<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. 31 X
-------- -------
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
-------
Amendment No. 33 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
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X on December 14, 1998 pursuant to paragraph (b) of Rule 485
--------
60 days after filing pursuant to paragraph (a) of Rule 485
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on (date) pursuant to paragraph (a) of Rule 485
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----------------------------
The Commission is requested to send copies of all communications to:
Allan Mostoff, 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, MICHIGAN,
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, MICHIGAN 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 December 14, 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, 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 December 14, 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>
<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 MICHIGAN NEW JERSEY OHIO
TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT
FUND FUND FUND FUND FUND FUND(1)** FUND FUND
---------- ---------- ----------- ---------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fee.......... .50% .50% .50% .50% .50% -- .50% .50%
Comprehensive Fee....... -- -- -- -- -- .80% -- --
12b-1 Fee............... .17% .20% .16% .20% .03% .20% .19% .00%
Other Operating Expenses
Administration And
Operations
Expenses............. .22% .22% .20% .20% .17% None .26% .47%
Equipment............. .03% .03% .02% .03% .03% None .03% .01%
Other................. .02% .01% .01% .01% .02% None .01% .02%
--- --- --- --- --- ---- --- ----
Total Operating
Expenses.............. .94% .96% .89% .94% .75% 1.00% .99% 1.00%
=== === === === === ==== === ====
<CAPTION>
PENNSYLVANIA
TAX-EXEMPT
FUND
------------
<S> <C>
Management Fee.......... .50%
Comprehensive Fee....... --
12b-1 Fee............... .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. (1) Michigan Tax-Exempt Fund is charged a comprehensive management fee
of 0.80% per annum of its average net assets for both advisory and ordinary
operating expenses during the year. ** Shares of the Michigan Tax-Exempt Fund
were not offered until December 14, 1998.
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
Michigan Tax-Exempt Fund............................ $10 $32 $55 $122
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. The Reserve
Tax-Exempt Trust did not begin offering shares of the Michigan Tax-Exempt Fund
until December 14, 1998. As of that date, no other portfolios or classes of
shares were outstanding. This information should be read in conjunction with the
financial statements and related notes incorporated by reference. Such
information has been audited by PricewaterhouseCoopers LLP, whose report appears
in the Trusts' Annual Report to Shareholders, which is incorporated by reference
in the SAI. Further information concerning investment performance is contained
in the Trusts' Annual Report, which is available without charge.
<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 (loss)
(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 (loss)
(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 (loss) (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 1992
--------------------------- ------- ------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
year......................... $1.0000 $1.0000 $1.0000 $1.0000 $ 1.0000 $ 1.0000 $ 1.0000
------- ------- ------- ------- -------- -------- --------
Income from investment
operations................... .0358 .0341 .0368 .0352 .0250 .0269 .0400
Expenses....................... .0091 .0098 .0102 .0098(3) .0086(3) .0087(3) .0091(3)
------- ------- ------- ------- -------- -------- --------
Net investment income(1)....... .0267 .0243 .0266 .0254 .0164 .0182 .0309
Dividends from net investment
income (loss)(1)............. (.0267) (.0243) (.0266) (.0254) (.0164) (.0182) (.0309)
------- ------- ------- ------- -------- -------- --------
Net asset value, end of year... $1.0000 $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% 3.09%
RATIOS/SUPPLEMENTAL DATA
- -------------------
Net assets in thousands, end of
year......................... $36,787 $33,497 $34,801 $26,626 $128,693 $157,115 $191,101
Ratio of expenses to average
net assets................... .89% .97% 1.01% .89%(3) .85%(3) .86%(3) .90%(3)
Ratio of net investment income
to average net assets........ 2.64% 2.39% 2.61% 2.33% 1.62% 1.81% 3.05%
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
----------------------------------
CONNECTICUT TAX-EXEMPT FUND 1991 1990 1989
--------------------------- -------- -------- --------
<S> <C> <C> <C>
Net asset value, beginning of
year......................... $ 1.0000 $ 1.0000 $ 1.0000
-------- -------- --------
Income from investment
operations................... .0534 .0615 .0604
Expenses....................... .0086(3) .0083(3) .0086(3)
-------- -------- --------
Net investment income(1)....... .0448 .0532 .0518
Dividends from net investment
income (loss)(1)............. (.0448) (.0532) (.0518)
-------- -------- --------
Net asset value, end of year... $ 1.0000 $ 1.0000 $ 1.0000
======== ======== ========
Total Return................... 4.48% 5.32% 5.18%
RATIOS/SUPPLEMENTAL DATA
- -------------------
Net assets in thousands, end of
year......................... $241,790 $314,489 $247,929
Ratio of expenses to average
net assets................... .85%(3) .81%(3) .84%(3)
Ratio of net investment income
to average net assets........ 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>
FOR FISCAL YEARS ENDED MAY 31,
-----------------------------------------------------------------------------------------
MASSACHUSETTS TAX-EXEMPT FUND 1998 1997 1996 1995 1994 1993 1992 1991
----------------------------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
year.......................... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- ------- ------- ------- -------
Income from investment
operations.................... .0361 .0338 .0362 .0335 .0227 .0257 .0386 .0551
Expenses........................ .0077 .0079(3) .0086(3) .0070(3) .0052(3) .0048(3) .0045(3) .0032(3)
------- ------- ------- ------- ------- ------- ------- -------
Net investment income (1)....... .0284 .0259 .0276 .0265 .0175 .0209 .0341 .0519
Dividends from net investment
income (loss)(1).............. (.0284) (.0259) (.0276) (.0285) (.0175) (.0209) (.0341) (.0519)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of year.... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= ======= ======= ======= =======
Total Return.................... 2.84% 2.59% 2.76% 2.65% 1.75% 2.09% 3.41% 5.19%
RATIOS/SUPPLEMENTAL DATA
- -------------------
Net assets in thousands, end of
year........................... $25,383 $13,035 $ 8,955 $10,169 $14,824 $13,305 $ 7,186 $ 4,652
Ratio of expenses to average net
assets........................ .75% .79%(3) .84%(3) .69%(3) .61%(3) .46%(3) .44%(3) .30%(3)
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%
<CAPTION>
JANUARY 22, 1990
(COMMENCEMENT OF
OPERATIONS) THROUGH
MASSACHUSETTS TAX-EXEMPT FUND MAY 31, 1990
----------------------------- -------------------
<S> <C>
Net asset value, beginning of
year.......................... $1.0000
-------
Income from investment
operations.................... .0209
Expenses........................ .0010
-------
Net investment income (1)....... .0199
Dividends from net investment
income (loss)(1).............. (.0199)(4)
-------
Net asset value, end of year.... $1.0000
=======
Total Return.................... 5.59%(2)
RATIOS/SUPPLEMENTAL DATA
- -------------------
Net assets in thousands, end of
year........................... $ 2,140
Ratio of expenses to average net
assets........................ .29%(2)
Ratio of net investment income
to average net assets......... 5.53%(2)
</TABLE>
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 (loss)(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 (loss) (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 (loss)(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 guaranteed. This
investment objective may not be changed without the vote of a majority of the
outstanding shares of each 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 MICHIGAN. Specifically, the credit quality of
the Michigan Tax-Exempt Fund will depend on the continued financial strength of
the State of Michigan and its political subdivisions. Michigan's fiscal
condition continues to be tested by its dependence on the inherently cyclical
auto industry. While the State's employment base has diversified away from
durable goods manufacturing to trade and services, it remains auto-dependent.
Michigan's unemployment rate of 4.0% remained below the national rate of 4.7%
through January 1998. The State unemployment rate has remained below the
national average for the past 2.5 years. Prior to 1998, the State had exceeded
the national unemployment rate for 15 years. Personal income grew 4.6% in 1997
while the State maintained its traditionally low debt levels. All debt ratios in
the State are below the medians. Michigan has made significant progress in
achieving a strengthened financial position and long-term structural budget
balance through aggressive management controls and conservative fiscal
practices. These practices are evident in the State's establishment and
maintenance of a large "rainy day" cash reserve. Continued conservative
management should enable state finances to remain balanced over the course of
longer economic cycles. At present, Michigan's general obligation bonds are
rated AA+ and Aa1 by S&P and Moody's 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.
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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 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, as of the date of this prospectus, has assets in
excess of $5.3 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 Michigan Tax-Exempt Fund pays the Adviser a
comprehensive management fee calculated at 0.80% per annum of the average daily
net assets.
The Investment Management Agreements provide 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 by the Adviser 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.
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TRUSTEES. The Trustees serve indefinite terms (subject to certain removal
procedures) and they appoint their own successors, provided that at least a
majority of the Trustees have been elected by shareholders. A Trustee may be
removed at any meeting of shareholders by a vote of a majority of the
shareholders of Reserve Tax-Exempt Trust or Reserve New York Tax-Exempt Trust.
TRANSFER AGENT AND DIVIDEND-PAYING AGENT. Reserve Tax-Exempt Trust and Reserve
New York Tax-Exempt Trust act as their own transfer agent and dividend-paying
agent.
HOW TO BUY SHARES
METHOD OF PAYMENT. The minimum initial investment is $1,000 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 whom 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. Pacific Global Fund Distributors, Inc., 206 North Jackson Street, Suite
201, Glendale, CA 91206 is also a distributer of the Funds.
EXCHANGE PRIVILEGE. The shares offered by this Prospectus may be exchanged for
shares in other Reserve 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
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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.
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 nine (9)
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
12
<PAGE> 15
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 U.S. and its possessions and territories will
be exempt from the Florida intangibles tax, and the remaining portions of those
shares will be fully subject to the intangibles tax, even if they partly relate
to Florida tax-exempt securities and the same is true with respect to the
Pennsylvania Tax-Exempt Fund and the Pennsylvania county personal property tax.
Shareholders are advised to retain all statements to maintain accurate
records of their investments. If any dividends are not exempt from federal,
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 NAV
determined after receipt by the Fund of a request in proper form. Each Fund
usually transmits payment the same day when requests are received before 11:00
AM (New York time) 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 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.
Each 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.
13
<PAGE> 16
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 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 or
another, for example a husband or 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.
14
<PAGE> 17
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 telephone 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 Reserve Funds.
SPECIAL SERVICES. The Funds reserve the right to charge shareholder accounts
for specific costs incurred in processing unusual transactions for shareholders.
Such transactions include, but are not limited to, stop payment requests, copies
of Fund redemption or shareholder checks and special research services.
PERFORMANCE. The Funds may compare 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.
------------------------
15
<PAGE> 18
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
<CAPTION>
PAGE
---
<S> <C>
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
</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.
12/98
LOGO Founders of
"America's First
Money Fund"
-------------------------------------------------------------------------
----------
-------------------------------------------------------------------------
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NEW YORK TAX-EXEMPT FUND
CALIFORNIA TAX-EXEMPT FUND
CONNECTICUT TAX-EXEMPT FUND
FLORIDA TAX-EXEMPT FUND
MASSACHUSETTS TAX-EXEMPT FUND
MICHIGAN TAX-EXEMPT FUND
NEW JERSEY TAX-EXEMPT FUND
OHIO TAX-EXEMPT FUND
PENNSYLVANIA TAX-EXEMPT FUND
<PAGE> 19
RESERVE TAX-EXEMPT TRUST
CALIFORNIA TAX-EXEMPT FUND
CONNECTICUT TAX-EXEMPT FUND
FLORIDA TAX-EXEMPT TRUST
MASSACHUSETTS TAX-EXEMPT FUND
MICHIGAN 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, Michigan 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 December 14, 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 address or telephone number shown above. 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 December 14, 1998.
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
----------------- -----
<S> <C>
Investment Objective and Policies.............................. 2
Trustees and Executive Officers................................ 3
Investment Management, Distribution, Service and Custodian
Agreements..................................................... 5
Portfolio Turnover, Transaction Charges and Allocation......... 7
Shares of Beneficial Interest.................................. 7
Purchase, Redemption and Pricing of Shares..................... 10
Distributions and Taxes........................................ 12
Fund Yield..................................................... 14
Reserve Cash Performance Account............................... 15
Municipal Obligations.......................................... 15
Ratings........................................................ 16
Risk Factors of Concentrating in California.................... 16
Risk Factors of Concentrating in Connecticut................... 19
Risk Factors of Concentrating in Florida....................... 21
Risk Factors of Concentrating in Massachusetts................. 22
Risk Factors of Concentrating in Michigan...................... 23
Risk Factors of Concentrating in New Jersey.................... 24
Risk Factors of Concentrating in New York...................... 25
Risk Factors of Concentrating in Ohio.......................... 27
Risk Factors of Concentrating in Pennsylvania.................. 28
Financial Statements........................................... 29
</TABLE>
SHARES OF THE FUNDS 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.
<PAGE> 20
INVESTMENT OBJECTIVE AND POLICIES
The following information provides additional details about the Funds'
investment objectives and policies.
Each Fund's investment objective is to seek as high a level of short-term
interest income exempt from federal, state, and, with respect to the New York
Portfolio, local income taxes, 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> 21
(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").
+EDWIN EHLERT, JR., 67, Trustee, 125 Elm Street, Westfield, NJ 07091.
3
<PAGE> 22
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., 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, RNYTET, RTET and RPES and a Director of Bear Stearns
Companies since 1993.
+WILLIAM E. VIKLUND, 58, Trustee, 110 Grist Mill Lane, Plandome Manor, NY
11030-1110.
Mr. Viklund is formerly President and COO of Bancorp and President and CEO
of Long Island Savings (1980-1996). He is currently Trustee of RF, RIT, RTET,
RNYTET and RPES.
BRUCE R. BENT II, 32, Senior Vice President 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.
ARTHUR T. BENT III, 30, Vice President and Assistant Secretary, 810 Seventh
Avenue, New York, NY 10019-5868.
Mr. Bent III joined The Reserve Funds in 1997 and is Vice President and
Assistant Secretary of RF, RIT, RTET, RNYTET and RPES. Before joining Reserve,
he was a private investor.
MARYKATHLEEN FOYNES, 29, 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. Prior to that, Ms. Foynes worked for the U.S. House of
Representatives as a District Manager for a Member of Congress.
- -------
+ 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 they attend and an annual fee of $16,000
for service to all of the Trusts in the complex.
As of October 30, 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 FUNDS AND FUND COMPLEX
NAME OF TRUSTEE FROM FUNDS (4 ADDITIONAL TRUSTS) PAID TO TRUSTEE
--------------- ---------- -------------------------------------
<S> <C> <C>
Bruce R. Bent, President & Trustee $ 0 $ 0
Edwin Ehlert, Jr., Trustee $6600 $30,000
Henri W. Emmet, Trustee $6600 $30,000
Rev. Donald J. Harrington, Trustee $6600 $30,000
</TABLE>
4
<PAGE> 23
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> 24
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 the 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 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
("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 NAV 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,
6
<PAGE> 25
1998, substantially all payments made by the Funds were to brokers or other
financial institutions and intermediaries for share balances in the Funds.
The Plan and related agreements were duly approved by shareholders and as to
any Fund may be terminated at any time by a vote of a majority of the
outstanding voting securities of such Fund or by vote of the disinterested
Trustees. The Plan and related agreements may be renewed from year to year, if
approved by a vote of a majority of the Board of Trustees, and by the vote of
the disinterested Trustees cast in person at a meeting called for the purpose of
voting on such renewal. The Plan may not be amended to increase materially the
amount to be spent for distribution without shareholder approval. All material
amendments to the Plan must be approved by a vote of the Board of Trustees and
of the disinterested Trustees, cast in person at a meeting called for the
purpose of such vote.
CUSTODIAL SERVICES AND INDEPENDENT ACCOUNTANT. The Chase Manhattan Bank, 4
New York Plaza, New York, NY 10004 and Bankers Trust Company, One Bankers Trust
Plaza, New York, NY 10015 are Custodians of the Fund's securities and cash
pursuant to Custodian Agreements. PricewaterhouseCoopers LLP, 1301 Avenue of the
Americas, New York, NY 10019 is the Funds' independent accountant.
PORTFOLIO TURNOVER, TRANSACTION CHARGES AND ALLOCATION
As investment securities transactions made by each Fund are normally
principal transactions at net prices, the Funds do not normally incur brokerage
commissions. Purchases of securities from underwriters involve a commission or
concession paid by the issuer to the underwriter and aftermarket transactions
with dealers involve a spread between the bid and asked prices. During the past
three fiscal years the Funds have not paid any brokerage commissions.
The Funds' policy of investing in debt securities maturing within one year
results in high portfolio turnover. However, because the cost of these
transactions is minimal, high turnover does not have a materially adverse effect
upon the net asset value or yield of a Fund.
Subject to the overall supervision of each Fund's officers and the Boards of
Trustees, RMCI places all orders for the purchase and sale of a Fund's
investment securities. In general, in the purchase and sale of investment
securities, RMCI will seek to obtain prompt and reliable execution of orders at
the most favorable prices or yields. In determining best price and execution,
RMCI may take into account a dealer's operational and financial capabilities,
the type of transaction involved, the dealer's general relationship with RMCI,
and any statistical, research, or other services provided by the dealer to RMCI.
To the extent such non-price factors are taken into account, the execution price
paid may be increased, but only in reasonable relation to the benefit of such
non-price factors to the Funds as determined in good faith by RMCI. Brokers or
dealers who execute investment securities transactions may also sell shares of a
Fund; however, any such sales will not be either a qualifying or disqualifying
factor in the selection of brokers or dealers.
When orders to purchase or sell the same security on identical terms are
simultaneously placed for the Funds and other portfolios managed by RMCI, the
transactions are allocated as to amount in accordance with each order placed for
each portfolio. However, RMCI may not always be able to purchase or sell the
same security on identical terms for all portfolios affected.
SHARES OF BENEFICIAL INTEREST
The Declaration of Trusts permit the Trusts 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
7
<PAGE> 26
arising from the operations of the first class of shares. No changes can be made
to a Fund's issued shares without shareholder approval.
Each Fund share, when issued, is fully paid, non-assessable (except as set
forth below), and fully transferable or redeemable at the shareholder's option.
Each Fund share has an equal interest in the net assets of its portfolio, equal
rights to all dividends and other distributions from its portfolio, and one vote
for all purposes. Shares of all classes vote together for the election of
Trustees, and have noncumulative voting rights, meaning that the holders of more
than 50% of the shares voting for the election of Trustee could elect all
Trustees if they so chose, and in such event the holders of the remaining shares
could not elect any person to the Board of Trustees.
Under Massachusetts law, the shareholders and trustees of a business trust
can be personally liable for the Funds' obligations unless, as in this instance,
the Declaration of Trusts provide, 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 Trusts also require
the Fund to indemnify its shareholders and Trustees against such liabilities and
any related claims or expenses.
The Declaration of Trusts further provide that the Trustees will not be
liable for errors of judgment or mistakes of fact or law; but nothing in the
Trusts 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 October 30, 1998, no persons owned beneficially or of record 5 percent
or more of the California Tax-Exempt Fund or New Jersey Tax-Exempt Fund. As of
October 30, 1998, the following persons owned beneficially or of record 5
percent or more of the Connecticut Tax-Exempt Fund, Florida Tax-Exempt Fund,
Massachusetts Tax-Exempt Fund, Ohio Tax-Exempt Fund, Pennsylvania Tax-Exempt
Fund or the New York Tax-Exempt Fund:
CONNECTICUT TAX-EXEMPT FUND
I. RESERVE TAX-EXEMPT TRUST
<TABLE>
<CAPTION>
SHARES PERCENT
BENEFICIALLY OUTSTANDING
OWNED (1) SHARES OWNED
--------- ------------
<S> <C> <C>
62,517,687 16.74%
A. CT TAX-EXEMPT FUND
Name and Address of SHARES PERCENT
Beneficial Owner BENEFICIALLY OUTSTANDING
- ------------------- OWNED (1) SHARES OWNED
------------ -------------
Fiduciary Trust Co. International 5,563,304 13.76%
Customer Accounts
Attn: Felyce Porr
P.O. Box 3199 Church Street
New York, NY
Chase Manhattan Bank 3,394,701 8.40%
Attn: Client Services
c/o Seven Marinos/Mohamed Nasrudin
</TABLE>
8
<PAGE> 27
<TABLE>
<CAPTION>
<S> <C> <C>
1211 Avenue of the Americas 33rd Fl.
New York, NY 10036
B. FL TAX-EXEMPT FUND
Name and Address of
Beneficial Owner SHARES PERCENT
- -------------------
BENEFICIALLY OUTSTANDING
OWNED (1) SHARES OWNED
--------- ------------
Jobarr Securities 1,728,814 7.68%
Account 46D 10537
100 Church Street
New York, NY 10007
Fleet Securities 1,495,663 6.64%
Account 30038269
14 Wall Street
New York, NY 10005
Advantage Trading Group 1,166,131 5.18%
Florida Omnibus A/C
2170 W. St. Road Suite 124
Longwood, FL 32779
C. MA TAX-EXEMPT FUND
Name and Address of SHARES PERCENT
Beneficial Owner BENEFICIALLY OUTSTANDING
- -------------------
OWNED (1) SHARES OWNED
--------- ------------
Jansco Marketing Inc. 1,553,383 6.03%
769 Plain Street
Marshfield, MA 02050
15.44%
Friedman Billings Ramsey & Co. 3,980,087
Account 278952310517
1001 19th St. No.
Rosslyn, VA 22209
Friedman Billings Ramsey & Co. 3,435,669 13.33%
Account 278952329517
1001 19th St. No.
Rosslyn, VA 22209
Morgan Schiff & Co. 2,925,397 11.35%
Account 276580073119
350 Park Avenue
New York, NY 10022
Volpe Brown Whelan & Co. LLC 1,321,790 5.13%
Account 275607048518
1 Maritime Plaza
San Francisco, CA 94111
D. OH TAX-EXEMPT FUND
2,203,917.27 98.60%
Reserve Management Co. Inc
Account 51589455
810 Seventh Avenue
New York, NY 10019
E. PA TAX-EXEMPT FUND
Name and Address of SHARES PERCENT
</TABLE>
9
<PAGE> 28
<TABLE>
<CAPTION>
<S> <C> <C>
Beneficial Owner BENEFICIALLY OUTSTANDING
- ---------------- OWNED (1) SHARES OWNED
--------- ------------
SW Ryan & Co. 1,142,116 5.56%
Account 275660030015
111 Presidential Blvd.
Bala Cynwyd, PA 19004
Valley Forge Investment Corp. 1,158,407 5.64%
Account 36811176
P.O. Box 837
Valley Forge, PA 19482
Bear Stearns 1,254,090 6.11%
Account 272205378017
245 Park Avenue
New York, NY 10167
II. RESERVE NEW YORK TAX-EXEMPT TRUST
A. NY TAX-EXEMPT FUND
Name and Address of SHARES PERCENT
Beneficial Owner BENEFICIALLY OUTSTANDING
- ------------------- OWNED (1) SHARES OWNED
--------- ------------
Fiduciary Trust Company International 13,363,700 7.46%
Customer Accounts
P.O. Box 3199, Church St. Station
New York, NY 10008
</TABLE>
(1) Fractional Shares have been omitted.
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 the 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.
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 NAV is not
calculated on New Year's Day, Martin Luther King, Jr. Day,
10
<PAGE> 29
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 NAV 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 per 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 NAV 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 NAV of a Fund from $1.00 per 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.
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
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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 % 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 maximum federal 20% capital gains rate, regardless of how long the
shareholder has held
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<PAGE> 31
the Fund's shares, and are not eligible for the dividends-received deduction.
Shareholders receiving distributions in the form of additional shares, rather
than cash, generally will have a cost basis in each such share equal to the NAV
of a share of the Fund on the reinvestment date. Shareholders will be notified
annually as to the U.S. federal tax status of distributions, and shareholders
receiving distributions in the form of additional shares will receive a report
as to the NAV of those shares.
Upon the sale or other disposition of shares of the Fund, in the event that
the Fund fails to maintain a constant NAV 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.
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
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<PAGE> 32
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.
Tax-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: Tax-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 two Business
Days. Participants should refer to the VISA Account Shareholder Agreement for
complete information regarding responsibilities and liabilities with respect to
the VISA Gold check 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.
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<PAGE> 33
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 1940 Act. The Funds will determine the variable
rate demand instruments it will purchase in accordance with procedures
prescribed by its Board to minimize credit risks. The Fund's investment adviser
may determine that an unrated variable rate demand instrument meets the Fund's
investment high quality criteria if it is backed by a suitable bank letter of
credit or guarantee.
The variable rate demand instruments that the Funds may invest in include
participation interests purchased from banks in variable rate tax-exempt
Municipal Obligations owned by banks or affiliated organizations. A
participation
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<PAGE> 34
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.
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
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<PAGE> 35
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%.
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.
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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 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
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previously estimated. This shortfall is much smaller than the State has faced in
recent years, and has been addressed in the Governor's Budget.
The State has taken significant steps to restructure its budget, reduce its
accumulated deficit, and is in the fifth year of holding expenditures equal to,
or below, revenues. Continued spending pressures for education, corrections,
and, until recently, health and welfare have made it difficult for the State to
accumulate any significant contingency reserves. The State now projects a very
modest ending reserve for fiscal 1997, and has budgeted about a 1% reserve for
fiscal 1998. Overall, the General Fund GAAP-basis deficit has been reduced from
a peak of $4.6 billion in 1992-93 to $2.1 billion at fiscal 1996.
The Governor's proposed 1997-98 budget provides for moderate expenditure
growth of about 3.9%. Revenue growth is projected at 4.7%, including the effects
of a proposed 5% cut in the bank and corporate tax rate. Spending levels
continue to be driven by constitutional spending requirements of Proposition 98,
which requires about 40% of the general fund to be dedicated to K-14 education.
Overall funding for K-14 education is proposed to increase by 7.6% over fiscal
1997 levels, outpacing other spending categories.
On December 6, 1994, Orange County, California (the "County"), together with
its pooled investment funds (the "Funds") filed for bankruptcy protection under
Chapter 9, causing a liquidity crisis for the Funds and the County. More than
180 other public entities, most of which, but not all, are located in the
County, were also depositors in the Funds. As of mid-January, 1995, following a
restructuring of most of the Funds' assets to increase their liquidity and
reduce their exposure to interest rate increases, the County estimated the
Funds' loss at about $1.69 billion, or about 23% of their initial deposits of
approximately $7.5 billion. Many of the entities which deposited monies in the
Funds, including the County, are facing cash flow difficulties because of the
bankruptcy filing and may be required to reduce programs or capital projects.
This may also affect their ability to meet their outstanding obligations.
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
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machinery and electrical machinery. Defense-related business plays an important
role in the Connecticut economy. Economic activity has been affected by the
volume of defense contracts awarded to Connecticut firms. In the past ten years
Connecticut has generally ranked from 6th to 11th among all states in total
defense contracts awards, receiving 2.8% of all such contracts in 1992. On a per
capita basis, defense awards to Connecticut have been among the highest in the
nation. In recent years, the federal government has reduced defense-related
spending and this trend is expected to continue. Both United Technologies
Corporation and General Dynamics Corporation's Electric Boat Division have
announced substantial labor force reduction. Any further decline in the federal
defense budget could have a detrimental affect on the Connecticut economy.
The industrial activity of the State is concentrated in two regions. The
first, the Naugatuck Valley, extends from Bridgeport north through Ansonia and
Waterbury to Torrington, and has a high proportion of heavy industry. The
second, a belt extending from Hartford southwest through New Britain, Middleton
and Meriden to New Haven, is typified by highly skilled precision metal products
manufacturing. In addition, certain large submarine building activity and
chemical production exist in the Groton area.
Hartford, the capital of Connecticut, is a center of the insurance industry
and a major service center for business and commerce. The southwestern portion
of the State benefits from its proximity to New York City, with a substantial
amount of suburban commutation to New York. An important factor in Connecticut's
overall economic and employment picture is the influx of major business
organizations that are relocating corporate headquarters or executive offices in
Connecticut. Major employers in Connecticut include United Technologies
Corporation, General Dynamics Corporation, Aetna Life and Casualty Company, The
Travelers Insurance Company and Yale University.
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,
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several Sales Tax exemptions were added which include, among others, amusements
and recreation, certain tax preparation services and car washes.
Although the State recorded General Fund surpluses in its fiscal years 1985
through 1987, Connecticut reported deficits from its General Fund operations for
the fiscal years 1988 through 1991. Together with the deficit carried forward
from the State's 1990 fiscal year, the total General Fund deficit for the 1991
fiscal year was $965.7 million. The total deficit was funded by the issuance of
General Obligation Economic Recovery Notes. The Comptroller's annual reports for
the fiscal years ended June 30, 1992, 1993 and 1994 reflected General Fund
operating surpluses of $110 million, $113.5 million, and $19.7 million,
respectively. The Comptroller's monthly report for the period ended August 31,
1994 stated that on a GAAP basis the cumulative deficit is $531 million for
fiscal 1994-95. The deficit continued to narrow in fiscal 1996 from $496 million
to $399 million. As of June 1998, S&P, Moody's and Fitch rated Connecticut's
bonds AA-, Aa3 and AA, respectively.
While the enacted budget for fiscal 1997 relied on non-recurring measures to
achieve balance, the State has chosen to defer some $100 million of these
measures, a decision made possible by better-than-expected revenue performance
which began in the final quarter of fiscal 1996 and has continued to date in
1997.
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 following concerns the risks of concentrating investments in obligations
of the State of Florida ("State") and its political subdivisions, duly
constituted authorities and corporations.
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.
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The over-dependence on the sensitive sales tax creates vulnerability to
recession. Accordingly, financial operations have been strained during the past
few years, but the state has responded in a timely manner to maintain budgetary
control.
Florida's debt structure is complex. Most state debt is payable from
specified taxes and additionally secured by the full faith and credit of the
state. Under the general obligation pledge, to the extent specified taxes are
insufficient, the state is unconditionally required to make payment on bonds
from all non-dedicated taxes.
Currently, the State's general obligation bonds are rated Aa2, AA+ and AA by
Moody's, S&P and Fitch, respectively.
The Fund's concentration in securities issued by the State and its political
subdivisions provides a greater level of risk than a fund which is diversified
across numerous states and municipal entities. The ability of the State or its
municipalities to meet their obligations will depend on the availability of tax
and other revenues; economic, political, and demographic conditions within the
State; and the underlying condition of the State, and its municipalities.
RISK FACTORS OF CONCENTRATING IN MASSACHUSETTS
The following concerns the risks of concentrating investments in obligations
of the Commonwealth of Massachusetts ("Commonwealth") 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 Commonwealth 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
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million in fiscal 1996, up from a $25 million deficit at the end of fiscal 1995,
while the Budgeted Operating Funds balance (GAAP-basis) increased to $709
million, up from $287 million in fiscal 1995.
The current ratings of the Commonwealth's general obligation bonds are Aa3,
AA- and AA- by Moody's, S&P and Fitch, respectively.
There can be no assurance that general economic difficulties or the
financial circumstances of Massachusetts or its political subdivisions will not
adversely affect the ability of Massachusetts issuers or obligors of
Commonwealth, municipal and public authority obligations to meet those
obligations.
RISK FACTORS OF CONCENTRATING IN MICHIGAN
The following discusses the risks of concentrating investments in
obligations of the State of Michigan (the "State") and its political
subdivisions, duly constituted authorities and corporations.
The State's financial management will continue to be tested by its
dependence on the inherently cyclical auto industry. While the State's
employment base has diversified away from durable goods manufacturing to trade
and services, it remains auto-dependent. Auto industry employment in the State
has been stable and should prove less cyclical than in the past as a result of
corporate restructuring and reinvestment which has improved its competitive
position. In addition, recent industry investments in the State should enable it
to retain a significant share of vehicle manufacturing as well as a primary role
in research and development. The State's economy, however, is likely to be more
cyclical than other states over the long term.
The State's unemployment rate was 4.0% through January 1998 versus a
national rate of 4.7%. The State's unemployment rate has remained below the
national average for the past 2.5 years. Prior to 1998, the State's unemployment
rate had exceeded the national rate for the past 15 years. Personal income grew
9.4% in 1994 and 6.5% in 1995, but slowed to 4.3% in 1996 and 4.6% in 1997. The
national economic recovery has continued to be robust in Michigan.
The State constitution limits the State's general obligation debt to (i)
short-term debt for State operating purposes; (ii) short and long-term debt for
the purpose of making loans to school districts; and (iii) long-term debt for
voter-approved purposes. The State has issued and has outstanding general
obligation full-faith and credit bonds and notes for Water Resources,
Environmental Protection, Recreation Programs and School Loan purposes. As of
September 30, 1997, the outstanding principal amount of State general obligation
bonds was approximately $655,184,000 with annual debt service requirements of
approximately $63,760,000 and $63,617,000 for the fiscal years ending September
30, 1998 and 1999, respectively. The State issued between $500 million and $900
million in short-term general obligation notes in each fiscal year from 1990-91
through 1997-98, except during the 1993-94 fiscal year when no notes were
issued. These notes were issued for cash-flow purposes and were fully paid at
maturity.
In 1977, the State enacted legislation which created the Counter-Cyclical
Budget and Economic Stabilization Fund ("BSF"). This fund is designed to
accumulate balances during years of significant economic growth which may be
utilized in years when the State's economy experiences cyclical downturns or
unforeseen fiscal emergencies. Calculated on an accrual basis, the unreserved
ending accrued balance of the BSF on September 30, 1995 was $987.9 million, on
September 30, 1996 was $614.5 million and estimated to be $646.3 million on
September 30, 1997. The balance is net of a reserve for future education funding
of $529.1 million on September 30, 1996 and $572.6 million on September 30 1997.
The State's economic forecast for calendar years 1998 and 1999 projects
healthy growth. Real GDP is projected to grow 3.1 % in 1998 and 2.0 % in 1999,
on a calendar year basis. Car and light truck sales are expected to total 14.9
million units in 1998 and 14.8 million units in 1999. Total wage and salary
employment is projected to grow 1.7% in 1998 and 0.8% in 1999. The unemployment
rate is projected to average 4.1% in 1998 and 4.4% in 1999. These forecasts
reflect the ongoing diversification of the Michigan economy.
The State has made significant progress in achieving a strengthened
financial position and long-term structural budget balance through aggressive
management controls and conservative fiscal practices. This progress is evident
in the State's buildup and maintenance of a large "rainy day" cash reserve.
Continued conservative fiscal management practices should enable the State to
keep finances balanced over the course of future economic cycles.
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At present, the State's general obligation bonds are rated AA+ and Aa1by
Standard & Poors and Moody's.
There can be no assurance that general economic difficulties or the
financial circumstances of Michigan or its political subdivisions will not
adversely affect the ability of Michigan issuers or obligors of State, municipal
and public authority debt 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
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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.
RISK FACTORS OF CONCENTRATING IN NEW YORK
The following concerns the risks of concentrating investments in obligations
of the State of New York ("State") and its political subdivisions, duly
constituted authorities and corporations.
The financial condition of the 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
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
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City of New York, ("MAC"), created to provide financing assistance to New York
City, is the only municipal assistance corporation created to date. To enable
MAC to pay debt service on its obligations, MAC receives, subject to annual
appropriation by the Legislature, receipts from the 4% New York Sales Tax for
the Benefits of New York City, the State-imposed Stock Transfer Tax and, subject
to certain prior liens, local assistance payments otherwise payable to the City.
The 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 Tax-Exempt 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.
26
<PAGE> 45
Estimates of the City's revenues and expenditures are based on numerous
assumptions and are subject to various uncertainties. If expected federal or
State aid is not forthcoming, if unforeseen developments in the economy
significantly reduce revenues derived from economically sensitive taxes or
necessitate increased expenditures for public assistance, if the City should
negotiate wage increases for its employees greater than the amounts provided for
the City's financial plan or if other uncertainties materialized that reduce
expected revenues or increase projected expenditures, then, to avoid operating
deficits, the City may be required to implement additional actions, including
increases in taxes and reductions in essential City services. The City might
also seek additional assistance from the State.
More than any other municipality, the fiscal health of the City has a
significant effect on the fiscal health of the State. The national economic
downturn which began in July 1990 adversely affected the local economy, which
had been declining since late 1989. As a result, the City experienced job losses
in 1990 and 1991 and real Gross City Product ("GCP") fell in those two years.
Beginning in calendar year 1992, the improvement in the national economy helped
stabilize conditions in the City. Employment losses moderated toward year-end
and real GCP increased, boosted by strong wage gains. In 1993 and 1994, the City
experienced job gains of 2,000 and 21,000, respectively. The City now projects,
and its current four-year financial plan assumes, that economic growth will slow
in calendar years 1995 and from one year to the next and the City budget for
fiscal year 1996 reduces City-funded spending for the second consecutive year.
There can be no assurance that the City will continue to maintain a balanced
budget as required by State law without additional reductions in City services
or entitlement programs or tax or other revenue increases which could adversely
affect the City's economic base.
In July 1995, the City published the City Financial Plan for the 1996-1999
fiscal years. The 1996-1999 Financial Plan projects revenues and expenditures
for the 1996 fiscal year (July 1, 1995-June 30, 1996) balanced in accordance
with GAAP. The City Financial Plan sets forth proposed actions to close a
previously projected budget gap of approximately $3.1 billion for the 1996
fiscal year. Such gap-closing actions for the 1996 fiscal year include, among
others, substantial reductions in entitlement programs, City service and
personnel reductions, saving initiatives related to labor and pension costs,
increases in federal and State aid, the sale of certain City assets and
increases in certain lease and fee payments due the City.
The City Financial Plan also sets forth projections for the 1997 through
1999 fiscal years and outlines a proposed gap-closing program to close projected
budget gaps of $888 million, $1.46 billion and $1.44 billion for the 1997
through 1999 fiscal years, respectively, after the successful implementation of
the $3.1 billion gap-closing program for the 1996 fiscal year. Proposed
gap-closing actions for the 1997 through 1999 fiscal years include additional
service and expenditure reductions, labor productivity gains and fee
initiatives.
Implementation of the City Financial Plan is also dependent upon the City's
ability to market its securities successfully in the public credit markets. The
City's financing program for fiscal years 1996 through 1999 contemplates the
issuance of $9.3 billion of general obligation bonds primarily to reconstruct
and rehabilitate the City's infrastructure and physical assets and to make
capital investments. In addition, the City issues revenue notes and tax
anticipation notes to finance its seasonal working capital requirements. The
success of projected public sales of City bonds and notes will be subject to
prevailing market conditions. If the City were unable to sell its general
obligation bonds and notes, it would be prevented from meeting its planned
operating and capital expenditures.
As of March 22, 1995, Moody's Investors Services, Inc. ("Moody's") rated the
City's general obligation bonds Baa1 and Fitch Investors Service, Inc. ("Fitch")
rated such bonds A-. On July 10, 1995, Standard & Poor's revised downward its
rating on City general obligation bonds from A- to BBB+. Standard & Poor's
stated that the downgrade was a reflection of the City's inability to eliminate
a structural budget imbalance due to persistent softness in the City's economy,
weak job growth, a trend of using nonrecurring budget devices, optimistic
projections of State and federal aid and high levels of debt service. There is
no assurance that such ratings will continue for any given period of time or
that they will not be revised downward or withdrawn entirely. Any such downward
revision or withdrawal could have an 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
27
<PAGE> 46
The following concerns the risks of concentrating investments in
obligations of the State of Ohio ("State") and its political subdivision, duly
constituted authorities and corporations.
Financial Operations continued to show improvement in fiscal year 1996. The
State achieved an operating surplus as total operating revenue grew more rapidly
than total expenditures. The State ended the biennium with an estimated general
revenue fund balance of $597.6 million. The State's reserves have been restored
to levels which now exceed those seen before the last recession. General revenue
spending increased in 1997, with increases in most major spending categories
except health and human services, which decreased 0.2%. Revenues and
expenditures met target levels for the first six months of fiscal 1996.
The State's current direct debt levels are relatively moderate,
representing, on a per capita basis, $592 or 2.5% of personal income. Debt
service payments to cover general obligations and lease obligations constitute
approximately 5% of the State's budget.
Over the past ten years, employment and earnings in Ohio have grown steadily
and become more diversified. Although manufacturing still provides 21% of the
employment in the State, employment growth in the services and trade sectors has
created a more stable economy. Statewide employment was up 3% from 1990-1995,
and employment gains in 1994 and 1995 were enough to offset losses in recession
years. Although manufacturing employment decreased 1.2% in the year ending
August 1997, growth in the services, trade and construction industries should
continue to produce strong economic growth.
The rate of personal income growth, however, has declined as lower-paying
service jobs have replaced those lost in manufacturing, with income levels
currently slightly below the national average. Personal income per capita, which
nearly equaled that of the U.S. in 1970, was 96% of the U.S. figure in 1996.
Currently, Ohio's general obligation bonds are rated Aa1, AA+ and AA+ by
Moody's, S&P and Fitch, respectively.
RISK FACTORS OF CONCENTRATING IN PENNSYLVANIA
The following concerns the risks of concentrating investments in
obligations of the State of Pennsylvania ("State") and its political
subdivision, duly constituted authorities and corporations.
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. the Commonwealth had outstanding
general obligation debt of $5.2 billion on June 30, 1996. the Commonwealth 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,
the Commonwealth 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 the Commonwealth 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 the Commonwealth 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 the Commonwealth. The
issuance of non-electoral general obligation debt is limited by constitutional
and statutory provision. Electoral
28
<PAGE> 47
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. the Commonwealth's average
annual unemployment rate for the years 1988, 1989 and 1990 remained slightly
below the nation's annual average unemployment rate, and the Commonwealth's
average annual unemployment rate for the years 1992, 1993 and 1994 remained
slightly above the nation's annual average unemployment rate. The seasonally
adjusted unemployment rate for Pennsylvania for January, 1996 was 6.1% compared
to 5.3% for the U.S. The unadjusted unemployment rate for Pennsylvania and the
U.S. for January, 1996 was 6.7% and 6.3%, respectively. The population of
Pennsylvania, 12,052 million people as of July 1, 1994, according to the U.S.
Bureau of the Census, represents an increase from the July 1, 1985 estimate of
11,772 million. Per capita income in Pennsylvania for calendar 1994 of $22,196
was higher than the per capita income of the U.S. of $21,699. As of June 30,
1996, Pennsylvania's Tax Stabilization Reserve Fund (GAAP Basis) had a surplus
of $183.6 million.
Pennsylvania is currently involved in certain litigation where adverse
decisions could have an adverse impact on its ability to pay debt service. In
Baby Neal v. Commonwealth of Pennsylvania, the American Civil Liberties Union
filed a lawsuit against the Commonwealth seeking an order that would require the
Commonwealth to provide additional funding for child welfare services. County Of
Allegheny v. Commonwealth of Pennsylvania involves litigation regarding the
state constitutionality of the statutory scheme for county funding of the
judicial system. In Pennsylvania Association of Rural and Small Schools v.
Casey, the constitutionality of Pennsylvania's system for funding local school
districts has been challenged. No estimates for the amount of these claims are
available.
FINANCIAL STATEMENTS
Financial Statements (audited) for The Trusts for the fiscal year ended May
31, 1998, including notes thereto, are incorporated by reference in the SAI from
the Trusts' Annual Report to Shareholders dated May 31, 1998 filed with the SEC
on July 31, 1998.
29
<PAGE> 48
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> 49
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 October 30, 1998
-------------- ------------------------
<S> <C>
Interstate Fund 11,361
Connecticut Tax-Exempt Fund 1,447
California Tax-Exempt Fund 1,250
Massachusetts Tax-Exempt Fund 322
New Jersey Tax-Exempt Fund 3,591
Florida Tax-Exempt Fund 484
Pennsylvania Tax-Exempt Fund 277
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> 50
<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> 51
<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> 52
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. 31 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 24th day of November, 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. 31 to its Registration Statement has been below
signed by the following persons in the capacities and on the dates indicated.
* /s/ Bruce R. Bent Date 11/24/98
- ----------------------------------------------- -----------------
Bruce R. Bent, President, Treasurer
and Board Member (principal executive,
operating and financial officer)
* Date 11/24/98
- ---------------------------------------------- -----------------
Edwin Ehlert Jr., Board Member
* Date 11/24/98
---------------------------------------------- -----------------
Henri W. Emmet, Board Member
* Date 11/24/98
---------------------------------------------- -----------------
Donald J. Harrington, Board Member
/s/ MaryKathleen Foynes Date 11/24/98
- ---------------------------------------------------- -----------------
MaryKathleen Foynes, *Attorney-in-Fact
General Counsel
<PAGE> 53
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
November 24, 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, Michigan Tax-Exempt, Ohio
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
Exhibit 11
[PRICEWATERHOUSECOOPERS LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
-------------
We consent to the inclusion in this registration statement on Form N-1A
(File No. 2-85406) of our report dated July 28, 1998, on our audit of the
financial statements and financial highlights of the Reserve New York
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 NEW YORK TAX-EXEMPT TRUST, a Massachusetts business trust, does hereby
constitute and appoint MaryKathleen Foynes, 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.
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Edwin Ehlert Jr., Board Member
/s/ Donald J. Harrington
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Donald J. Harrington, Board Member
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of
RESERVE NEW YORK TAX-EXEMPT TRUST, a Massachusetts business trust, does hereby
constitute and appoint MaryKathleen Foynes, 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
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Henri W. Emmet, Board Member
