
Company, Inc. ("Adviser") and its affiliates have provided investment advice to
The Reserve Funds which currently has assets of approximately $4.7 billion.
Under the Investment Management Agreement, the Adviser manages the Funds and
invests in furtherance of its objectives and policies subject to the overall
control and direction of the Funds' Board of Trustees.
As compensation for these services, the Adviser receives a management fee
which is a percentage of the average daily net assets of the Fund, calculated as
follows: (i) 0.50% per annum of the first $500 million of average daily net
assets; (ii) 0.475% per annum of the next $500 million of such assets; (iii)
0.45% per annum of the next $500 million of such assets; (iv) 0.425% per annum
of the next $500 million of such assets; and (v) 0.40% per annum of such assets
in excess of $2 billion. For the fiscal year ended May 31, 1998, the Adviser
received a management fee of 0.50% of the average net assets of the Fund.
The Investment Management Agreement provides that the Adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Fund in connection with the matters to which the Agreement relates, except a
loss resulting from the willful malfeasance, bad faith or gross negligence on
the part of the Adviser or from reckless disregard by it of its duties and
obligations thereunder. The Adviser may make such advertising and promotional
expenditures, using its own resources, as it deems appropriate.
SERVICE AGREEMENT. The Adviser furnishes to the Fund, pursuant to a Service
Agreement, at cost, all personnel required for its operations such as executive,
administrative, clerical, recordkeeping, bookkeeping, shareholder accounting and
servicing, as well as suitable office space and necessary equipment and supplies
used by such personnel in performing these functions. Operating costs for which
the Fund reimburses the Adviser includes salaries and other personnel expense,
rent, depreciation of equipment and facilities, interest and amortization of
loans which finance equipment used by the Fund, and all other expenses incurred
in the conduct of the Fund's affairs. Affiliates of the Adviser may provide some
of these services. The Fund also reimburses the Adviser for: brokerage fees and
commissions, interest charges and taxes, the cost of registering for sale,
issuing and redeeming the Fund's shares and of printing and mailing all
prospectuses, proxy statements and shareholder reports furnished to current
shareholders and the fees and expenses of the Fund's custodian, auditors,
lawyers and disinterested Trustees.
The Adviser has agreed to repay the Fund promptly any amount which a
majority of disinterested Trustees reasonably determines is not properly
attributable to the Fund. The Service Agreement is nonassignable and continues
until terminated by either party on 120 days' notice.
YEAR 2000. The Trust could be adversely affected if the computer systems and
other service providers that interface with it are unable to process data from
January 1, 2000 and after. However, steps are being taken to reasonably address
this issue and to obtain assurance that comparable effort is being made by
service providers. There can be no assurance that these steps will be sufficient
to avoid any adverse impact to the Trust.
TRUSTEES. The Trustees serve indefinite terms (subject to certain removal
procedures) and they appoint their own successors, provided that at least a
majority of the Trustees have been elected by shareholders. A Trustee may be
removed at any meeting of shareholders by a vote of a majority of the Fund's
shareholders.
TRANSFER AGENT AND DIVIDEND-PAYING AGENT. Reserve Tax-Exempt Trust acts as its
own transfer agent and dividend-paying agent.
HOW TO BUY SHARES
METHOD OF PAYMENT. The minimum initial investment is $1,000 with no minimum
subsequent investments (denominated in U.S. dollars). An initial purchase must
be accompanied by an Application or equivalent information. For clients of
certain broker-dealers and financial institutions ("Firms"), shares may be
purchased directly through such Firms. You can buy shares of the Fund each
Business
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<PAGE> 36
Day at the net asset value determined after receipt by the Fund of a properly
completed order and payment in Federal Funds (member bank deposits with the
Federal Reserve Bank). Payments must be made:
- By check (drawn on a U.S. bank) payable to The Reserve Funds, 810 Seventh
Avenue, New York, NY 10019-5868. You must include your account number (or
Taxpayer Identification Number) on the "pay to the order of" line for each
check made payable to The Reserve Funds or within the endorsement for each
check endorsed to The Reserve Funds.
- By wire -- Prior to calling your bank, call the Fund for specific
instructions at 800-637-1700 or the Firm from which you received this
Prospectus.
Checks and wires which do not correctly identify the account to be credited
may be returned or delay the purchase of shares. If you do not specify the Fund
you wish to invest in, all money sent will be invested in The Reserve U.S.
Government Fund. Because the Fund must pay for its securities purchases on the
same day in Federal Funds, only Federal Funds wires and checks drawn on the
Fund's bank are eligible for entry as of the business day received. For Federal
Funds wires to be eligible for same-day order entry, the Fund must be notified
before 11:00 AM (New York time) of the amount to be transmitted and the account
to be credited. Payment by check not immediately convertible into Federal Funds
will be entered as of the Business Day when covering Federal Funds are received
or bank checks are converted into Federal Funds. This usually occurs within two
(2) Business Days, but may take longer. Checks delivered to the Fund's offices
after 11:00 AM will be considered received the next Business Day. A fee will be
charged if any check used for investment in your account does not clear.
Any monies which cannot be credited to an account by the end of the business
day following that on which Federal Funds become available will be returned as
promptly as possible to the sender or, if this cannot be readily determined, to
the bank from which they came or were drawn. The Fund reserves the right, with
respect to any person or class of persons, under certain circumstances to waive
investment minimums and redemption requirements. The Fund also reserves the
right to suspend the offering of shares from time to time and to reject any
purchase order for any reason. The Fund will only accept purchase checks in
excess of $100 which are payable to The Reserve Funds or payable to the
shareholder/payee of the check and endorsed to The Reserve Funds. The Fund does
not accept travelers checks.
RESERVE AUTOMATIC ASSET-BUILDER PLAN. If you have an account balance of $5,000
or more, you may purchase shares of the Fund ($25 minimum) from a checking, NOW,
or bank money market deposit account or from a U.S. government distribution ($25
minimum) such as Social Security, federal salary, or certain veterans' benefits,
or other payments from the federal government. Call the Funds at 800-637-1700
for an application.
NET ASSET VALUE. Shares are sold to the public at net asset value ("NAV") which
is calculated at the close of each Business Day (normally 4:00 PM New York time)
by taking the sum of the value of the Fund's investments (amortized cost value
is used for this purpose) and any cash or other assets, subtracting liabilities
and dividing by the total number of shares outstanding. A "Business Day" is
Monday through Friday exclusive of New Year's Day, Martin Luther King, Jr. Day,
President's Day, Good Friday, Memorial Day (observed), Independence Day, Labor
Day, Columbus Day and Veterans' Day, Thanksgiving Day, Christmas Day, days the
New York Stock Exchange ("NYSE") is closed for trading and regional bank
holidays in New York State. It is the policy of the Fund to seek to maintain a
stable NAV of $1.00 per share although this share price is not guaranteed.
DISTRIBUTORS. The Distributors of the Fund are Resrv Partners, Inc., 810
Seventh Avenue, New York, NY 10019-5868, which is a wholly-owned subsidiary of
the Adviser and Pacific Global Fund Distributors, Incorporated, 206 North
Jackson Street, Suite 201, Glendale, CA 91206.
EXCHANGE PRIVILEGE. The shares offered by this Prospectus may be exchanged for
shares in other Reserve money market funds at NAV. Customers of some Firms may
exchange shares of the Fund for shares of certain equity and bond funds where a
sales load normally applies. A waiver of the sales load may apply if the shares
being exchanged were acquired: (a) by a previous exchange from shares of a fund
purchased with a sales load, or (b) through investments of dividends or
distributions paid with respect to the foregoing category of shares. Exchanges
of shares of one fund for another may be a taxable event and may result in a
gain or loss for federal income tax purposes. The exchange privilege may be
modified or terminated at any time, or from time to time, upon 60 days' notice
to shareholders. Shares to be acquired in an exchange must be registered for
sale in the investor's state. The exchange privilege described under this
heading may not be available to clients of some Firms and some Firms may impose
conditions on their clients which are different from those described in this
Prospectus.
DISTRIBUTION AND SERVICE PLAN. Accounts may be opened through brokers,
financial intermediaries and institutions ("Firms"), some of which participate
in the Fund's Plan of Distribution ("Plan"). Under Rule 12b-1 of the 1940 Act,
the Fund makes assistance payments at an annual rate of 0.20% of net assets,
substantially all of which are paid to those Firms for distribution assistance
and administrative services provided to the Fund. The Adviser is required by the
Plan to pay an equivalent amount and may, at its discretion, pay additional
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amounts based upon assets committed to the Fund by such Firms. The Plan does not
permit the carrying over of payments from year to year. The Adviser also
reimburses Firms for a portion of their costs for advertising and marketing of
the Fund. All such arrangements are designed to facilitate the sale of the
Fund's shares.
CLIENTS OF FIRMS. Firms provide varying arrangements for their clients with
respect to the purchase and redemption of the Fund's shares and may arrange with
their clients for other investment or administrative services. Firms are
responsible for the prompt transmission of purchase and redemption orders. Some
Firms which utilize a centralized purchase method for shares, may have an
earlier cut-off for purchase orders than stated above and may establish higher
minimum investment requirements than set forth above. Some Firms may
independently establish and charge additional fees to their clients for their
services, which would reduce their clients' yield or return. Firms may also hold
shares in nominee or street name on behalf of their clients. In such instances,
the Fund's transfer agents will have no information with respect to or control
over the accounts of specific shareholders. Such shareholders may obtain access
to their accounts and information about their accounts only from their Firm.
Some Firms may receive compensation for recordkeeping and other services
relating to these nominee accounts. In addition, certain privileges with respect
to the purchase and redemption of shares (such as check writing redemptions) or
the reinvestment of dividends may not be available through such Firms or may
only be available subject to certain conditions and limitations. Some Firms may
participate in a program allowing them access to their clients' accounts for
servicing including, without limitation, changes of registration and
dividend-payees and may perform functions such as generation of confirmations
and periodic statements and disbursement of cash dividends. The Prospectus
should be read in connection with such Firm's material regarding its fees and
services.
SHARES OF BENEFICIAL INTEREST
Reserve Tax-Exempt Trust ("Trust") was organized as a Massachusetts business
trust on January 25,1983 and is an open-end management investment company
commonly known as a mutual fund. At the date of this Prospectus, there were
eight (8) separate series authorized and outstanding. Additional series may be
added in the future by the Board of Trustees. The Trust is authorized to issue
an unlimited number of shares of beneficial interest which may be issued in any
number of series. Shares issued will be fully paid and non-assessable and will
have no preemptive rights. The shareholders of the Trust are entitled to a full
vote for each full share held (and fractional votes for fractional shares) and
have equal rights with respect to earnings, dividends, redemptions and in the
net assets of their series upon liquidation. The Trustees do not intend to hold
annual meetings but will call such special meetings of shareholders as may be
required under the 1940 Act (e.g., to approve a new investment advisory
agreement or change the fundamental investment policies) or by the Declaration
of Trust.
Under Massachusetts law, the shareholders and trustees of a business trust
may, in certain circumstances, be personally liable for the trust's obligations
to third parties unless, as in this instance, the Declaration of Trust provides,
in substance, that no shareholder or Trustee shall be personally liable for the
Trust's, and each investment portfolio's obligations to third parties, and
requires that every written contract made by the Trust or the Fund contain a
provision to that effect. The Declaration of Trust also requires the Trust to
indemnify its shareholders and Trustees against such liabilities and any related
claims or expenses.
DAILY DIVIDENDS
The Fund declares dividends each Business Day. Dividends are distributed
daily as additional shares to shareholder accounts except for shareholders who
elect in writing to receive cash dividends, in which case monthly dividend
checks are sent to the shareholder.
TAXES
To maintain its regulated investment company status for federal income tax
purposes, the Fund intends to satisfy certain requirements imposed by the
Internal Revenue Code, so as to avoid any federal income or excise tax
liability. Dividends derived from the interest earned on Municipal Obligations
and designated by the Fund as "exempt interest dividends" are not subject to
federal income taxes. Dividends paid out of the Fund's investment company
taxable income (including dividends, interest and net short-term capital gains)
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 (the
excess of net long-term capital gains over net short-term capital losses), if
any, designated as capital gain dividends are taxable to individual shareholders
at the applicable 20% or 28% capital gains rate, regardless of how long the
shareholder has held the Fund's shares. Dividends are taxable to shareholders in
the same manner whether received in cash or reinvested in additional Fund
shares.
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A distribution 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. 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.
Shareholders are advised to retain all statements to maintain accurate
records of their investments. If any dividends are not exempt from federal,
state or local taxes, shareholders will be advised of the percentage by February
of the following year. Shareholders should consult their tax advisers regarding
specific questions as to federal, state or local taxes.
Further information relating to tax consequences is contained in the SAI.
REDEMPTIONS
TIME AND METHOD OF REDEMPTION. Shares of the Fund are redeemed at their NAV
determined after receipt by the Fund of a request in proper form. The Fund
usually transmits payment the same day when requests are received before 11:00
AM (New York time) and the next day for requests received after 11:00 AM.
However, this is not always possible and transmission of redemption proceeds may
be delayed up to seven (7) days. Orders received after 11:00 AM are not
processed until the next business day to enable shareholders to receive
additional dividends. Payment will normally be made by check or bank transfer.
Shares do not earn dividends on the day a redemption is effected, regardless of
the time received.
WRITTEN AND TELEPHONE REDEMPTION REQUESTS. The Fund strongly suggests (but does
not require) that each redemption, written or by telephone, be at least $1,000,
except for redemptions which are intended to liquidate the account. A
shareholder will be charged $2 for redemption checks issued for less than $100.
Upon request, redemptions will be made by bank wire, however, wire redemptions
of less than $10,000 will be charged a fee (currently $10). The Fund assumes no
responsibility for delays in the receipt of wired or mailed funds. The use of a
predesignated financial institution, such as a savings bank, credit union or
savings and loan association, which is not a member of the Federal Reserve wire
system could cause such a delay. If the Fund has previously been advised in
writing of your brokerage or bank account, telephone requests will be accepted
by calling 800-637-1700. The Fund may be liable for any losses caused by its
failure to employ reasonable procedures. To reduce the risk of loss, proceeds of
telephone redemptions may be sent only to (1) the bank or brokerage account
designated by the shareholder on the Application or in a letter with the
signature(s) guaranteed; or (2) the address of record if all the conditions
listed below are met. To change the designated brokerage or bank account it is
necessary to contact the Firm through which shares of the Fund were purchased
or, if purchased directly from the Fund, it is necessary to send a written
request to the Fund with signature(s) guaranteed. Other redemption orders must
be in writing with the necessary signature(s) guaranteed by a domestic
commercial bank; a domestic trust company; a domestic savings bank, credit union
or savings association; or a member firm of a national securities exchange.
Guarantees from notaries public are unacceptable. The Fund will waive the
signature guarantee requirement on a redemption request once every thirty (30)
days if all of the following conditions apply: if the redemption check is (1)
for $5,000 or less; (2) payable to the shareholder(s) of record; and (3) mailed
to the shareholder(s) at the address of record. The requirement of a guaranteed
signature protects against an unauthorized person redeeming shares and obtaining
the redemption proceeds. Redemption instructions and election of the plans
described below may be made when your account is opened. Subsequent elections
and changes in instructions must be in writing with the signature(s) guaranteed.
Changes in registration or authorized signatories may require additional
documentation.
The Fund reserves the right to refuse a telephone redemption if it believes
it is advisable to do so. Procedures for telephone redemptions may be modified
or terminated by the Fund at any time. During times of drastic economic or
market conditions, shareholders may experience difficulty in contacting the Fund
by telephone to request a redemption or exchange of the Fund's shares. In such
cases, shareholders should consider using another method of redemption, such as
a written request or a redemption by check.
CHECKING, VISA AND ATM ACCESS. The Fund offers a comprehensive package of
services which enhance access to your account. By completing the Application or
a signature card (for existing accounts) and certain other documentation if the
owner of record is a fiduciary, corporation, partnership, trust or other
organization, you can write checks in any amount against your account.
Redemptions by check lengthen the time your money earns dividends, since
redemptions are not made until the check is processed by the Fund. Because of
this, you cannot write a check to completely liquidate your account, nor may a
check be presented for certification or immediate payment. Otherwise, you may
use your Reserve checking account as you would any checking account. Your checks
will be returned (bounced) and a fee charged if they are postdated, contain an
irregularity in the signature, amount or otherwise, or are written against
accounts with insufficient funds. All transaction activity, including check
redemptions, will be reported on your account statement. A fee will be charged
for providing check copies. Upon proper notice, the Fund may choose to impose a
fee if it deems a shareholder's actions
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<PAGE> 39
to be burdensome. Checking may not be available to clients of some Firms and a
Firm may establish its own minimum check amount. Reserve VISA cards provide
access to your Reserve balances and margin line for worldwide purchasing power
and cash at over 250,000 ATMs. For more information, call 800-637-1700.
STOP PAYMENTS. The Fund will honor stop payment requests on unpaid shareholder
checks provided they are advised of the correct check number, payee, check
amount and date. Stop payment requests received by the Fund by 2:00 PM (New York
time) in proper form will be effective the next business day. Oral stop payment
requests are effective for fourteen (14) calendar days, at which time they will
be canceled unless confirmed in writing. Written stop payment requests will
remain in effect for one year. A fee will be charged for this service.
AUTOMATIC WITHDRAWAL PLANS. If you have an account with a balance of at least
$5,000, you may elect in writing to participate in either of the following: (i)
an Income Distribution Plan providing for monthly, quarterly or annual payments
by redemption of shares from reinvested dividends or distributions paid to your
account during the preceding period; or (ii) a Fixed Amount Withdrawal Plan
providing for the automatic redemption of a sufficient number of shares of your
account to make a specified monthly, quarterly or annual payment of a fixed
amount. Changes to instructions must be in writing with signature(s) guaranteed.
In order for such payments to continue under either Plan, there must be a
minimum of $25 available from reinvested dividends or distributions. Payments
can be made to you or your designee. An application for the Automatic Withdrawal
Plans can be obtained from the Fund. The amount, frequency and recipient of the
payments may be changed by giving proper written notice to the Fund. The Fund
may impose a charge, modify or terminate any Automatic Withdrawal Plan at any
time after the participant has been duly notified. This privilege may not be
available to clients of some Firms or may be available subject to conditions or
limitations.
RESERVE AUTOMATIC TRANSFER PLAN. You may redeem Fund shares (minimum $100)
without charge by telephone if you have filed a separate Reserve Automatic
Transfer application with the Fund. The proceeds will be transferred between
your Fund account and the checking, NOW or bank money market deposit account (as
permitted) designated in the application. Only such an account maintained in a
domestic financial institution which is an Automated Clearing House member may
be so designated. Redemption proceeds will be on deposit in your account at the
Automated Clearing House member bank ordinarily two (2) Business Days after
receipt of the redemption request. The Fund may impose a charge, modify or
terminate this privilege at any time after the participant has been duly
notified. This privilege may not be available to clients of some Firms or may be
available subject to conditions or limitations.
REDEMPTIONS THROUGH BROKERS AND FINANCIAL INSTITUTIONS. Redemptions through
brokers and financial institutions may involve such Firms' own redemption
minimums, service fees, and other redemption requirements.
RESTRICTIONS. The right of redemption may be suspended or the date of payment
postponed for more than seven (7) days only(a) when the NYSE is closed (other
than for customary closings), (b) when, as determined by the SEC, trading on the
Exchange is restricted or an emergency exists making it not reasonably
practicable to dispose of securities owned by the Fund or for it to determine
fairly the value of its net assets, or (c) for such periods as the SEC may
permit. If shares of 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 generally take up to ten (10) Business Days.
Shareholder checks written against funds which are not yet considered collected
will be returned and a fee charged against the account. When a purchase is made
by wire and subsequently redeemed, the proceeds from such redemptions normally
will not be transmitted until two (2) Business Days after the purchase.
GENERAL INFORMATION
JOINT OWNERSHIP. When an account is registered in the name of one person or
another, for example a husband or wife, either person is entitled to redeem
shares in the account. The Fund assumes no responsibility to either joint owner
for actions taken by the other with respect to an account so registered. The
Application provides that persons so registering their account indemnify and
hold the Fund harmless for actions taken by either party.
REPORTS AND STATEMENTS. Shareholders receive an annual report containing
audited financial statements and an unaudited semi-annual report. A statement is
sent to each shareholder at least quarterly. Shareholders who are clients of
some Firms will receive a statement combining transactions in Fund shares with
statements covering other brokerage or mutual fund accounts.
SMALL BALANCES. Because of the expense of maintaining accounts with small
balances (less than $1,000), the Fund may either levy a monthly charge
(currently $5) or redeem the account and remit the proceeds. Some Firms may
establish variations of minimum balances and fee amounts if those variations are
approved by the Fund.
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RESERVE EASY ACCESS. Easy Access is The Reserve Funds' 24-hour toll-free
telephone service that lets customers use a touch-tone phone to obtain yields
and account balances. To use it, call 800-637-1700 and follow the instructions.
Clients may also access full account activity for the previous six months on the
Internet at www.reservefunds.com.
INQUIRIES. Shareholders should direct their inquiries to the Firm from which
they received this Prospectus or to the Fund.
SPECIAL SERVICES. The Fund reserves the right to charge shareholder accounts
for specific costs incurred in processing unusual transactions for shareholders.
Such transactions include, but are not limited to, stop payment requests, copies
of Fund redemption or shareholder checks, copies of statements and special
research services.
PERFORMANCE. The Fund may compare its performance to other income-producing
alternatives such as (i) money market funds (based on yields cited by IBC's
Money Fund Report and other industry publications); and (ii) various bank
products (based on average rates of bank and thrift institution certificates of
deposit, money market deposit accounts and NOW accounts as reported by various
industry publications). An investment in shares of the Fund is not insured by
the Federal Deposit Insurance Corporation.
Yield information is useful in reviewing the Fund's performance relative to
other funds that hold investments of similar quality. Because yields will
fluctuate, yield information may not provide a basis for comparison with bank
and thrift certificates of deposit which normally pay a fixed rate for a fixed
term and are subject to a penalty for withdrawals prior to maturity which will
reduce their return.
------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
------------------------
10
<PAGE> 41
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
statements of operations and of changes in net assets and financial highlights
present fairly, in all material respects, the financial position of Interstate
Tax-Exempt Fund (one of eight series constituting Reserve Tax-Exempt Trust) at
May 31, 1998, the results of its operations for the year then ended, the changes
in its net assets for each of the two years in the period 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, New York
July 24, 1998
11
<PAGE> 42
RESERVE TAX-EXEMPT TRUST--INTERSTATE 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>
ALABAMA -- .14%
Pell City IDA for General Signal Corporation, 3.90%(a).... 10/1/2000 $ 500 $ 503,378
ARIZONA -- 3.41%
Apache IDA for Tucson Electric Power Company Series 83B,
3.90%(a)................................................ 12/15/2018 4,900 4,908,921
Apache IDA for Tucson Electric Power Company Series 83A,
3.85%(a)................................................ 12/15/2018 2,000 2,003,641
Pima IDA PCR for Tucson Electric Project, 3.85%(a)........ 10/1/2022 5,100 5,117,151
CALIFORNIA -- 7.22%
Alameda School Finance Authority Series D, 3.55%(a)....... 7/1/2018 4,000 4,024,756
California School District Cash Reserves Program, 4.75%... 7/2/1998 2,000 2,088,403
Fremont Public Finance Authority for Family Resource
Center, 3.60%(a)........................................ 8/1/2028 500 501,577
Grand Terrace Community Redevelopment Agency, 4.40%(a).... 12/1/2011 5,800 5,818,234
Los Angeles USD TRAN, 4.50%............................... 6/30/1998 4,900 5,104,805
San Bernadino HFR Alta Park Project, 4.40%(a)............. 5/1/2006 1,400 1,405,234
San Francisco Bayside Village Series 85D, 4.20%(a)........ 12/1/2005 6,000 6,044,642
Santa Clara HFA for El Camino Hospital District Series A,
3.60%(a)................................................ 8/1/2015 500 501,557
COLORADO -- 3.17%
Englewood HCF for SW Medical Professional Ltd. Series 85,
4.20%(a)................................................ 12/1/2010 1,450 1,454,171
Jefferson Country IDR for S.W. Medical Project,
4.20%(a)................................................ 11/1/2010 2,350 2,356,760
Eagle Revenue Bonds for Smith Creek Metro District,
3.75%(a)................................................ 10/1/2035 6,700 6,744,128
Wheat Ridge IDA for Pearse Electronics Inc. Project,
4.25%(a)................................................ 6/1/1999 625 638,281
CONNECTICUT -- 2.93%
Connecticut DAI for Allen Group Inc., 3.90%(a)............ 2/1/2013 1,000 1,003,312
Connecticut Development Authority HCR for Independent
Living Project, 3.70%(a)................................ 7/1/2015 1,200 1,203,738
Connecticut Development Authority PCR for Western
Massachusetts Electric Co. Series 1993A, 3.70%(a)....... 9/1/2028 900 902,853
Connecticut HEF for Yale University Series T, 3.70%(a).... 7/1/2029 1,000 1,003,241
Connecticut State GOB Series B, 3.75%(a).................. 5/15/2014 1,500 1,504,839
Hartford Redevelopment Agency MHR for Underwood Towers
Project, 3.75%(a)....................................... 6/1/2020 2,000 2,006,433
Sprague BAN, 4.05%........................................ 9/4/1998 2,630 2,711,234
DISTRICT OF COLUMBIA -- 1.51%
Washington, D.C. American University, 3.95%(a)............ 10/1/2015 3,065 3,075,198
Washington, D.C. Housing Finance Agency MHR for Chastleton
Development Project, 3.90%(a)........................... 7/1/2027 2,200 2,235,790
FLORIDA -- 4.41%
Boca Raton IDA for Parking Garage Project, 4.075%(a)...... 12/1/2014 2,200 2,222,325
Broward MHR for Welleby Apartments Project, 3.60%(a)...... 12/1/2006 400 401,307
Dade County Hospital Revenue Bonds, 3.90%(a).............. 9/1/2025 300 300,816
Dade County IDA for Dolphin Stadium Project Series B,
3.90%(a)................................................ 1/1/2016 4,200 4,213,946
Duval County HFA for Lakes of Mayport Apartment Project,
3.95%(a)................................................ 12/1/2009 300 301,013
Gulf Breeze Series 85 A Revenue Bonds, 3.70%(a)........... 12/1/2015 10 10,033
Jacksonville Hospital Revenue Bonds for University Medical
Center, 4.25%(a)........................................ 2/1/2018 2,600 2,609,996
Jacksonville Hospital Revenue Bonds for University Medical
Center, 4.25%(a)........................................ 2/1/2019 3,400 3,413,071
Martin PCR for Florida Power & Light, 3.95%(a)............ 9/1/2024 2,000 2,006,370
University of North Florida HEF Capital Improvement
Project, 3.75%(a)....................................... 11/1/2024 100 100,332
GEORGIA -- 3.93%
Clayton County DAI for Rivers Edge Development,
3.80%(a)................................................ 8/1/2006 3,925 3,938,189
Elbert County Industrial Building Authority Revenue Bonds
for Seaboard Farms of Elberton, 3.90%(a)................ 7/1/2005 1,800 1,811,929
Hapeville IDA for Hapeville Hotel Partnership Project,
3.95%(a)................................................ 11/1/2015 600 601,904
Municipal Electric Authority, 3.85%(a).................... 1/1/2026 7,500 7,520,425
IOWA -- 2.73%
Buffalo IDA for Linwood Mining & Materials, 4.20%(a)...... 1/1/2000 805 807,872
</TABLE>
12
<PAGE> 43
RESERVE TAX-EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1998--(CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
----------------------- -------- -------------- --------
<S> <C> <C> <C>
IOWA -- (CONTINUED)
Iowa Finance Authority Revenue Bonds for Hospital Health
Care Systems Series B, 3.85%(a)......................... 7/1/2020 $3,400 $ 3,411,267
Iowa RAW Series A, 4.50%.................................. 6/26/1998 5,000 5,211,897
Polk County IDA for Convalescence Center Series 88,
3.95%(a)................................................ 1/1/2011 200 200,671
ILLINOIS -- 0.75%
Chicago O'Hare Airport Revenue Bonds for American
Airlines, 4%(a)......................................... 12/1/2017 100 100,321
Illinois HFA for Community Hospital Center, 3.75%(a)...... 10/1/2015 900 906,010
Streamwood IDA for Olde Church Centre Project, 3.90%(a)... 12/1/2014 1,635 1,640,588
INDIANA -- 2.94%
Indiana Muni Power Authority Revenue Bonds Series A,
3.95%(a)................................................ 1/1/2018 1,600 1,605,298
Tippecanoe County PCR for Caterpillar Inc., 3.90%(a)...... 11/1/2006 8,750 8,779,498
KANSAS -- 1.71%
Olathe GO Temp Notes Series A, 4.125%..................... 6/1/1999 6,000 6,042,882
KENTUCKY -- 3.04%
Lexington Fayette Residential Facilities Revenue Bonds for
Richmond Place Associate Project, 3.70%(a).............. 4/1/2015 1,100 1,106,783
Ohio County PCR for Big River Electric Corporation,
4.35%(a)................................................ 6/1/2013 4,000 4,084,745
Ohio County PCR for Big River Electric Corporation Project
Series 1985, 4.50%(a)................................... 10/1/2015 5,500 5,521,247
LOUISIANA -- 0.28%
Louisiana Public Facilities Authority W. Knighton Project,
3.95%(a)................................................ 9/1/2025 1,000 1,002,795
MARYLAND -- 2.42%
Baltimore IDA for Mayor and City Counsel Project,
4.50%(a)................................................ 8/1/2016 1,500 1,504,736
Maryland Health and Higher Education Pooled Project Series
85A, 3.85%(a)........................................... 4/1/2035 5,000 5,016,555
Montgomery County IDA for Info Systems and Network
Corporation, 3.90%(a)................................... 4/1/2014 500 501,656
Prince George County IDA for Frank Parsons Paper Co.,
4.05%(a)................................................ 1/1/2013 1,500 1,505,160
MASSACHUSETTS -- 7.06%
Clinton BAN, 4.25%........................................ 11/20/1998 5,000 5,120,082
Cohasset BAN, 4.15%....................................... 10/1/1998 2,000 2,056,987
Massachusetts GOB Series B, 3.80%(a)...................... 8/1/2015 1,800 1,805,938
Massachusetts HEF for Harvard University, 3.60%(a)........ 2/1/2016 600 601,899
Massachusetts HEF for Partners Health Care Systems,
3.75%(a)................................................ 7/1/2027 1,000 1,003,205
Massachusetts IFA for Gordon College Series 97,
3.70%(a)................................................ 12/1/2027 500 501,262
Massachusetts IFA for Governor Dummer Academy, 3.70%(a)... 7/1/2026 1,200 1,203,018
Massachusetts IFA for Milton Academy, 4%(a)............... 3/1/2027 1,000 1,003,397
Massachusetts Water Resource Authority, 3.75%(a).......... 4/1/2028 2,200 2,207,052
Massachusetts Muni Wholesale Electric Co., 3.75%(a)....... 7/1/2019 700 702,244
Natick BAN, 4.25%......................................... 8/7/1998 5,000 5,175,994
Ware BAN, 4%.............................................. 12/18/1998 3,500 3,546,250
MICHIGAN -- 2.03%
Grand Rapids Water Supply System, 3.80%(a)................ 1/1/2020 1,700 1,724,308
Jackson EDC for Thrifty Leoni Inc. Project, 3.825%(a)..... 12/1/2014 2,700 2,726,055
Michigan Job Development Authority for Mazda Motor,
4.325%(a)............................................... 10/1/2008 2,000 2,007,718
Michigan Job Development Authority for Hitachi Metals,
4.10%(a)................................................ 1/1/2004 700 702,438
MINNESOTA -- 2.51%
Eagan MHR for Aspen Woods, 4.50%(a)....................... 1/1/2026 5,480 5,501,349
New Brighton Industrial Development Refunding Revenue
Bonds for Taylor Corporation Series 1988, 5.44%(a)...... 11/1/1999 321 322,027
New Hope Commercial Development Revenue Bonds for National
Beauty Project Series 1994, 4.10%(a).................... 5/1/2010 775 777,744
New Ulm Commercial Development Authority for Rob H.
Bradley Project, 4.10%(a)............................... 10/1/2011 2,250 2,257,967
MISSOURI -- 1.62%
Cole IDA for Modine Manufacturing Series 85, 4%(a)........ 12/1/2015 2,000 2,014,008
</TABLE>
13
<PAGE> 44
RESERVE TAX-EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1998--(CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
----------------------- -------- -------------- --------
<S> <C> <C> <C>
MISSOURI -- (CONTINUED)
Kansas IDA Hospital Revenue for Baptist Health Series 88A,
3.75%(a)................................................ 8/1/2018 $ 625 $ 629,174
Missouri State Environmental Improvement and Energy
Resources Authority Pollution Control RAW Series A,
3.95%(a)................................................ 6/1/2014 3,000 3,059,250
MONTANA -- .16%
Great Falls Commercial Development Revenue Bonds for
Liberty Development Partners Project, 4.05%(a).......... 12/1/2007 570 572,015
NEBRASKA -- 3.58%
Nebraska EFA for Creighton University Project, 3.85%(a)... 12/15/2012 7,500 7,520,712
Nuckolls IDA for Agrex Inc Project, 4.40%,(a)............. 2/1/2015 5,100 5,119,233
NEW JERSEY -- 3.82%
Atlantic City IDA for Improvement Loan Program,
3.65%(a)................................................ 7/1/2026 500 501,546
Jersey City School Promissory Note, 4.125%................ 3/5/1999 4,000 4,054,699
New Jersey EDA for Stolthaven Perth Amboy, 3.80%(a)....... 1/15/2018 500 501,529
New Jersey EDA for Public Service Electric and Gas Series
A, 3.75%(a)............................................. 9/1/2012 200 200,634
New Jersey EDA for Volvo of America Corp., 4.246%(a)...... 12/1/2004 1,300 1,313,131
New Jersey Sports Expo Authority Series C, 3.65%(a)....... 9/1/2024 1,600 1,614,058
New Jersey Turnpike Authority Series D, 3.75%(a).......... 1/1/2018 800 810,615
North Arlington BAN, 4.25%................................ 9/11/1998 2,000 2,041,677
Rutgers University GOB, 7%(a)............................. 5/1/2019 1,350 1,423,973
Trenton School Temporary Note, 3.70%...................... 3/10/1999 1,000 1,009,302
NEW YORK -- 8.22%
Brentwood USD TAN, 4.25%.................................. 6/30/1998 4,000 4,152,845
New York City GOB Series A, 3.95%(a)...................... 8/1/2023 1,000 1,003,185
New York City GOB Series E5, 4%(a)........................ 8/1/2015 2,700 2,708,644
New York City GOB Series E5, 4%(a)........................ 8/1/2017 1,100 1,103,522
New York City GOB Series E5, 4%(a)........................ 8/1/2019 1,100 1,103,522
New York City GOB Series E2, 4%(a)........................ 8/1/2020 6,550 6,570,969
New York City GOB Series E2, 4%(a)........................ 8/1/2021 1,100 1,103,522
North Hempstead BAN, 4.10%................................ 10/29/1998 3,487 3,573,791
Oyster Bay BAN, 4%........................................ 4/30/1999 2,642 2,658,637
Rochester BAN, 3.75%...................................... 3/9/1999 5,000 5,049,313
NORTH DAKOTA -- .17%
Minot IDR for Finance Project, 4.20%(a)................... 12/1/2002 600 602,140
OHIO -- 5.38%
Brunswick IDA for Kinder-Care Learning Centers Project
Series A, 4.05%(a)...................................... 6/1/2002 325 326,122
Claremont Hospital Facilities Revenue for Mercy Health
Systems, 3.85%(a)....................................... 12/1/2021 900 902,974
Columbus ERD Electric Systems Revenue Bonds, 3.75%(a)..... 9/1/2009 800 802,548
Cuyahoga IDA for Allen Group Project, 3.85%(a)............ 12/1/2015 900 902,460
Cuyahoga Hospital Facilities Revenue for Cleveland Clinic,
3.90%(a)................................................ 1/1/2016 3,400 3,411,248
Cuyahoga IDA for Edgecomb Metals Co., 3.70%(a)............ 9/1/2009 900 908,282
Franklin County Industrial Development Refunding Revenue
Bonds for Kinder-Care Learning Centers Project Series A,
4.05%(a)................................................ 6/1/2002 1,080 1,083,728
Franklin County Hospital Revenue for US Health Corp Series
A, 3.90%(a)............................................. 12/1/2021 3,500 3,511,574
Lucas County HFR for Lutheran Homes Society Project,
3.90%(a)................................................ 11/1/2019 900 902,992
Mohoning Hospital Facilities Revenue for Forum Health
Group Series B, 3.90%(a)................................ 12/1/2028 2,800 2,809,259
Port Authority of Cincinnati and Hamilton Counties for
Kenwood Office Association, 3.95%(a).................... 9/1/2025 1,000 1,003,192
Sharonville IDA for Edgecomb Metals Inc., 3.70%(a)........ 11/1/2009 1,610 1,615,427
Toledo Special Obligation Assessment Notes, 3.90%......... 12/1/1998 800 802,645
OKLAHOMA -- 1.00%
Oklahoma IDA for Christian College, 4.625%(a)............. 7/1/2015 3,500 3,526,118
OREGON -- 1.14%
Medford HFA for Rogue Valley Health Services, 3.95%(a).... 10/1/2016 100 100,318
Portland MFR for South Park Project, 3.60%(a)............. 12/1/2011 3,900 3,912,683
</TABLE>
14
<PAGE> 45
RESERVE TAX-EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1998--(CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
----------------------- -------- -------------- --------
<S> <C> <C> <C>
PENNSYLVANIA -- 12.61%
Allegheny Hospital Development Authority for Allegheny
General Hospital Series B, 3.90%(a)..................... 9/1/2010 $5,500 $ 5,518,248
Allegheny University Project Series 85, 3.60%(a).......... 7/1/2015 400 402,534
Allegheny Hospital Development Authority for St. Francis
Health Systems, 3.90%(a)................................ 11/1/2027 500 501,658
Bucks IDA for Edgecomb Metals Co., 3.70%(a)............... 10/1/2009 530 533,494
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 1,569,228
Chester IDA for Archdiocese of Philadelphia, 4%(a)........ 7/1/2027 1,400 1,404,444
Clarion County IDA for Special Development Revenue Bonds
for Meritcare Project Series A, 3.90%(a)................ 12/1/2012 2,000 2,006,685
Dallastown Area School District GOB, 3.93%(a)............. 2/1/2018 2,000 2,006,708
Dauphin General Authority Revenue Bonds, 3.93%(a)......... 11/1/2017 100 100,335
Delaware IDA PCR for Philadelphia Electric Company,
3.95%(a)................................................ 8/1/2016 600 601,896
Delaware Valley Regional Finance Authority Revenue Bonds
Series 85D, 3.90%(a).................................... 12/1/2020 4,750 4,765,571
Emmans GOB Local Government Revenue Bonds, 3.95%(a)....... 3/1/2024 2,400 2,408,002
Emmans GOB Local Government Revenue Bonds, 3.80%(a)....... 12/1/2028 5,000 5,016,486
Mercersburg General Purpose Authority, 3.85%(a)........... 11/1/2027 955 957,656
Northeastern HEF Wyoming Valley HCS Revenue Bonds,
3.85%(a)................................................ 1/1/2024 500 501,652
Pennsylvania COP, 4.25%................................... 7/1/1998 1,000 1,017,728
Pennsylvania Higher Education for Kings College Series B4,
4.50%(a)................................................ 11/1/2002 3,800 3,824,033
Philadelphia MHR for Harbor View Tower Project,
4.50%(a)................................................ 11/1/2027 3,500 3,512,835
Philadelphia Hospital Authority for Children's Hospital,
4%(a)................................................... 3/1/2027 300 300,960
Philadelphia TRAN, 4.50%.................................. 6/30/1998 1,500 1,562,340
Philadelphia School District TRAN, 4.50%.................. 6/30/1998 1,500 1,562,340
Philadelphia Redevelopment Authority for Multifamily Court
Project, 3.75%(a)....................................... 6/1/2025 4,425 4,439,439
PUERTO RICO -- 0.29%
Puerto Rico Electric Power Authority Series 11,
3.85%(a)................................................ 7/1/2022 1,000 1,014,325
SOUTH CAROLINA -- 0.65%
South Carolina HFA for Waverly Place Project, 3.80%(a).... 11/1/2007 2,270 2,277,608
TENNESSEE -- 1.92%
Chattanooga IDA for Baylor School Project, 3.90%(a)....... 11/1/2016 375 376,244
Chattanooga IDA for Erlanger Medical Center, 4%(a)........ 10/1/2017 500 501,605
Clarksville Public Building Authority for Muni Bond Fund,
3.90%(a)................................................ 11/1/2027 5,000 5,016,630
Franklin HEF for Franklin Health Care Center, 4.40%(a).... 6/1/2005 865 868,232
TEXAS -- 1.54%
Harris HCF for Greater Houston Project, 3.85%(a).......... 11/1/2025 2,700 2,709,080
Texas Small Business IDC Public Access Project,
3.95%(a)................................................ 7/1/2026 2,700 2,707,468
UTAH -- 1.56%
Salt Lake City IDR for Parkview Plaza Project, 3.95%(a)... 12/1/2014 5,475 5,490,269
WASHINGTON -- 0.77%
Port of Seattle DAI for Douglas Management Corporation,
3.95%(a)................................................ 12/1/2005 2,700 2,709,239
WISCONSIN -- 2.80%
Green Bay IDA for St. Mary Cement Company Ltd., 4%(a)..... 11/1/2000 3,500 3,509,939
Mukwonago School District TRAN, 4.12%..................... 8/28/1998 5,150 5,316,563
Wisconsin GOB, 6.50%...................................... 5/1/1999 1,000 1,039,882
</TABLE>
15
<PAGE> 46
RESERVE TAX-EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1998--(CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
----------------------- -------- -------------- --------
<S> <C> <C> <C>
WYOMING -- 0.51%
Sweetwater IDA for Pacific Corp Project Series A,
3.60%(a)................................................ 7/1/2015 $1,800 $ 1,805,817
------------
Total Interstate Tax-Exempt 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 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:
<TABLE>
<S> <C> <C>
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
RAW -- Revenue Anticipation Warrants
USD -- Unified School District Bonds
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE> 47
RESERVE TAX-EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND
STATEMENT OF OPERATIONS
YEAR ENDED MAY 31, 1998
<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.
17
<PAGE> 48
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.
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.
18
<PAGE> 49
RESERVE TAX EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND ("TRUST")
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. MANAGEMENT'S USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the dates of
the financial statements and the reported amounts of income and expenses
during the reporting periods. Actual results could differ from those
estimates.
6. COMPONENTS OF NET ASSETS
At 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 Fund are exempt interest
dividends for Federal tax purposes.
------------------------
19
<PAGE> 50
[CAPTION]
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
PAGE
---
<S> <C>
Shareholder Expenses............................ 2
Financial Highlights............................ 3
Yield........................................... 3
Investment Objective and Policies............... 3
Management...................................... 5
How to Buy Shares............................... 5
Shares of Beneficial Interest................... 7
Daily Dividends................................. 7
Taxes........................................... 7
Redemptions..................................... 8
General Information............................. 9
Report of Independent Accountants............... 11
Financial Statements............................ 12
Investors are advised to read and retain
this Prospectus for future reference.
</TABLE>
Founders of
"America's First
Money Fund"
810 Seventh Avenue, New York, NY 10019-5868
GENERAL INFORMATION AND 24 HOUR YIELD AND BALANCE INFORMATION
800-637-1700 M www.reservefunds.com
Distribution -- Resrv Partners, Inc.
7/98
Founders of
"America's First
Money Fund"
-------------------------------------------------------------------------
----------
-------------------------------------------------------------------------
----------
INTERSTATE TAX-EXEMPT FUND
<PAGE> 51
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 OF CONTENTS PAGE
----------------- ----
Investment Objective and Policies.........................................
Trustees and Executive Officers...........................................
Investment Management, Distribution, Service and Custodian Agreements.....
Portfolio Turnover, Transaction Charges and Allocation....................
Shares of Beneficial Interest.............................................
Purchase, Redemption and Pricing of Shares................................
Distributions and Taxes...................................................
Fund Yield................................................................
Reserve Cash Performance Account..........................................
Municipal Obligations.....................................................
Ratings...................................................................
Risk Factors of Concentrating in California...............................
Risk Factors of Concentrating in Connecticut..............................
Risk Factors of Concentrating in Florida..................................
Risk Factors of Concentrating in Massachusetts............................
Risk Factors of Concentrating in New Jersey...............................
Risk Factors of Concentrating in New York.................................
Risk Factors of Concentrating in Ohio.....................................
Risk Factors of Concentrating in Pennsylvania.............................
Financial Statements......................................................
Report of Independent Accountants.........................................
1
<PAGE> 52
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 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:
2
<PAGE> 53
(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> 54
+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.
PAT A. COLLETTI, 39, Controller, 810 Seventh Avenue, New York, NY
10019.
Mr. Colletti has been Controller of RF, RIT, RNYTET, RTET since 1989
and RPES since 1994.
- ----------
+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>
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM FUND AND FUND COMPLEX
NAME OF TRUSTEE FROM FUND (4 ADDITIONAL TRUSTS) PAID TO 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> 55
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 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.
5
<PAGE> 56
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.
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.
6
<PAGE> 57
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 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.
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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.
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.
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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, 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.
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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.
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."
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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.
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.
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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.
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
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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
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
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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
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.
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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.
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%.
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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 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.
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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.
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
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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.
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.
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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.
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.
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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.
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.
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There can be no assurance that general economic difficulties or the
financial circumstances of Massachusetts or its political subdivisions will not
adversely affect the ability of Massachusetts issuers or obligors of State,
municipal and public authority obligations to meet those obligations.
RISK FACTORS OF CONCENTRATING IN 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.
21
<PAGE> 72
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 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.
22
<PAGE> 73
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 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
23
<PAGE> 74
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 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.
24
<PAGE> 75
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., 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
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<PAGE> 76
$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.
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<PAGE> 77
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>
27
<PAGE> 78
<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>
- -------------------
SEE NOTES TO FINANCIAL STATEMENTS
28
<PAGE> 79
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
</TABLE>
29
<PAGE> 80
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ----------------------- ---- ------------- --------
<S> <C> <C> <C>
Orange County HFA for Lantern Pines Apartments, 3.50% (a) 12/1/2027 1,000 1,008,721
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>
- --------------------
SEE NOTES TO FINANCIAL STATEMENTS.
30
<PAGE> 81
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
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
</TABLE>
31
<PAGE> 82
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ----------------------- ---- ------------- --------
<S> <C> <C> <C>
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 ============
Beneficial interest of $.001 par value outstanding
</TABLE>
- ---------------
SEE NOTES TO FINANCIAL STATEMENTS.
32
<PAGE> 83
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>
33
<PAGE> 84
<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>
SEE NOTES TO FINANCIAL STATEMENTS.
34
<PAGE> 85
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
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
</TABLE>
35
<PAGE> 86
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ----------------------- ---- ------------- --------
<S> <C> <C> <C>
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.
36
<PAGE> 87
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
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.
37
<PAGE> 88
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.
38
<PAGE> 89
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>
39
<PAGE> 90
(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 - 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
SEE NOTES TO FINANCIAL STATEMENTS.
40
<PAGE> 91
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.
41
<PAGE> 92
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.
SEE NOTES TO FINANCIAL STATEMENTS.
42
<PAGE> 93
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
============= =============
</TABLE>
<TABLE>
<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>
SEE NOTES TO FINANCIAL STATEMENTS.
43
<PAGE> 94
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
------------ ------------ ------------ ------------
INCREASE (DECREASE) IN NET ASSET
FROM INVESTMENT OPERATIONS:
Net investment income paid to
<S> <C> <C> <C> <C>
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>
SEE NOTES TO FINANCIAL STATEMENTS.
44
<PAGE> 95
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>
SEE NOTES TO FINANCIAL STATEMENTS.
45
<PAGE> 96
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.
46
<PAGE> 97
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.
47
<PAGE> 98
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)
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
=============== ============== ============== ==============
</TABLE>
<TABLE>
<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.
---------------------
48
<PAGE> 99
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
-------------------------------------------------------------------------
NEW YORK TAX-EXEMPT FUND 1998 1997 1996 1995 1994 1993
- ------------------------ ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
-------- -------- -------- -------- -------- --------
Income from investment operations .0363 .0352 .0381 .0352 .0249 .0281
Expenses .0095 .0105 .0105 .0099 .0099 .0103
-------- -------- -------- -------- -------- --------
Net investment income (1) .0268 .0247 .0276 .0253 .0150 .0178
Dividends from net investment income (1) (.0268) (.0247) (.0276) (.0253) (.0150) (.0178)
-------- -------- -------- -------- -------- --------
Net asset value, end of year $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
======== ======== ======== ======== ======== ========
Total Return 2.68% 2.47% 2.76% 2.53% 1.50% 1.78%
RATIOS/SUPPLEMENTAL DATA
Net assets in thousands,
end of year 171,212 153,180 125,454 152,906 148,387 149,785
Ratio of expenses to average
net assets .94% 1.04% 1.04% .98% .98% 1.02%
Ratio of net investment income
to average net assets 2.63% 2.43% 2.72% 2.48% 1.48% 1.76%
</TABLE>
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
-----------------------------------------------
NEW YORK TAX-EXEMPT FUND 1992 1991 1990 1989
- ------------------------ ---- ---- ---- ----
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
-------- -------- -------- --------
Income from investment operations .0421 .0563 .0616 .0600
Expenses .0104 .0105 .0100 .0103
-------- -------- -------- --------
Net investment income (1) .0317 .0458 .0516 .0497
Dividends from net investment income (1) (.0317) (.0458) (.0516) (.0497)
-------- -------- -------- --------
Net asset value, end of year $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
======== ======== ======== ========
Total Return 3.17% 4.58% 5.16% 4.97%
RATIOS/SUPPLEMENTAL DATA
Net assets in thousands,
end of year 156,567 148,079 120,142 90,378
Ratio of expenses to average
net assets 1.03% 1.01% .98% 1.00%
Ratio of net investment income
to average net assets 3.09% 4.43% 5.02% 4.86%
</TABLE>
49
<PAGE> 100
FINANCIAL HIGHLIGHTS (CONTINUED)
<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 1993
- --------------------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
-------- -------- -------- -------- -------- --------
Income from investment operations .0358 .0341 .0368 .0352 .0250 .0269
Expenses .0091 .0098 .0102 .0098(3) .0086(3) .0087(3)
-------- -------- -------- -------- -------- --------
Net investment income (1) .0267 .0243 .0266 .0254 .0164 .0182
Dividends from net investment income (1) (.0267) (.0243) (.0266) (.0254) (.0164) (.0182)
-------- -------- -------- -------- -------- --------
Net asset value, end of year $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
======== ======== ======== ======== ======== ========
Total Return 2.67% 2.43% 2.66% 2.54% 1.64% 1.82%
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net assets in thousands, end of year 36,787 33,497 34,801 26,626 128,693 157,115
Ratio of expenses to average
net assets .89% 0.97% 1.01% .89%(3) .85%(3) .86%(3)
Ratio of net investment income
to average net assets 2.64% 2.39% 2.61% 2.33% 1.62% 1.81%
</TABLE>
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
--------------------------------------------------------
CONNECTICUT TAX-EXEMPT FUND 1992 1991 1990 1989
- --------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
-------- -------- -------- --------
Income from investment operations .0400 .0534 .0615 .0604
Expenses .0091(3) .0086(3) .0083(3) .0086(3)
-------- -------- -------- --------
Net investment income (1) .0309 .0448 .0532 .0518
Dividends from net investment income (1) (.0309) (.0448) (.0532) (.0518)
-------- -------- -------- --------
Net asset value, end of year $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
======== ======== ======== ========
Total Return 3.09% 4.48% 5.32% 5.18%
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net assets in thousands, end of year 191,101 241,790 314,489 247,929
Ratio of expenses to average
net assets .90%(3) .85%(3) .81%(3) .84%(3)
Ratio of net investment income
to average net assets 3.05% 4.41% 5.17% 5.05%
</TABLE>
50
<PAGE> 101
FINANCIAL HIGHLIGHTS (CONTINUED)
<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 1993
- ----------------------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
-------- -------- -------- -------- -------- --------
Income from investment operations .0361 .0338 .0362 .0335 .0227 .0257
Expenses .0077 .0079(3) .0086(3) .0070(3) .0052(3) .0048(3)
-------- -------- -------- -------- -------- --------
Net investment income (1) .0284 .0259 .0276 .0265 .0175 .0209
Dividends from net investment income (1) (.0284) (.0259) (.0276) (.0265) (.0175) (.0209)
-------- -------- -------- -------- -------- --------
Net asset value, end of year $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
======== ======== ======== ======== ======== ========
Total Return 2.84% 2.59% 2.76% 2.65% 1.75% 2.09%
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net assets in thousands, end of year 25,383 13,035 8,955 10,169 14,824 13,305
Ratio of expenses to average net assets .75% .79%(3) .84%(3) .69%(3) .51%(3) .46%(3)
Ratio of net investment income to
average net assets 2.78% 2.58% 2.71% 2.60% 1.73% 2.04%
</TABLE>
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
----------------------------------------------------
JANUARY 22, 1990
(COMMENCEMENT OF
OPERATIONS) THROUGH
MASSACHUSETTS TAX-EXEMPT FUND 1992 1991 MAY 31, 1990
- ----------------------------- ---- ---- ------------
<S> <C> <C> <C>
Net asset value, beginning of year $ 1.0000 $ 1.0000 $ 1.0000
-------- -------- --------
Income from investment operations .0386 .0551 .0209
Expenses .0045(3) .0032(3) .0010
-------- -------- --------
Net investment income (1) .0341 .0519 .0199
Dividends from net investment income (1) (.0341) (.0519) (.0199)(4)
-------- -------- --------
Net asset value, end of year $ 1.0000 $ 1.0000 $ 1.0000
======== ======== ========
Total Return 3.41% 5.19% 5.59%(2)
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net assets in thousands, end of year 7,186 4,652 2,140
Ratio of expenses to average net assets .44%(3) .30%(3) .29%(2)
Ratio of net investment income to
average net assets 3.28% 4.79% 5.53%(2)
</TABLE>
51
<PAGE> 102
FINANCIAL HIGHLIGHTS (CONTINUED)
<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)
</TABLE>
<TABLE>
<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>
52
<PAGE> 103
FINANCIAL HIGHLIGHTS (CONTINUED)
<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.
53
<PAGE> 104
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
<PAGE> 105
THE INTERSTATE TAX-EXEMPT FUND
810 SEVENTH AVENUE, NEW YORK, N.Y. 10019-5868
212-977-9982 - 800-637-1700
--------------------------------------------
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.
TABLE OF CONTENTS PAGE
----------------- ----
Investment Objective and Policies..............................
Trustees and Executive Officers................................
Investment Management, Distribution and Custodian Agreements...
Portfolio Turnover, Transaction Charges and Allocation.........
Shares of Beneficial Interest..................................
Purchase, Redemption and Pricing of Shares.....................
Distributions and Taxes........................................
Fund Yield.....................................................
Reserve Cash Performance Account...............................
Municipal Obligations..........................................
Ratings........................................................
Financial Statements...........................................
Report of Independent Accountants..............................
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.
<PAGE> 106
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:
(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;
<PAGE> 107
(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").
+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.
<PAGE> 108
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.
PAT A. COLLETTI, 39, Controller, 810 Seventh Avenue, New York, NY
10019-5868.
Mr. Colletti has been Controller of RF, RIT, RTET, RNYTET and RPES
since 1994.
+ 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.
COMPENSATION TABLE
FOR FISCAL YEAR ENDED MAY 31, 1998
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM FUND AND FUND COMPLEX
NAME OF TRUSTEE, POSITION FROM FUNDS (4 ADDITIONAL TRUSTS) PAID TO TRUSTEE
- ------------------------- ---------- -------------------------------------
<S> <C> <C>
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
</TABLE>
<PAGE> 109
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 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")
<PAGE> 110
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.
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
<PAGE> 111
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 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.
<PAGE> 112
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 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.
<PAGE> 113
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 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
<PAGE> 114
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
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.
<PAGE> 115
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 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.
<PAGE> 116
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.
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
<PAGE> 117
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 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 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."
<PAGE> 118
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.
<PAGE> 119
RESERVE TAX-EXEMPT TRUST - INTERSTATE 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>
ALABAMA - .14%
Pell City IDA for General Signal Corporation, 3.90% (a) 10/1/2000 $ 500 $ 503,378
ARIZONA - 3.41%
Apache IDA for Tucson Electric Power Company Series 83B, 3.90% (a) 12/15/2018 4,900 4,908,921
Apache IDA for Tucson Electric Power Company Series 83A, 3.85% (a) 12/15/2018 2,000 2,003,641
Pima IDA PCR for Tucson Electric Project, 3.85% (a) 10/1/2022 5,100 5,117,151
CALIFORNIA - 7.22%
Alameda School Finance Authority Series D, 3.55% (a) 7/1/2018 4,000 4,024,756
California School District Cash Reserves Program, 4.75% 7/2/1998 2,000 2,088,403
Fremont Public Finance Authority for Family Resource Center, 3.60% (a) 8/1/2028 500 501,577
Grand Terrace Community Redevelopment Agency, 4.40% (a) 12/1/2011 5,800 5,818,234
Los Angeles USD TRAN, 4.50% 6/30/1998 4,900 5,104,805
San Bernadino HFR Alta Park Project, 4.40% (a) 5/1/2006 1,400 1,405,234
San Francisco Bayside Village Series 85D, 4.20% (a) 12/1/2005 6,000 6,044,642
Santa Clara HFA for El Camino Hospital District Series A, 3.60% (a) 8/1/2015 500 501,557
COLORADO - 3.17%
Englewood HCF for SW Medical Professional Ltd. Series 85, 4.20% (a) 12/1/2010 1,450 1,454,171
Jefferson Country IDR for S.W. Medical Project, 4.20% (a) 11/1/2010 2,350 2,356,760
Eagle Revenue Bonds for Smith Creek Metro District, 3.75% (a) 10/1/2035 6,700 6,744,128
Wheat Ridge IDA for Pearse Electronics Inc. Project, 4.25% (a) 6/1/1999 625 638,281
CONNECTICUT - 2.93%
Connecticut DAI for Allen Group Inc., 3.90% (a) 2/1/2013 1,000 1,003,312
Connecticut Develop. Authority HCR for Independent
Living Project, 3.70% (a) 7/1/2015 1,200 1,203,738
Connecticut Development Authority PCR for Western Massachusetts
Electric Co. Series 1993A, 3.70% (a) 9/1/2028 900 902,853
Connecticut HEF for Yale University Series T, 3.70% (a) 7/1/2029 1,000 1,003,241
Connecticut State GOB Series B, 3.75% (a) 5/15/2014 1,500 1,504,839
Hartford Redevelopment Agency MHR for Underwood Towers Project, 3.75% (a) 6/1/2020 2,000 2,006,433
Sprague BAN, 4.05% 9/4/1998 2,630 2,711,234
DISTRICT OF COLUMBIA - 1.51%
Washington, D.C. American University, 3.95% (a) 10/1/2015 3,065 3,075,198
Washington, D.C. Housing Finance Agency MHR for
Chastleton Development Project, 3.90% (a) 7/1/2027 2,200 2,235,790
</TABLE>
<PAGE> 120
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ----------------------- ---- ------------- --------
<S> <C> <C> <C>
FLORIDA - 4.41%
Boca Raton IDA for Parking Garage Project, 4.075% (a) 12/1/2014 2,200 2,222,325
Broward MHR for Welleby Apartments Project, 3.60% (a) 12/1/2006 400 401,307
Dade County Hospital Revenue Bonds, 3.85% (a) 3/1/2025 100 100,274
Dade County Hospital Revenue Bonds, 3.90% (a) 9/1/2025 200 200,542
Dade County IDA for Dolphin Stadium Project Series B, 3.90% (a) 1/1/2016 4,200 4,213,946
Duval County HFA for Lakes of Mayport Apartment Project, 3.95% (a) 12/1/2009 300 301,013
Gulf Breeze Series 85 A Revenue Bonds, 3.70% (a) 12/1/2015 10 10,033
Jacksonville Hospital Revenue Bonds for University Medical Center, 4.25% (a) 2/1/2018 2,600 2,609,996
Jacksonville Hospital Revenue Bonds for University Medical Center, 4.25% (a) 2/1/2019 3,400 3,413,071
Martin PCR for Florida Power & Light, 3.95% (a) 9/1/2024 2,000 2,006,370
University of North Florida HEF Capital Improvement Project, 3.75% (a) 11/1/2024 100 100,332
GEORGIA - 3.93%
Clayton County DAI for Rivers Edge Development, 3.80% (a) 8/1/2006 3,925 3,938,189
Elbert County Industrial Building Authority Revenue Bonds for
Seaboard Farms of Elberton, 3.90% (a) 7/1/2005 1,800 1,811,929
Hapeville IDA for Hapeville Hotel Partnership Project, 3.95% (a) 11/1/2015 600 601,904
Municipal Electric Authority, 3.85% (a) 1/1/2026 7,500 7,520,425
IOWA - 2.73%
Buffalo IDA for Linwood Mining & Materials, 4.20% (a) 1/1/2000 805 807,872
Iowa Finance Authority Revenue Bonds for Hospital Health
Care Systems Series B, 3.85% (a) 7/1/2020 3,400 3,411,267
Iowa RAW Series A, 4.50% 6/26/1998 5,000 5,211,897
Polk County IDA for Convalescene Center Series 88, 3.95% (a) 1/1/2011 200 200,671
ILLINOIS - 0.75%
Chicago O'Hare Airport Revenue Bonds for American Airlines, 4% (a) 12/1/2017 100 100,321
Illinois HFA for Community Hospital Center, 3.75% (a) 10/1/2015 900 906,010
Streamwood IDA for Olde Church Centre Project, 3.90% (a) 12/1/2014 1,635 1,640,588
INDIANA - 2.94%
Indiana Muni Power Authority Revenue Bonds Series A, 3.95% (a) 1/1/2018 1,600 1,605,298
Tippecanoe County PCR for Caterpillar Inc., 3.90% (a) 11/1/2006 8,750 8,779,498
KANSAS - 1.71%
Olathe GO Temp Notes Series A, 4.125% 6/1/1999 6,000 6,042,882
</TABLE>
<PAGE> 121
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ----------------------- ---- ------------- --------
<S> <C> <C> <C>
KENTUCKY - 3.04%
Lexington Fayette Residential Facilities Revenue Bonds for
Richmond Place Associate Project, 3.70% (a) 4/1/2015 1,100 1,106,783
Ohio County PCR for Big River Electric Corporation, 4.35% (a) 6/1/2013 4,000 4,084,745
Ohio County PCR for Big River Electric Corporation
Project Series 1985, 4.50%(a) 10/1/2015 5,500 5,521,247
LOUISIANA - 0.28%
Louisiana Public Facilities Authority W. Knighton Project, 3.95% (a) 9/1/2025 1,000 1,002,795
MARYLAND - 2.42%
Baltimore IDA for Mayor and City Counsel Project, 4.50% (a) 8/1/2016 1,500 1,504,736
Maryland Health and Higher Education Pooled Project Series 85A, 3.85% (a) 4/1/2035 5,000 5,016,555
Montgomery County IDA for Info Systems and Network Corporation, 3.90% (a) 4/1/2014 500 501,656
Prince George County IDA for Frank Parsons Paper Co., 4.05% (a) 1/1/2013 1,500 1,505,160
MASSACHUSETTS - 7.06%
Clinton BAN, 4.25% 11/20/1998 5,000 5,120,082
Cohasset BAN, 4.15% 10/1/1998 2,000 2,056,987
Massachusetts GOB Series B, 3.80% (a) 8/1/2015 1,800 1,805,938
Massachusetts HEF for Harvard University, 3.60% (a) 2/1/2016 600 601,899
Massachusetts HEF for Partners Health Care Systems, 3.75% (a) 7/1/2027 1,000 1,003,205
Massachusetts IFA for Gordon College Series 97, 3.70% (a) 12/1/2027 500 501,262
Massachusetts IFA for Governor Dummer Academy, 3.70% (a) 7/1/2026 1,200 1,203,018
Massachusetts IFA for Milton Academy, 4% (a) 3/1/2027 1,000 1,003,397
Massachusetts Water Resource Authority, 3.75% (a) 4/1/2028 2,200 2,207,052
Massachusetts Muni Wholesale Electric Co., 3.75% (a) 7/1/2019 700 702,244
Natick BAN, 4.25% 8/7/1998 5,000 5,175,994
Ware BAN, 4% 12/18/1998 3,500 3,546,250
MICHIGAN - 2.03%
Grand Rapids Water Supply System, 3.80% (a) 1/1/2020 1,700 1,724,308
Jackson EDC for Thrifty Leoni Inc. Project, 3.825% (a) 12/1/2014 2,700 2,726,055
Michigan Job Development Authority for Mazda Motor, 4.325% (a) 10/1/2008 2,000 2,007,718
Michigan Job Development Authority for Hitachi Metals, 4.10% (a) 1/1/2004 700 702,438
MINNESOTA - 2.51%
Eagan MHR for Aspen Woods, 4.50% (a) 1/1/2026 5,480 5,501,349
New Brighton Industrial Development Refunding Revenue Bonds
for Taylor Corporation Series 1988, 5.44% (a) 11/1/1999 321 322,027
</TABLE>
<PAGE> 122
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ----------------------- ---- ------------- --------
<S> <C> <C> <C>
MINNESOTA - (CONTINUED)
New Hope Commercial Development Revenue Bonds for National Beauty
Project Series 1994, 4.10% (a)
5/1/2010 775 777,744
New Ulm Commercial Development Authority for Rob H. Bradley
Project, 4.10% (a) 10/1/2011 2,250 2,257,967
MISSOURI - 1.62%
Cole IDA for Modine Manufacturing Series 85, 4% (a) 12/1/2015 2,000 2,014,008
Kansas IDA Hospital Revenue for Baptist Health Series 88A, 3.75% (a) 8/1/2018 625 629,174
Missouri State Environmental Improvement and Energy Resources Authority
Pollution Control RAW Series A, 3.95% (a) 6/1/2014 3,000 3,059,250
MONTANA - .16%
Great Falls Commercial Development Revenue Bonds for Liberty Development
Partners Project, 4.05% (a)
12/1/2007 570 572,015
NEBRASKA - 3.58%
Nebraska EFA for Creighton University Project, 3.85% (a) 12/15/2012 7,500 7,520,712
Nuckolls IDA for Agrex Inc Project, 4.40%, (a) 2/1/2015 5,100 5,119,233
NEW JERSEY - 3.82%
Atlantic City IDA for Improvement Loan Program, 3.65% (a) 7/1/2026 500 501,546
Jersey City School Promissory Note, 4.125% 3/5/1999 4,000 4,054,699
New Jersey EDA for Stolthaven Perth Amboy, 3.80% (a) 1/15/2018 500 501,529
New Jersey EDA for Public Service Electric and Gas Series A, 3.75% (a) 9/1/2012 200 200,634
New Jersey EDA for Volvo of America Corp., 4.246% (a) 12/1/2004 1,300 1,313,131
New Jersey Sports Expo Authority Series C, 3.65% (a) 9/1/2024 1,600 1,614,058
New Jersey Turnpike Authority Series D, 3.75% (a) 1/1/2018 800 810,615
North Arlington BAN, 4.25% 9/11/1998 2,000 2,041,677
Rutgers University GOB, 7% (a) 5/1/2019 1,350 1,423,973
Trenton School Temporary Note, 3.70% 3/10/1999 1,000 1,009,302
NEW YORK - 8.22%
Brentwood USD TAN, 4.25% 6/30/1998 4,000 4,152,845
New York City GOB Series A, 3.95% (a) 8/1/2023 1,000 1,003,185
New York City GOB Series E5, 4% (a) 8/1/2015 2,700 2,708,644
New York City GOB Series E5, 4% (a) 8/1/2017 1,100 1,103,522
New York City GOB Series E5, 4% (a) 8/1/2019 1,100 1,103,522
New York City GOB Series E2, 4% (a) 8/1/2020 6,550 6,570,969
New York City GOB Series E2, 4% (a) 8/1/2021 1,100 1,103,522
</TABLE>
<PAGE> 123
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ----------------------- ---- ------------- --------
<S> <C> <C> <C>
NEW YORK - (CONTINUED)
North Hempstead BAN, 4.10% 10/29/1998 3,487 3,573,791
Oyster Bay BAN, 4% 4/30/1999 2,642 2,658,637
Rochester BAN, 3.75% 3/9/1999 5,000 5,049,313
NORTH DAKOTA - .17%
Minot IDR for Finance Project, 4.20% (a) 12/1/2002 600 602,140
OHIO - 5.38%
Brunswick IDA for Kinder-Care Learning Centers Project Series A, 4.05% (a) 6/1/2002 325 326,122
Claremont Hospital Facilities Revenue for Mercy Health Systems, 3.85% (a) 12/1/2021 900 902,974
Columbus ERD Electric Systems Revenue Bonds, 3.75% (a) 9/1/2009 800 802,548
Cuyahoga IDA for Allen Group Project, 3.85% (a) 12/1/2015 900 902,460
Cuyahoga Hospital Facilities Revenue for Cleveland Clinic, 3.90% (a) 1/1/2016 3,400 3,411,248
Cuyahoga IDA for Edgecomb Metals Co., 3.70% (a) 9/1/2009 900 908,282
Franklin County Industrial Development Refunding Revenue Bonds for
Kinder-Care Learning Centers Project Series A, 4.05% (a) 6/1/2002 1,080 1,083,728
Franklin County Hospital Revenue for US Health Corp Series A, 3.90% (a) 12/1/2021 3,500 3,511,574
Lucas County HFR for Lutheran Homes Society Project, 3.90% (a) 11/1/2019 900 902,992
Mohoning Hospital Facilities Revenue for Forum Health Group Series B, 3.90% (a) 12/1/2028 2,800 2,809,259
Port Authority of Cincinnati and Hamilton Counties for Kenwood Office
Association, 3.95% (a) 9/1/2025 1,000 1,003,192
Sharonville IDA for Edgecomb Metals Inc., 3.70% (a) 11/1/2009 1,610 1,615,427
Toledo Special Obligation Assessment Notes, 3.90% 12/1/1998 800 802,645
OKLAHOMA - 1.00%
Oklahoma IDA for Christian College, 4.625% (a) 7/1/2015 3,500 3,526,118
OREGON - 1.14%
Medford HFA for Rogue Valley Health Services, 3.95% (a) 10/1/2016 100 100,318
Portland MFR for South Park Project, 3.60% (a) 12/1/2011 3,900 3,912,683
PENNSYLVANIA - 12.61%
Allegheny Hospital Development Authority for Allegheny General
Hospital Series B, 3.90% (a) 9/1/2010 5,500 5,518,248
Allegheny University Project Series 85, 3.60% (a) 7/1/2015 400 402,534
Allegheny Hospital Development Authority for St. Francis
Health Systems, 3.90% (a) 11/1/2027 500 501,658
Bucks IDA for Edgecomb Metals Co., 3.70% (a) 10/1/2009 530 533,494
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 1,569,228
Chester IDA for Archdiocese of Philadelphia, 4% (a) 7/1/2027 1,400 1,404,444
</TABLE>
<PAGE> 124
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ----------------------- ---- ------------- --------
<S> <C> <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 2,006,685
Dallastown Area School District GOB, 3.93% (a) 2/1/2018 2,000 2,006,708
Dauphin General Authority Revenue Bonds, 3.93% (a) 11/1/2017 100 100,335
Delaware IDA PCR for Philadelphia Electric Company, 3.95% (a) 8/1/2016 600 601,896
Delaware Valley Regional Finance Authority Revenue Bonds Series 85D, 3.90%(a) 12/1/2020 4,750 4,765,571
Emmans GOB Local Government Revenue Bonds, 3.95% (a) 3/1/2024 2,400 2,408,002
Emmans GOB Local Government Revenue Bonds, 3.80% (a) 12/1/2028 5,000 5,016,486
Mercersburg General Purpose Authority, 3.85% (a) 11/1/2027 955 957,656
Northeastern HEF Wyoming Valley HCS Revenue Bonds, 3.85% (a) 1/1/2024 500 501,652
Pennsylvania COP, 4.25% 7/1/1998 1,000 1,017,728
Pennsylvania Higher Education for Kings College Series B4, 4.50% (a) 11/1/2002 3,800 3,824,033
Philadelphia MHR for Harbor View Tower Project, 4.50% (a) 11/1/2027 3,500 3,512,835
Philadelphia Hospital Authority for Children's Hospital, 4% (a) 3/1/2027 300 300,960
Philadelphia TRAN, 4.50% 6/30/1998 1,500 1,562,340
Philadelphia School District TRAN, 4.50% 6/30/1998 1,500 1,562,340
Philadelphia Redevelopment Authority for Multifamily Court Project, 3.75% (a) 6/1/2025 4,425 4,439,439
PUERTO RICO - 0.29%
Puerto Rico Electric Power Authority Series 11, 3.85% (a) 7/1/2022 1,000 1,014,325
SOUTH CAROLINA - 0.65%
South Carolina HFA for Waverly Place Project, 3.80% (a) 11/1/2007 2,270 2,277,608
TENNESSEE -1.92%
Chattanooga IDA for Baylor School Project, 3.90% (a) 11/1/2016 375 376,244
Chattanooga IDA for Erlanger Medical Center, 4% (a) 10/1/2017 500 501,605
Clarksville Public Building Authority for Muni Bond Fund, 3.90% (a) 11/1/2027 5,000 5,016,630
Franklin HEF for Franklin Health Care Center, 4.40% (a) 6/1/2005 865 868,232
TEXAS - 1.54%
Harris HCF for Greater Houston Project, 3.85% (a) 11/1/2025 2,700 2,709,080
Texas Small Business IDC Public Access Project, 3.95% (a) 7/1/2026 2,700 2,707,468
UTAH - 1.56%
Salt Lake City IDR for Parkview Plaza Project, 3.95% (a) 12/1/2014 5,475 5,490,269
WASHINGTON - 0.77%
Port of Seattle DAI for Douglas Management Corporation, 3.95% (a) 12/1/2005 2,700 2,709,239
</TABLE>
<PAGE> 125
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ----------------------- ---- ------------- --------
<S> <C> <C> <C>
WISCONSIN - 2.80%
Green Bay IDA for St. Mary Cement Company Ltd., 4% (a) 11/1/2000 3,500 3,509,939
Mukwonago School District TRAN, 4.12% 8/28/1998 5,150 5,316,563
Wisconsin GOB, 6.50% 5/1/1999 1,000 1,039,882
WYOMING - 0.51%
Sweetwater IDA for Pacific Corp Project Series A, 3.60% (a) 7/1/2015 1,800 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.
<PAGE> 126
RESERVE TAX-EXEMPT TRUST-INTERSTATE TAX-EXEMPT FUND
STATEMENT OF OPERATIONS
YEAR ENDED MAY 31, 1998
<TABLE>
<CAPTION>
<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.
<PAGE> 127
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.
<PAGE> 128
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.
------------
<PAGE> 129
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
INTERSTATE TAX-EXEMPT FUND 1998 1997 1996 1995 1994 1993 1992 1991
- -------------------------- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $1.0000 $1.0000 $1.0000 1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- ------- ------- ------- -------
Income from investment operations .0378 .0361 .0390 .0368 .0268 .0312 .0455 .0599
Expenses .0099 .0105 .0105 .0103 .0103 .0104 .0106 .0105
------- ------- ------- ------- ------- ------- ------- -------
Net investment income (1) .0279 .0256 .0285 .0265 .0165 .0208 .0349 .0494
Dividends from net investment (.0279) (.0256) (.0285) (.0265) (.0165) (.0208 ) (.0349) (.0494)
------- ------- ------- ------- ------- ------- ------- -------
income (1)
Net asset value, end of year $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= ======= ======= ======= =======
Total return 2.79% 2.56% 2.85% 2.65% 1.65% 2.08 % 3.49% 4.94%
RATIOS/SUPPLEMENTAL DATA
Net assets in thousands, end of year 352,869 306,152 292,067 315,232 352,594 366,383 358,101 333,321
Ratio of expenses to average
net assets .97% 1.04% 1.04% 1.00% 1.02% 1.03 % 1.03% 1.03%
Ratio of net investment income
to average net assets 2.75% 2.52% 2.80% 2.59% 1.63% 2.06 % 3.41% 4.81%
</TABLE>
<TABLE>
<CAPTION>
INTERSTATE TAX-EXEMPT FUND 1990 1989
- -------------------------- ---- ----
<S> <C> <C>
Net asset value, beginning of year $1.0000 $1.0000
------- -------
Income from investment operations .0663 .0650
Expenses .0104 .0104
------- -------
Net investment income (1) .0559 .0546
Dividends from net investment (.0559) (.0546)
------- -------
income (1)
Net asset value, end of year $1.0000 $1.0000
======= =======
Total return 5.59% 5.46%
RATIOS/SUPPLEMENTAL DATA
Net assets in thousands, end of year 306,153 12,239
Ratio of expenses to average
net assets 1.01% 1.01%
Ratio of net investment income
to average net assets 5.43% 5.29%
</TABLE>
- ----------
(1) Based on compounding of daily dividend. Not indicative of future results.
<PAGE> 130
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
54
<PAGE> 131
RESERVE TAX-EXEMPT TRUST
PART C
Item 24. Financial Statements and Exhibits
(a) Financial Statements Included in Part A
(1) Financial Highlights
Financial Statements Included in Part A and Part B
(1) Statements of Net Assets at May 31, 1998
(2) Statements of Operations for the year ended May 31, 1998
(3) Statements of Changes in Net Assets for the years ended
May 31, 1997 and 1998
(4) Notes to Financial Statements
(5) Report of Independent Accountants.
(b) Exhibits
(1) Declaration of Trust was filed as an exhibit to Registrant's
Initial Registration Statement dated March 23, 1983*
(2) Bylaws were filed as an exhibit to Registrant's Initial
Registration Statement dated March 23, 1983.
Amendment No. 2 filed as an exhibit to Post-Effective
Amendment No. 15 dated July 31, 1990*
(3) Not Applicable
(4) Not Applicable
(5) Form of Investment Management Agreement filed as an Exhibit
to Post-Effective Amendment No. 14 dated November 1, 1989*
(6) Form of Distribution Agreement and Plan of Distribution
filed as an exhibit to Registrant's Pre-Effective
Amendment No. 1 dated July 22, 1983. Amendment to
Plan of Distribution filed as exhibit to
Post-Effective Amendment No. 11 dated August 1, 1988*
(7) Pension Plan of Reserve Management Corporation was filed as
an exhibit to Post-Effective Amendment No. 9 dated
September 30, 1986; Amendments to Pension Plan filed
as an exhibit to Post-Effective Amendment No. 45 of
The Reserve Fund (File No. 811-2033) dated July 31,
1989*
(8) Custodian Agreement with Chemical Bank filed as an exhibit
to Registrant's Initial Registration Statement dated
March 23, 1983*
(9) (a) Form of Service Agreement filed as an exhibit to
Post-Effective Amendment No. 14 dated November 1,
1989; Transfer Agent Agreement with First Wisconsin
Trust Company filed as an exhibit to Post-Effective
Amendment No. 15 dated July 31, 1990*
(10) Opinion of counsel**
(11) Consent of auditors**
(12) Not Applicable
(14) Not Applicable
(15) See item No. 6*
(16) Schedule of computation of each performance quotation
provided in Registration Statement
(17) Powers of Attorney**
(18) Not Applicable
- -----------------------
* Incorporated by reference
**Filed herewith
<PAGE> 132
Item 25. Persons Controlled by or Under Common Control with Registrant
Not Applicable
Item 26. Number of Holders of Securities
<TABLE>
<CAPTION>
Number of Record Holders
Title of Class at June 30, 1998
-------------- ------------------------
<S> <C>
Interstate Fund 12,016
Connecticut Tax-Exempt Fund 1,459
California Tax-Exempt Fund 1,200
Massachusetts Tax-Exempt Fund 314
New Jersey Tax-Exempt Fund 3,459
Florida Tax-Exempt Fund 415
Pennsylvania Tax-Exempt Fund 258
Ohio Tax-Exempt Fund 3
</TABLE>
Item 27. Indemnification
Each Trustee, officer, employee or agent of the Registrant, and any
person who has served at its request as a Director, Trustee, officer or
employee of another business entity, shall be entitled to be indemnified
by the Registrant to the fullest extent permitted by the laws of the
Commonwealth of Massachusetts, subject to the provisions of the
Investment Company Act of 1940 and the rules and regulations thereunder.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to Trustees, officers and controlling
persons of the Registrant pursuant to the Declaration of Trust or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of any expenses incurred or
paid by a Trustee, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is asserted by
such Trustee, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act
and will be governed the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser
<TABLE>
<CAPTION>
Name Position with the Adviser Other Businesses
- ---- ------------------------- ----------------
<S> <C> <C>
Henry B.R. Brown President, Treasurer and President, Treasurer and Director of
Director Director of Reserve Management
Corporation of the same address as the
Trust; Director and Treasurer of Transfer
Agent Inc. 5 Cornwall St., N.W., Leesburg,
Virginia 22075.
Bruce R. Bent Vice President, Secretary Vice President, Secretary and Director of
and Director Reserve Management Corporation and
Director of Resrv Partners, Inc. both of the
same address as the Trust.
</TABLE>
Item 29. Principal Underwriters
(a) Resrv Partners, Inc., a principal underwriter of the Registrant,
also acts as principal underwriter to The Reserve Fund, Reserve
Institutional Trust, Reserve New York Tax-Exempt Trust and Reserve
Private Equity Series.
<PAGE> 133
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address with Resrv Partners, Inc. with Registrant
- ------------------ -------------------------- ---------------------
<S> <C> <C>
Bruce R. Bent Chairman and Director President, Treasurer
810 Seventh Avenue & Trustee
New York, NY 10019
</TABLE>
(b) Mesirow Financial, Inc. also acts as a principal underwriter of Reserve
Tax-Exempt Trust.
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address with Mesirow Financial Inc. with Registrant
- ------------------ ---------------------------- ----------------------
<S> <C> <C>
Richard D. Laurer Managing Director None
Suite 110
101 S. Phillips
Sioux Falls, SD 57102
Lester A. Morris Director,
350 N. Clark Street Chief Executive Officer None
Chicago, IL 60610
Eve Slusarczyk Managing Director, None
350 N. Clark Street Chief Financial Officer
Chicago, IL 60610 and Assistant Secretary
Lawrence M. Cohen Managing Director None
350 N. Clark Street
Chicago, IL 60610
Norman M. Mesirow Managing Director None
350 N. Clark Street
Chicago, IL 60610
Richard S. Mesirow Managing Director None
350 N. Clark Street
Chicago, IL 60610
Myron Berkson Managing Director None
350 N. Clark Street
Chicago, IL 60610
Ruth C. Hannenberg Director, Managing None
350 N. Clark Street Director and Secretary
Chicago, IL 60610
Robert O. Ackerman Managing Director None
579 Central Avenue
Highland Park, IL 60035
James C. Tyree Director and None
350 N. Clark Street Chief Operating Officer
Chicago, IL 60610
</TABLE>
(c) Pacific Global Fund Distributors, Inc. ("Pacific Global") also acts as a
principal underwriter of Reserve Tax-Exempt Trust and Pacific Advisors
Fund Inc.
<PAGE> 134
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address with Pacific Global with Registrant
- ------------------- ------------------------ -------------------------
<S> <C> <C>
George A. Henning Chairman None
206 North Jackson Street
Suite 201
Glendale, CA 91206
Kathleen Scott President None
206 North Jackson Street
Suite 201
Glendale, CA 91206
Thomas H. Hanson Executive Vice President None
206 North Jackson Street
Suite 201
Glendale, CA 91206
Eileen P. Hannemann Financial Principal None
206 North Jackson Street
Suite 201
Glendale, CA 91206
</TABLE>
Item 30. Location of Accounts and Records
All records required to be maintained by Section 31(a) of the 1940
Act and the Rules promulgated thereunder are maintained at 810 Seventh Avenue,
New York, NY 10019 except those relating to receipts and deliveries of
securities, which are maintained by the Registrant's Custodian.
Item 31. Management Services
See "Investment Management, Distribution, Service and Custodian
Agreements" in Part B.
Item 32. Undertakings
Not Applicable
<PAGE> 135
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that this
Post-Effective Amendment to its Registration Statement meets all of the
requirements for effectiveness pursuant to Rule 485(b) under the Securities Act
of 1933 and Registrant has duly caused this Post-Effective Amendment No. 30 to
its Registration Statement to be signed on its behalf by the undersigned
thereunto duly authorized, in the City of New York and State of New York, on
the 31st day of July, 1998.
/s/ Bruce R. Bent
----------------------------------------
Bruce R. Bent, President
Attest:
/s/ MaryKathleen Foynes
- -----------------------------------------
MaryKathleen Foynes, Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 30 to its Registration Statement has been below
signed by the following persons in the capacities and on the dates indicated.
* Date 7/30/98
- ----------------------------------------------- -----------------
Bruce R. Bent, President, Treasurer
and Board Member (principal executive,
operating and financial officer)
* Date 7/30/98
- ---------------------------------------------- -----------------
Edwin Ehlert Jr., Board Member
* Date 7/30/98
---------------------------------------------- -----------------
Henri W. Emmet, Board Member
* Date 7/30/98
---------------------------------------------- -----------------
Donald J. Harrington, Board Member
/s/ MaryKathleen Foynes Date 7/30/98
- ---------------------------------------------------- -----------------
MaryKathleen Foynes, *Attorney-in-Fact
General Counsel
<PAGE> 136
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibit No. Description
- ----------- -----------
<S> <C>
1. Declaration of Trust of Registrant**
2. By-Laws of Registrant**
3. Not Applicable
4. Not Applicable
5. (a) Form of Investment Management Agreement
between the Registrant and Reserve Management Company Inc.**
6. (a) Form of Distribution Agreement between the
Registrant and Resrv Partners, Inc.**
(b) Form of Selected Dealer Agreement.**
7. Pension Plan of Reserve Management Corp. filed
as an exhibit to Post-Effective Amendment No., 32
of The Reserve Fund (File No. 2-36429);
amendments thereto filed as an exhibit to
Post-Effective Amendment No. 45 and all are
incorporated by reference
8. Form of Custodian Agreements between Registrant and
Custodial Trust Company**
9. Not Applicable
10. Opinion of Counsel
11. Consent of Auditors
12. Not Applicable
13. Form of Subscription Agreement between the Registrant
and Reserve Management Company, Inc. **
14. Not Applicable
15. Form of Service Plan **
16. Schedule of computation of each performance quotation provided in Registration Statement
17. Powers of Attorney
18. Not Applicable
27(a) Financial Data Schedule
27(b) Financial Data Schedule
27(c) Financial Data Schedule
27(d) Financial Data Schedule
27(e) Financial Data Schedule
27(f) Financial Data Schedule
27(g) Financial Data Schedule
27(h) Financial Data Schedule
</TABLE>
* To be filed by amendment
**Previously filed
<PAGE> 1
(THE RESERVE FUNDS LETTERHEAD)
Exhibit 10
July 30, 1998
Board of Trustees
Reserve Tax-Exempt Trust
810 Seventh Avenue
New York, New York 10019
Gentlemen:
I have acted as counsel to Reserve Tax-Exempt Trust a Massachusetts
business trust (the "Fund"), in connection with the registration of shares of
the California Tax-Exempt, Connecticut Tax-Exempt, Florida Tax-Exempt,
Pennsylvania Tax-Exempt, Massachusetts Tax-Exempt, New Jersey Tax-Exempt and
Interstate Funds ("Portfolios") with the Securities and Exchange Commission.
As counsel to the Fund, I have made such investigations and have examined
and relied upon the originals or copies, certified or otherwise identified to
my satisfaction, of such records, instruments, certificates, memoranda and
other documents as I have deemed necessary or advisable for the purposes of
this opinion.
1. The Fund has been duly incorporated and is validly existing under the
laws of Massachusetts.
2. To the best of my knowledge, no further approval, consent or other
order of the Board of Trustees is legally required in connection with
the organization of the Portfolios and the registration of their
shares.
3. To the best of my knowledge, the shares of the Portfolios, when
issued, will be legally issued, non-assessable and, when subscribed
to, fully paid.
I consent to the filing of this opinion as an exhibit to the Fund's
registration statement under the Securities Act of 1933.
Very truly yours,
/s/ MaryKathleen Foynes
-----------------------------
MaryKathleen Foynes
Counsel
<PAGE> 1
[PRICEWATERHOUSE COOPERS LETTERHEAD]
Exhibit 11
CONSENT OF INDEPENDENT ACCOUNTANTS
-----------------------------------------------
We consent to the inclusion in this registration statement on Form N-1A
(File No. 2-82592) of our report dated July 28, 1998, on our audit of the
financial statements and financial highlights of the Reserve Tax-Exempt Trust.
We also consent to the reference to our firm under the captions "Financial
Highlights" and "Custodial Services and Independent Accountants".
/S/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
New York, New York
July 30, 1998
<PAGE> 1
Exhibit 17
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of
RESERVE TAX-EXEMPT TRUST, a Massachusetts business trust, does hereby constitute
and appoint MaryKathleen Foynes, and each of them, his true and lawful attorney
and agent to do any and all acts and things and to execute any and all
instruments which said attorney and agent may deem necessary or advisable; (i)
to enable the said Trust to comply with the Securities Act of 1933, as amended,
and any rules, regulations and requirements of the Securities and Exchange
Commission in respect thereof, in connection with the registration under said
Securities Act of the shares of beneficial interest of said Trust (the
"Securities"), including specifically, but without limiting the generality of
the foregoing, the power and authority to sign for and on behalf of the
undersigned the name of the undersigned as trustee of said Trust to a
Registration Statement or to any amendment thereto filed with the Securities and
Exchange Commission in respect of said Securities and to any instrument or
document filed as part of, as an exhibit to or in connection with said
Registration Statement or amendment; (ii) to enable said Trust to comply with
the Investment Company act of 1940, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the registration under said Investment Company Act of the Trust,
including specifically, but without limiting the generality of the foregoing,
the power and authority to sign for and on behalf of the undersigned the name of
the undersigned as trustee of said Trust to a Registration Statement or to any
amendment thereto filed with the Securities and Exchange Commission in respect
of said Trust and to any instrument or document filed as part of, as an exhibit
to or in connection with said Registration Statement or amendment; and (iii) to
register or qualify said Securities for sale and to register or license said
Trust as a broker or dealer in said Securities under the securities or Blue Sky
laws of all such states as may be necessary or appropriate to permit therein the
offering and sale of said Securities as contemplated by said Registration
Statement, including specifically, but without limiting the generality of the
foregoing, the power and authority to sign for and on behalf of the undersigned
the name of the undersigned as trustee of said Trust to any application,
statement, petition, prospectus, notice or other instrument or document, or to
any amendment thereto, or to any exhibit filed as a part thereof or in
connection therewith, which is required to be signed by the undersigned and to
be filed with the public authority or authorities administering said securities
or Blue Sky laws for the purpose of so registering or qualifying said Securities
or registering or licensing said Trust, and the undersigned does hereby ratify
and confirm as his own act and deed all that said attorney and agent shall do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this
28th day of May, 1998.
/s/ Edwin Ehlert Jr.
-----------------------------------------
Edwin Ehlert Jr., Board Member
/s/ Donald J. Harrington
-----------------------------------------
Donald J. Harrington, Board Member
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of
RESERVE TAX-EXEMPT TRUST, a Massachusetts business trust, does hereby constitute
and appoint MaryKathleen Foynes, and each of them, his true and lawful attorney
and agent to do any and all acts and things and to execute any and all
instruments which said attorney and agent may deem necessary or advisable; (i)
to enable the said Trust to comply with the Securities Act of 1933, as amended,
and any rules, regulations and requirements of the Securities and Exchange
Commission in respect thereof, in connection with the registration under said
Securities Act of the shares of beneficial interest of said Trust (the
"Securities"), including specifically, but without limiting the generality of
the foregoing, the power and authority to sign for and on behalf of the
undersigned the name of the undersigned as trustee of said Trust to a
Registration Statement or to any amendment thereto filed with the Securities and
Exchange Commission in respect of said Securities and to any instrument or
document filed as part of, as an exhibit to or in connection with said
Registration Statement or amendment; (ii) to enable said Trust to comply with
the Investment Company act of 1940, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the registration under said Investment Company Act of the Trust,
including specifically, but without limiting the generality of the foregoing,
the power and authority to sign for and on behalf of the undersigned the name of
the undersigned as trustee of said Trust to a Registration Statement or to any
amendment thereto filed with the Securities and Exchange Commission in respect
of said Trust and to any instrument or document filed as part of, as an exhibit
to or in connection with said Registration Statement or amendment; and (iii) to
register or qualify said Securities for sale and to register or license said
Trust as a broker or dealer in said Securities under the securities or Blue Sky
laws of all such states as may be necessary or appropriate to permit therein the
offering and sale of said Securities as contemplated by said Registration
Statement, including specifically, but without limiting the generality of the
foregoing, the power and authority to sign for and on behalf of the undersigned
the name of the undersigned as trustee of said Trust to any application,
statement, petition, prospectus, notice or other instrument or document, or to
any amendment thereto, or to any exhibit filed as a part thereof or in
connection therewith, which is required to be signed by the undersigned and to
be filed with the public authority or authorities administering said securities
or Blue Sky laws for the purpose of so registering or qualifying said Securities
or registering or licensing said Trust, and the undersigned does hereby ratify
and confirm as his own act and deed all that said attorney and agent shall do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this
29th day of May, 1998.
/s/ Henri W. Emmet
-----------------------------------------
Henri W. Emmet, Board Member
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FINANCIAL STATEMENTS, FISCAL YEAR ENDED 5/31/98 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH POST-EFFECTIVE AMENDMENT
</LEGEND>
<SERIES>
<NUMBER> 01
<NAME> INTERSTATE TAX-EXEMPT FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 349,665,603
<INVESTMENTS-AT-VALUE> 306,924,758
<RECEIVABLES> 2,939,634
<ASSETS-OTHER> 292,616
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 352,897,853
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 28,996
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 352,868,857
<SHARES-COMMON-PRIOR> 306,151,866
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 352,868,857
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 12,517,551
<OTHER-INCOME> 0
<EXPENSES-NET> 3,266,708
<NET-INVESTMENT-INCOME> 9,250,843
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 46,716,991
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,592,263,345
<NUMBER-OF-SHARES-REDEEMED> 1,545,546,354
<SHARES-REINVESTED> 9,250,843
<NET-CHANGE-IN-ASSETS> 46,716,991
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,676,899
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,266,708
<AVERAGE-NET-ASSETS> 336,347,310
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .028
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.028)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .97
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FINANCIAL STATEMENTS, FISCAL YEAR ENDED 5/31/98 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH 485b POST-EFFECTIVE AMENDMENT.
</LEGEND>
<SERIES>
<NUMBER> 02
<NAME> CONNECTICUT TAX-EXEMPT FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 36,112,511
<INVESTMENTS-AT-VALUE> 36,130,734
<RECEIVABLES> 337,581
<ASSETS-OTHER> 339,608
<OTHER-ITEMS-ASSETS> 36,789,700
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,023
<TOTAL-LIABILITIES> 3,023
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 36,786,677
<SHARES-COMMON-PRIOR> 33,496,503
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 36,786,677
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,313,617
<OTHER-INCOME> 0
<EXPENSES-NET> 332,236
<NET-INVESTMENT-INCOME> 981,381
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 3,290,174
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 981,381
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 142,288,978
<NUMBER-OF-SHARES-REDEEMED> 138,998,804
<SHARES-REINVESTED> 981,381
<NET-CHANGE-IN-ASSETS> 3,290,174
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 185,719
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 332,236
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .027
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.027)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .89
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS, FISCAL YEAR ENDED 5/31/98 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH 485b POST-EFFECTIVE AMENDMENT.
</LEGEND>
<SERIES>
<NUMBER> 03
<NAME> MASSACHUSETTS TAX-EXEMPT FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 24,595,043
<INVESTMENTS-AT-VALUE> 24,656,892
<RECEIVABLES> 180,826
<ASSETS-OTHER> 609,205
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 25,385,074
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 2,086
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 25,382,988
<SHARES-COMMON-PRIOR> 13,034,609
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 25,382,988
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 645,025
<OTHER-INCOME> 0
<EXPENSES-NET> 137,482
<NET-INVESTMENT-INCOME> 507,543
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 12,348,379
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 73,474,702
<NUMBER-OF-SHARES-REDEEMED> 61,126,323
<SHARES-REINVESTED> 507,543
<NET-CHANGE-IN-ASSETS> 12,348,379
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 91,116
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 137,482
<AVERAGE-NET-ASSETS> 18,276,601
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .028
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.028)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FINANCIAL STATEMENTS, FISCAL YEAR ENDED 5/31/98 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH 485b POST-EFFECTIVE AMENDMENT.
</LEGEND>
<SERIES>
<NUMBER> 04
<NAME> NEW JERSEY TAX-EXEMPT FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 36,072,891
<INVESTMENTS-AT-VALUE> 36,095,124
<RECEIVABLES> 363,609
<ASSETS-OTHER> 1,167,030
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 37,603,530
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 3,090
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 37,600,440
<SHARES-COMMON-PRIOR> 39,452,100
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 37,600,440
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,384,900
<OTHER-INCOME> 0
<EXPENSES-NET> 393,281
<NET-INVESTMENT-INCOME> 991,619
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> (1,851,660)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 235,252,858
<NUMBER-OF-SHARES-REDEEMED> 237,104,518
<SHARES-REINVESTED> 991,619
<NET-CHANGE-IN-ASSETS> (1,851,660)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 197,592
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 393,281
<AVERAGE-NET-ASSETS> 39,607,454
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .025
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.025)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .99
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS, FISCAL YEAR ENDED 5/31/98 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH 485b POST-EFFECTIVE AMENDMENT.
</LEGEND>
<SERIES>
<NUMBER> 05
<NAME> CALIFORNIA TAX-EXEMPT FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1998
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 66,305,682
<INVESTMENTS-AT-VALUE> 66,353,252
<RECEIVABLES> 598,528
<ASSETS-OTHER> 34,002
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 66,938,212
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 2,750
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 66,932,712
<SHARES-COMMON-PRIOR> 30,952,396
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 66,932,712
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,735,780
<OTHER-INCOME> 0
<EXPENSES-NET> 475,154
<NET-INVESTMENT-INCOME> 1,260,626
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 35,980,316
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 333,633,769
<NUMBER-OF-SHARES-REDEEMED> 297,653,769
<SHARES-REINVESTED> 1,260,626
<NET-CHANGE-IN-ASSETS> 35,980,316
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 246,741
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 475,154
<AVERAGE-NET-ASSETS> 49,490,582
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .026
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.026)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .96
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FINANCIAL STATEMENTS, FISCAL YEAR ENDED 5/13/98 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH 485b POST-EFFECTIVE AMENDMENT.
</LEGEND>
<SERIES>
<NUMBER> 06
<NAME> FLORIDA TAX-EXEMPT FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 10,674,540
<INVESTMENTS-AT-VALUE> 10,686,508
<RECEIVABLES> 66,308
<ASSETS-OTHER> 77,280
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 10,818,128
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 889
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 10,817,239
<SHARES-COMMON-PRIOR> 4,109,384
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 10,817,239
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 362,174
<OTHER-INCOME> 0
<EXPENSES-NET> 95,479
<NET-INVESTMENT-INCOME> 266,695
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 6,707,855
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 266,695
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 99,617,152
<NUMBER-OF-SHARES-REDEEMED> 92,909,297
<SHARES-REINVESTED> 266,695
<NET-CHANGE-IN-ASSETS> 6,707,855
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 50,766
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 95,479
<AVERAGE-NET-ASSETS> 10,182,589
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .027
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (.027)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .94
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FINANCIAL STATEMENTS, FISCAL YEAR ENDED 5/31/98 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH 485b POST-EFFECTIVE AMENDMENT.
</LEGEND>
<SERIES>
<NUMBER> 07
<NAME> PENNSYLVANIA TAX-EXEMPT FUND
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> SEP-12-1997
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 12,737,417
<INVESTMENTS-AT-VALUE> 12,741,817
<RECEIVABLES> 85,042
<ASSETS-OTHER> 365,763
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 13,188,222
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 1,084
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 13,187,138
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 13,187,138
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 331,243
<OTHER-INCOME> 0
<EXPENSES-NET> 91,510
<NET-INVESTMENT-INCOME> 239,733
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 13,187,138
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 239,733
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 56,820,020
<NUMBER-OF-SHARES-REDEEMED> 43,632,882
<SHARES-REINVESTED> 239,733
<NET-CHANGE-IN-ASSETS> 13,187,138
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 45,755
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 91,510
<AVERAGE-NET-ASSETS> 12,754,145
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .019
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.019)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FINANCIAL STATEMENTS, FISCAL YEAR ENDED 5/31/98 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH 485b POST-EFFECTIVE AMENDMENT.
</LEGEND>
<SERIES>
<NUMBER> 08
<NAME> OHIO TAX-EXEMPT FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 2,499,743
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 6,526
<ASSETS-OTHER> 542
<OTHER-ITEMS-ASSETS> 2,506,811
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 206
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 2,506,605
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 2,506,605
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 14,779
<OTHER-INCOME> 0
<EXPENSES-NET> 3,830
<NET-INVESTMENT-INCOME> 10,949
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 2,506,605
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 10,949
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,368,250
<NUMBER-OF-SHARES-REDEEMED> 1,861,645
<SHARES-REINVESTED> 10,949
<NET-CHANGE-IN-ASSETS> 2,506,605
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,915
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,830
<AVERAGE-NET-ASSETS> 2,291,876
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .005
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.005)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
