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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
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Pre-Effective Amendment No.
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Post-Effective Amendment No. 30 X
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
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Amendment No. 32 X
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(Check appropriate box or boxes.)
RESERVE TAX-EXEMPT TRUST
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(Exact Name of Registrant as Specified in Charter)
810 Seventh Avenue, New York, NY 10019
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (212) 977-9882
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Bruce R. Bent, President, Reserve Tax-Exempt Trust, 810 Seventh Avenue, 17th
Floor,
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New York, NY 10019
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(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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on July 31, 1997 pursuant to paragraph (b) of Rule 485
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60 days after filing pursuant to paragraph (a) of Rule 485
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X on April 1, 1998 pursuant to paragraph (a) of Rule 485
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The Commission is requested to send copies of all communications to:
Paul F. Roye, Esq.
Dechert Price & Rhoads
1500 K Street, NW
Washington, DC 20005
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, 1997 was filed with the Commission on
July 25, 1997.
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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
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<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>
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General Information, Purchases and
Redemptions
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24 Hour Yield and Balance Information
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Nationwide
800-637-1700 M www.reservefunds.com
THE INTERSTATE TAX-EXEMPT FUND
The INTERSTATE TAX-EXEMPT FUND of Reserve Tax-Exempt Trust (the "Fund") is
a no-load money market fund whose investment objective is to seek as high a
level of short-term interest income exempt from federal income taxes as is
consistent with preservation of capital and liquidity. The Fund invests
principally in short-term obligations issued by the states, territories and
possessions of the United States and their political subdivisions, duly
constituted authorities and corporations. The average maturity of the Fund's
investments are 90 days or less.
The INTERSTATE TAX-EXEMPT FUND is designed for institutions and individuals
as a convenient alternative to the direct investment of temporary cash balances
in short-term money market accounts or instruments. The Fund seeks to employ
idle cash at yields competitive with yields of other comparable short-term
investments, and is designed to reduce or eliminate for the investor the
mechanical problems of direct investment in money market instruments such as
scheduling maturities, evaluating the credit of issuers, investing in round
lots, safeguarding receipt and delivery of securities and reinvesting.
SHARES OF THE FUND ARE NEITHER GUARANTEED NOR INSURED BY THE U.S.
GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN
A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
This Prospectus sets forth the information about the Fund which a
prospective investor should know before investing. A Statement of Additional
Information ("SAI") dated July 31, 1997, providing further details about the
Fund, has been filed with the Securities and Exchange Commission ("SEC"). It may
be obtained without charge by writing or calling the Fund at 800-637-1700. The
Statement of Additional Information is incorporated by reference into this
Prospectus.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR 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.
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Prospectus dated July 31, 1997.
Investors are advised to read and retain this Prospectus for future reference.
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SHAREHOLDER EXPENSES
The following table illustrates all expenses and fees that a shareholder of
the Fund will incur. The expenses and fees set forth in the table are for the
fiscal year ended May 31, 1997.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Load Imposed on Purchases............................. None
Sales Load Imposed on Reinvested Dividends.................. None
Redemption Fees*............................................ None
Exchange Fees............................................... None
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<S> <C>
Management Fee.............................................. .50%
12b-1 Fees.................................................. .19%
Other Operating Expenses
Administration and Operations Expenses.................... .28%
Equipment................................................. .04%
Other..................................................... .03%
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Total Operating Expenses.................................... 1.04%
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</TABLE>
The purpose of this table is to assist the investor in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. *A $2.00 fee will be charged on redemption checks issued by the Fund
of less than $100 and a $10 fee will be charged for wire redemptions of less
than $10,000.
The following example illustrates the expenses that a shareholder would pay
on a $1,000 investment over various time periods assuming: (1) a 5% annual rate
of return and (2) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C>
$11 $33 $57 $127
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
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FINANCIAL HIGHLIGHTS
The following information applies to a share of the Reserve Tax-Exempt
Trust--Interstate Tax-Exempt Fund outstanding throughout each period. It should
be read in conjunction with the financial statements and related notes on page
11. Such information has been audited by Coopers & Lybrand L.L.P. as indicated
in their report on page 11.
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
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INTERSTATE TAX-EXEMPT FUND 1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year....................... $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
-------- -------- -------- -------- --------
Income from investment
operations................. .0361 .0390 .0368 .0268 .0312
Expenses..................... .0105 .0105 .0103 .0103 .0104
-------- -------- -------- -------- --------
Net investment income (1).... .0256 .0285 .0265 .0165 .0208
Dividends from net investment
income (1)................. (.0256) (.0285) (.0265) (.0165) (.0208)
-------- -------- -------- -------- --------
Net asset value, end of
year....................... $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
======== ======== ======== ======== ========
Total return................. 2.56% 2.85% 2.65% 1.65% 2.08%
RATIOS/SUPPLEMENTAL DATA
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Net assets in thousands, end
of year..................... 306,152 292,067 315,232 352,594 366,383
Ratio of expenses to average
net assets................. 1.04% 1.04% 1.00% 1.02% 1.03%
Ratio of net investment
income to average net
assets..................... 2.52% 2.80% 2.59% 1.63% 2.06%
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
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INTERSTATE TAX-EXEMPT FUND 1992 1991 1990 1989 1988
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<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year....................... $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
-------- -------- -------- -------- --------
Income from investment
operations................. .0455 .0599 .0663 .0650 .0528
Expenses..................... .0106 .0105 .0104 .0104 .0102
-------- -------- -------- -------- --------
Net investment income (1).... .0349 .0494 .0559 .0546 .0426
Dividends from net investment
income (1)................. (.0349) (.0494) (.0559) (.0546) (.0426)
-------- -------- -------- -------- --------
Net asset value, end of
year....................... $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
======== ======== ======== ======== ========
Total return................. 3.49% 4.94% 5.59% 5.46% 4.26%
RATIOS/SUPPLEMENTAL DATA
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Net assets in thousands, end
of year..................... 358,101 333,321 306,153 312,239 371,227
Ratio of expenses to average
net assets................. 1.03% 1.03% 1.01% 1.01% 1.00%
Ratio of net investment
income to average net
assets..................... 3.41% 4.81% 5.43% 5.29% 4.17%
</TABLE>
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(1) Based on compounding of daily dividend. Not indicative of future results.
YIELD
For the seven calendar days ended May 31, 1997, the current and effective
yields of the Fund were 2.93% and 2.97%, respectively.
Current yield refers to the income generated by an investment in the Fund
over a seven-day period. This income is then annualized, that is, the amount of
income generated by the investment during that week is assumed to be generated
each week over a 52 week period and is shown as a percentage of the investment.
The effective yield is calculated similarly but, when annualized, the income
earned is assumed to be reinvested. The effective yield will be higher than the
current yield because of this compounding effect.
The Fund may also quote its tax equivalent yield, which shows the taxable
yield an investor would have to earn before taxes to equal the Fund's tax-free
yield. The tax equivalent yield is calculated by dividing the Fund's current or
effective yield by the result of one minus a stated federal tax rate.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek as high a level of
short-term interest income exempt from Federal income taxes as is consistent
with preservation of capital and liquidity. The Fund seeks to attain this
objective by investing principally in obligations issued by states, territories,
and possessions of the United States and their subdivisions, duly constituted
authorities and corporations, or participation interests in such obligations.
However, achievement of this objective cannot be assured. This investment
objective cannot be changed without the vote of a majority of the outstanding
shares of the Fund as defined in the Investment Company Act of 1940 ("1940
Act").
These securities are generally known as municipal bonds or notes and the
interest on them is exempt from federal income tax in the opinion of either bond
counsel for the issuers or the issuer itself ("Municipal Obligations"). They are
issued to raise money for various public purposes such as constructing public or
private facilities. General obligation bonds and notes are backed by the taxing
power of the issuer. Revenue bonds and notes are backed by the revenues of a
project or facility such as a toll road or, in some cases, from the proceeds of
a special excise tax, but not by the general taxing power. Industrial
development revenue bonds and notes are backed by the credit of a private
issuer. The Fund may invest any portion of its assets in such bonds and notes.
Municipal Obligations bear fixed, variable or floating rates of interest. At
least 80% of the value of the Fund's assets will be invested in Municipal
Obligations unless the Fund has adopted a temporary defensive position.
3
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The Fund may purchase floating and variable rate demand notes, which are
Municipal Obligations normally having stated maturities in excess of one year,
but which permit the Fund to demand payment of principal and accrued interest at
any time, or at specified intervals not exceeding one year, usually upon not
more than seven days' notice. Frequently, these Obligations are secured by
letters of credit or other credit support arrangements provided by banks. The
Fund may invest any portion of its assets in such demand notes. The Fund will
not invest more than 10% of the value of its assets in floating or variable rate
demand notes for which there is no secondary market if the demand feature on
such Municipal Obligations is exercisable on more than seven days' notice.
In view of the investment of the Fund in industrial revenue development
bonds and notes secured by letters of credit or guarantees of banks, an
investment in Fund shares should be made with an understanding of the
characteristics of the banking industry and the risks such an investment may
entail. In addition, general economic conditions play an important part in the
operations of banks, and exposure to credit losses arising from possible
financial difficulties of borrowers might affect a bank's ability to meet its
obligations under a letter of credit.
The Fund will purchase tax-exempt securities which are rated MIG-1 or MIG-2
by Moody's Investor Services, Inc. ("Moody's"), SP-1 or SP-2 by Standard &
Poor's Corporation ("S&P") or the equivalent thereof and non-rated securities
which are determined to be of comparable quality by the Fund's Investment
Adviser pursuant to guidelines established by the Board of Trustees.
OTHER POLICIES. Certain banks and other municipal securities dealers have
indicated a willingness to sell Municipal Obligations to the Fund accompanied by
a commitment to repurchase the securities at the Fund's option or at a specified
date, at an agreed upon price. If a bank or other municipal securities dealer
defaults under its stand-by commitment, the liquidity of the security subject to
such commitment may be adversely affected.
There is no limit on the Fund's ability to purchase Municipal Obligations on
a when-issued or delayed-delivery basis. The price of these securities is fixed
at the time the commitment to purchase is made but delivery and payment takes
place at a later date, normally within one month, and no interest accrues in the
interim. Commitments to purchase when-issued securities will be reflected in
determining the Fund's NAV and readily marketable assets of at least equal value
will be maintained. The Investment Adviser does not believe that the Fund's net
asset value or income will be adversely affected by the purchase of Municipal
Obligations on a when-issued or delayed-delivery basis.
The Fund may purchase participation interests in Municipal Obligations from
financial institutions which give the Fund a proportionate undivided interest in
the security. These instruments may have fixed, floating or variable rates of
interest and may be secured by bank credit support arrangements.
The Tax Reform Act of 1986 ("the Act") subjects interest received on certain
otherwise tax-exempt securities ("private activity bonds") 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 the Fund, to
the AMT. However, as of the date of this Prospectus, the Fund does not purchase
such securities, but reserves the right to do so depending on market conditions
in the future.
Yields on municipal securities depend on a variety of factors, including
general economic and monetary conditions, money market factors, conditions in
the tax-exempt securities market, size of a particular offering, maturity of the
obligation and rating of the issue. The ability of the Fund to achieve its
investment objective is also dependent on the continuing ability of issuers of
municipal securities to meet their obligations for the payment of interest and
principal when due.
From time to time the Fund may invest in taxable short-term investments
("Taxable Investments") consisting of obligations backed by the full faith and
credit of the United States government, its agencies or instrumentalities,
deposit-type obligations, acceptances, letters of credit of Federal Deposit
Insurance Corporation member banks and instruments fully collateralized by such
obligations. Unless the Fund has adopted a temporary defensive position, no more
than 20% of the net assets of the Fund will be invested in Taxable Investments
at any time. The Fund may enter into repurchase agreements with regard to the
taxable obligations listed above. Although the Fund is permitted to make taxable
temporary investments, there is no current intention of generating income
subject to federal income tax.
The Fund's Investment Adviser uses its reasonable business judgment in
selecting investments in addition to considering the ratings of Moody's and S&P.
This analysis considers, among other things, the financial condition of the
issuer by taking into account present and future liquidity, cash flow and
capacity to meet debt service requirements. Since the market value of debt
obligations fluctuates as an inverse function of changing interest rates, the
Fund seeks to minimize the effect of such fluctuations by investing in
instruments with remaining maturities of 397 days or less and limiting its
average maturity to 90 days or less.
4
<PAGE> 7
The principal risk factors associated with investment in the Fund are
fluctuations in short-term interest rates, default of one or more issuers of
securities held and non-diversification. As a non-diversified investment
company, the Fund is permitted to have all its assets invested in a limited
number of issuers. Accordingly, since a relatively high percentage of the Fund's
assets may be invested in the securities of a limited number of issuers, the
Fund's investment securities may be more susceptible to any single economic,
political or regulatory occurrence than the investment securities of a
diversified investment company. However, the Fund intends to qualify as a
"regulated investment company" for purposes of the Internal Revenue Code. This
limits the aggregate value of all investments (except 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.
MANAGEMENT
INVESTMENT MANAGEMENT AGREEMENT. Since November 15, 1971 Reserve Management
Company, Inc. ("Adviser") and its affiliates have provided investment advice to
The Reserve Funds which currently have assets of approximately $4 billion,
pursuant to an Investment Management Agreement. Under the Agreement, the Adviser
manages the Funds and invests in furtherance of its objectives and policies
subject to the overall control and direction of the Funds' Board of Trustees.
As compensation for these services, the Adviser receives a management fee
which is a percentage of the average daily net assets of the Fund, calculated as
follows: (i) .50% per annum of the first $500 million of average daily net
assets; (ii) .475% per annum of the next $500 million of such assets; (iii) .45%
per annum of the next $500 million of such assets; (iv) .425% per annum of the
next $500 million of such assets; and (v) .40% per annum of such assets in
excess of $2 billion. For the fiscal year ended May 31, 1997, the Adviser
received a management fee of .50% of the average net assets of the Fund.
The Investment Management Agreement provides that the Adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Funds in connection with the matters as to which the Agreement relates,
except a loss resulting from the willful malfeasance, bad faith or gross
negligence on the part of the Adviser.
SERVICE AGREEMENT. The Adviser furnishes to the Fund, pursuant to a Service
Agreement, at cost, all personnel required for its operations such as executive,
administrative, clerical, recordkeeping, bookkeeping, shareholder accounting and
servicing, as well as suitable office space and necessary equipment and supplies
used by such personnel in performing these functions. Operating costs for which
the Fund reimburses the Adviser includes salaries and other personnel expense,
rent, depreciation of equipment and facilities, interest and amortization of
loans which finance equipment used by the Fund, and all other expenses incurred
in the conduct of the Fund's affairs. Affiliates of the Adviser may provide some
of these services. The Fund also reimburses the Adviser for: brokerage fees and
commissions, interest charges and taxes, the cost of registering for sale,
issuing and redeeming the Fund's shares and of printing and mailing all
prospectuses, proxy statements and shareholder reports furnished to current
shareholders and the fees and expenses of the Fund's custodian, auditors,
lawyers and disinterested Trustees.
The Adviser has agreed to repay the Fund promptly any amount which a
majority of disinterested Trustees reasonably determines is not properly
attributable to the Fund. The Service Agreement is nonassignable and continues
until terminated by either party on 120 days' notice.
The Fund's total operating expense for the fiscal year ended May 31, 1997,
was 1.04% of the average daily net assets.
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.
TRANSFER AGENT AND DIVIDEND PAYING AGENT. Reserve Tax-Exempt Trust acts as its
own transfer agent and dividend paying agent.
5
<PAGE> 8
HOW TO BUY SHARES
METHOD OF PAYMENT. The minimum initial investment is $1,000 and $250 for
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 Fund each business day at
the net asset value determined after receipt by the Funds of a properly
completed order and payment in Federal Funds (member bank deposits with the
Federal Reserve Bank). Payments must be made:
- By check (drawn on a U.S. bank) payable to The Reserve Funds, 810 Seventh
Avenue, New York, NY 10019-5868. You must include your account number (or
Taxpayer Identification Number) on the "pay to the order of" line for each
check made payable to The Reserve Funds or within the endorsement for each
check endorsed to The Reserve Funds.
- By wire -- Prior to calling your bank, call the Fund for specific
instructions at 800-637-1700 or the broker-dealer or financial institution
("Firm") from which you received this Prospectus.
Checks and wires which do not correctly identify the account to be credited
may be returned or delay the purchase of shares. Because the Fund must pay for
its securities purchases on the same day in Federal Funds, only Federal Funds
wires and checks drawn on the Fund's bank are eligible for entry as of the
business day received. For Federal Funds wires to be eligible for same-day order
entry, the Fund must be notified before 11:00 AM (New York time) of the amount
to be transmitted and the account to be credited. Payment by check not
immediately convertible into Federal Funds will be entered as of the business
day when covering Federal Funds are received or bank checks are converted into
Federal Funds. This usually occurs within two (2) business days, but may take
longer. Checks delivered to the Fund's offices after 11:00 AM will be considered
received the next business day. A fee will be charged if any check used for
investment in your account does not clear.
Any monies which cannot be credited to an account by the end of the business
day following that on which Federal Funds become available will be returned as
promptly as possible to the sender or, if this cannot be readily determined, to
the bank from which they came or were drawn. The Fund reserves the right, with
respect to any person or class of persons, under certain circumstances to waive
investment minimums and redemption requirements. The Fund reserves the right to
suspend the offering of shares from time to time and to reject any purchase
order for any reason. The Fund will only accept purchase checks in excess of
$100 which are payable to The Reserve Funds or payable to the shareholder/payee
of the check and endorsed to The Reserve Funds. The Fund does not accept
travelers checks.
RESERVE AUTOMATIC ASSET-BUILDER PLAN. If you have an account balance of $5,000
or more, you may purchase shares of the Fund ($25 minimum) from a checking, NOW,
or bank money market deposit account or from a U.S. government distribution ($25
minimum) such as Social Security, federal salary, or certain veterans' benefits,
or other payments from the federal government. Call the Funds at (800) 637-1700
for an application.
NET ASSET VALUE. Shares are sold to the public at net asset value ("NAV"). The
NAV of the Fund is calculated at the close of each business day (normally 4:00
PM New York time) by taking the sum of the Fund's investments (amortized cost
value is used for this purpose) and any cash or other assets, subtracting
liabilities and dividing by the total number of shares outstanding. A "business
day" is Monday through Friday exclusive of days the New York Stock Exchange is
closed for trading and bank holidays in New York State which include Martin
Luther King's Birthday and Columbus Day. It is the policy of the Fund to seek to
maintain a stable NAV of $1.00 per share although this share price is not
guaranteed.
DISTRIBUTORS. The Distributors of the Fund are Resrv Partners, Inc., 810
Seventh Avenue, New York, NY 10019-5868, which is a wholly-owned subsidiary of
the Advisor and Pacific Global Fund Distributors, Incorporated, 250 North
Marengo Avenue, Pasadena, CA 91101.
EXCHANGE PRIVILEGE. The shares offered by this Prospectus may be exchanged for
shares in other Reserve money market funds at net asset value. Customers of some
firms may exchange shares of the Fund for shares of certain equity and bond
funds where a sales load normally applies. A waiver of the sales load may apply
if the shares being exchanged were acquired: (a) by a previous exchange from
shares of a fund purchased with a sales load, or (b) through investments of
dividends or distributions paid with respect to the foregoing category of
shares. Exchanges of shares of one fund for another is a taxable event and may
result in a gain or loss for federal income tax purposes. The exchange privilege
may be modified or terminated at any time, or from time to time, upon 60 days'
notice to shareholders. Shares to be acquired in an exchange must be registered
for sale in the investor's state. The exchange privilege described under this
heading may not be available to clients of some firms and some firms may impose
conditions on their clients which are different from those described in this
Prospectus.
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<PAGE> 9
DISTRIBUTION AND SERVICE PLAN. Accounts may be opened through brokers,
financial intermediaries and institutions ("Firms"), some of which participate
in the Fund's Plan of Distribution ("Plan"). Under Rule 12b-1 of the 1940 Act,
the Fund makes assistance payments at an annual rate of .20% of net assets,
substantially all of which are paid to those Firms for distribution assistance
and administrative services provided to the Fund. The Adviser is required by the
Plan to pay an equivalent amount and may, at its discretion, pay additional
amounts based upon assets committed to the Fund by such Firms. The Plan does not
permit the carrying over of payments from year to year. The Adviser also
reimburses Firms for a portion of their costs for advertising and marketing of
the Fund. All such arrangements are designed to facilitate the sale of a Fund's
shares.
CLIENTS OF FIRMS. Firms provide varying arrangements for their clients with
respect to the purchase and redemption of the Fund's shares and may arrange with
their clients for other investment or administrative services. Firms are
responsible for the prompt transmission of purchase and redemption orders. Some
Firms may independently establish and charge additional fees such as redemption
fees to their clients for their services, which charges would reduce their
clients' yield or return. Firms may also hold the Fund's shares in nominee or
street name on behalf of their clients. In such instances, the Fund's transfer
agents will have no information with respect to or control over the accounts of
specific shareholders. Such shareholders may obtain access to their accounts and
information about their accounts only from their Firm. Some Firms may receive
compensation for recordkeeping and other services relating to these nominee
accounts. In addition, certain privileges with respect to the purchase and
redemption of shares (such as check writing redemptions) or the reinvestment of
dividends may not be available through such Firms or may only be available
subject to certain conditions and limitations. Some Firms may participate in a
program allowing them access to their clients' accounts for servicing including,
without limitation, changes of registration and dividend-payees and may perform
functions such as generation of confirmations and periodic statements and
disbursement of cash dividends. The Prospectus should be read in connection with
such Firm's material regarding its fees and services.
SHARES OF BENEFICIAL INTEREST
Reserve Tax-Exempt Trust ("Trust") was organized as a Massachusetts business
trust on January 25,1983 and is an open-end management investment company
commonly known as a mutual fund. At the date of this Prospectus, there were
seven separate series authorized and outstanding. Additional series may be added
in the future by the Board of Trustees. The Trust is authorized to issue an
unlimited number of shares of beneficial interest which may be issued in any
number of series. Shares issued will be fully paid and nonassessable and will
have no preemptive rights. The shareholders of the Trust are entitled to a full
vote for each full share held (and fractional votes for fractional shares) and
have equal rights with respect to earnings, dividends, redemption and in the net
assets of their respective series on 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 the Fund) or by the
Declaration of Trust.
Under Massachusetts law, the shareholders and trustees of a business trust
may, in certain circumstances, be personally liable for the trust's obligations
to third parties. However, the Declaration of Trust provides, in substance, that
no shareholder or Trustee shall be personally liable for the Trust's, and each
separate investment portfolio's obligations to third parties, and that every
written contract made by the Trust or the Fund contain a provision to that
effect. The Declaration of Trust also requires the Trust to indemnify
shareholders and Trustees against such liabilities and any related claims or
expenses.
DAILY DIVIDENDS
The Fund declares dividends each business day. Dividends are distributed
daily as additional shares to shareholder accounts except for shareholders who
elect in writing to receive cash dividends, in which case monthly dividend
checks are sent to the shareholder.
TAXES
To maintain its regulated investment company status for federal income tax
purposes, the Fund intends to satisfy certain requirements imposed by the
Internal Revenue Code, so as to avoid any federal income or excise tax
liability. Dividends derived from the interest earned on Municipal Obligations
constitute "tax-exempt interest dividends" and are not subject to federal income
taxes. Any distributions of net realized long-term capital gains earned by the
Fund are taxable to shareholders as such regardless of the length of time the
Fund's shares have been owned by the shareholder.
Shareholders are advised to retain all statements to maintain accurate
records of their investments. If any dividends are not exempt from federal,
state or local taxes, shareholders will be advised of the percentage by February
of the following year. Shareholders should consult their tax advisers regarding
specific questions as to federal, state or local taxes.
7
<PAGE> 10
REDEMPTIONS
TIME AND METHOD OF REDEMPTION. Shares of the Fund are redeemed at their net
asset value determined after receipt by the Fund of a request in proper form.
The Fund usually transmits payment the same day when requests are received
before 11:00 AM (New York time) and the next day for requests received after
11:00 AM. However, this is not always possible and transmission of redemption
proceeds may be delayed up to seven days. Orders received after 11:00 AM are not
processed until the next business day to enable shareholders to receive
additional dividends. Payment will normally be made by check or bank transfer.
Shares do not earn dividends on the day a redemption is effected, regardless of
whether the redemption order is received before or after 11:00 AM.
WRITTEN AND TELEPHONE REDEMPTION REQUESTS. The Fund strongly suggests (but does
not require) that each redemption, written or by telephone, be at least $1,000,
except for redemptions which are intended to liquidate the account. A
shareholder will be charged $2 for redemption checks issued by the Fund for less
than $100. Upon request, redemptions will be made by bank wire, however, wire
redemptions of less than $10,000 will be charged a fee (currently $10). The Fund
assumes no responsibility for delays in the receipt of wired or mailed funds.
The use of a predesignated financial institution, such as a savings bank, credit
union or savings and loan association, which is not a member of the Federal
Reserve wire system could cause such a delay. If the Fund has previously been
advised in writing of your brokerage or bank account, telephone requests will be
accepted by calling 800-637-1700. The Fund may be liable for any losses caused
by its failure to employ reasonable procedures. To reduce the risk of loss,
proceeds of telephone redemptions may be sent only to (1) the bank or brokerage
account designated by the shareholder, in writing, on the Application or in a
letter with the signature(s) guaranteed; or (2) to the address of record if all
the conditions listed below are met. To change the designated brokerage or bank
account it is necessary to contact the Firm through which shares of the Fund
were purchased or, if purchased directly from the 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 Fund will waive the signature guarantee requirement on a redemption request
once every thirty (30) days if all of the following conditions apply: if the
redemption check is (1) for $5,000 or less; (2) payable to the shareholder(s) of
record; and (3) mailed to the shareholder(s) at the address of record. The
requirement of a guaranteed signature protects against an unauthorized person
redeeming shares and obtaining the redemption proceeds. Redemption instructions
and election of the plans described below may be made when your account is
opened. Subsequent elections and changes in instructions must be in writing with
the signature(s) guaranteed. Changes in registration or authorized signatories
may require additional documentation.
The Fund reserves the right to refuse a telephone redemption if it believes
it is advisable to do so. Procedures for telephone redemptions may be modified
or terminated by the Fund at any time. During times of drastic economic or
market conditions, shareholders may experience difficulty in contacting the Fund
by telephone to request a redemption or exchange of the Fund's shares. In such
cases shareholders should consider using another method of redemption, such as a
written request or a redemption by check.
CHECKING, VISA AND ATM ACCESS. The Fund offers a comprehensive package of
services which enhance access to your account. By completing the Application or
a signature card (for existing accounts) and certain other documentation if the
owner of record is a fiduciary, corporation, partnership, trust or other
organization, you can write checks in any amount against your account.
Redemptions by check lengthen the time your money earns dividends, since
redemptions are not made until the check is processed by the Funds. Because of
this, you cannot write a check to completely liquidate your account, nor may a
check be presented for certification or immediate payment. Otherwise, you may
use your Reserve checking account as you would any checking account. Your checks
will be returned (bounced) and a fee charged if they are postdated, contain an
irregularity in the signature, amount or otherwise, or are written against
accounts with insufficient funds. All transaction activity, including check
redemptions, will be reported on your account statement. A fee will be charged
for providing check copies. Upon proper notice, the Funds may choose to impose a
fee if it deems a shareholder's actions to be burdensome. Checking may not be
available to clients of some Firms and a Firm may establish its own minimum
check amount. Reserve VISA cards provide access to your Reserve balances and
margin line for worldwide purchasing power and cash at over 250,000 ATMs. For
more information call 800-637-1700.
STOP PAYMENTS. The Fund will honor stop payment requests on unpaid shareholder
checks provided they are advised of the correct check number, payee, check
amount, and date. Stop payment requests received by the Fund by 2:00 PM (New
York time) in proper form will be effective the next business day. Oral stop
payment requests are effective for fourteen (14) calendar days, at which time
they will be canceled unless confirmed in writing. Written stop payment requests
will remain in effect for one year. A fee will be charged for this service.
AUTOMATIC WITHDRAWAL PLANS. If you have an account with a balance of at least
$5,000, you may elect in writing to participate in either of the following: (i)
an Income Distribution Plan providing for monthly, quarterly or annual payments
by redemption of shares from reinvested dividends or distributions paid to your
account during the preceding period; or (ii) a Fixed Amount Withdrawal Plan
providing for the automatic redemption of a sufficient number of shares of your
account to make a specified monthly, quarterly or annual payment
8
<PAGE> 11
of a fixed amount. Changes in instructions must be in writing with signature(s)
guaranteed. In order for such payments to continue under either Plan, there must
be a minimum of $25 available from reinvested dividends or distributions.
Payments can be made to you or your designee. An application for the Automatic
Withdrawal Plans can be obtained from the Fund. The amount, frequency and
recipient of the payments may be changed by giving proper written notice to the
Fund. The Fund may impose a charge, modify or terminate any Automatic Withdrawal
Plan at any time after the participant has been duly notified. This privilege
may not be available to clients of some Firms or may be available subject to
conditions or limitations.
RESERVE AUTOMATIC TRANSFER PLAN. You may redeem Fund shares (minimum $100)
without charge by telephone if you have filed a separate Reserve Automatic
Transfer application with the Fund. The proceeds will be transferred between
your Fund account and the checking, NOW or bank money market deposit account (as
permitted) designated in the application. Only such an account maintained in a
domestic financial institution which is an Automated Clearing House member may
be so designated. Redemption proceeds will be on deposit in your account at the
Automated Clearing House member bank ordinarily two (2) business days after
receipt of the redemption request. The Fund may impose a charge, modify or
terminate this privilege at any time after the participant has been duly
notified. This privilege may not be available to clients of some Firms or may be
available subject to conditions or limitations.
RESTRICTIONS. The right of redemption may be suspended or the date of payment
postponed for more than seven (7) days only (a) when the New York Stock Exchange
is closed (other than for customary closings), (b) when, as determined by the
Securities and Exchange Commission ("SEC"), trading on the Exchange is
restricted or an emergency exists making it not reasonably practicable to
dispose of securities owned by the Fund or for it to determine fairly the value
of its net assets, or (c) for such periods as the SEC may permit. If shares of
the Fund are purchased by check or Reserve Automatic Transfer, the Fund may
delay transmittal of redemption proceeds until such time as it has assured
itself that good payment has been collected for the purchase of such shares,
which may generally take up to ten (10) business days. Shareholder checks
written against funds which are not yet considered collected will be returned
and a fee charged against the account. When a purchase is made by wire and
subsequently redeemed, the proceeds from such redemptions normally will not be
transmitted until two (2) business days after the purchase.
GENERAL INFORMATION
JOINT OWNERSHIP. When an account is registered in the name of one person and
another, for example a husband and wife, either person is entitled to redeem
shares in the account. The Application provides that persons so registering
their account indemnify and hold the Fund harmless for actions taken by either
party.
REPORTS AND STATEMENTS. Shareholders receive an annual report containing
audited financial statements and an unaudited semi-annual report. A statement is
sent to each shareholder at least quarterly. Shareholders who are clients of
some Firms will receive a statement combining transactions in Fund shares with
statements covering other brokerage or mutual fund accounts.
SMALL BALANCES. Because of the expense of maintaining accounts with small
balances (less than $1,000), the Fund will either levy a monthly charge
(currently $5) or redeem the account and remit the proceeds. Some Firms may
establish variations of minimum balances and fee amounts if those variations are
approved by the Fund.
RESERVE EASY ACCESS. Easy Access is The Reserve Funds' 24 hour toll-free
telephone service that lets customers use a touch-tone phone to obtain yields
and account balances. To use it, call 800-637-1700 and follow the instructions
you will receive. Clients may also access full account activity for the previous
six months on the Internet at www.reservefunds.com.
INQUIRIES. Shareholders should direct their inquiries to the Firm from which
they received this Prospectus or to the Fund.
SPECIAL SERVICES. The Fund reserves the right to charge shareholder accounts
for specific costs incurred in processing unusual transactions for shareholders.
Such transactions include, but are not limited to, stop payment requests, copies
of Fund redemption or shareholder checks and special research services.
CASH PERFORMANCE ACCOUNT (CPA). A Reserve CPA can be used for everything from
daily expenses to the special luxuries of life -- or just to have cash when you
need it. It's the smartest way to manage your money -- keep it in a Reserve Cash
Performance Account. For more information see page 8, Checking, VISA and ATM
Access, or call 800-637-1700.
PERFORMANCE. The Fund may compare its performance to other income producing
alternatives such as (i) money market funds (based on yields cited by IBC's
Money Fund Report and other industry publications); and (ii) various bank
products (based on average rates of bank and thrift institution certificates of
deposit, money market deposit accounts and NOW accounts as reported by the Bank
Rate Monitor and other industry publications). An investment in shares of the
Fund is not insured by the Federal Deposit Insurance Corporation.
9
<PAGE> 12
Yield information is useful in reviewing the Fund's performance relative to
other funds that hold investments of similar quality. Because yields will
fluctuate, yield information may not provide a basis for comparison with bank
and thrift certificates of deposit which normally pay a fixed rate for fixed
term and are subject to a penalty for withdrawals prior to maturity which will
reduce their return.
------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
------------------------
10
<PAGE> 13
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Trustees of Reserve Tax-Exempt
Trust--Interstate Tax-Exempt Fund:
We have audited the accompanying statement of net assets of the Interstate
Tax-Exempt Fund (one of the series constituting Reserve Tax-Exempt Trust) as of
May 31, 1997, and the related statement of operations for the year then ended,
the statements of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the periods presented.
These financial statements and financial highlights are the responsibility of
the Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1997, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Interstate Tax-Exempt Fund of Reserve Tax-Exempt Trust as of May 31, 1997, the
results of its operations, the changes in its net assets and its financial
highlights for the periods referred to above, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
New York, New York
June 27, 1997
RESERVE TAX-EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
----------------------- -------- -------------- --------
<S> <C> <C> <C>
ALABAMA -- .66%
Decatur IDA for Scientific Manufacturing, 4.15%(a)........ 2/1/2014 $ 1,000 $ 1,000,114
Pell City IDA for General Signal Corporation, 4.05%(a).... 10/1/2000 1,000 1,007,059
ARIZONA -- 6.45%
Apache IDA for Tucson Electric Power Company, 3.90%(a).... 12/15/2018 6,000 6,011,992
Apache IDA for Tucson Electric Power Company, 3.95%(a).... 12/15/2018 2,000 2,004,030
Coconino PCR for Tucson Electric Power Company Series B,
3.80%(a)................................................ 5/1/2031 1,000 1,002,841
Gila IDA PCR for Cobre Valley Hospital, 3.90%(a).......... 11/1/2025 4,000 4,014,597
Pima IDA PCR for Tucson Electric Project, 3.90%(a)........ 10/1/2022 5,600 5,600,598
Pima IDA for Tucson Retirement Center, 3.85%(a)........... 1/1/2009 800 805,451
Yauapai IDA for Kachina Pointe Project, 3.85%(a).......... 1/1/2009 300 302,044
CALIFORNIA -- 8.23%
California School District Cash Reserves Program Series A,
4.75%................................................... 7/2/1997 3,000 3,132,529
California Community Development Authority, 3.65%(a)...... 5/15/2025 100 100,185
Grand Terrace Community Redevelopment Agency, 3.95%(a).... 12/1/2011 5,700 5,716,694
Irvine Beach Assessment, 3.70%(a)......................... 9/2/2011 300 300,030
Los Angeles MHR for Malibu Meadows Project Series 91-A,
3.95%(a)................................................ 12/1/2015 800 802,941
Los Angeles USD TRAN, 4.50%............................... 6/30/1997 500 520,970
Los Angeles Transportation Commission Custodial Receipts,
4%(a)................................................... 7/1/2005 600 609,143
San Bernadino HFR Alta Park Project, 4%(a)................ 5/1/2006 3,500 3,512,940
San Francisco Bayside Village Series 85D, 3.95%(a)........ 12/1/2005 4,000 4,027,944
San Joaquin USD TRAN, 4.50%............................... 1/15/1998 1,000 1,033,515
San Jose Community Redevelopment Agency, 3.80%(a)......... 7/1/2026 1,300 1,304,495
San Mateo USD TRAN, 4.50%................................. 7/1/1997 3,000 3,125,535
Union City MHR for Skylark Apartments, 4%(a).............. 11/1/2007 1,000 1,001,999
</TABLE>
11
<PAGE> 14
RESERVE TAX-EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997--(CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
----------------------- -------- -------------- --------
<S> <C> <C> <C>
COLORADO -- 2.22%
Englewood HCF for SW Medical Professional Ltd. Series 85
Series 85, 4.05%(a)..................................... 12/1/2010 $ 2,000 $ 2,007,523
Jefferson County IDR for Kinder-Care Learning Centers
Series C, 4.15%(a)...................................... 2/1/2001 1,700 1,700,193
Jefferson Country IDR for S.W. Medical Project Series 85,
4.05%(a)................................................ 11/1/2010 2,450 2,459,216
Wheat Ridge IDA for Pearse Electronics Inc. Project,
4.25%(a)................................................ 6/1/1999 625 626,178
CONNECTICUT -- .56%
Connecticut Development Authority Health Care Revenue
Bonds for Independent Living Project 1990 Series,
3.70%(a)................................................ 7/1/2015 300 301,052
Hartford Redevelopment Agency MHR for Underwood Towers,
3.65%(a)................................................ 6/1/2020 1,400 1,404,816
DELAWARE -- .66%
Wilmington GOB, 5%........................................ 10/1/1997 2,000 2,025,644
DISTRICT OF COLUMBIA -- .73%
Washington, D.C. Housing Finance Agency MHR for Chastleton
Development Project, 4%(a).............................. 7/1/1997 2,200 2,236,950
FLORIDA -- 4.51%
Boca Raton IDA for Parking Garage Project, 4.325%(a)...... 12/1/2014 2,800 2,800,336
Broward Country MHR for Welleby Apartment Project,
4%(a)................................................... 12/1/2006 600 602,209
Collier IDA for Retirement Housing Revenue Bonds,
3.95%(a)................................................ 12/1/2015 200 200,724
Dade County Hospital Revenue Bonds, 3.85%(a).............. 9/1/2025 200 200,570
Dade County IDA for Dolphin Stadium Project, 3.95%(a)..... 1/1/2016 2,800 2,810,218
Dade County Hospital Revenue Bonds Project, 3.85%(a)...... 3/1/2025 100 100,285
Duval County HFA for Lakes of Mayport Apartment Project,
4%(a)................................................... 12/1/2009 700 702,602
Florida HFR/Oaks at Mill Creek Project Series 85,
3.95%(a)................................................ 11/1/2007 200 200,578
Gulf Breeze Series 85 A Revenue Bonds, 4%(a).............. 12/1/2015 400 401,476
Hillsborough IDA for Tampa Electric Co., 4.15%(a)......... 9/1/2025 700 702,451
Hillsborough PCR for Cannon Conversion, 4%(a)............. 5/15/2018 200 200,690
Jacksonville IDA for Coastal Islands Project, 4.05%(a).... 8/1/2008 195 195,022
Lee County IDA for Charter Glade Hospital Project,
4.10%(a)................................................ 8/1/2007 4,375 4,391,379
Palm Beach PCR for Water and Sewer Project, 4.05%(a)...... 10/1/2011 200 200,022
University of North Florida HEF Capital Improvement
Project, 3.90%(a)....................................... 11/1/2024 100 100,368
GEORGIA -- 5.80%
Clayton County DAI for Rivers Edge Development,
3.95%(a)................................................ 8/1/2006 2,880 2,890,664
Elbert County Industrial Building Authority Revenue Bonds
for Seaboard Farms of Elberton, 3.95%(a)................ 7/1/2005 1,800 1,812,452
Gwinnett County IDA for United Stationers Supply Company,
3.95%(a)................................................ 10/31/2002 3,800 3,813,998
Municipal Electric Authority, 4.05%(a).................... 1/1/2026 9,200 9,226,982
IOWA -- 2.09%
Buffalo IDA for Linwood Mining & Materials, 4.20%(a)...... 1/1/2000 1,165 1,165,134
Iowa School Corp. Warrant Certificates Series A, 4.75%.... 6/27/1997 5,000 5,223,866
ILLINOIS -- 0.55%
Streamwood IDA for Olde Church Centre Project, 4.05%(a)... 12/1/2014 1,685 1,691,258
INDIANA -- 4.53%
Indianapolis Airport Custodial Receipts, 4.05%(a)......... 7/1/2015 5,000 5,077,784
Tippecanoe County PCR for Caterpillar Inc., 3.95%(a)...... 11/1/2006 8,750 8,782,315
KANSAS -- 1.33%
Ottawa IDA for Our Own Hardware Co., 3.95%(a)............. 10/1/2004 4,080 4,080,442
KENTUCKY -- 3.76%
Danville EDA Multi-Lease Revenue Bonds, 4.20%(a).......... 4/1/2007 900 903,443
Ohio County PCR for Big River Electric Corporation,
4.40%(a)................................................ 6/1/2013 4,500 4,593,605
Ohio County PCR for Big River Electric Corporation Project
Series 1985, 4.85%(a)................................... 10/1/2015 6,000 6,024,279
LOUISIANA -- 0.33%
Louisiana Public Facilities Authority W. Knighton Project,
3.90%(a)................................................ 9/1/2025 1,000 1,002,893
</TABLE>
12
<PAGE> 15
RESERVE TAX-EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997--(CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
----------------------- -------- -------------- --------
<S> <C> <C> <C>
MARYLAND -- 6.03%
Anne Arundel County Industrial Refunding Revenue Bonds for
Kinder-Care Learning Centers, 4.15%(a).................. 2/1/2001 $ 2,260 $ 2,260,257
Baltimore IDA for Mayor and City Counsel Project,
4.05%(a)................................................ 8/1/2016 2,500 2,507,548
Maryland Health and Higher Education Pooled Project Series
85A, 3.90%(a)........................................... 4/1/2035 13,000 13,001,389
Montgomery County IDA for Info Systems and Network
Corporation, 4.15%(a)................................... 4/1/2014 700 702,547
MASSACHUSETTS -- 2.82%
Boston Water and Sewer Commission Revenue Bonds 1994 A,
3.80%(a)................................................ 11/1/2024 300 301,040
Massachusetts HEF for Harvard University, 3.65%(a)........ 2/1/2016 400 401,391
Massachusetts IFA for Governor Dummer Academy, 3.80%(a)... 7/1/2026 1,200 1,204,228
Massachusetts IFA for Griffin Realty, 3.85%(a)............ 7/1/2008 200 200,710
Massachusetts IFA for Quamco Series B, 3.70%(a)........... 9/1/2001 200 200,693
Watertown BAN, 4.25%...................................... 5/13/1998 5,000 5,022,986
Westfield BAN, 4.50%...................................... 5/8/1998 1,300 1,308,657
MICHIGAN -- 1.44%
Dearborn Heights EDC for Oakbrook Common Project Series
1993, 3.85%(a).......................................... 3/1/2025 3,900 3,900,411
Jackson EDC for Thrifty Leoni Inc. Project, 4.075%(a)..... 12/1/2014 500 500,057
MINNESOTA -- 2.21%
Eagan MHR for Aspen Woods, 4.15%(a)....................... 1/1/2026 5,580 5,601,594
New Brighton Industrial Development Refunding Revenue
Bonds for Taylor Corporation Series 1988, 5.44%(a)...... 11/1/1999 385 384,694
New Hope Commercial Development Revenue Bonds for National
Beauty Project Series 1994, 4.15%(a).................... 5/1/2010 775 775,088
MISSOURI -- 2.26%
Cole IDA for Modine Manufacturing Series 85, 4.15%(a)..... 12/1/2015 2,940 2,961,552
Missouri State Environmental Improvement and Energy
Resources Authority Pollution Control RAW Series A,
3.95%(a)................................................ 6/1/2014 3,000 3,000,000
St. Louis Industrial Development Refunding Revenue Bonds
for Kinder-Care Learning Centers, 4.15%(a).............. 2/1/2001 965 965,110
MONTANA -- .20%
Great Falls Commercial Development Revenue Bonds for
Liberty Development Partners Project, 4.15%(a).......... 12/1/2007 625 625,071
NEBRASKA -- 1.67%
Nuckolls IDA for Agrex Inc Project, 4.40%,(a)............. 2/1/2015 5,100 5,120,665
NEVADA -- 1.31%
Clark Unlimited Tax GOB Series A, 4.05%(a)................ 10/1/2030 4,000 4,014,395
NEW JERSEY -- 5.98%
East Rutherford BAN, 4.31%................................ 1/23/1998 2,000 2,010,892
Fair Lawn BAN, 4%......................................... 8/1/1997 1,866 1,929,017
Fairfield BAN, 4%......................................... 12/17/1997 2,000 2,036,685
New Jersey EDA for Volvo of America Corp., 4.40%(a)....... 12/1/2004 1,800 1,800,217
New Jersey Sports Expo Authority Series 92C, 3.65%(a)..... 9/1/2024 600 605,374
Rahway BAN, 4%............................................ 12/23/1997 2,740 2,792,260
Trenton Temp Notes, 4%.................................... 12/18/1997 3,000 3,060,889
Vernon Board of Education Temp Notes, 4%.................. 1/16/1998 4,000 4,066,052
NEW MEXICO -- 3.97%
Dona Ana IDR for Foamex Products, 3.90%(a)................ 11/1/2013 2,100 2,107,623
Farmington PCR for Public Service Four Corners,
4.05%(a)................................................ 4/1/2022 10,000 10,035,986
NEW YORK -- 8.68%
Nassau BAN, 4.50%......................................... 8/15/1997 4,000 4,133,848
New York City GOB Series A7, 4%(a)........................ 8/1/2020 1,300 1,300,142
New York City GOB Series B4, 4.05%(a)..................... 8/15/2023 1,800 1,800,200
New York City GOB Series B8, 3.85%(a)..................... 8/15/2023 500 500,053
New York City GOB Series C4-97, 4%(a)..................... 8/1/1997 3,100 3,100,345
</TABLE>
13
<PAGE> 16
RESERVE TAX-EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997--(CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
----------------------- -------- -------------- --------
<S> <C> <C> <C>
NEW YORK -- (CONTINUED)
New York City GOB Series E5, 4%(a)........................ 8/1/2009 $ 1,500 $ 1,500,164
New York State R&D PCR for Niagara Mohawk, 4.20%(a)....... 7/1/2015 1,000 1,000,115
North Hempstead G.O. BAN, 4.25%........................... 2/26/1998 4,000 4,057,026
Roslyn BAN, 4%............................................ 10/15/1997 5,000 5,099,618
Syracuse BAN Series 96A, 3.90%............................ 12/19/1997 4,000 4,073,677
NORTH CAROLINA -- .03%
North Carolina HEF for Guilford College Project,
4.10%(a)................................................ 9/1/2023 100 100,351
NORTH DAKOTA -- .36%
Minot IDR for Nash Finch Co. Project, 4.15%(a)............ 12/1/2002 1,100 1,100,125
OHIO -- 3.11%
Brunswick IDA for Kinder-Care Learning Centers Project
Series A, 4.15%(a)...................................... 6/1/2002 425 425,048
Columbus ERD Electric Systems Revenue Bonds, 3.60%(a)..... 9/1/2009 1,000 1,003,156
Cuyahoga IDA for Allen Group Project, 3.80%(a)............ 12/1/2015 1,000 1,002,841
Cuyahoga IDA for Edgecomb Metals Co., 3.95%(a)............ 9/1/2009 1,000 1,000,110
Franklin County Industrial Development Refunding Revenue
Bonds for Kinder-Care Learning Centers Project Series A,
4.15%(a)................................................ 6/1/2002 1,080 1,080,123
Montgomery IDA for Sister Chart Health Care, 3.85%(a)..... 5/15/2025 1,900 1,906,832
Sharonville IDA for Edgecomb Metals Inc., 3.85%(a)........ 11/1/2009 1,610 1,615,901
Toledo Special Obligation Assessment Notes, 3.90%(a)...... 12/1/1998 1,500 1,500,321
OKLAHOMA -- 1.64%
Tulsa IDA for University of Tulsa Project Series B,
4%(a)................................................... 10/1/2026 5,000 5,017,774
OREGON -- 0.69%
Medford HFA for Rogue Valley, 4.10%(a).................... 10/1/2016 100 100,011
Port of Portland IDR for Tyerson & Sons, 4.05%(a)......... 11/01/2007 2,000 2,007,400
PENNSYLVANIA -- 5.84%
Allegheny University Project Series 85, 3.75%(a).......... 7/1/2015 1,400 1,409,298
Berks TRAN, 4.375%........................................ 12/31/1997 2,500 2,555,421
Butler IDA for Lutheran Welfare Series A, 4.25%(a)........ 11/1/2026 1,700 1,710,461
Chartier Valley Industrial and Commercial Development
Authority Revenue Bonds for 1133 Penn Associates Project
Series A, 3.95%(a)...................................... 8/1/2007 1,664 1,670,129
Clarion County Industrial Development Authority Special
Development Revenue Bonds for Meritcare Project Series
A, 3.95%(a)............................................. 12/1/2012 2,100 2,107,756
Delaware Valley Regional Finance Authority Series 85A,
Revenue Bonds 3.90%(a).................................. 12/1/2020 2,000 2,007,279
Emmans GOB Local Government Revenue Bonds, 3.95%(a)....... 3/1/2024 1,900 1,907,004
Northeastern HEF Wyoming Valley HCS Revenue Bonds,
3.85%(a)................................................ 1/1/2024 1,000 1,003,618
Penn GOB, 3.70%........................................... 7/17/1997 2,000 2,006,488
Philadelphia Hospital Authority for Children's Hospital,
4.05%(a)................................................ 3/1/2027 1,000 1,003,479
University of Pittsburgh Capital Project Bonds,
3.75%(a)................................................ 1/1/2019 500 503,321
PUERTO RICO -- 1.25%
Puerto Rico Electric Power Authority Series 11,
4.10%(a)................................................ 7/1/2022 3,810 3,814,708
TENNESSEE -- 1.90%
Coster County IDB Seville Properties Series 1991,
4.30%(a)................................................ 6/15/2013 100 100,402
Chattanooga IDA for Baylor School Project, 3.95%(a)....... 11/1/2016 1,000 1,000,108
Knox IDB for Loews Investment Corp., 3.90%(a)............. 10/1/2005 500 501,710
Metropolitan Nashville/Davidson Lake Shore Estates,
4.30%(a)................................................ 9/1/2009 200 200,819
Tennessee School Bond Authority, 3.95%.................... 3/1/1998 4,000 4,014,482
TEXAS -- 1.11%
North Central HEF for YMCA for Metro Dallas, 3.95%(a)..... 6/1/2021 3,400 3,412,533
UTAH -- .28%
Bountiful DAI for Bountiful Gateway Park Project,
4.05%(a)................................................ 12/1/1997 865 868,071
WEST VIRGINIA -- 0.16%
Virginia Hospital Finance Authority Revenue Bonds for
Mid-Atlantic Capital Project 3.90%(a)................... 12/1/2025 500 501,847
</TABLE>
14
<PAGE> 17
RESERVE TAX-EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997--(CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
----------------------- -------- -------------- --------
<S> <C> <C> <C>
VIRGINIA -- 2.83%
Fairfax IDR for Kinder-Care Learning Centers Series E,
4.15%(a)................................................ 10/1/1999 $ 4,875 $ 4,875,554
Virginia HFR for AHC Service, 3.95%(a).................... 9/1/2017 3,800 3,800,411
WASHINGTON -- 1.05%
Port of Seattle DAI for Douglas Management Corporation,
4.05%(a)................................................ 12/1/2005 3,200 3,212,003
WISCONSIN -- 1.31%
Green Bay IDA for St. Mary Cement Company Ltd.,
4.05%(a)................................................ 11/1/2000 4,000 4,011,848
WYOMING -- 0.33%
Sweetwater IDA for Pacific Corp Project Series A,
3.90%(a)................................................ 7/1/2015 1,000 1,003,596
------------
Total Interstate Fund Investments (100.87%) (Cost
$306,924,758)............................................. 308,829,868
Other liabilities, less assets (-.87%)...................... (2,678,002)
------------
NET ASSETS (100%) equivalent to $1.00 net asset value,
offering and redemption prices per share on 306,151,866
shares of beneficial interest of $.001 par value
outstanding. $306,151,866
============
</TABLE>
- ---------------
(a) The interest rate is subject to change periodically. The rates shown were in
effect at May 31, 1997. Securities payable on demand are collateralized by
bank letters of credit or other bank credit agreements.
------------------------
SECURITY TYPE ABBREVIATIONS:
<TABLE>
<S> <C> <C>
BAN -- Bond Anticipation Notes
DAI -- Development Authority Industrial Development
Refunding Bonds
EDA -- Economic Development Authority Revenue Bonds
EDC -- Economic Development Corporation
ERD -- Energy Research and Development Authority
GOB -- General Obligation Bonds
HCF -- Health Care Facility
HCS -- Health Care Systems, Inc.
HEF -- Health and Educational Facilities Revenue Bonds
HFA -- Health Facilities Authority Revenue Bonds
HFR -- Health Facilities Revenue Bonds
IDA -- Industrial Development Authority Revenue Bonds
IDB -- Industrial Development Board Revenue Bonds
IDR -- Industrial Development Agency Revenue Bonds
IFA -- Industrial Finance Agency Revenue Bonds
MHR -- Multifamily Housing Revenue Bonds
PCR -- Pollution Control Revenue Bonds
TRAN -- Tax & Revenue Anticipation Notes
RAN -- Revenue Anticipation Notes
RAW -- Revenue Anticipation Warrants
USD -- Unified School District Bonds
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE> 18
RESERVE TAX-EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND
STATEMENT OF OPERATIONS
YEAR ENDED MAY 31, 1997
<TABLE>
<S> <C>
INTEREST INCOME (Note 1).................................... $10,956,203
-----------
EXPENSES (Note 2)
Management fee............................................ 1,532,970
Shareholder servicing, administration and general office
expenses................................................ 673,797
Distribution assistance (Note 3).......................... 577,267
Equipment expense......................................... 106,255
Professional fees......................................... 84,398
Occupancy costs........................................... 41,693
Stationery, printing and supplies......................... 84,093
Trustee fees.............................................. 12,315
Other expenses............................................ 80,920
-----------
Total Expenses.......................................... 3,193,708
-----------
NET INVESTMENT INCOME....................................... $ 7,762,495
===========
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MAY 31, 1997 MAY 31, 1996
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM INVESTMENT OPERATIONS:
Net investment income paid to shareholders as dividends
(Note 1)............................................... $ (7,762,495) $ (8,935,332)
--------------- ---------------
FROM CAPITAL SHARE TRANSACTIONS (at net asset value of $1
per share):
Net proceeds from sale of shares........................ 1,254,673,650 1,383,537,294
Net asset value of shares issued on reinvestment of
dividends.............................................. 7,762,495 8,935,332
--------------- ---------------
Subtotal.............................................. 1,262,436,145 1,392,472,626
Cost of shares redeemed................................. (1,248,351,729) (1,415,637,331)
--------------- ---------------
Net increase (decrease) in net assets derived from
capital share transactions and from investment
operations............................................. 14,084,416 (23,164,705)
NET ASSETS:
Beginning of year......................................... 292,067,450 315,232,155
--------------- ---------------
End of year............................................... $ 306,151,866 $ 292,067,450
=============== ===============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE> 19
RESERVE TAX EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND ("TRUST")
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
The Trust is registered under the Investment Company Act of 1940 as a
nondiversified, open-end investment company. The policies summarized below
are consistently followed in the preparation of its financial statements in
conformity with generally accepted accounting principles.
A. The Trust's shares of beneficial interest authorized are unlimited and
divided into six series, Interstate, Connecticut, Massachusetts, California,
New Jersey and Florida Funds. These financial statements and notes apply only
to the Interstate Fund ("Fund").
B. Securities are stated at value which represents amortized cost plus
interest accrued to date. Under Securities and Exchange Commission Rule 2a-7,
the Trust uses amortized cost to value the Fund, by which investments are
valued at cost and the difference between the cost of each instrument and its
value at maturity is accrued into income on a straight line basis over the
days to maturity, irrespective of intervening changes in interest rates or
market value of investments. The maturity of floating or variable rate
instruments in which the Trust may invest will be deemed to be, for floating
rate instruments (1) following, and for variable rate instruments the longer
of (1) or (2) following: (1) the notice period required before the Fund is
entitled to receive payment of the principal amount of the instrument; (2)
the period remaining until the instrument's next rate adjustment, for
purposes of Rule 2a-7 and for computing the portfolio's average weighted life
to maturity.
C. It is the Trust's policy to comply with the requirements of Subchapter M
of the Internal Revenue Code and to distribute all income to its
shareholders. Accordingly, no Federal income tax provision is required.
D. Investments are recorded as of the date of their purchase and sale.
Interest income is determined on the basis of interest accrued, premium
amortized, and discount accreted.
E. Net investment income on investments is distributed to shareholders daily
and automatically reinvested in additional shares.
F. The Fund is charged only for its direct or allocated (in proportion to net
assets or number of shareholder accounts) share of expenses.
G. The Fund had payables of $4,500,320 for securities purchased but not
received at May 31, 1997.
2. MANAGEMENT FEE, SHAREHOLDER SERVICING COSTS AND TRANSACTIONS WITH AFFILIATES:
Reserve Management Company, Inc. ("RMCI") manages the Interstate portfolio's
investments, as well as the investments of the Connecticut, Massachusetts,
California, New Jersey and Florida Funds of the Reserve Tax-Exempt Trust,
effects purchases and sales thereof, and absorbs certain promotional
expenses. For such services RMCI receives management fees at an annual rate
of .50% of the first $500 million, .475% of the next $500 million, .45% of
the next $500 million, .425% of the next $500 million, and .40% of any excess
over $2 billion of the average daily closing net assets of each Fund. Also,
under the current Service Agreement, RMCI was reimbursed $1,083,471 during
the year ended May 31, 1997 for expenditures made on behalf of the Fund for
personnel, office space and equipment and shareholder accounting and
administrative services, to conduct the Fund's business. At May 31, 1997, the
Fund had accrued expenses of $26,415 due to RMCI.
3. DISTRIBUTION ASSISTANCE:
Pursuant to a Distribution Plan, the Trust will make payments of up to .20%
per annum of the average net asset value of the Trust qualified shareholder
accounts as to which the payee or RMCI has rendered assistance in
distributing its shares.
4. INVESTMENT CONCENTRATION
The Interstate Fund invests substantially all of its assets in a portfolio of
tax-exempt debt obligations primarily consisting of issuers of various
states. The issuers' abilities to meet their obligations may be affected by
economic, regional or political developments. In order to reduce the credit
risk associated with such factors, 84.23% of the Interstate Funds investments
were backed by letters of credit, bond insurance of financial institutions
and financial guaranty assurance agencies.
17
<PAGE> 20
RESERVE TAX EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND ("TRUST")
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. MANAGEMENT'S USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the dates of
the financial statements and the reported amounts of income and expenses
during the reporting periods. Actual results could differ from those
estimates.
6. COMPONENTS OF NET ASSETS
At 5/31/97, the Interstate Fund's net assets consisted of $306,152 par-value
and $305,845,714 paid-in-capital.
------------------------
FEDERAL TAX INFORMATION
The dividends distributed by the Interstate Fund are exempt interest
dividends for Federal tax purposes.
------------------------
18
<PAGE> 21
[CAPTION]
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
PAGE
---
<S> <C>
Shareholder Expenses............................ 2
Financial Highlights............................ 3
Yield........................................... 3
Investment Objective and Policies............... 3
Management...................................... 5
How to Buy Shares............................... 6
Shares of Beneficial Interest................... 7
Daily Dividends................................. 7
Taxes........................................... 7
Redemptions..................................... 8
General Information............................. 9
Report of Independent Accountants............... 11
Financial Statements............................ 11
Investors are advised to read and retain
this Prospectus for future reference.
</TABLE>
Founders of
"America's
First
Money Fund"
810 Seventh Avenue, New York, NY 10019-5868
GENERAL INFORMATION AND 24 HOUR YIELD AND BALANCE INFORMATION
800-637-1700 M www.reservefunds.com
Distribution -- Resrv Partners, Inc.
RF/I-7/97
Founders of
"America's First
Money Fund"
INTERSTATE TAX-EXEMPT FUND
<PAGE> 22
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
NEW YORK, CALIFORNIA, CONNECTICUT, FLORIDA,
MASSACHUSETTS, NEW JERSEY, OHIO AND PENNSYLVANIA
The NEW YORK TAX-EXEMPT FUND of Reserve New York Tax-Exempt Trust and the
CALIFORNIA TAX-EXEMPT, CONNECTICUT TAX-EXEMPT, FLORIDA TAX-EXEMPT, MASSACHUSETTS
TAX-EXEMPT, NEW JERSEY TAX-EXEMPT, OHIO TAX-EXEMPT and PENNSYLVANIA TAX-EXEMPT
FUNDS of Reserve Tax- Exempt Trust (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, state and local income and/or property taxes, if any, for
resident holders of the particular state fund as is consistent with preservation
of capital and liquidity.
The Funds are designed for institutions and individuals as a convenient
alternative to the direct investment of temporary cash balances in short-term
money market accounts or instruments. The Funds seek to employ idle cash at
yields competitive with yields of other comparable short-term investments, and
are designed to reduce or eliminate for the investor the mechanical problems of
direct investment in money market instruments such as scheduling maturities,
evaluating the credit of issuers, investing in round lots, safeguarding receipt
and delivery of securities and reinvesting.
Each of the Funds invests principally in high-quality tax-exempt obligations
issued by the specific state and its counties, municipalities, authorities or
other political subdivisions.
SHARES OF THE FUNDS ARE NEITHER GUARANTEED NOR INSURED BY THE U.S.
GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE FUNDS WILL BE ABLE TO MAINTAIN
A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
This Prospectus sets forth the information about the Funds which a
prospective investor should know before investing. A Statement of Additional
Information ("SAI") dated July 31, 1997, as amended April 1, 1998, providing
further details about the Funds, has been filed with the Securities and Exchange
Commission ("SEC"). It may be obtained without charge by writing or calling the
Funds at 800-637-1700. The Statement of Additional Information is incorporated
by reference into this Prospectus.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR OBLIGATIONS
GUARANTEED OR ENDORSED BY ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
Prospectus dated July 31, 1997, as amended April 1, 1998.
Investors are advised to read and retain this Prospectus for future reference.
<PAGE> 23
SHAREHOLDER EXPENSES
The following table illustrates all expenses and fees that a shareholder of
each Fund will incur. The expenses and fees set forth in the table are for the
fiscal year ended May 31, 1997.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
NEW YORK CALIFORNIA CONNECTICUT FLORIDA MASSACHUSETTS NEW JERSEY OHIO
TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT
FUND FUND FUND FUND FUND FUND FUND**
---------- ---------- ----------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales Load Imposed on
Purchases............ None None None None None None None
Sales Load Imposed on
Reinvested
Dividends............ None None None None None None None
Redemption Fees*....... None None None None None None None
Exchange Fees.......... None None None None None None None
<CAPTION>
PENNSYLVANIA
TAX-EXEMPT
FUND**
------------
<S> <C>
Sales Load Imposed on
Purchases............ None
Sales Load Imposed on
Reinvested
Dividends............ None
Redemption Fees*....... None
Exchange Fees.......... None
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
NEW YORK CALIFORNIA CONNECTICUT FLORIDA MASSACHUSETTS NEW JERSEY OHIO
TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT
FUND FUND FUND FUND FUND FUND FUND
---------- ---------- ----------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Management Fees (after
waiver).............. .50% .50% .50% .50% .46% .50% .50%
12b-1 Fees............. .18% .20% .16% .15% .03% .19% .20%
Other Operating
Expenses
Administration and
Operations
Expenses........... .32% .27% .27% .34% .25% .32%
Equipment............ .03% .04% .03% .04% .03% .04%
Other................ .01% .02% .01% .01% .02% .01% .30%
----- ----- ----- ----- ---- ----- -----
Total Operating
Expenses............. 1.04% 1.03% .97% 1.04% .79% 1.06% 1.00%
===== ===== ===== ===== ==== ===== =====
<CAPTION>
PENNSYLVANIA
TAX-EXEMPT
FUND
------------
<S> <C>
Management Fees (after
waiver).............. .50%
12b-1 Fees............. .20%
Other Operating
Expenses
Administration and
Operations
Expenses...........
Equipment............
Other................ .30%
-----
Total Operating
Expenses............. 1.00%
=====
</TABLE>
The purpose of this table is to assist the investor in understanding the
costs and expenses that a shareholder in a Fund will bear directly or
indirectly. These figures reflect a voluntary reduction of the management fee
for the Massachusetts Tax-Exempt Fund by the Adviser. If there was no voluntary
reduction, the management fee would be .50%. *A $2.00 fee will be charged on
redemption checks issued by the Funds of less than $100 and a $10 fee will be
charged for wire redemption of less than $10,000.
The following example illustrates the expenses that a shareholder would pay
on a $1,000 investment over various time periods assuming: (1) a 5% annual rate
of return and (2) redemption at the end of each time period. The example
reflects the voluntary reduction of the management fee for the Massachusetts
Tax-Exempt Fund by the adviser. **The Pennsylvania Tax-Exempt Fund commenced
operations September 12, 1997 and the Ohio Tax-Exempt Fund plans to commence its
operations during April 1998.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
New York Tax-Exempt Fund............................ $11 $33 $57 $127
California Tax-Exempt Fund.......................... $11 $33 $57 $126
Connecticut Tax-Exempt Fund......................... $10 $31 $54 $119
Florida Tax-Exempt Fund............................. $11 $33 $57 $127
Massachusetts Tax-Exempt Fund....................... $ 8 $25 $44 $ 98
New Jersey Tax-Exempt Fund.......................... $11 $34 $58 $129
Ohio Tax-Exempt Fund................................ $10 $32 $55 $122
Pennsylvania Tax-Exempt Fund........................ $10 $32 $55 $122
</TABLE>
THIS EXAMPLE 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> 24
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 and New Jersey
Tax-Exempt Funds outstanding throughout each period. It should be read in
conjunction with the financial statements and related notes on page 16. Such
information has been audited by Coopers & Lybrand L.L.P. as indicated in their
report on page 16.
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
---------------------------------------------------------------
NEW YORK TAX-EXEMPT FUND 1997 1996 1995 1994 1993 1992
------------------------ -------- -------- -------- -------- -------- --------
<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.................. .0352 .0381 .0352 .0249 .0281 .0421
Expenses...................... .0105 .0105 .0099 .0099 .0103 .0104
------- ------- ------- ------- ------- -------
Net investment income (1)..... .0247 .0276 .0253 .0150 .0178 .0317
Dividends from net investment
income(1)................... (.0247) (.0276) (.0253) (.0150) (.0178) (.0317)
------- ------- ------- ------- ------- -------
Net asset value, end of
year........................ $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= ======= =======
Total Return.................. 2.47% 2.76% 2.53% 1.50% 1.78% 3.17%
RATIOS/SUPPLEMENTAL DATA
- ------------------------------
Net assets in thousands, end
of year..................... 153,180 125,454 152,906 148,387 149,785 156,567
Ratio of expenses to average
net assets.................. 1.04% 1.04% .98% .98% 1.02% 1.03%
Ratio of net investment income
to average net assets....... 2.43% 2.72% 2.48% 1.48% 1.76% 3.09%
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
-----------------------------------------
NEW YORK TAX-EXEMPT FUND 1991 1990 1989 1988
------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of
year........................ $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- -------
Income from investment
operations.................. .0563 .0616 .0600 .0476
Expenses...................... .0105 .0100 .0103 .0102
------- ------- ------- -------
Net investment income (1)..... .0458 .0516 .0497 .0374
Dividends from net investment
income(1)................... (.0458) (.0516) (.0497) (.0374)
------- ------- ------- -------
Net asset value, end of
year........................ $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= =======
Total Return.................. 4.58% 5.16% 4.97% 3.74%
RATIOS/SUPPLEMENTAL DATA
- ------------------------------
Net assets in thousands, end
of year..................... 148,079 120,142 90,378 86,749
Ratio of expenses to average
net assets.................. 1.01% .98% 1.00% 1.00%
Ratio of net investment income
to average net assets....... 4.43% 5.02% 4.86% 3.66%
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 17, 1994
YEAR ENDED YEAR ENDED (COMMENCEMENT OF OPERATIONS)
CALIFORNIA TAX-EXEMPT FUND MAY 31, 1997 MAY 31, 1996 THROUGH MAY 31, 1995
-------------------------- ------------ ------------ ----------------------------
<S> <C> <C> <C>
Net asset value, beginning of year........................ $1.0000 $1.0000 $1.0000
------- ------- -------
Income from investment operations......................... .0341 .0379 .0243
Expenses.................................................. .0102 .0106 .0062
------- ------- -------
Net investment income (1)................................. .0239 .0273 .0181
Dividends from net investment income (1).................. (.0239) (.0273) (.0181)
------- ------- -------
Net asset value, end of year.............................. $1.0000 $1.0000 $1.0000
======= ======= =======
Total Return.............................................. 2.39% 2.73% 1.81%
RATIOS/SUPPLEMENTAL DATA
- ----------------------------------------------------------
Net assets in thousands, end of year...................... 30,952 12,612 11,088
Ratio of expenses to average net assets................... 1.03% 1.04% 1.02%(2)
Ratio of net investment income to average net assets...... 2.40% 2.67% 2.95%(2)
</TABLE>
3
<PAGE> 25
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
CONNECTICUT TAX-EXEMPT --------------------------------------------------------
FUND 1997 1996 1995 1994 1993
---------------------- ------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of year................... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- -------
Income from investment
operations................ .0341 .0368 .0352 .0250 .0269
Expenses.................... .0098 .0102 .0098(3) .0086(3) .0087(3)
------- ------- ------- ------- -------
Net investment income (1)... .0243 .0266 .0254 .0164 .0182
Dividends from net
investment income (1)..... (.0243) (.0266) (.0254) (.0164) (.0182)
------- ------- ------- ------- -------
Net asset value, end of
year...................... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= =======
Total Return................ 2.43% 2.66% 2.54% 1.64% 1.82%
RATIOS/SUPPLEMENTAL DATA
- ----------------------------
Net assets in thousands, end
of year................... 33,497 34,801 26,626 128,693 157,115
Ratio of expenses to average
net assets................ .97% 1.01% .89%(3) .85%(3) .86%(3)
Ratio of net investment
income to average net
assets.................... 2.39% 2.61% 2.33% 1.62% 1.81%
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
CONNECTICUT TAX-EXEMPT --------------------------------------------------------------
FUND 1992 1991 1990 1989 1988
---------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of year................... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- -------
Income from investment
operations................ .0400 .0534 .0615 .0604 .0481
Expenses.................... .0091(3) .0086(3) .0083(3) .0086(3) .0092(3)
------- ------- ------- ------- -------
Net investment income (1)... .0309 .0448 .0532 .0518 .0389
Dividends from net
investment income (1)..... (.0309) (.0448) (.0532) (.0518) (.0389)
------- ------- ------- ------- -------
Net asset value, end of
year...................... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= =======
Total Return................ 3.09% 4.48% 5.32% 5.18% 3.89%
RATIOS/SUPPLEMENTAL DATA
- ----------------------------
Net assets in thousands, end
of year................... 191,101 241,790 314,489 247,929 245,588
Ratio of expenses to average
net assets................ .90%(3) .85%(3) .81%(3) .84%(3) .90%(3)
Ratio of net investment
income to average net
assets.................... 3.05% 4.41% 5.17% 5.05% 3.81%
</TABLE>
<TABLE>
<CAPTION>
JUNE 24, 1996
(COMMENCEMENT OF OPERATIONS)
FLORIDA TAX-EXEMPT FUND THROUGH MAY 31, 1997
----------------------- ----------------------------
<S> <C>
Net asset value, beginning of period........................ $1.0000
-------
Income from investment operations........................... .0321
Expenses.................................................... .0093
-------
Net investment income (1)................................... .0228
Dividends from net investment income (1).................... (.0228)
-------
Net asset value, end of period.............................. $1.0000
=======
Total Return (2)............................................ 2.42%
RATIOS/SUPPLEMENTAL DATA
- ------------------------------------------------------------
Net assets in thousands, end of period...................... 4,109
Ratio of expenses to average net assets (2)................. 1.04%
Ratio of net investment income to average net assets (2).... 2.39%
</TABLE>
4
<PAGE> 26
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31, JANUARY 22, 1990
------------------------------------------------------------------- (COMMENCEMENT OF OPERATIONS)
MASSACHUSETTS TAX-EXEMPT FUND 1997 1996 1995 1994 1993 1992 1991 THROUGH MAY 31, 1990
- ----------------------------- ------- ------- ------- ------- ------- ------- ------- ----------------------------
<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................ .0338 .0362 .0335 .0227 .0257 .0386 .0551 .0209
Expenses (3)................ .0079 .0086 .0070 .0052 .0048 .0045 .0032 .0010
------- ------- ------- ------- ------- ------- ------- -------
Net investment income (1)... .0259 .0276 .0265 .0175 .0209 .0341 .0519 .0199
Dividends from net investment
income (1)................ (.0259) (.0276) (.0265) (.0175) (.0209) (.0341) (.0519) (.0199)(4)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of
year...................... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= ======= ======= ======= =======
Total Return................ 2.59% 2.76% 2.65% 1.75% 2.09% 3.41% 5.19% 5.59%(2)
RATIOS/SUPPLEMENTAL DATA
- ----------------------------
Net assets in thousands, end
of year................... 13,035 8,955 10,169 14,824 13,305 7,186 4,652 2,140
Ratio of expenses to average
net assets (3)............ .79% .84% .69% .51% .46% .44% .30% .29%(2)
Ratio of net investment
income to average net
assets.................... 2.58% 2.71% 2.60% 1.73% 2.04% 3.28% 4.79% 5.53%(2)
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 17, 1994
YEAR ENDED YEAR ENDED (COMMENCEMENT OF OPERATIONS)
NEW JERSEY TAX-EXEMPT FUND MAY 31, 1997 MAY 31, 1996 THROUGH MAY 31, 1995
-------------------------- ------------ ------------ ----------------------------
<S> <C> <C> <C>
Net asset value, beginning of year........................ $1.0000 $1.0000 $1.0000
------- ------- -------
Income from investment operations......................... .0343 .0369 .0330
Expenses.................................................. .0107 .0106 .0087(3)
------- ------- -------
Net investment income (1)................................. .0236 .0263 .0243
Dividends from net investment income (1).................. (.0236) (.0263) (.0243)
------- ------- -------
Net asset value, end of year.............................. $1.0000 $1.0000 $1.0000
======= ======= =======
Total Return.............................................. 2.36% 2.63% 2.43%
RATIOS/SUPPLEMENTAL DATA
- ----------------------------------------------------------
Net assets in thousands, end of year...................... 39,452 41,026 21,607
Ratio of expenses to average net assets................... 1.06% 1.04% 1.01%(2)(3)
Ratio of net investment income to average net assets...... 2.33% 2.59% 2.82%(2)
</TABLE>
- ---------------
(1) Based on compounding of daily dividends. Not indicative of future results.
(2) Annualized.
(3) During these periods the Manager waived all or a portion of fees and
expenses. If there were no reductions in expenses, the actual expenses for
the Connecticut Fund would have been .10% higher and the actual expenses for
the Massachusetts Fund would have been .04%, .05%, .11%, .43%, .50%, .50%,
.50% and .50% higher and .01% higher for the New Jersey Fund.
(4) .01c per share represents distributions of taxable income.
5
<PAGE> 27
YIELD
For the seven calendar days ended May 31, 1997, the current and effective
yields for the Funds were as follows:
<TABLE>
<CAPTION>
CURRENT YIELD EFFECTIVE YIELD
------------- ---------------
<S> <C> <C>
New York Tax-Exempt Fund.................................... 2.80% 2.84%
California Tax-Exempt Fund.................................. 2.76% 2.80%
Connecticut Tax-Exempt Fund................................. 2.71% 2.75%
Florida Tax-Exempt Fund..................................... 2.79% 2.82%
Massachusetts Tax-Exempt Fund............................... 3.02% 3.07%
New Jersey Tax-Exempt Fund.................................. 2.81% 2.85%
</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, state and local income taxes, if
any, as is consistent with preservation of capital and liquidity. However,
achievement of this objective cannot be assured. This investment objective may
not be changed without the vote of a majority of the outstanding shares of a
Fund as defined in the Investment Company Act of 1940 ("1940 Act").
Each Fund seeks to attain its objective by investing principally in
tax-exempt obligations issued by the state for which it is named and the state's
counties, municipalities, authorities or other political subdivisions. There can
be no assurance that any of the Funds will achieve its investment objective.
These securities are generally known as "municipal bonds" or "municipal
notes" 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
("Municipal Obligations"). 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, state
and, with respect to the New York Tax-Exempt Fund, local income taxes and, with
respect to the Florida Tax-Exempt Fund, the Florida intangibles tax, and with
respect to the Pennsylvania Tax-Exempt Fund, the Pennsylvania county personal
property tax, unless it has adopted a temporary defensive position. In addition,
during periods when the Funds' Investment Adviser believes that Municipal
Obligations meeting each respective Fund's quality standards are not available,
a Fund may invest up to 20% of the value of its assets, or a greater percentage
on a temporary basis, in Municipal Obligations exempt only from federal income
taxes.
Each Fund may purchase floating and variable rate demand notes, which are
Municipal Obligations normally having stated maturities in excess of one year,
but which permit the holder to demand payment of principal and accrued interest
at any time, or at specified intervals not exceeding one year, in each case
usually upon not more than seven (7) days' notice. The interest rates on these
floating and variable rate demand notes fluctuate from time to time. Frequently,
such Municipal Obligations are secured by letters of credit or other credit
support arrangements provided by banks. The Funds may invest any portion of
their assets in floating and variable rate demand notes secured by bank letters
of credit or other credit support arrangements. Use of letters of credit or
other credit support arrangements will not adversely affect the tax-exempt
status of these Municipal Obligations. A Fund will not invest more than 10% of
the value of its assets in floating or variable rate demand notes for which
there is no secondary market if the demand feature on such Municipal Obligations
is exercisable on more than seven (7) days' notice.
6
<PAGE> 28
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. 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.
The Tax Reform Act of 1986 ("the Act") subjects interest received on certain
otherwise tax-exempt securities ("private activity bonds") to a federal
Alternative Minimum Tax ("AMT"). It is the position of the SEC that in order for
a fund to call itself "tax-free", not more than 20% of its net assets may be
invested in municipal securities subject to the AMT or at least 80% of its
income will be tax-exempt. Income received on such securities is classified as a
"tax preference item," which could subject certain shareholders of each Fund to
the AMT. However, as of the date of this Prospectus, each Fund does not purchase
such securities, but reserves the right to do so depending on market conditions
in the future.
Yields on municipal securities depend on a variety of factors, including
general economic and monetary conditions, money market factors, conditions in
the tax-exempt securities market, size of a particular offering, maturity of the
obligation and rating of the issue. The ability of each Fund to achieve its
investment objective is also dependent on the continuing ability of issuers of
municipal securities to meet their obligations for the payment of interest and
principal when due.
From time to time a Fund may invest in taxable short-term investments
("Taxable Investments") consisting of obligations backed by the full faith and
credit of the United States government, its agencies or instrumentalities ("U.S.
Governments"), deposit-type obligations, acceptances, letters of credit of
Federal Deposit Insurance Corporation member banks and instruments fully
collateralized by such obligations. Unless a Fund has adopted a temporary
defensive position, no more than 20% of the net assets of each Fund will be
invested in Taxable Investments at any time. A Fund may enter into repurchase
agreements with regard to the taxable obligations listed
7
<PAGE> 29
above. Although a Fund is permitted to make taxable temporary investments, there
is no current intention of generating income subject to federal income tax.
The Fund's Investment Adviser uses its reasonable business judgment in
selecting investments in addition to considering the ratings of Moody's and S&P.
This analysis considers, among other things, the financial condition of the
issuer by taking into account present and future liquidity, cash flow and
capacity to meet debt service requirements. Since the market value of debt
obligations fluctuates as an inverse function of changing interest rates, each
Fund seeks to minimize the effect of such fluctuations by investing in
instruments with remaining maturities of 397 days or less and limiting its
average maturity to 90 days or less.
The principal risk factors associated with investment in each Fund are the
risk of fluctuations in short-term interest rates, the risk of default among one
or more issuers of securities which comprise a Fund's assets and the risk of
non-diversification. As a non-diversified investment company, each Fund is
permitted to have all its assets invested in a limited number of issuers.
Accordingly, since a relatively high percentage of a Fund's assets may be
invested in the securities of a limited number of issuers, a Fund's investment
securities may be more susceptible to any single economic, political or
regulatory occurrence than the investment securities of a diversified investment
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.
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 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
8
<PAGE> 30
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 A+,
A+ and A1, 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. As of February 1997, New York State's general obligation
debt is rated A2 by Moody's. In January 1992, S&P lowered its ratings of New
York State general obligation bonds from A to A- and stated that it continued to
assess the ratings outlook as negative. The ratings of various agency debt,
state moral obligations, contractual obligations, lease purchase obligations and
state guarantees also were lowered. In February 1991, Moody's lowered its rating
on New York City's general obligation bonds from A to Baa1 and in July 1995, S&P
lowered its rating on such bonds from A- to BBB+. The rating changes reflected
the rating agencies' concerns about the financial condition of New York State
and City, the heavy debt load of the State and City, and economic uncertainties
in the region.
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.
9
<PAGE> 31
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 A1 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 Statement of Additional Information further discusses risk factors in
concentrating in securities issued by the respective states and their political
subdivisions for each Fund.
MANAGEMENT
INVESTMENT MANAGEMENT AGREEMENT. Since November 15, 1971 Reserve Management
Company, Inc. ("Adviser") and its affiliates have provided investment advice to
The Reserve Funds which currently have assets of over $4.6 billion, pursuant to
an Investment Management Agreement. Under the 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) .50% per annum of the first $500 million of average daily net
assets, (ii) .475% per annum of the next $500 million of such assets; (iii) .45%
per annum of the next $500 million of such assets; (iv) .425% per annum of the
next $500 million of such assets; and (v) .40% per annum of such assets in
excess of $2 billion. For the fiscal year ended May 31, 1997, the Adviser
received management fees of .50% of the average net assets of the New York,
California, Connecticut, Florida, New Jersey Tax-Exempt Funds and .46% of the
Massachusetts Tax-Exempt Fund. During the year, the Adviser voluntarily agreed
to a reduction of the management fee for the Massachusetts Tax-Exempt Fund.
The Investment Management Agreement provides that the Adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered by 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.
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 and $250 for
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
10
<PAGE> 32
institutions, shares may be purchased directly through such Firm. You can buy
shares of the Funds each business day at the net asset value determined after
receipt by the Funds of a properly completed order and payment in Federal Funds
(member bank deposits with the Federal Reserve Bank System). Payments must be
made:
- By check (drawn on a U.S. bank) payable to The Reserve Funds, 810 Seventh
Avenue, New York, NY 10019-5868. You must include your account number (or
Taxpayer Identification Number) on the "pay to the order of" line for each
check-made payable to The Reserve Funds or within the endorsement for each
check endorsed to The Reserve Funds.
- By wire -- Prior to calling your bank, call the Funds for specific
instructions at 800-637-1700 or the broker-dealer or financial institution
("Firm") from which you received this Prospectus.
Checks and wires which do not correctly identify the 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 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 net asset value ("NAV"). The
NAV of each Fund 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 is closed for trading and bank holidays in New York State which include
Martin Luther King's Birthday and Columbus Day. It is the policy of each Fund to
seek to maintain a stable NAV of $1.00 per share although this share price is
not guaranteed.
DISTRIBUTOR. The Distributor of the Funds is Resrv Partners, Inc., 810 Seventh
Avenue, New York, NY 10019-5868, which is a wholly-owned subsidiary of the
Adviser.
EXCHANGE PRIVILEGE. The shares offered by this Prospectus may be exchanged for
shares in other Reserve money market funds at net asset value. Shares to be
acquired in an exchange must be registered for sale in the investor's state. The
exchange privilege described under this heading may not be available to clients
of some Firms and some Firms may impose conditions on their clients which are
different from those described in this Prospectus. In addition, this exchange
privilege may be modified or terminated at any time, or from time to time, upon
sixty (60) days' notice to shareholders.
DISTRIBUTION AND SERVICE PLAN. Accounts may be opened through brokers,
financial intermediaries and institutions ("Firms"), some of which participate
in each Fund's Plan of Distribution ("Plan"). Under Rule 12b-1 of the 1940 Act,
each Fund makes assistance payments at an annual rate of .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
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<PAGE> 33
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 seven 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
constitute "tax-exempt interest dividends" and are not subject to federal income
taxes. To the extent a Fund invests in Municipal Obligations issued by its
respective state or political subdivision thereof, dividends derived from the
interest thereon is not subject to state and, with respect to the New York
Tax-Exempt Fund, local 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.
However, if the portfolio consists of any assets which are not so exempt on
the annual assessment date, only the portion of the shares of the Fund which
relate to securities issued by the United States and its possessions and
territories will be exempt from the 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.
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<PAGE> 34
In a majority of states that have an income tax, dividends paid by a mutual
fund attributable to investments in a particular state's Municipal Obligations
are exempt from both federal and that state's income tax. If Florida were to
adopt an income tax in the future, and assuming that its income tax policy with
respect to mutual funds investing in Florida state and local Municipal
Obligations would be similar to the general tax policy of other states,
dividends paid by the Fund would be exempt from Florida state income tax. A
constitutional amendment approved by referendum would be required before an
individual income tax could be imposed.
Shares of the Pennsylvania Tax-Exempt Fund are exempt from Pennsylvania
county personal property taxes to the extent that the Fund's portfolio consists
of Pennsylvania Municipal Obligations and direct obligations of the U.S.
government.
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.
REDEMPTIONS
TIME AND METHOD OF REDEMPTION. Shares of each Fund are redeemed at their net
asset value determined after receipt by the Fund of a request in proper form.
Each Fund usually transmits payment the same day when requests are received
before 11:00 AM (New York time) and the next day for requests received after
11:00 AM, however, this is not always possible, and transmission of redemption
proceeds may be delayed. Orders received after 11:00 AM are not processed until
the next business day to enable shareholders to receive additional dividends.
Payment will normally be made by check or bank transfer. Shares do not earn
dividends on the day a redemption is effected, regardless of whether the
redemption order is received before or after 11:00 AM.
WRITTEN AND TELEPHONE REDEMPTION REQUESTS. The Funds strongly suggest (but do
not require) that each redemption, written or by telephone, be at least $1,000,
except for redemptions which are intended to liquidate the account. A
shareholder will be charged $2 for redemption checks issued for less than $100.
The Funds assume no responsibility for delays in the receipt of wired or mailed
funds. The use of a predesignated financial institution, such as a savings bank,
credit union or savings and loan association, which is not a member of the
Federal Reserve wire system could cause such a delay. If a Fund has previously
been advised in writing of your brokerage or bank account, telephone requests
will be accepted by calling 800-637-1700. A Fund may be liable for any losses
caused by its failure to employ reasonable procedures. To reduce the risk of
loss, proceeds of telephone redemptions may be sent only to (1) the bank or
brokerage account designated by the shareholder on the Application or in a
letter with the signature(s) guaranteed; or (2) to the address of record if all
the conditions listed below are met. To change the designated brokerage or bank
account it is necessary to contact the Firm through which shares of a Fund were
purchased or, if purchased directly from a Fund it is necessary to send a
written request to the Fund with signature(s) guaranteed as described below.
Other redemption orders must be in writing with the necessary signature(s)
guaranteed by a domestic commercial bank; a domestic trust company; a domestic
savings bank, credit union or savings association or a member firm of a national
securities exchange. Guarantees from notaries public are unacceptable. The Funds
will waive the signature guarantee requirement on a redemption request once
every thirty (30) days if all of the following conditions apply: if the
redemption check is (1) for $5,000 or less; (2) payable to the shareholder(s) of
record; and (3) mailed to the shareholder(s) at the address of record. The
requirement of a guaranteed signature protects against an unauthorized person
redeeming shares and obtaining the redemption proceeds. Redemption instructions
and election of the plans described below may be made when your account is
opened. Subsequent elections and changes in instructions must be in writing with
the signature(s) guaranteed. Changes in registration or authorized signatories
may require additional documentation.
The Fund reserves the right to refuse a telephone redemption if it believes
it is advisable to do so. Procedures for telephone redemptions may be modified
or terminated by the Fund at any time. During times of drastic economic or
market conditions shareholders may experience difficulty in contacting the Funds
by telephone to request a redemption or exchange of a Fund's shares. In such
cases shareholders should consider using another method of redemption, such as a
written request or a redemption by check.
CHECKING, VISA AND ATM ACCESS. The Funds offer a comprehensive package of
services which enhance access to your account. By completing the Application or
a signature card (for existing accounts) and certain other documentation if the
owner of record is a fiduciary, corporation, partnership, trust or other
organization, you can write checks in any amount against your account.
Redemptions by check lengthen the time your money earns dividends, since
redemptions are not made until the check is processed by the Funds. Because of
this, you cannot write a check to completely liquidate your account, nor may a
check be presented for certification or immediate payment, otherwise, you may
use your Reserve checking account as you would any checking account. Your checks
will be returned (bounced) and a fee charged if they are postdated, contain an
irregularity in the signature, amount or otherwise, or are written against
accounts with insufficient funds. All transaction activity, including check
redemptions, will be reported on your account statement. A fee will be charged
for providing check copies. Upon proper notice, the Funds may choose to impose a
fee if it deems a shareholder's actions to be burdensome. Checking may not be
available to clients of some Firms and a Firm may establish its own
13
<PAGE> 35
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 cancelled 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 New York Stock Exchange
is closed (other than for customary closings), (b) when, as determined by the
Securities and Exchange Commission ("SEC"), trading on the Exchange is
restricted or an emergency exists making it not reasonably practicable to
dispose of securities owned by a Fund or for it to determine fairly the value of
its net assets, or (c) for such periods as the SEC may permit. If shares of a
Fund are purchased by check or Reserve Automatic Transfer, the Fund may delay
transmittal of redemption proceeds until such time as it has assured itself that
good payment has been collected for the purchase of such shares, which may
generally take up to ten (10) business days. Shareholder checks written against
funds which are not yet considered collected will be returned and a fee charged
against the account. When a purchase is made by wire and subsequently redeemed,
the proceeds from such redemption normally will not be transmitted until two (2)
business days after the purchase.
GENERAL INFORMATION
JOINT OWNERSHIP. When an account is registered in the name of one person and
another, for example a husband and wife, either person is entitled to redeem
shares in the account. The Application provides that persons so registering
their account indemnify and hold the Funds harmless for actions taken by either
party.
USE OF JOINT PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION. Although each
Fund is offering only its own shares, it is possible that a Fund might become
liable for any misstatement in the Prospectus and Statement of Additional
Information 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 Statement of Additional Information.
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 will either levy a monthly charge
(currently $5) or redeem the account and remit the proceeds. Some Firms may
establish variations of minimum balances and fee amounts if those variations are
approved by the Funds.
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<PAGE> 36
RESERVE EASY ACCESS. Easy Access is The Reserve Funds' 24 hour toll-free
telephone service that lets customers use a touch-tone phone to obtain yields
and account balances. To use it, call 800-637-1700 and follow the instructions
you will receive. Clients may also access full account activity for the previous
six months on the Internet at www.reservefunds.com.
INQUIRIES. Shareholders should direct their inquiries to the Firm from which
they received this Prospectus or to the Funds.
SPECIAL SERVICES. The Funds reserve the right to charge shareholder accounts
for specific costs incurred in processing unusual transactions for shareholders.
Such transactions include, but are not limited to, stop payment requests, copies
of Fund redemption or shareholder checks and special research services.
CASH PERFORMANCE ACCOUNT (CPA). A Reserve CPA can be used for everything from
daily expenses to the special luxuries of life -- or just to have cash when you
need it. It's the smartest way to manage your money -- keep it in a Reserve Cash
Performance Account. For more information see page 13, Checking, VISA and ATM
Access, or call 800-637-1700.
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.
------------------------
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<PAGE> 37
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Trustees of Reserve New York Tax-Exempt
Trust -- New York Tax-Exempt Fund and Reserve Tax-Exempt Trust -- California,
Connecticut, Florida, Massachusetts and New Jersey Tax-Exempt Funds:
We have audited the accompanying statements of net assets of the Reserve New
York Tax-Exempt Trust -- New York Tax-Exempt Fund and the California,
Connecticut, Florida, Massachusetts and New Jersey Tax-Exempt Funds, (five of
the series constituting Reserve Tax-Exempt Trust) and the statement of assets
and liabilities of the Florida Tax-Exempt Fund as of May 31, 1997, and the
related statements of operations for the year then ended and the statements of
changes in net assets for each of the two years in the period then ended except
for the Florida Tax-Exempt Fund for which the period was from June 24, 1996
(commencement of operations) to May 31, 1997, and the financial highlights for
each of the periods presented. These financial statements and financial
highlights are the responsibility of the respective Trust's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1997, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Reserve New York Tax-Exempt Trust -- New York Tax-Exempt Fund and the
California, Connecticut, Florida, Massachusetts and New Jersey Tax-Exempt Funds
of Reserve Tax-Exempt Trust as of May 31, 1997, the results of their operations,
the changes in their net assets and their financial highlights for the periods
referred to above, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
New York, New York
June 27, 1997
RESERVE NEW YORK TAX-EXEMPT TRUST--NEW YORK TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
----------------------- -------- -------------- --------
<S> <C> <C> <C>
Bleecker HDC Terrace Apt Project S85, 3.85%(a).............. 7/1/2015 $2,515 $ 2,532,168
Brockport CSD GOB, 5.375%................................... 6/15/1997 900 922,973
Buffalo RAN, 4.25%.......................................... 7/15/1997 1,000 1,024,051
Eagle Tax-Exempt Trust COP Series 1994C-2 Class A,
4.01%(a).................................................. 6/15/2018 3,000 3,051,512
Erie County RAN, 4.25%...................................... 11/19/1997 2,000 2,051,014
Guilderland IDA for North Eastern Industrial Park Series
1993 A, 4%(a)............................................. 12/1/2008 3,600 3,613,468
Jefferson County IDA for Watertown Carthage, 3.75%(a)....... 12/1/2012 3,500 3,511,507
Metropolitan Transportation Authority Commuter Facilities
Revenue Bonds
Series 1991, 3.95%(a)................................... 7/1/2021 5,800 5,821,277
Monroe-Woodbury GOB, 5.625%................................. 5/15/1998 640 651,376
Montgomery County IDA for Service Merchandise Co.,
3.75%(a).................................................. 12/31/2024 1,600 1,602,959
Nassau County BAN, 4.50%.................................... 8/15/1997 2,000 2,066,924
New York City GOB, 3.75%(a)................................. 8/1/2014 1,500 1,503,082
New York City GOB Fiscal 96 Series J2, 3.75%(a)............. 2/15/2016 9,000 9,017,568
New York City GOB Custodial Receipts Series A31, 4%(a)...... 7/2/2000 4,000 4,049,375
New York City GOB Fiscal 1994 Series A, 4%(a)............... 8/1/2022 5,380 5,380,590
New York City GOB Series A, 4%(a)........................... 8/1/2023 2,800 2,800,307
New York City GOB Series B, 3.85%(a)........................ 8/15/2024 3,400 3,400,358
New York City GOB Series B1, 3.85%(a)....................... 8/15/2024 8,000 8,000,844
</TABLE>
16
<PAGE> 38
RESERVE NEW YORK TAX-EXEMPT TRUST--NEW YORK TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997--(CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
----------------------- -------- -------------- --------
<S> <C> <C> <C>
New York City GOB Series B4, 4.20%(a)....................... 8/15/2022 $ 700 $ 700,081
New York City GOB Series C4-97, 4%(a)....................... 8/1/1997 1,000 1,000,110
New York City GOB Series C4-98, 4%(a)....................... 8/1/1998 1,000 1,000,110
New York City GOB Series D, 3.85%(a)........................ 2/1/2020 300 300,032
New York City GOB Series E4, 4%(a).......................... 8/1/2021 1,000 1,000,110
New York City GOB Series E4, 4%(a).......................... 8/1/2022 3,800 3,800,416
New York City GOB Series E5, 4%(a).......................... 8/1/2010 1,000 1,000,110
New York City GOB Series E5, 4%(a).......................... 8/1/2017 1,000 1,000,110
New York City GOB Series E5, 4%(a).......................... 8/1/2019 1,000 1,000,110
New York City GOB Series E6, 4%(a).......................... 8/1/2019 1,900 1,900,208
New York City GOB Fiscal 1994 Series E2, 4%(a).............. 8/1/2020 2,000 2,000,219
New York City HDC for Carnegie Park Project Series A,
4.50%(a).................................................. 12/1/2016 1,410 1,410,176
New York City HDC for Columbus Green Project, 4.50%(a)...... 12/1/2009 900 900,113
New York City IDA for Goodwill Project, 3.80%(a)............ 3/1/2000 955 957,667
New York City IDA for Stroheim & Roman, 3.85%(a)............ 12/1/2015 1,500 1,513,759
New York State ERD for Brooklyn Union Gas, 3.80%(a)......... 12/1/2020 2,000 2,005,606
New York State ERD/PCR for LILCO Series 85B, 3.60%(a)....... 3/1/2016 3,000 3,027,230
New York State ERD/PCR for Niagara Mohawk Power Plant,
4.20%(a).................................................. 7/1/2015 2,100 2,100,242
New York State ERD/PCR for Rochester Gas & Electric
Corporation, 3.55%(a)..................................... 10/1/2014 3,000 3,009,337
New York State ERD/PCR for Rochester Gas & Electric R&D,
3.60%(a).................................................. 11/15/2015 3,000 3,005,283
New York State Job Development Authority Series F,
4.05%(a).................................................. 3/1/1999 495 496,758
New York State Local Government Assistance 1993A,
3.80%(a).................................................. 4/1/2022 10,000 10,035,370
New York State Local Government Assistance Series B,
3.80%(a).................................................. 4/1/2025 3,900 3,913,901
North Hempstead BAN, 4.25%.................................. 2/26/1998 4,287 4,348,117
Onondaga County IDR for Edgecomb Metals Project, 3.85%(a)... 11/1/2009 1,100 1,103,636
Onondaga County IDR for McLane Co. Project, 4.15%(a)........ 11/1/2004 2,100 2,107,747
Onondaga County IDR for McLane Co. Project, 4.35%(a)........ 11/1/2004 460 461,707
Onondaga County IDR for Pass and Seymour, Inc. Project,
3.55%(a).................................................. 6/15/1997 1,900 1,903,326
Oppenheim-Ephreta GOB, 5.125%............................... 6/15/1997 2,500 2,624,752
Oyster Bay BAN, 4%.......................................... 2/27/1998 675 682,178
Riverhead TAN, 4.25%........................................ 6/26/1997 3,000 3,119,685
Roslyn BAN, 4%.............................................. 10/15/1997 2,600 2,651,801
Sands Point BAN, 3.80%...................................... 11/20/1997 1,500 1,530,971
Suffolk County IDA for Target Rock Corporation Revenue
Bonds, 3.75%(a)........................................... 2/1/2007 1,500 1,500,154
Suffolk County IDA for Satellite Transmission Systems, Inc.,
4.05%(a).................................................. 11/1/2007 1,630 1,636,044
Syossett BAN, 4.25%......................................... 7/18/1997 1,700 1,763,573
Syracuse BAN, 3.90%......................................... 12/19/1997 2,000 2,036,838
Syracuse IDA for General Accident Insurance Co. Project,
3.80%(a).................................................. 12/1/2003 4,550 4,550,000
Triboro Bridge and Tunnel Authority Special Obligation
Series 1994, 3.85%(a)..................................... 1/1/2024 4,800 4,817,174
Yonkers IDA Civic Revenue Bonds for Consumers Union,
3.70%(a).................................................. 7/1/2019 1,400 1,403,823
Yonkers IDR for Consumers Union Facility, 3.70%(a).......... 7/1/2021 4,500 4,512,291
------------
Total New York Fund Investments (98.47%) (Cost
$149,922,624)............................................. 150,832,228
Other assets, less liabilities (1.53%)...................... 2,347,856
------------
NET ASSETS (100%) equivalent to $1.00 net asset value,
offering and redemption prices per share on 153,180,084
shares of beneficial interest of $.001 par value
outstanding............................................... $153,180,084
============
</TABLE>
- ------------
(a) The interest rate is subject to change periodically. The rates shown were in
effect at May 31, 1997. Securities payable on demand are collateralized by
bank letters of credit or other bank credit agreements.
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE> 39
RESERVE TAX-EXEMPT TRUST--CALIFORNIA TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
----------------------- -------- -------------- --------
<S> <C> <C> <C>
Anaheim COP, 3.70%(a)....................................... 8/1/2019 $ 250 $ 252,888
California Community Development Authority Series A3,
3.65%(a).................................................. 5/15/2025 2,200 2,204,069
California HFA for Sutter Health Series 1990 B, 3.85%(a).... 3/1/2020 400 400,042
California Modesto Santa Clara Redding Public Power,
3.25%(a).................................................. 7/1/2022 300 300,855
California RAN, 3.80%....................................... 6/30/1997 400 401,403
California School District Cash Reserve Program Series A,
4.75%..................................................... 7/2/1997 500 522,088
East Bay Municipal Water and Sewer Utility, 6%(a)........... 6/1/1998 500 510,318
Foothill/Eastern Transportation Toll Road Revenue Bonds
Series 95C, 3.70%(a)...................................... 1/2/2035 1,000 1,003,467
Foothill/Eastern Transportation Toll Road Revenue Bonds,
3.75%(a).................................................. 1/2/2035 500 501,755
Grand Terrace HFA for Community Redevelopment Agency,
3.95%(a).................................................. 12/1/2011 1,300 1,303,807
Hemet MHR for Sunwest Resort Village, 4%(a)................. 7/1/2006 1,500 1,510,570
Hermosa Beach EDA for Parking District Facility Project,
3.70%(a).................................................. 12/1/2023 2,000 2,005,444
Irvine Improvement Bond Assessment District 85, 3.70%(a).... 9/2/2011 2,000 2,000,203
Irvine Ranch PCR for Water District Election #282,
3.70%(a).................................................. 11/15/2013 500 500,051
Lancaster MHR for Westwood Park Apartments 1985, 3.70%(a)... 12/1/2007 500 501,766
Los Angeles Community Redevelopment Agency for Baldwin
Hills, 3.80%(a)........................................... 12/1/2014 400 401,129
Los Angeles Community Redevelopment for Promenade Towers
Series 1989, 3.85%(a)..................................... 4/1/2009 400 402,684
Los Angeles Custodial Receipts, 4%(a)....................... 7/1/2005 1,290 1,309,657
Los Angeles Housing Authority Malibu Meadows Project Series
91-A, 3.95%(a)............................................ 12/1/2015 200 200,735
Los Angeles IDA for International Airport Authority,
4%(a)..................................................... 12/1/2025 1,000 1,000,110
Los Angeles USD TRAN, 4.50%................................. 6/30/1997 500 520,970
Los Angeles Waste-Water Bond, 8.125%(a)..................... 11/1/1997 500 522,705
Orange County Apartment Development Revenue Bonds Issue A of
1991, the Lakes Project 3.80%, Letter of Credit with
Citibank(a)............................................... 12/1/2006 1,000 1,003,568
Orange County Sanitation District Capital Improvement
Program 1990-92, 3.75% Letter of Credit with National
Westminster(a)............................................ 8/1/2015 200 200,021
Pasadena IDA for Rose Bowl Improvement Project, 3.70%(a).... 12/1/2011 600 602,089
Pico Rivera Community Redevelopment Agency for Rainer Fund
Crossroads Plaza Project, 3.75%(a)........................ 12/1/2010 700 702,016
Puerto Rico GOB, 3.60%...................................... 6/12/1997 1,000 1,005,326
Redlands COP, 3.80%(a)...................................... 9/1/2015 1,000 1,003,536
San Bernadino HFR for Alta Park Project, 4%(a).............. 5/1/2006 500 501,849
San Bernadino IDA for Gate City, 4.45%(a)................... 3/1/2005 200 200,024
San Francisco HFR for Yerba Buena Gardens, 3.75%(a)......... 9/1/2006 1,000 1,003,474
San Joaquin USD TRAN, 4.50%................................. 1/15/1998 1,000 1,033,515
San Jose HFR Redevelopment Agency, 3.80%(a)................. 7/1/2026 1,700 1,705,878
San Mateo USD TRAN, 4.50%................................... 7/1/1997 500 520,922
Santa Clara Electric Revenue Bonds Series 85C, 3.80%(a)..... 7/1/2010 400 401,414
Santa Clara El Cammino Hospital District, 3.75%(a).......... 8/1/2015 200 200,681
Union City MHR for Skylark Apartments, 4%(a)................ 11/1/2007 1,200 1,202,398
Upland MHR Community Redevelopment Bonds Series B for
Northwood Project, 4.45%(a)............................... 3/1/2014 300 303,174
Vista MHR for Shadow Ridge Apartments Project, 3.90%(a)..... 5/1/2005 800 802,828
-----------
Total California Fund Investments (99.09%) (Cost
$30,495,520).............................................. 30,669,429
Other assets, less liabilities (.91%)....................... 282,967
-----------
NET ASSETS (100%) equivalent to $1.00 net asset value,
offering and redemption prices per share on 30,952,396
shares of beneficial interest of $.001 par value
outstanding............................................... $30,952,396
===========
</TABLE>
- ---------------
(a) The interest rate is subject to change periodically. The rates shown were in
effect at May 31, 1997. Securities payable on demand are collateralized by
bank letters of credit or other bank credit agreements.
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE> 40
RESERVE TAX-EXEMPT TRUST--CONNECTICUT TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
----------------------- -------- -------------- --------
<S> <C> <C> <C>
Beacon Falls BAN, 4.25%..................................... 10/23/1997 $1,000 $ 1,027,880
Connecticut DAI for Allen Group Inc., 3.80%(a).............. 2/1/2013 1,400 1,404,664
Connecticut DAI for Conco Medical Co. Project Series 85,
3.85%(a).................................................. 11/1/2005 700 702,477
Connecticut DAI for General Accident Insurance Co.,
3.80%(a).................................................. 12/1/2013 1,700 1,700,000
Connecticut DAI for Martin Brower Corp. Series 1985,
3.65%(a).................................................. 5/1/2005 170 170,577
Connecticut DAI for Regional YMCA Project, 4.65%(a)......... 6/1/2008 550 551,648
Connecticut DAI for Trudy Corporation Project, 3.75%(a)..... 9/1/2009 600 601,973
Connecticut DAI for Zotos International Project, 4.05%(a)... 12/1/2004 1,655 1,660,876
Connecticut Development Authority Health Care Revenue Bonds
for
Independent Living Project 1990 Series, 3.70%(a)........ 7/1/2015 1,945 1,951,771
Connecticut Development Authority PCR for Central Vermont
Public
Service, 3.55%(a)....................................... 12/1/2015 1,400 1,404,357
Connecticut Development Authority PCR for Connecticut Light
and
Power Project Series 1993, 3.80%(a)..................... 9/1/2028 1,300 1,304,668
Connecticut Development Authority PCR for Western
Massachusetts
Electric Co. Series 1993A, 3.75%(a)..................... 9/1/2028 1,700 1,705,987
Connecticut HEF for Charlotte Hospital Series B, 3.60%(a)... 7/1/2010 600 602,026
Connecticut HEF for Kingswood Oxford School Issue Series A,
4.65%(a).................................................. 2/1/2009 490 491,998
Connecticut HEF for New Haven Hospital RAW Series E,
3.80%(a).................................................. 6/1/2012 500 500,000
Connecticut HEF for Pomfret School Issue Series A,
3.60%(a).................................................. 7/1/2024 1,385 1,388,738
Connecticut HFA BDS Project, 3.80%, (a)..................... 5/15/2018 1,400 1,402,718
Connecticut State GOB, 4.75%................................ 8/15/1997 500 508,004
Connecticut State GOB, 6%................................... 3/1/1998 1,000 1,032,975
Connecticut State GOB, 3.90%(a)............................. 5/15/2014 1,500 1,500,321
Connecticut State Special Assessment Unemployment
Compensation
RAW Series C, 3.90%(a).................................. 11/15/2001 1,500 1,524,564
Connecticut State Special Assessment Unemployment
Compensation
RAW Series 1993B Pre-refunded, 7.20%(a)................. 2/15/1998 460 489,183
Connecticut State Special Tax Transportation Infrastructure
2nd Lien
Revenue Bonds, 3.85%(a)................................. 12/1/2010 1,570 1,575,605
Hartford Redevelopment Agency MHR for Underwood Towers
Project,
3.65%(a)................................................ 6/1/2020 2,100 2,107,223
New Canaan BAN, 3.75%....................................... 3/10/1998 1,000 1,011,025
Puerto Rico Industrial, Medical and Environmental Higher
Education Facility Authority, 4.05%(a).................... 12/1/2015 400 401,454
Puerto Rico Industrial, Medical, and Environmental RAW for
Reynolds Metals, 3.80%(a)................................. 9/1/2013 1,200 1,211,524
Puerto Rico GOB, 3.60%...................................... 6/12/1997 2,000 2,010,652
Puerto Rico GOB, 3.85%...................................... 6/19/1997 590 590,871
Simsbury GOB, 4.60%......................................... 1/15/1998 410 419,661
Tolland BAN, 3.70%.......................................... 6/12/1997 650 673,340
Windsor Locks BAN, 3.90%.................................... 10/15/1997 1,000 1,001,490
Wollcott BAN, 4.25%......................................... 8/13/1997 704 728,535
-----------
Total Connecticut Fund Investments (105.56%) (Cost
$35,145,207).............................................. 35,358,785
Other liabilities, less assets, (-5.56%).................... (1,862,282)
-----------
NET ASSETS (100%) equivalent to $1.00 net asset value,
offering and redemption prices per share on 33,496,503
shares of beneficial interest of $.001 par value
outstanding............................................... $33,496,503
===========
</TABLE>
- ---------------
(a) The interest rate is subject to change periodically. The rates shown were in
effect at May 31, 1997. Securities payable on demand are collateralized by
bank letters of credit or other bank credit agreements.
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE> 41
RESERVE TAX-EXEMPT TRUST--FLORIDA TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
----------------------- -------- -------------- --------
<S> <C> <C> <C>
FLORIDA -- 82.47%
Boca Raton IDA for Parking Garage Project, 4.325%(a)...... 12/1/2014 $200 $ 200,024
Broward MHR for Welleby Apartment Project Series 1984,
4%(a)................................................... 12/1/2006 200 200,736
Collier IDA for Retirement Rental Housing Revenue Bonds
HFA, 3.95%(a)........................................... 12/1/2015 100 100,362
Dade IDA for Aviation Authority Facilities Series 84A,
4.30%(a)................................................ 10/1/2009 100 100,314
Dade IDA for Dolphin Stadium Project, 3.95%(a)............ 1/1/2016 300 301,095
Dade HFA for Hospital Revenue Bonds for Miami Children's
Hospital Project, 3.85%(a).............................. 3/1/2025 200 200,570
Duval HFA for Lakes of Mayport Apartment Project, 4%(a)... 12/1/2009 200 200,744
Florida MHR for Oaks at Mill Creek Series 85, 3.95%(a).... 11/1/2007 200 200,578
Hillsborough IDA for Tampa Electric Company Project,
4.15%(a)................................................ 9/1/2025 300 301,050
Jacksonville IDR for Coastal Islands Project, 4.05%(a).... 8/1/2008 180 180,020
Lee IDA For Charter Glade, 4.10%(a)....................... 8/1/2007 200 200,749
Manatee PCR for Florida Power and Light, 3.95%(a)......... 9/1/2024 200 200,022
Palm Beach PCR for Water and Sewer Project, 4.05%(a)...... 10/1/2011 200 200,022
Putnam PCR for Florida Power and Light, 3.95%(a).......... 9/1/2024 100 100,011
Port St. Lucie PCR for Florida Power and Light,
3.75%(a)................................................ 1/1/2011 200 200,658
Tampa Occupational License Tax Bonds, 3.90%(a)............ 5/1/2027 200 200,571
University of North Florida Capital Improvement Project,
3.90%(a)................................................ 11/1/2024 300 301,103
CHICAGO -- 2.43%
Chicago O'Hare International Airport American Airlines
Series 94, 4.05%(a)..................................... 12/1/2017 100 100,011
LOUISIANA -- 2.43%
LA Offshore Terminal Authority, 4.05%(a).................. 9/1/2008 100 100,011
MICHIGAN -- 2.46%
Michigan Strategic Fund for Detroit Edison Company Series
95C, 3.05%(a)........................................... 9/1/2030 100 100,996
----------
Total Florida Fund Investments (89.79%) (Cost $3,680,000)... 3,689,647
Other assets, less liabilities, (10.21%).................... 419,737
----------
NET ASSETS (100%) equivalent to $1.00 net asset value,
offering and redemption prices per share on 4,109,384
shares of beneficial interest of $.001 par value
outstanding............................................... $4,109,384
==========
</TABLE>
- ---------------
(a) The interest rate is subject to change periodically. The rates shown were in
effect at May 31, 1997. Securities payable on demand are collateralized by
bank letters of credit or other bank credit agreements.
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE> 42
RESERVE TAX-EXEMPT TRUST--MASSACHUSETTS TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
----------------------- -------- -------------- --------
<S> <C> <C> <C>
Arlington GOB, 6.30%........................................ 8/15/1997 $315 $ 325,919
Billerica GOB, 5.85%........................................ 10/15/1997 345 350,187
Boston Water and Sewer Commission Revenue Bonds 1994A,
3.80%(a).................................................. 11/1/2024 200 200,693
Chelmsford GOB, 6.90%....................................... 7/15/1997 100 103,018
Dennis GOB, 4.50%........................................... 3/1/1998 470 478,244
Dighton-Rehoboth Regional School District GOB, 6.50%........ 6/1/1998 190 194,653
Framingham IDA for Perrini Corp., 4.05%(a).................. 9/30/2005 300 301,112
Hingham BAN, 4%............................................. 12/19/1997 300 306,105
Massachusetts, Municipal Wholesale Electric Series 1994 C,
3.75%(a).................................................. 7/1/2019 300 301,042
Massachusetts Dedicated Income Tax Bonds Series B, 4%(a).... 12/1/1997 800 800,087
Massachusetts Dedicated Income Tax Bonds Series E, 4%(a).... 12/1/1997 100 100,010
Massachusetts HEF for Endicott College Series A, 3.75%(a)... 10/1/2011 400 401,411
Massachusetts HEF for Clark University, 3.80%(a)............ 12/1/2004 100 100,349
Massachusetts HEF for Boston University Series H,
3.85%(a).................................................. 12/1/2015 400 400,802
Massachusetts HEF for Harvard University, 3.65%(a).......... 2/1/2016 487 488,694
Massachusetts HEF for Harvard University, 3.65%(a).......... 8/1/2017 200 200,696
Massachusetts HEF for Mount College Series A, 3.75%(a)...... 7/1/2018 400 401,411
Massachusetts HEF Capital Assistance Program Series G-1,
3.60%(a).................................................. 1/1/2019 300 300,798
Massachusetts HEF Capital Asset Series D, 4%(a)............. 1/1/2035 400 401,375
Massachusetts HEF Capital Asset Series E, 4.05%(a).......... 1/1/2035 600 602,073
Massachusetts HEF for Williams College Series E, 3.75%(a)... 8/1/2014 400 401,401
Massachusetts HEF for Wellesley College Series B,
3.70%(a).................................................. 7/1/2022 400 400,041
Massachusetts IDA for KRH Rolls Inc. Project Series 1988,
4.40%(a).................................................. 5/1/2006 500 503,732
Massachusetts IFA for Composite Easy Day, 3.80%(a).......... 7/1/2006 170 170,596
Massachusetts IFA for Emerson College, 3.80%(a)............. 11/1/2025 500 501,805
Massachusetts IFA for Governor Dummer Academy, 3.80%(a)..... 7/1/2026 300 301,057
Massachusetts IFA for Griffin Realty Series B, 3.85%(a)..... 7/1/2008 465 466,650
Massachusetts IFA for Groton School, 3.75%(a)............... 6/1/2019 200 200,689
Massachusetts IFA for Holyoke Water Power Project,
3.90%(a).................................................. 5/1/2022 300 301,043
Massachusetts IFA for Quamco Series B, 3.70%(a)............. 9/1/2001 800 802,774
Massachusetts Showa Women's Institute of Boston, 3.90%(a)... 3/15/2004 500 500,052
Massachusetts State GOB Series C, 6.90%..................... 6/1/1997 300 300,000
Puerto Rico Industrial, Medical, Higher Education and
Environmental Bonds for PCR Facility Authority,
4.05%(a).................................................. 12/1/2015 300 301,090
Watertown BAN, 4.25%........................................ 5/13/1998 345 346,585
Westfield BAN, 4.50%........................................ 5/8/1998 500 503,332
-----------
Total Massachusetts Fund Investments (97.89%) (Cost
$12,721,412).............................................. 12,759,526
Other assets, less liabilities (2.11%)...................... 275,083
-----------
NET ASSETS (100%) equivalent to $1.00 net asset value,
offering and redemption prices per share on 13,034,609
shares of beneficial interest of $.001 par value
outstanding............................................... $13,034,609
===========
</TABLE>
- ---------------
(a) The interest rate is subject to change periodically. The rates shown were in
effect at May 31, 1997. Securities payable on demand are collateralized by
bank letters of credit or other bank credit agreements.
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE> 43
RESERVE TAX-EXEMPT TRUST--NEW JERSEY TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
----------------------- -------- -------------- --------
<S> <C> <C> <C>
Burlington BAN, 3.69%....................................... 6/13/1997 $1,000 $ 1,035,697
Cranford GOB, 4%............................................ 2/27/1998 1,291 1,306,982
East Rutherford BAN, 4.31%.................................. 1/23/1998 498 500,410
Eatontown BAN, 4.25%........................................ 12/17/1997 550 562,218
Essex County Improvement Authority GOB, 3.75%(a)............ 12/01/2025 2,000 2,006,964
Evesham Fire District BAN, 4.50%............................ 4/14/1998 675 678,979
Fair Lawn BAN, 4%........................................... 8/1/1997 1,000 1,033,577
Fairfield BAN, 4%........................................... 12/17/1997 600 611,006
Haddonfield Temp Notes, 4.25%............................... 7/3/1997 1,450 1,506,680
Millville BAN, 4.02%........................................ 9/4/1997 1,319 1,337,117
Monmouth BAN, 3.55%(a)...................................... 8/1/2016 100 100,311
Morristown GOB, 5.30%....................................... 7/15/1997 310 316,760
New Jersey EDA for Bayonne IMTT Docking Revenue Bonds,
3.70%(a).................................................. 12/1/2027 2,200 2,207,088
New Jersey EDA for Bayonne IMTT Docking Revenue Bonds,
3.75%(a).................................................. 12/1/2027 400 401,306
New Jersey EDA for Bayonne IMTT Docking Revenue Bonds,
3.75%(a).................................................. 12/1/2027 700 702,286
New Jersey EDA for Economic Growth Bond Series F,
3.75%(a).................................................. 8/1/2014 770 772,709
New Jersey EDA for Lawrenceville School, 3.70%(a)........... 7/1/2026 1,000 1,003,378
New Jersey EDA for PCR Series 95, 3.55%(a).................. 9/1/2012 1,000 1,003,296
New Jersey EDA for St. Peters School Series 1995,
3.80%(a).................................................. 1/1/2010 1,145 1,149,122
New Jersey EDA for Trailer Marine Corps Project, 3.70%(a)... 2/1/2002 400 400,041
New Jersey EDA for Volvo of American Corp, 4.40%(a)......... 12/1/2004 3,500 3,500,422
New Jersey EDA for RJB Associate Project, 3.90%(a).......... 8/1/2008 900 903,276
New Jersey HCF Hospital Capital Asset, 3.65%(a)............. 7/01/2035 400 401,368
New Jersey Sports Expo Authority Series 92C, 3.65%(a)....... 9/01/2024 2,400 2,421,495
New Jersey Transportation Series 1997A, 4%.................. 6/13/1997 2,000 2,003,945
New Jersey Turnpike Authority General Series 91D,
3.70%(a).................................................. 1/01/2018 3,700 3,751,901
Ocean County BAN, 4.25%..................................... 6/20/1997 1,000 1,040,594
Passaic BAN, 4%............................................. 9/26/1997 900 918,625
Port Authority of New York and New Jersey Special Versatile
Structure Obligation, 4%(a)............................. 5/1/2019 3,100 3,110,735
Puerto Rico Industrial, Medical, Environmental PCR,
3.85%(a).................................................. 6/19/1997 1,000 1,001,477
Rahway BAN, 4%.............................................. 12/23/1997 500 509,630
Trenton Temp Notes, 4%...................................... 12/18/1997 1,000 1,020,296
Vernon Board of Education Temp Notes, 4%.................... 1/16/1998 1,000 1,016,513
Washington GOB, 5.30%....................................... 10/1/1997 315 319,155
-----------
Total New Jersey Fund Investments (102.80%) (Cost
$40,160,883).............................................. 40,555,359
Other liabilities, less assets (-2.80%)..................... (1,103,259)
-----------
NET ASSETS (100%) equivalent to $1.00 net asset value,
offering and redemption prices per share on 39,452,100
shares of beneficial interest of $.001 par value
outstanding............................................... $39,452,100
===========
</TABLE>
- ---------------
(a) The interest rate is subject to change periodically. The rates shown were in
effect at May 31, 1997. Securities payable on demand are collateralized by
bank letters of credit or other bank credit agreements.
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE> 44
RESERVE TAX-EXEMPT TRUST--NEW JERSEY TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997--(CONTINUED)
SECURITY TYPE ABBREVIATIONS:
<TABLE>
<S> <C> <C>
BAN -- Bond Anticipation Notes
COP -- Certificate of Participation
CSD -- Central School District
DAI -- Development Authority Industrial Development Refunding
Bonds
EDA -- Economic Development Authority Revenue Bonds
ERD -- Energy Research and Development Authority
GOB -- General Obligation Bonds
HCF -- Health Care Facilities Revenue Bonds
HDC -- Housing Development Corporation Bonds
HEF -- Health and Educational Facilities Revenue Bonds
HFA -- Health Facilities Authority Revenue Bonds
IDA -- Industrial Development Authority Revenue Bonds
IDR -- Industrial Development Agency Revenue Bonds
IFA -- Industrial Finance Authority
MHR -- Multifamily Housing Revenue Bonds
PCR -- Pollution Control Revenue Bonds
RAN -- Revenue Anticipation Notes
RAW -- Revenue Anticipation Warrants
TAN -- Tax Anticipation Notes
TRAN -- Tax & Revenue Anticipation Notes
USD -- Unified School District
</TABLE>
RESERVE TAX-EXEMPT TRUST--FLORIDA TAX-EXEMPT FUND
STATEMENT OF ASSETS AND LIABILITIES--MAY 31, 1997
<TABLE>
<CAPTION>
JUNE 24, 1996
(COMMENCEMENT OF
OPERATIONS) THROUGH
MAY 31, 1997
-------------------
<S> <C>
ASSETS:
Investments, at value (identified cost--$3,680,000)....... $3,689,647
Cash...................................................... 420,058
----------
Total Assets............................................ 4,109,705
----------
LIABILITIES:
Accrued expenses.......................................... 321
----------
Total Liabilities....................................... 321
----------
NET ASSETS.................................................. $4,109,384
==========
NET ASSETS CONSIST OF:
Shares of beneficial interest, $.001 par value, unlimited
number of shares authorized............................. $ 4,109
Paid-in capital in excess of par.......................... 4,105,275
----------
NET ASSETS--Equivalent to $1.00 per share based on 4,109,384
shares of beneficial interest outstanding................. $4,109,384
==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE> 45
STATEMENTS OF OPERATIONS--YEAR ENDED MAY 31, 1997
<TABLE>
<CAPTION>
RESERVE
NEW YORK
TAX-EXEMPT TRUST RESERVE TAX-EXEMPT TRUST
---------------- ----------------------------------------------------------------
NEW YORK CALIFORNIA CONNECTICUT FLORIDA MASSACHUSETTS NEW JERSEY
FUND FUND FUND FUND * FUND FUND
---------------- ---------- ----------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME (Note 1).................. $5,477,002 $711,345 $1,121,367 $130,782 $372,093 $1,321,959
---------- -------- ---------- -------- -------- ----------
EXPENSES (Note 2)
Management fee.......................... 786,904 103,607 166,430 19,304 55,173 194,595
Shareholder servicing, administration
and general office expenses........... 383,457 43,265 67,635 8,681 19,844 94,664
Distribution assistance (Note 3)........ 278,860 40,979 51,730 5,627 3,232 75,554
Equipment expense....................... 56,426 7,437 11,105 1,450 3,516 13,976
Professional fees....................... 44,566 6,806 9,706 1,116 2,987 12,332
Occupancy costs......................... 22,032 2,841 4,359 550 1,344 5,470
Stationery, printing and supplies....... 41,554 4,200 7,116 671 2,018 9,335
Trustee fees............................ 6,048 701 1,328 98 372 1,589
Other expenses.......................... 18,237 3,410 3,991 512 2,588 5,026
---------- -------- ---------- -------- -------- ----------
Total Expenses........................ 1,638,084 213,246 323,400 38,009 91,074 412,541
Less: Management fees and other expenses
voluntarily waived by Investment
Manager............................... (4,167)
---------- -------- ---------- -------- -------- ----------
Net Expenses............................ 1,638,084 213,246 323,400 38,009 86,907 412,541
---------- -------- ---------- -------- -------- ----------
NET INVESTMENT INCOME..................... $3,838,918 $498,099 $ 797,967 $ 92,773 $285,186 $ 909,418
========== ======== ========== ======== ======== ==========
</TABLE>
- ---------------
* The Florida Tax-Exempt Fund commenced operations on June 24, 1996.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
RESERVE NEW YORK
TAX-EXEMPT TRUST RESERVE TAX-EXEMPT TRUST
----------------------------- ----------------------------------------------------------
NEW YORK FUND CALIFORNIA FUND CONNECTICUT FUND
----------------------------- ---------------------------- ---------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, 1997 MAY 31, 1996 MAY 31, 1997 MAY 31, 1996 MAY 31, 1997 MAY 31, 1996
------------- ------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS FROM INVESTMENT
OPERATIONS:
Net investment income paid to
shareholders as dividends
(Note 1).................... $ (3,838,918) $ (4,189,736) $ (498,099) $ (269,905) $ (797,967) $ (804,738)
------------- ------------- ------------ ------------- ------------ ------------
FROM CAPITAL SHARE
TRANSACTIONS (at net asset
value of $1 per share):
Net proceeds from sale of
shares...................... 676,647,327 636,980,296 153,856,260 51,508,091 104,926,291 98,890,288
Net asset value of shares
issued on reinvestment of
dividends................... 3,838,918 4,189,736 498,099 269,905 797,967 804,738
------------- ------------- ------------ ------------- ------------ ------------
Subtotal.................... 680,486,245 641,170,032 154,354,359 51,777,996 105,724,258 99,695,026
Cost of shares redeemed..... (652,760,567) (668,621,594) (136,013,932) (50,253,639) (107,029,059) (91,519,680)
------------- ------------- ------------ ------------- ------------ ------------
Net increase (decrease) in net
assets derived from capital
share transactions and from
investment operations....... 27,725,678 (27,451,562) 18,340,427 1,524,357 (1,304,801) 8,175,346
NET ASSETS:
Beginning of year............. 125,454,406 152,905,968 12,611,969 11,087,612 34,801,304 26,625,958
------------- ------------- ------------ ------------- ------------ ------------
End of year................... $ 153,180,084 $ 125,454,406 $30,952,396 $ 12,611,969 $33,496,503 $ 34,801,304
============= ============= ============ ============= ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE> 46
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
RESERVE TAX-EXEMPT TRUST
-------------------------------------------------------------------------------
FLORIDA FUND MASSACHUSETTS FUND NEW JERSEY FUND
------------------- --------------------------- ---------------------------
JUNE 24, 1996
(COMMENCEMENT OF
OPERATIONS) THROUGH YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, 1997 MAY 31, 1997 MAY 31, 1996 MAY 31, 1997 MAY 31, 1996
------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
INVESTMENT OPERATIONS:
Net investment income paid to
shareholders as dividends (Note 1)..... $ (92,773) $ (285,186) $ (288,434) $ (909,418) $ (797,253)
----------- ----------- ----------- ------------ ------------
FROM CAPITAL SHARE TRANSACTIONS
(at net asset value of $1 per share):
Net proceeds from sale of shares....... 38,626,682 52,472,123 44,175,742 223,428,579 189,336,696
Net asset value of shares issued on
reinvestment of dividends............ 92,773 285,186 288,434 909,418 797,253
----------- ----------- ----------- ------------ ------------
Subtotal............................. 38,719,455 52,757,309 44,464,176 224,337,997 190,133,949
Cost of shares redeemed.............. (34,610,071) (48,678,063) (45,677,798) (225,911,698) (170,715,398)
----------- ----------- ----------- ------------ ------------
Net increase (decrease) in net assets
derived from capital share transactions
and from investment operations......... 4,109,384 4,079,246 (1,213,622) (1,573,701) 19,418,551
NET ASSETS:
Beginning of year........................ 0 8,955,363 10,168,985 41,025,801 21,607,250
----------- ----------- ----------- ------------ ------------
End of year.............................. $ 4,109,384 $13,034,609 $ 8,955,363 $39,452,100 $ 41,025,801
=========== =========== =========== ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
25
<PAGE> 47
RESERVE NEW YORK TAX-EXEMPT TRUST ("NY TRUST")
RESERVE TAX-EXEMPT TRUST (CALIFORNIA, CONNECTICUT, FLORIDA,
MASSACHUSETTS AND NEW JERSEY FUNDS) ("TRUST")
(THE NY TRUST AND TRUST ARE COLLECTIVELY REFERRED TO AS "TRUSTS")
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
The Trusts are registered under the Investment Company Act of 1940 as
nondiversified, open-end management investment companies. The policies
summarized below are consistently followed in the preparation of their
financial statements in conformity with generally accepted accounting
principles.
A. The Trust and NY Trust shares of beneficial interest authorized are
unlimited. The Trust's shares are divided into six series, California Fund,
Connecticut Fund, Florida Fund, Interstate Fund, Massachusetts Fund, and New
Jersey Fund. These financial statements and notes apply only to the
California, Connecticut, Florida, Massachusetts and New Jersey Funds of
Reserve Tax-Exempt Trust and to the New York Fund of Reserve New York
Tax-Exempt Trust.
B. Securities are stated at value which represents amortized cost plus
interest accrued to date. Under Securities and Exchange Commission Rule 2a-7,
the Trusts use amortized cost to value each Fund, by which investments are
valued at cost and the difference between the cost of each instrument and its
value at maturity is accrued into income on a straight line basis over the
number of days to maturity, irrespective of intervening changes in interest
rates or market values of investments. The maturity of floating or variable
rate instruments in which the Trusts may invest will be deemed to be, for
floating rate instruments (1) following, and for variable rate instruments
the longer of (1) or (2) following: (1) the notice period required before the
Fund is entitled to receive payment of the principal amount of the
instrument; (2) the period remaining until the instrument's next rate
adjustment, for purposes of Rule 2a-7 and for computing each portfolio's
average weighted life to maturity.
C. It is the Trusts' policy to comply with the requirements of Subchapter M
of the Internal Revenue Code and to distribute all income to its
shareholders. Accordingly, no Federal income tax provision is required.
D. Investments are recorded as of the date of their purchase and sale.
Interest income is determined on the basis of interest accrued, premium
amortized, and discount accreted.
E. Net investment income on investments is distributed to shareholders daily
and automatically reinvested in additional shares.
F. Each Fund is charged only for its direct or allocated (in proportion to
net assets or number of shareholder accounts) share of expenses.
G. The New York and Massachusetts Funds had purchases of $4,550,000 and
$194,653, respectively, not delivered at May 31, 1997.
2. MANAGEMENT FEE, SHAREHOLDER SERVICING COSTS AND TRANSACTIONS WITH AFFILIATES:
Reserve Management Company, Inc. ("RMCI") manages the Trusts' investments,
effects purchases and sales thereof, and absorbs certain promotional
expenses. For such services RMCI receives management fees from each Fund at
an annual rate of .50% of the first $500 million, .475% of the next $500
million, .45% of the next $500 million, .425% of the next $500 million and
.40% of any excess over $2 billion of the average daily closing net assets.
Also, under the current Service Agreement, RMCI was reimbursed $572,320 (New
York Fund), $68,660 (California Fund), $105,240 (Connecticut Fund), $13,078
(Florida Fund), $32,669 (Massachusetts Fund) and $142,392 (New Jersey Fund)
during the year ended May 31, 1997 for expenditures made on behalf of the
Trusts' for personnel, office space and equipment and shareholder accounting
and administrative services, to conduct the Trusts' business. The manager
waived management fees and expenses of $4,167 on the Massachusetts Fund. At
May 31, 1997, the New York, California, Connecticut, Florida, Massachusetts
and New Jersey Funds, had accrued expenses of $12,713, $2,543, $2,532, $321,
$803 and $3,436, respectively, due to RMCI.
3. DISTRIBUTION ASSISTANCE:
Pursuant to a Distribution Plan, each Trust will make payments of up to .20%
per annum of the average net asset value of the Trust qualified shareholder
accounts as to which the payee or RMCI has rendered assistance in
distributing its shares.
26
<PAGE> 48
RESERVE NEW YORK TAX-EXEMPT TRUST ("NY TRUST")
RESERVE TAX-EXEMPT TRUST (CALIFORNIA, CONNECTICUT, FLORIDA,
MASSACHUSETTS AND NEW JERSEY FUNDS) ("TRUST")
(THE NY TRUST AND TRUST ARE COLLECTIVELY REFERRED TO AS "TRUSTS")
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. MANAGEMENT'S USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the dates of
the financial statements and the reported amounts of income and expenses
during the reporting periods. Actual results could differ from those
estimates.
5. INVESTMENT CONCENTRATION
The New York, California, Connecticut, Florida, Massachusetts and New Jersey
Funds invest substantially all of their assets in portfolios of tax-exempt
debt obligations primarily consisting of issuers of each of the respective
states. The issuers' abilities to meet their obligations may be affected by
economic, regional or political developments. In order to reduce the credit
risk associated with such factors, 83.89%, 84.15%, 71.04%, 100%, 80.51% and
67.83% of the New York, California, Connecticut, Florida, Massachusetts and
New Jersey Funds' investments, respectively, were backed by letters of
credit, bond insurance of financial institutions and financial guaranty
assurance agencies.
6. COMPONENTS OF NET ASSETS
At 5/31/97, the following funds had these components of net assets:
<TABLE>
<CAPTION>
NEW YORK CONNECTICUT CALIFORNIA MASSACHUSETTS NEW JERSEY
-------- ----------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Par Value.................................. $ 153,180 $ 33,497 $ 30,952 $ 13,035 $ 39,452
Paid-in-Capital............................ 153,026,904 33,463,006 30,921,444 13,021,574 39,412,648
------------ ----------- ----------- ----------- -----------
Net Assets................................. $153,180,084 $33,496,503 $30,952,396 $13,034,609 $39,452,100
============ =========== =========== =========== ===========
</TABLE>
---------------------
FEDERAL TAX INFORMATION
The dividends distributed by each Fund are exempt interest dividends for Federal
tax purposes.
27
<PAGE> 49
[CAPTION]
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
PAGE
---
<S> <C>
Shareholder Expenses............................ 2
Financial Highlights............................ 3
Yield........................................... 6
Investment Objective and Policies............... 6
Management...................................... 10
How to Buy Shares............................... 10
Shares of Beneficial Interest................... 12
Daily Dividends................................. 12
Taxes........................................... 12
Redemptions..................................... 13
General Information............................. 14
Investors are advised to read and retain
this Prospectus for future reference.
</TABLE>
Founders of
"America's
First
Money Fund"
810 Seventh Avenue, New York, NY 10019-5868
GENERAL INFORMATION AND 24 HOUR YIELD AND BALANCE INFORMATION
800-637-1700 M www.reservefunds.com
Distribution -- Resrv Partners, Inc.
04/98
THE RESERVE FUNDS LOGO
Founders of
"America's First
Money Fund"
NEW YORK TAX-EXEMPT FUND
CALIFORNIA TAX-EXEMPT FUND
CONNECTICUT TAX-EXEMPT FUND
FLORIDA TAX-EXEMPT FUND
MASSACHUSETTS TAX-EXEMPT FUND
NEW JERSEY TAX-EXEMPT FUND
OHIO TAX-EXEMPT FUND
PENNSYLVANIA TAX-EXEMPT FUND
<PAGE> 50
RESERVE TAX-EXEMPT TRUST
INTERSTATE TAX-EXEMPT FUND
810 SEVENTH AVENUE, NEW YORK, N.Y. 10019
(212) 977-9982
(800) 637-1700
--------------------------------------------
YIELD AND BALANCE INFORMATION
TOLL FREE (800) 637-1700 -- TOUCH TONE PHONE
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information describes the Interstate
Tax-Exempt Fund of the Reserve Tax-Exempt Trust (the "Fund"). This Statement
is not a Prospectus, but provides detailed information to supplement the
Prospectus and should be read in conjunction with the Prospectus. A copy of
the Prospectus may be obtained from the Fund at the above address. This
Statement is dated July 31, 1997.
<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 8
Purchase, Redemption and Pricing
of Shares 9
Distributions and Taxes 11
Fund Yield 12
Reserve Cash Performance Plus Account 12
Municipal Obligations 13
Ratings 14
Report of Independent Accountants 16
Financial Statements 17
</TABLE>
SHARES OF THE FUND ARE NEITHER GUARANTEED NOR INSURED BY THE U.S.
GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN
A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
<PAGE> 51
INVESTMENT OBJECTIVE AND POLICIES
The following information provides additional details about the
Interstate Fund's investment objective and policies discussed in the
Prospectus.
The INTERSTATE TAX-EXEMPT FUND'S investment objective is to seek as high
a level of short term interest income exempt from federal income taxes as is
consistent with preservation of capital and liquidity, by investing principally
in obligations issued by states, territories, and possessions of the United
States and by their political subdivisions, duly constituted authorities and
corporations.
These securities are generally known as "municipal bonds" or "municipal
notes" (hereinafter collectively referred to as "Municipal Obligations") and
the interest on them is exempt from Federal income tax in the opinion of bond
counsel for the issuers. Municipal Obligations generally include debt
obligations issued to obtain funds for various public purposes, including the
construction of a wide range of public facilities such as airports, bridges,
highways, housing, hospitals, mass transportation, schools, streets, water and
sewer works. Other public purposes for which Municipal Obligations may be
issued include refunding outstanding obligations, obtaining funds for general
operating expenses and lending such funds to other public institutions and
facilities. In addition, certain types of industrial development bonds are
issued by or on behalf of public authorities to obtain funds to provide for the
construction, equipment, repair or improvement of privately operated housing
facilities, sports facilities, convention or trade show facilities, airport,
mass transit, industrial, port or parking facilities, air or water pollution
control facilities and certain local facilities for water supply, gas,
electricity or sewage or solid waste disposal; the interest paid on such
obligations may be exempt from Federal income tax. At least 80% of the
Interstate Fund's ("Fund") assets will be invested in Municipal Obligations
unless the Fund has adopted a defensive position.
The Fund will purchase tax exempt securities which are rated MIG-1 or
MIG-2 by Moody's Investor Services, Inc. ("Moody's"); SP-1 or SP-2 by Standard
& Poor's Corporation ("S&P") or rated the equivalent thereof. Municipal
Obligations which are not rated may be purchased provided such securities are
determined 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 the Fund may invest.
Subsequent to its purchase by the Fund, an issue of rated Municipal
Obligations may cease to be rated or its rating may be reduced below the
minimum required for purchase by the Fund. In the event a Municipal
Obligation's rating falls below the second highest rating category of a
nationally recognized statistical rating agency, the Municipal Obligation will
be disposed of within five business days of the date the investment adviser
becomes aware of the new rating. Should a rated Municipal Obligation cease to
be rated, the investment adviser will promptly reassess the credit risk of the
Municipal Obligation. The ratings of Moody's and S&P represent their opinions
as to the quality of the Municipal Obligations they rate. It should be
emphasized, however, that ratings are relative and subjective and are not
absolute standards of quality.
From time to time, on a temporary basis other than for temporary
defensive purposes, the Fund may invest in taxable short term investments
("Taxable Investments") consisting of obligations backed by the full faith and
credit of the United States Government, its agencies and instrumentalities
("U.S. Governments"); deposit-type obligations, acceptances and letters of
credit of Federal Deposit Insurance Corporation member banks; or instruments
fully secured or collateralized by such obligations. The Fund will not invest
in foreign securities or in taxable commercial paper. Interest earned on
Taxable Investments will be taxable income to investors. Unless the Fund has
adopted a temporary defensive position, no more than 20% of its net assets will
be invested in Taxable Investments at any time.
SUPPLEMENTAL INVESTMENT POLICIES. The investment objective, and the following
supplemental policies may not be changed without the affirmative vote of a
majority of the outstanding shares of the Fund. A majority of the outstanding
shares of the Fund means the vote of the lesser of (i) 67% or more of the
shares of the Fund present at a meeting, if the holders of more than 50% of the
outstanding shares of the Fund are present or represented by proxy, or (ii)
more than 50% of the outstanding shares of the Fund. The Fund cannot (1)
invest in any security other than those discussed herein or in the Prospectus;
(2) borrow money except as a temporary or emergency measure (but not for the
purpose of purchasing investment securities), and not in an amount to exceed 5%
of the value of its total assets; (3) issue securities senior to its capital
stock; (4) act as an underwriter with respect to the securities of others; (5)
concentrate investments in any particular industry
<PAGE> 52
except to the extent that its investments are concentrated exclusively in
Municipal Obligations, in U.S. Governments, or instruments secured by such
obligations; (6) purchase, sell or otherwise invest in real estate or
commodities or commodity contracts; however, the Fund may purchase Municipal
Obligations secured by interests in real estate; (7) lend more than 33 1/3% of
the value of its total assets to the extent its investments may be considered
loans; (8) sell any security short or write, sell or purchase any futures
contract or put or call option; provided, however, that the Fund shall have the
authority to purchase Municipal Obligations subject to a stand-by commitment,
at the Fund's option; (9) invest in voting securities or in companies for the
purpose of exercising control; (10) invest in the securities of other
investment companies except in compliance with the Investment Company Act of
1940; (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, the investment adviser, or affiliated person except in compliance with
the Investment Company Act of 1940.
OTHER POLICIES. Certain banks and other municipal securities dealers have
indicated a willingness to sell Municipal Obligations to the Fund accompanied
by a commitment to repurchase the securities, at the Fund's option or on a
specified date, at an agreed-upon price or yield within a specified period
prior to the maturity date of such securities.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS. A repurchase agreement
transaction occurs when the Fund purchases and simultaneously contracts to
resell in advance securities at fixed prices determined by the yields
negotiated. The Fund will limit repurchase agreement transactions to those
financial institutions and securities dealers who are deemed credit worthy
pursuant to guidelines established by the Fund's Board of Trustees. The
investment manager will follow procedures intended to provide that all acquired
repurchase agreements are at least 100% collateralized as to principal and
interest. The Fund will make payment for such instruments only upon their
physical delivery to, or evidence of their book-entry transfer to, the account
of the Fund's custodian. If the seller defaults on the repurchase obligation,
the Fund could incur a loss, and may incur costs in disposing of the underlying
security. The Fund will not hold more than 10% of its net assets in illiquid
securities, including repurchase agreements with a term greater than seven
days.
The Fund may sell securities in a reverse repurchase agreement when it is
considered advantageous, such as to cover net redemptions or to avoid a
premature outright sale of its portfolio securities. In a typical reverse
repurchase agreement transaction, the seller (Fund) retains the right to
receive interest and principal payments on the security, but transfers title to
and possession of 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, the
seller repurchases the transferred security. It is the Fund's policy that
entering into a reverse repurchase agreement will be for temporary purposes
only and, when aggregated with other borrowings may not exceed 5% of the value
of the total assets of the Fund at the time of the transaction.
TRUSTEES AND EXECUTIVE OFFICERS
*BRUCE R. BENT, President, Treasurer and Trustee, 810 Seventh Avenue, New
York, New York 10019.
Mr. Bent is President, Treasurer, and Trustee of The Reserve Fund ("RF"),
Reserve Institutional Trust ("RIT"), Reserve Tax-Exempt Trust ("RTET") and
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, and Chairman and Director of
Resrv Partners, Inc. Before 1968, he was associated with Stone & Webster
Securities Corp., and previously, Teachers Insurance and Annuity Association.
EDWIN EHLERT, JR., Trustee, 125 Elm Street, Westfield, New Jersey 07091.
Mr. Ehlert is President and Director of Ehlert Travel Associates, Inc.
(travel agency formerly called Travelong of Westfield, Inc.) and Ehlert Travel
Associates of Florida, Inc. (travel agency), and Trustee of RF, RIT, RNYTET,
RTET and RPES.
<PAGE> 53
HENRI W. EMMET, Trustee, 176 East 71st Street, New York, New York 10021.
Mr. Emmet is the Managing Director of Servus Associates, Inc, and U.S.A.
Representative of the First National Bank of Southern Africa and Trustee of RF,
RET, RNYTET, RTET and RPES. Until 1989, he was Senior Vice President of the
New York branch of Banque Nationale de Paris.
*DONALD J. HARRINGTON, C.M, Trustee, St. John's University, Jamaica, New
York 11439.
The Reverend Harrington is President of St. John's University (NY) and a
Trustee of RF, RIT, RNYTET, RTET and RPES. The Reverend Harrington served as
President of Niagara University from 1984 to 1989 and was Executive Vice
President of Niagara University from 1981 to 1984.
MICHELLE L. NEUFELD, Counsel and Secretary, 810 Seventh Avenue, New York,
NY 10019.
Ms. Neufeld is Counsel and Secretary of RF, RIT, RTET, RNYTET and RPES.
Before joining The Reserve Funds in 1997, Ms. Neufeld was a staff attorney at
NASD Regulation, Inc.
PAT A. COLLETTI, Controller, 810 Seventh Avenue, New York, New York 10019.
Mr. Colletti is Controller of RF, RIT, RTET, RNYTET and RPES. Prior to
joining The Reserve Funds in 1985, Mr. Colletti was Supervisor of Accounting of
Money Market Funds for the Dreyfus Corporation.
- --------------------------------------------
*Interested Trustee within the meaning of the Act (Enter). 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, 1997, the Trustees received fees of $8,955
from the Fund. As of June 30, 1996, Trustees and officers as a group owned
less than 1% of the outstanding shares of the Trust. During the year ended May
31, 1997, Reserve Tax-Exempt Trust held four Board meetings and one Review
Committee meeting.
<PAGE> 54
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM FUND AND FUND COMPLEX
NAME OF TRUSTEE FROM FUND* (4 ADDITIONAL TRUSTS) PAID TO TRUSTEE*
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Edwin Ehlert, Jr. $2,985 $39,000
Henri W. Emmet $2,985 $30,500
Rev. Donald J. Harrington $2,985 $30,000
</TABLE>
- ------------
* Amounts shown are for the Trust's fiscal year ending May 31, 1997.
INVESTMENT MANAGEMENT, DISTRIBUTION, SERVICE
AND CUSTODIAN AGREEMENTS
INVESTMENT MANAGEMENT AGREEMENT. Reserve Management Company, Inc. ("RMCI"), 14
Locust Place, Manhasset, NY 11030, of which Messrs. Henry B.R. Brown and Bruce
R. Bent are the Directors, manages the Fund and provides it with investment
advice pursuant to an Investment Management Agreement. Messrs. Brown and Bent
together with their children own RMCI. Under the Investment Management
Agreement, RMCI manages the Fund's investments, including effecting purchases
and sales thereof, in furtherance of its investment objective and policies,
subject to overall control and direction of the Trustees. RMCI also makes
promotional and advertising expenditures related to the sale of Fund shares
(paying for prospectuses distributed to potential investors and for other sales
literature, but not paying for prospectuses distributed to current
shareholders, distribution assistance payments paid by the Fund, or
registration fees and expenses).
For these services, the Fund periodically pays RMCI a management fee at
the annual rate of .50% of the first $500 million of average daily net assets,
.475% of the next $500 million of such assets, .45% of the next $500 million of
such assets, .425% per annum of the next $500 million of such assets, and .40%
of such assets in excess of $2 billion. For the fiscal years ended May 31,
1992, 1993, 1994, 1995 and 1996, RMCI received management fees of $1,797,084,
$1,826,877, $1,876,890, $1,702,033 and $1,602,360 respectively, from the Fund.
From time to time, RMCI may waive receipt of its fees and or voluntarily
assume certain expenses of the Fund which would have the effect of lowering the
Fund's expense ratio and increasing yield to investors at the time such amounts
are assumed or waived as the case may be.
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
its 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.
<PAGE> 55
determines is in excess of, or not properly attributable to, the cost of
operations or expenses of the Fund. The Service Agreement is non-assignable
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, during the fiscal year ended May 31,
1997 the Fund reimbursed RMCI $1,083,471 for expenses. For the fiscal years
ended May 31, 1995 and 1996 RMCI was reimbursed $1,062,207 and $1,081,664 for
expenses, respectively.
DISTRIBUTION AGREEMENT. The Fund's Distributors are Pacific Global Fund
Distributors, Incorporated ("PGFDI"), 215 North Marengo Avenue, Pasadena,
California 91101; and Resrv Partners, Inc. ("RESRV"), 810 Seventh Avenue, New
York, N.Y. 10019. The Fund has authorized the Distributors, in connection with
their sale of Fund shares, to give only such information and to make only such
statements and representations as are contained in the Prospectus. Sales may
be made only by the Prospectus. The Distributors may offer and sell shares of
the Fund pursuant to a separate Prospectus applicable to such Distributor. The
Distributors are "principal underwriters" for the Fund within the meaning of
the Investment Company Act of 1940, and as such act as agent in arranging for
the continuous offering of Fund shares. The Distributors have the right to
enter into selected dealer agreements with brokers or other persons of their
choice for the sale of Fund shares. Parties to selected dealer agreements may
receive assistance payments, if they qualify for such payments, under the
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 Fund may, therefore, continue to distribute its own shares.
The Distribution Agreements may be renewed annually if specifically
approved by the Board of Trustees and by the vote of a majority of the
disinterested Trustees cast in person at a meeting called for the purpose of
voting on such approval or by the vote of a majority of the outstanding voting
securities of the Fund.
PLAN OF DISTRIBUTION. The Fund maintains a Plan of Distribution ("Plan") and
related agreements, as amended, under Rule 12b-1 of the Investment Company Act
of 1940, 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 .20% of the average net asset value of qualified accounts.
Such distribution assistance may include, but may not be 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, in 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 and
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 the Fund and its shareholders.
The Glass-Steagall Act prohibits all entities which receive deposits
from engaging to any extent in the business of issuing, underwriting, selling,
or distributing securities, although national and state chartered banks are
permitted to purchase and sell securities upon the order and for the account of
their customers. Those persons who wish to provide assistance in the form of
activities not primarily intended to result in the sale of Fund shares (such as
administrative and account maintenance services) may include banks, upon
<PAGE> 56
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 Fund
shares, such as administrative and account maintenance services, do not violate
the Glass-Steagall Act. However, this is an unsettled area of the law and if a
determination contrary to management's position is made by a bank regulatory
agency or court concerning payments to banks contemplated by the Plan, any such
payments will be terminated and any shares registered in the bank's name, for
its underlying customer, will be registered in the name of that customer.
Financial institutions providing distribution assistance or administrative
services for the Fund may be required to register as securities dealers in
certain states.
Under the Plan, the Fund's Controller or Treasurer reports quarterly the
amounts and purposes of assistance payments. During the continuance of the
Plan the selection and nomination of the disinterested Trustees is at the
discretion of the disinterested Trustees currently in office.
During the fiscal year ended May 31, 1997, $577,267 was paid under the
Plan by the Fund. Any such payments are intended to benefit the Fund by
maintaining or increasing net assets to permit economies of scale in providing
services to shareholders and to contribute to the stability of shareholder
services. During the fiscal year ended May 31, 1997 substantially all payments
made by the Fund were to brokers or other financial institutions and
intermediaries for share balances in the Fund.
The Plan and related agreements were duly approved by shareholders and
may be terminated at any time by a vote of a majority of the outstanding voting
securities of the Fund or by vote of the disinterested trustees. The Plan and
related agreements may be renewed from year to year if approved by a vote of a
majority of the Board of Trustees and by a 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 also be approved by a vote of the Board of Trustees and of the
disinterested Trustees, cast in person at a meeting called for the purpose of
such vote.
The Securities and Exchange Commission had proposed to amend Rule 12b-1
under the Investment Company Act of 1940 in a manner which, among other things,
would effectively prohibit the implementation of compensation plans or any
other plans that do not tie payments by a fund to specific distribution
activities. If such a proposal were implemented, the Board of Trustees would
determine, at such time and in light of the existing circumstances, the
appropriateness of continuing the Plan, recommending its modification or
discontinuance, or taking any other action.
CUSTODIAL SERVICES AND INDEPENDENT ACCOUNTANT. The Chase Manhattan Bank, 4 New
York Plaza, New York, N.Y. 10004 and Bankers Company, One Bankers Plaza, New
York, N.Y. 10015 are Custodians of the Fund's securities and cash pursuant to
Custodian Agreements. Coopers & Lybrand L.L.P., 1301 Avenue of the Americas,
New York, N.Y. 10019 is the Fund's independent accountant.
PORTFOLIO TURNOVER, TRANSACTION CHARGES AND ALLOCATION
As investment securities transactions made by the Fund are normally
principal transactions at net prices, the Fund does not normally incur
brokerage commissions. Purchases of securities from underwriters involve a
commission or concession paid by the issuer to the underwriter and aftermarket
transactions with dealers involve a spread between the bid and asked prices.
During the past three fiscal years, the Fund has not paid any brokerage
commissions.
The Fund's policy of investing in debt securities maturing within one
year results in high portfolio turnover. However, because the cost of these
transactions is minimal, high turnover does not have a material adverse effect
upon the net asset value or yield of the Fund.
<PAGE> 57
Subject to the overall supervision of the officers of the Fund and the
Board of Trustees, RMCI places all orders for the purchase and sale of the
Fund's investment securities. In general, in the purchase and sale of
investment securities RMCI will seek to obtain prompt and reliable execution of
orders at the most favorable prices and yields. In determining best price and
execution, RMCI may take into account a dealer's operational and financial
capabilities, the type of transaction involved, the dealer's general
relationship with RMCI, and any statistical, research, or other services
provided by the dealer to RMCI. To the extent such non-price factors are taken
into account the execution price paid may be increased, but only in reasonable
relation to the benefit of such non-price factors to the Fund as determined by
RMCI. Brokers or dealers who execute investment securities transactions may
also sell shares of the Fund; however, any such sales will 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 Fund and other investment companies 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 investment companies
affected.
SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the trustees 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 Reserve Tax-Exempt Trust
("Trust"). The Trust consists of three separate portfolios. Each share
represents an interest in the respective portfolios of the Trust
proportionately equal to the interest of each other share. If they deem it
advisable and in the best interests of shareholders, the trustees may classify
or reclassify any unissued shares of the Trust by setting or changing the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms and conditions of
redemption of the stock. Any changes would be required to comply with any
applicable state and federal securities laws. These currently require that
each class be preferred over all other classes in respect of 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
the Trust, shareholders are entitled to share pro rata in the net assets of
their respective portfolios available for distribution to such shareholders.
It is possible, although considered highly unlikely in view of the method of
operation of mutual funds, that should the assets of one class of shares be
insufficient to satisfy its liabilities, the assets of another class could be
subjected to claims arising from the operations of the first class of shares.
No changes can be made to the Trust's issued shares without shareholder
approval.
Only Interstate Portfolio shares are offered by the Prospectus which
accompanied or preceded this Statement of Additional Information. Each Fund
share, when issued, is fully paid, nonassessable (except as set forth below),
and fully transferable or redeemable at the shareholder's option. Each Fund
share has an equal interest in the net assets of the Fund, equal rights to all
dividends and other distributions from the Fund, and one vote for all purposes.
Shares of all classes vote together for the election of Trustees and have
noncumulative voting rights, meaning that the holders of more than 50% of the
shares voting for the election of trustees could elect all trustees if they so
choose, and in such event the holders of the remaining shares could not elect
any person to the Board of Trustees.
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable for the obligations of the
Fund. The Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Fund and requires that notices of such
disclaimer be given in each agreement, obligation, or instrument entered into
or executed by the Fund or the trustees. The Declaration of Trust provides for
the indemnification out of the Fund property of any shareholder held personally
liable for the obligations of the Trust. The Declaration of Trust also
provides that the Fund shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Fund and satisfy
any judgment thereon. Thus, the risk of a shareholder incurring financial loss
on account of status as a shareholder is limited to circumstances in which the
Fund itself would be unable to meet its obligations.
<PAGE> 58
The Declaration of Trust further provides that the trustees will not be
liable for errors of judgment or mistakes of fact or law; but nothing in the
Declaration protects a trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
Regulations of the Securities and Exchange Commission provide that if a
class is separately affected by a matter requiring a vote (election of
trustees, ratification of independent auditor selection, and approval of an
underwriting agreement are not considered to have such separate effect and may
be voted upon by shareholders of the Trust as a whole), each such class will
vote separately. 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 as a group at an annual meeting of
shareholders at which at least 50 percent of the shares of each group are
represented.
As of June 30, 1997, no person was known to own of record or
beneficially 5% or more of the outstanding shares of the Fund.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Redemption payments will normally be made by check or wire transfer but
the Fund is authorized to make payment of redemptions partly or wholly in kind
(that is, by delivery of investment securities valued at the same time as the
redemption net asset value is determined). The Fund has elected to permit any
shareholder of record to make redemptions wholly in cash to the extent the
shareholder's redemptions in any 90-day period do not exceed the lesser of
$250,000 or 1% of the net assets of the Fund. The election is irrevocable
pursuant to rules and regulations under the Investment Company Act of 1940
unless withdrawal is permitted by order of the Securities and Exchange
Commission. Redemptions in kind are further limited by the Fund's intention to
redeem in kind only when necessary to reduce a disparity between amortized cost
and market value. In disposing of such securities, an investor might incur
transaction costs and on the date of disposition might receive an amount less
than the net asset value of the redemption.
IF SHARES OF THE FUND ARE PURCHASED BY CHECK OR RESERVE AUTOMATIC
TRANSFER THE FUND MAY DELAY TRANSMITTAL OF REDEMPTION PROCEEDS UNTIL SUCH TIME
AS IT HAS ASSURED ITSELF THAT GOOD PAYMENT HAS BEEN COLLECTED FOR THE PURCHASE
OF SUCH SHARES, WHICH WILL GENERALLY 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
investments or administrative services. Some of these participate in the
Fund's Plan of Distribution ("Plan"). Under the Plan, payments are made to
persons who provide assistance in distributing Fund shares or other assistance
to the Fund.
NET ASSET VALUE. Shares are offered at net asset value. The net asset value
of the Fund is calculated at the close of each business day as defined in the
Prospectus. The net asset value is not calculated on New Year's Day,
Washington's Birthday observed, Good Friday, Memorial Day observed,
Independence Day, Labor Day, Thanksgiving Day, Christmas Day, on other days the
New York Stock Exchange is closed for trading, and on regional banking holidays
which may include Martin Luther King's Birthday and Columbus Day. The net
asset value of the Fund is normally maintained at $1.00 per share. The Fund
cannot guarantee that its net asset value will always remain at $1.00 per
share.
The net asset value per share of the Fund is determined by adding the
fair value of all of the Fund's securities, cash and other assets, subtracting
its liabilities, and dividing the result by the number of its shares
outstanding. The Board of Trustees has determined the most practical method
currently available for valuing portfolio instruments is the amortized cost
method. This procedure values a purchased security at cost at the time of
purchase and thereafter assumes a constant amortization to maturity of any
discount or premium and accrual of interest income, irrespective of intervening
changes in interest rates or security market values.
<PAGE> 59
In order to maintain a $1.00 share price the Fund will utilize the
following practices: maintain a dollar-weighted average portfolio maturity of
90 days or less; purchase only instruments having remaining maturities of 397
days or less; and invest only in securities determined by the Board of Trustees
to be of high quality with minimal credit risk. To assess whether repurchase
agreement transactions present more than minimal credit risk, the trustees
periodically review RMCI's evaluation of the creditworthiness of all entities,
including banks and broker-dealers, with which the Fund proposes to enter into
repurchase agreements. In addition, the Fund has adopted procedures taking
into account current market conditions and the investment objective of the
Fund, to attempt to maintain its net asset value as computed for the purpose of
sales and redemptions at $1.00 per share. Such procedures will include review
by the Trustees, at such intervals as they may determine reasonable, to
ascertain the extent of any difference in the net asset value of the Fund from
$1.00 a share determined by valuing its assets at amortized cost as opposed to
valuing them based on market factors. If the deviation exceeds 1/2 of one
percent, the Trustees will promptly consider what action if any should be
initiated. If they believe that the deviation may result in material dilution
or other unfair results to shareholders, the trustees have undertaken to apply
appropriate corrective remedies which may include the sale of the Fund's assets
prior to maturity to realize capital gains or losses or to shorten the average
maturity of the Fund, withholding dividends, redemption of shares of the Fund
in kind, or reverting to valuation based upon market prices and estimates.
EXCHANGE PRIVILEGE. A shareholder of the Interstate Fund may exchange his
shares for shares of the Pacific Advisors Fund Inc. and its respective
portfolios. This exchange privilege may not be available to clients of certain
firms. A sales load will be charged on such an exchange unless a waiver of the
sales load applies. A shareholder may qualify for waiver of the sales load if
the shares of the Interstate Fund which are being exchanged were acquired: (a)
by a previous exchange from shares of the Pacific Advisors Fund Inc. purchased
with a sales load, or (b) through reinvestment of dividends or distributions
paid with respect to the foregoing category of shares. A shareholder of the
Pacific Advisors Fund Inc. may exchange, at net asset value, shares for shares
of the Interstate Fund. Shares to be acquired in an exchange must be registered
for sale in the investor's state. The Interstate Fund reserves the right to
record all exchange requests.
The exchange privilege may be modified or terminated at any time, or
from time to time, upon 60 days' notice to shareholders. Additional
information regarding the exchange privilege is available from the Pacific
Advisors Fund Inc. at (800) 282-6693 or any authorized firm. A shareholder
considering an exchange to the Pacific Advisors Fund Inc. should refer to its
prospectus for additional information.
SHAREHOLDER SERVICE POLICIES. The Fund's policies concerning shareholder
services are subject to change from time to time. The Fund reserves the right
to change the $1,000 minimum account size subject to the $5 monthly service
charge or involuntary redemption. The Fund further reserves the right to
impose special service charges for services provided to individual shareholders
generally including, but not limited to, fees for returned checks, stop payment
orders on official checks and shareholder checks, and special research
services. The Fund's standard service charges as described in the Prospectus
are also subject to adjustment from time to time. In addition, the Fund
reserves the right to increase its minimum initial investment amount at any
time.
CREDITING OF INVESTMENTS. The Fund will only give credit for investments in
the Fund on the day they become available in federal funds which is normally
within one or two days of receipt. A Federal Reserve wire system transfer
("Fed wire") is the only type of wire transfer that is reliably available in
federal funds on the day sent. For a Fed wire to receive same day credit, the
Fund must be notified before 11:00 AM (New York time) of the amount to be
transmitted and the account to be credited. Checks and other items submitted
to the Fund for investment are only accepted when submitted in proper form,
denominated in United States dollars, and are credited to shareholder accounts
only upon their conversion into federal funds, which normally takes one or two
business days following receipt. Physical items delivered to the Fund after
11:00 AM (New York time) are considered received on the following business day.
Checks drawn on foreign banks are normally not accepted by the Fund. In
addition, the Fund does not accept cash investments or travelers checks.
The Fund reserves the right to reject any investment in the Fund for any
reason and may at any time suspend all new investment in the Fund.
<PAGE> 60
IF SHARES PURCHASED ARE TO BE PAID FOR BY WIRE AND THE WIRE IS NOT
RECEIVED BY THE FUND OR IF SHARES ARE PURCHASED BY A CHECK WHICH, AFTER
DEPOSIT, IS RETURNED UNPAID OR PROVES UNCOLLECTABLE, THE SHARE PURCHASE MAY BE
CANCELED OR REDEEMED IMMEDIATELY. THE INVESTOR THAT GAVE NOTICE OF THE
INTENDED WIRE OR SUBMITTED THE CHECK WILL BE HELD FULLY RESPONSIBLE FOR ANY
LOSSES INCURRED BY THE FUND, THE INVESTMENT ADVISER OR THE DISTRIBUTOR. THE
FUND MAY REDEEM SHARES FROM ANY ACCOUNT REGISTERED IN THAT PURCHASER'S NAME AND
MAY APPLY THE PROCEEDS THEREFROM TO THE PAYMENT OF ANY AMOUNTS DUE THE FUND.
SHARE CERTIFICATES. Share certificates are not issued by the Fund.
DISTRIBUTIONS AND TAXES
The Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986 ("Code") so long as such
qualification is in the best interests of shareholders. The status of the Fund
as a regulated investment company does not involve government supervision of
management or of investment practices or policies. If it so qualifies, in any
fiscal year in which it distributes at least 90 percent of its net income, the
Fund will not be subjected to federal income tax on such distributed amounts.
Although interest derived from Municipal Obligations is not subject to federal
income taxation, any net capital gains realized by the Fund and distributed to
shareholders as regular or capital gains dividends, whether distributed in cash
or in the form of additional shares will be taxable to shareholders.
In order to qualify as a regulated investment company under the Code,
the Fund must, among other things, in each fiscal year distribute at least 90
percent of its investment company taxable income to shareholders; derive at
least 90 percent of its gross income from dividends, interest and gains from
the sale or disposition of securities; meet certain diversification
requirements; and derive less than 30 percent of the gross income from the sale
or disposition of securities held for less than three months.
Exempt interest dividends distributed to shareholders are not includable
in the shareholder's gross income for federal income tax purposes. The
percentage of income that is tax exempt will be determined for each year and
will be applied uniformly to all dividends declared during that year. This
percentage may differ from the actual tax exempt percentage for any particular
day. Distributions of net investment income received by the Fund from
investments in debt securities other than Municipal Obligations and any net
realized capital gains distributed by the Fund will be taxable as ordinary
income. Shareholders will be advised annually as to the federal income tax
consequences of distributions made during the year.
Statements as to the tax status of each investor's dividends and other
distributions will be mailed annually. The annual statements will set forth
the dollar amount of income subject to federal tax, if any. Distributions will
be reported under more than one identification number only if a separate
account is established for each number. If the Fund has both tax exempt and
taxable interest income, it will use the "actual earned method" for determining
the percentage that is taxable income. Under this method, the ratio of taxable
income earned during the period, for which a distribution was made, to total
income earned during the period determines the percentage of the distribution
designated taxable and, as a result, the percentage of the distribution that is
tax-exempt may vary from distribution to distribution.
The identification of the issuer of Municipal Obligations depends on the
terms and conditions of the security. When the assets and revenues of an
agency, authority, instrumentality, or other political subdivision are separate
from those of the government creating the subdivision, such subdivision would
be deemed to be the sole issuer. Similarly, in the case of an industrial
development bond, if that bond is backed only by the assets and revenues of the
nongovernmental user, then such nongovernmental user would be deemed to be the
sole issuer. However, in either case, if the creating government or some
entity guarantees a security, such guarantee would be considered a separate
security and is to be treated as an issue of such government or other agency.
The Tax Reform Act of 1986 (the "Act) provides that in the event the
Fund should hold certain private activity bonds issued after August 7, 1986,
shareholders must include as an item of tax preference, the
<PAGE> 61
portion of dividends paid by the Fund that is attributable to interest on such
bonds in their federal alternative minimum taxable income for purposes of
determining any liability for the alternative minimum tax applicable to
individuals and the alternative minimum tax and the environmental tax
applicable to corporations. In the case of corporations, federal alternative
minimum taxable income will also include one-half if the excess of the
corporation's pre-tax book income (including all exempt-interest dividends)
over the corporation's other federal alternative minimum taxable income
Shareholders receiving Social Security benefits should note that all
exempt-interest dividends will be taken into account in determining the
taxability of such benefits.
The Act also provides that, for taxable years beginning after December
31, 1986, every person required to file a tax return must report solely for
informational purposes on such return the amount of exempt interest dividends
received from the Fund during the taxable year. In addition, with respect to a
shareholder who receives exempt interest dividends on shares held for less than
six months, any loss on the sale or exchange of such shares will, to the extent
of the amount of such exempt interest dividends, be disallowed.
The exemption from federal income tax of dividends derived from interest
on Municipal Obligations does not necessarily result in exemption under the
other tax laws of the United States or any state or local taxing authority.
Shareholders are advised to consult with their tax advisers concerning
the application of state and local taxes to an investment or income there from
in the Fund which may differ from the Federal income tax consequences described
above.
FUND YIELD
The current yield of the Fund may differ from its effective yield and
annualized dividends.
Current yield is calculated by determining the net change (exclusive of
capital changes) in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period, dividing the net change in
account value by the value of the account at the beginning of the base period
to obtain the base period return, and multiplying the base period return by a
fraction having 365 in the numerator and the number of days in the base period
in the denominator. The current yield stated in the prospectus utilizes a
seven day base period. Net change in account value must reflect (i) the value
of additional shares purchased with dividends from the original share and
dividends declared on both the original share and any such additional shares;
and (ii) any recurring fees charged to all shareholder accounts, in proportion
to the length of the base period and the Fund's average or median account size.
Net change in account value must exclude realized gains or losses and
unrealized appreciation or depreciation.
Effective yield is computed adding one to 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) /7] 365 - 1. Effective annual
yields are a representation of the effective annual rate of return produced by
the monthly compounding of Fund dividends.
Taxable equivalent yield is computed by dividing either current yield or
effective yield by a denominator equal to one minus a stated income tax rate
according to the following formula: Taxable Equivalent Yield = Current or
Effective Yield / (1 - Income Tax Rate).
Yield information may be useful in reviewing the performance of the
Fund, but because of fluctuations, it may or may not provide a basis for
comparison with bank deposits, other money market funds or bank accounts which
have fluctuating share values, or other investments which pay a fixed yield for
a stated period of time, such as Treasury bills, bank certificates of deposit,
savings certificates and NOW accounts. When making comparisons, the investor
should also consider the quality and maturity of the portfolio securities of
the various money market funds. An investor's principal is not guaranteed by
the Fund, nor is it insured by a governmental agency.
<PAGE> 62
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
Primary, Government, and Treasury Funds for an additional fee. Reserve CPA is a
check arrangement with BankOne Columbus NA or the Chase Manhattan Bank whereby
checks are issued to Reserve shareholders which may be used to redeem shares in
the account in any amount. If a bank accepts a check, it will be paid in the
order received by redemption of shares from the investor's Reserve account.
Any check in an amount exceeding the Reserve account balance will be
returned to the payee. Reserve CPA checks can be used in the same manner as any
other bank checks. Paid checks will not be returned but complete information on
such paid checks will be provided monthly. Reserve CPA Plus is a checking
facility described above plus a VISA Gold debit card. 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 establishing a CPA or CPA Plus account 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.
A Fund will charge a non-refundable annual CPA service fee (currently
$60 which may be charged to the account monthly) and a transaction fee of
$0.50 for each additional check in excess of five presented for payment within
the statement period. Participants will also be charged for specific cost
incurred in placing stop payment orders, obtaining check copies and in
processing returned checks. The annual service fee and other charges may be
changed at any time upon 30 days notice. In addition, broker-dealers or other
financial institutions in the CPA Program may charge their own service fees in
addition to the annual fee.
VISA cardholders may be liable for the unauthorized use of their card
up to the amount set by the governing Federal regulations which is currently
$500 if the Fund or the bank is not notified of the theft or loss within 2
business days. Participants should refer to the VISA Account Shareholder
Agreement for complete information regarding responsibilities and liabilities
with respect to the VISA Gold card. If a Card is lost or stolen, the CPA Plus
participant 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
Agreements.
<PAGE> 63
MUNICIPAL OBLIGATIONS
Municipal bonds and municipal notes are the two major classifications of
Municipal Obligations. Such obligations are generally issued to obtain funds
for various public purposes, including the construction of public facilities
such as airports, bridges highways, houses, hospitals, mass transportation,
schools, streets, and water and sewer works. In addition, Municipal
Obligations may be issued to refund outstanding debt and obtain funds for
general operating expenses.
Municipal bonds, which are long term instruments and generally have
maturities longer than one year when issued, may be either "general obligation"
or "revenue" issues. General obligation bonds are secured by the issuer's
pledge of its full faith, credit, and taxing power for the payment of principal
and interest. Revenue bonds are payable only from the revenues derived from a
particular facility or class of facilities, as, in some cases, from the
proceeds of a special excise tax or other specific revenue source but not from
the general taxing power.
Certain kinds of industrial development bonds ("IDBs") are issued by or
on behalf of public authorities to provide funding for various privately
operated industrial facilities such as warehouse, office, plant, and store
facilities. IDBs are, in most cases, revenue bonds and do not generally
constitute the pledge of the credit of the issuer of such bonds. The payment
of the principal and interest on IDBs usually depends solely on the ability of
the user of the facilities financed by the bonds or other guarantor to meet its
financial obligations and, in certain instances, the pledge of real and
personal property as security for payment. If there is no established
secondary market for the IDBs, the IDBs or the participation interests
purchased by the Fund will be supported by repurchase commitments and bank
letters of credit or guarantees of banks that meet the quality criteria of the
Fund and which may be exercised by the Fund to provide liquidity.
Municipal notes are usually issued to obtain funds in anticipation of
receipt of taxes, receipt of proceeds of issuances of municipal bonds or other
revenue which will provide funds to repay the notes, and generally have
maturities of one year or less.
On April 20, 1988, the United States Supreme Court in South Carolina v.
Baker, overruled an 1895 case, Pollock v. Farmers' Loan & Company which held
that interest on Municipal Obligations was immune from federal taxation. As a
result, proposals may be introduced before the Congress to eliminate or
restrict the federal income tax exemption for interest on certain Municipal
Obligations.
The Fund may purchase securities affected by these proposals. If such
proposals are enacted, the availability of Municipal Obligations by the Fund
would be adversely affected. In such event, the Fund would reevaluate its
investment objective and policies and submit possible changes in the structure
of the Fund for the consideration of shareholders. Investors should be aware
that the quantity of Municipal Obligations available for purchase by the Fund
may be limited, and that factor may affect the amount of tax-exempt
<PAGE> 64
income which can be obtained from an investment in the Fund. Substantial
reductions in the availability of tax-exempt securities might also cause a
reevaluation of the Fund's investment objective and policies.
VARIABLE RATE DEMAND INSTRUMENTS. Variable rate demand instruments that the
Fund may purchase are tax-exempt Municipal Obligations or participation
interests therein that provide for a 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 Fund may invest will
comply with Rule 2a-7 under the Investment Company Act of 1940. The Fund will
determine the variable rate demand instruments it will purchase in accordance
with procedures prescribed by its Board to minimize credit risks. The Fund's
investment adviser may determine that an unrated variable rate demand
instruments meets the Fund's high quality criteria if it is backed by a
suitable bank letter of credit or guarantee.
The variable rate demand instruments that the Fund may invest in include
participation interests purchased from banks in variable rate tax exempt
Municipal Obligations owned by banks or affiliated organizations. A
participation interest gives the Fund an undivided interest in the Municipal
Obligation in the proportion that the Fund's participation interest bears to
the total principal amount of the Municipal Obligation and provides the
repurchase feature described above. Each participation is backed by an
irrevocable letter of credit or guarantee of an appropriately rated bank. The
Fund has the right to sell the instrument back to the bank and draw on the
letter of credit on demand, after seven days' notice, for all or any part of
the full principal amount of the Fund's participation interest in the bond plus
accrued interest. Banks usually retain a service fee, a letter of credit fee
and a fee for issuing repurchase commitments in an amount equal to the excess
of the interest paid on the Municipal Obligations over the negotiated yield at
which the instrument was purchased by the Fund.
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 a high
quality and are not considered speculative. Bonds rated A by Moody's are
considered to possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Such bonds have factors giving
security to principal and interest that are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future. Debt rated A by S&P is considered to have a strong capacity to pay
interest and repay principal although it is more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
TAX-EXEMPT PAPER RATINGS. Moody's tax-exempt paper rating are opinions of the
ability of issuers to repay punctually promissory obligations not having an
original maturity in excess of nine months. Moody's employs the following two
designations all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers: MIG-1/VMIG-1, Best Quality and
MIG-1/VMIG-1, High Quality. The designation of MIG-1/VMIG-1 indicates there is
strong protection by established cash flows, superior liquidity support of
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 in
MIG-1/VMIG-1.
Standard & Poor's tax-exempt paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. The highest quality obligations are rated "A". Issues assigned
A rating are regarded as having the greatest capacity for timely payment.
Issues in this category are further refined with designations to indicate the
relative degree of safety. The two top such designations are 1 and 2. The
"A-1" designation indicates that the degree of safety regarding timely payment
is strong. The "A-2" designation indicates that capacity for timely payment is
satisfactory. Municipal note ratings by 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
<PAGE> 65
to have a very strong or strong capacity to pay principal and interest.
Municipal notes designated SP-2 are considered to have a satisfactory capacity
to pay principal and interest.
<PAGE> 66
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Trustees of Reserve Tax-Exempt
Trust--Interstate Tax-Exempt Fund:
We have audited the accompanying statement of net assets of the Interstate
Tax-Exempt Fund (one of the series constituting Reserve Tax-Exempt Trust) as of
May 31, 1997, and the related statement of operations for the year then ended,
the statements of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the periods presented.
These financial statements and financial highlights are the responsibility of
the Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1997, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Interstate Tax-Exempt Fund of Reserve Tax-Exempt Trust as of May 31, 1997, the
results of its operations, the changes in its net assets and its financial
highlights for the periods referred to above, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
New York, New York
June 27, 1997
RESERVE TAX-EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
----------------------- -------- -------------- --------
<S> <C> <C> <C>
ALABAMA -- .66%
Decatur IDA for Scientific Manufacturing, 4.15%(a)........ 2/1/2014 $ 1,000 $ 1,000,114
Pell City IDA for General Signal Corporation, 4.05%(a).... 10/1/2000 1,000 1,007,059
ARIZONA -- 6.45%
Apache IDA for Tucson Electric Power Company, 3.90%(a).... 12/15/2018 6,000 6,011,992
Apache IDA for Tucson Electric Power Company, 3.95%(a).... 12/15/2018 2,000 2,004,030
Coconino PCR for Tucson Electric Power Company Series B,
3.80%(a)................................................ 5/1/2031 1,000 1,002,841
Gila IDA PCR for Cobre Valley Hospital, 3.90%(a).......... 11/1/2025 4,000 4,014,597
Pima IDA PCR for Tucson Electric Project, 3.90%(a)........ 10/1/2022 5,600 5,600,598
Pima IDA for Tucson Retirement Center, 3.85%(a)........... 1/1/2009 800 805,451
Yauapai IDA for Kachina Pointe Project, 3.85%(a).......... 1/1/2009 300 302,044
CALIFORNIA -- 8.23%
California School District Cash Reserves Program Series A,
4.75%................................................... 7/2/1997 3,000 3,132,529
California Community Development Authority, 3.65%(a)...... 5/15/2025 100 100,185
Grand Terrace Community Redevelopment Agency, 3.95%(a).... 12/1/2011 5,700 5,716,694
Irvine Beach Assessment, 3.70%(a)......................... 9/2/2011 300 300,030
Los Angeles MHR for Malibu Meadows Project Series 91-A,
3.95%(a)................................................ 12/1/2015 800 802,941
Los Angeles USD TRAN, 4.50%............................... 6/30/1997 500 520,970
Los Angeles Transportation Commission Custodial Receipts,
4%(a)................................................... 7/1/2005 600 609,143
San Bernadino HFR Alta Park Project, 4%(a)................ 5/1/2006 3,500 3,512,940
San Francisco Bayside Village Series 85D, 3.95%(a)........ 12/1/2005 4,000 4,027,944
San Joaquin USD TRAN, 4.50%............................... 1/15/1998 1,000 1,033,515
San Jose Community Redevelopment Agency, 3.80%(a)......... 7/1/2026 1,300 1,304,495
San Mateo USD TRAN, 4.50%................................. 7/1/1997 3,000 3,125,535
Union City MHR for Skylark Apartments, 4%(a).............. 11/1/2007 1,000 1,001,999
</TABLE>
11
<PAGE> 67
RESERVE TAX-EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997--(CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
----------------------- -------- -------------- --------
<S> <C> <C> <C>
COLORADO -- 2.22%
Englewood HCF for SW Medical Professional Ltd. Series 85
Series 85, 4.05%(a)..................................... 12/1/2010 $ 2,000 $ 2,007,523
Jefferson County IDR for Kinder-Care Learning Centers
Series C, 4.15%(a)...................................... 2/1/2001 1,700 1,700,193
Jefferson Country IDR for S.W. Medical Project Series 85,
4.05%(a)................................................ 11/1/2010 2,450 2,459,216
Wheat Ridge IDA for Pearse Electronics Inc. Project,
4.25%(a)................................................ 6/1/1999 625 626,178
CONNECTICUT -- .56%
Connecticut Development Authority Health Care Revenue
Bonds for Independent Living Project 1990 Series,
3.70%(a)................................................ 7/1/2015 300 301,052
Hartford Redevelopment Agency MHR for Underwood Towers,
3.65%(a)................................................ 6/1/2020 1,400 1,404,816
DELAWARE -- .66%
Wilmington GOB, 5%........................................ 10/1/1997 2,000 2,025,644
DISTRICT OF COLUMBIA -- .73%
Washington, D.C. Housing Finance Agency MHR for Chastleton
Development Project, 4%(a).............................. 7/1/1997 2,200 2,236,950
FLORIDA -- 4.51%
Boca Raton IDA for Parking Garage Project, 4.325%(a)...... 12/1/2014 2,800 2,800,336
Broward Country MHR for Welleby Apartment Project,
4%(a)................................................... 12/1/2006 600 602,209
Collier IDA for Retirement Housing Revenue Bonds,
3.95%(a)................................................ 12/1/2015 200 200,724
Dade County Hospital Revenue Bonds, 3.85%(a).............. 9/1/2025 200 200,570
Dade County IDA for Dolphin Stadium Project, 3.95%(a)..... 1/1/2016 2,800 2,810,218
Dade County Hospital Revenue Bonds Project, 3.85%(a)...... 3/1/2025 100 100,285
Duval County HFA for Lakes of Mayport Apartment Project,
4%(a)................................................... 12/1/2009 700 702,602
Florida HFR/Oaks at Mill Creek Project Series 85,
3.95%(a)................................................ 11/1/2007 200 200,578
Gulf Breeze Series 85 A Revenue Bonds, 4%(a).............. 12/1/2015 400 401,476
Hillsborough IDA for Tampa Electric Co., 4.15%(a)......... 9/1/2025 700 702,451
Hillsborough PCR for Cannon Conversion, 4%(a)............. 5/15/2018 200 200,690
Jacksonville IDA for Coastal Islands Project, 4.05%(a).... 8/1/2008 195 195,022
Lee County IDA for Charter Glade Hospital Project,
4.10%(a)................................................ 8/1/2007 4,375 4,391,379
Palm Beach PCR for Water and Sewer Project, 4.05%(a)...... 10/1/2011 200 200,022
University of North Florida HEF Capital Improvement
Project, 3.90%(a)....................................... 11/1/2024 100 100,368
GEORGIA -- 5.80%
Clayton County DAI for Rivers Edge Development,
3.95%(a)................................................ 8/1/2006 2,880 2,890,664
Elbert County Industrial Building Authority Revenue Bonds
for Seaboard Farms of Elberton, 3.95%(a)................ 7/1/2005 1,800 1,812,452
Gwinnett County IDA for United Stationers Supply Company,
3.95%(a)................................................ 10/31/2002 3,800 3,813,998
Municipal Electric Authority, 4.05%(a).................... 1/1/2026 9,200 9,226,982
IOWA -- 2.09%
Buffalo IDA for Linwood Mining & Materials, 4.20%(a)...... 1/1/2000 1,165 1,165,134
Iowa School Corp. Warrant Certificates Series A, 4.75%.... 6/27/1997 5,000 5,223,866
ILLINOIS -- 0.55%
Streamwood IDA for Olde Church Centre Project, 4.05%(a)... 12/1/2014 1,685 1,691,258
INDIANA -- 4.53%
Indianapolis Airport Custodial Receipts, 4.05%(a)......... 7/1/2015 5,000 5,077,784
Tippecanoe County PCR for Caterpillar Inc., 3.95%(a)...... 11/1/2006 8,750 8,782,315
KANSAS -- 1.33%
Ottawa IDA for Our Own Hardware Co., 3.95%(a)............. 10/1/2004 4,080 4,080,442
KENTUCKY -- 3.76%
Danville EDA Multi-Lease Revenue Bonds, 4.20%(a).......... 4/1/2007 900 903,443
Ohio County PCR for Big River Electric Corporation,
4.40%(a)................................................ 6/1/2013 4,500 4,593,605
Ohio County PCR for Big River Electric Corporation Project
Series 1985, 4.85%(a)................................... 10/1/2015 6,000 6,024,279
LOUISIANA -- 0.33%
Louisiana Public Facilities Authority W. Knighton Project,
3.90%(a)................................................ 9/1/2025 1,000 1,002,893
</TABLE>
12
<PAGE> 68
RESERVE TAX-EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997--(CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
----------------------- -------- -------------- --------
<S> <C> <C> <C>
MARYLAND -- 6.03%
Anne Arundel County Industrial Refunding Revenue Bonds for
Kinder-Care Learning Centers, 4.15%(a).................. 2/1/2001 $ 2,260 $ 2,260,257
Baltimore IDA for Mayor and City Counsel Project,
4.05%(a)................................................ 8/1/2016 2,500 2,507,548
Maryland Health and Higher Education Pooled Project Series
85A, 3.90%(a)........................................... 4/1/2035 13,000 13,001,389
Montgomery County IDA for Info Systems and Network
Corporation, 4.15%(a)................................... 4/1/2014 700 702,547
MASSACHUSETTS -- 2.82%
Boston Water and Sewer Commission Revenue Bonds 1994 A,
3.80%(a)................................................ 11/1/2024 300 301,040
Massachusetts HEF for Harvard University, 3.65%(a)........ 2/1/2016 400 401,391
Massachusetts IFA for Governor Dummer Academy, 3.80%(a)... 7/1/2026 1,200 1,204,228
Massachusetts IFA for Griffin Realty, 3.85%(a)............ 7/1/2008 200 200,710
Massachusetts IFA for Quamco Series B, 3.70%(a)........... 9/1/2001 200 200,693
Watertown BAN, 4.25%...................................... 5/13/1998 5,000 5,022,986
Westfield BAN, 4.50%...................................... 5/8/1998 1,300 1,308,657
MICHIGAN -- 1.44%
Dearborn Heights EDC for Oakbrook Common Project Series
1993, 3.85%(a).......................................... 3/1/2025 3,900 3,900,411
Jackson EDC for Thrifty Leoni Inc. Project, 4.075%(a)..... 12/1/2014 500 500,057
MINNESOTA -- 2.21%
Eagan MHR for Aspen Woods, 4.15%(a)....................... 1/1/2026 5,580 5,601,594
New Brighton Industrial Development Refunding Revenue
Bonds for Taylor Corporation Series 1988, 5.44%(a)...... 11/1/1999 385 384,694
New Hope Commercial Development Revenue Bonds for National
Beauty Project Series 1994, 4.15%(a).................... 5/1/2010 775 775,088
MISSOURI -- 2.26%
Cole IDA for Modine Manufacturing Series 85, 4.15%(a)..... 12/1/2015 2,940 2,961,552
Missouri State Environmental Improvement and Energy
Resources Authority Pollution Control RAW Series A,
3.95%(a)................................................ 6/1/2014 3,000 3,000,000
St. Louis Industrial Development Refunding Revenue Bonds
for Kinder-Care Learning Centers, 4.15%(a).............. 2/1/2001 965 965,110
MONTANA -- .20%
Great Falls Commercial Development Revenue Bonds for
Liberty Development Partners Project, 4.15%(a).......... 12/1/2007 625 625,071
NEBRASKA -- 1.67%
Nuckolls IDA for Agrex Inc Project, 4.40%,(a)............. 2/1/2015 5,100 5,120,665
NEVADA -- 1.31%
Clark Unlimited Tax GOB Series A, 4.05%(a)................ 10/1/2030 4,000 4,014,395
NEW JERSEY -- 5.98%
East Rutherford BAN, 4.31%................................ 1/23/1998 2,000 2,010,892
Fair Lawn BAN, 4%......................................... 8/1/1997 1,866 1,929,017
Fairfield BAN, 4%......................................... 12/17/1997 2,000 2,036,685
New Jersey EDA for Volvo of America Corp., 4.40%(a)....... 12/1/2004 1,800 1,800,217
New Jersey Sports Expo Authority Series 92C, 3.65%(a)..... 9/1/2024 600 605,374
Rahway BAN, 4%............................................ 12/23/1997 2,740 2,792,260
Trenton Temp Notes, 4%.................................... 12/18/1997 3,000 3,060,889
Vernon Board of Education Temp Notes, 4%.................. 1/16/1998 4,000 4,066,052
NEW MEXICO -- 3.97%
Dona Ana IDR for Foamex Products, 3.90%(a)................ 11/1/2013 2,100 2,107,623
Farmington PCR for Public Service Four Corners,
4.05%(a)................................................ 4/1/2022 10,000 10,035,986
NEW YORK -- 8.68%
Nassau BAN, 4.50%......................................... 8/15/1997 4,000 4,133,848
New York City GOB Series A7, 4%(a)........................ 8/1/2020 1,300 1,300,142
New York City GOB Series B4, 4.05%(a)..................... 8/15/2023 1,800 1,800,200
New York City GOB Series B8, 3.85%(a)..................... 8/15/2023 500 500,053
New York City GOB Series C4-97, 4%(a)..................... 8/1/1997 3,100 3,100,345
</TABLE>
13
<PAGE> 69
RESERVE TAX-EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997--(CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
----------------------- -------- -------------- --------
<S> <C> <C> <C>
NEW YORK -- (CONTINUED)
New York City GOB Series E5, 4%(a)........................ 8/1/2009 $ 1,500 $ 1,500,164
New York State R&D PCR for Niagara Mohawk, 4.20%(a)....... 7/1/2015 1,000 1,000,115
North Hempstead G.O. BAN, 4.25%........................... 2/26/1998 4,000 4,057,026
Roslyn BAN, 4%............................................ 10/15/1997 5,000 5,099,618
Syracuse BAN Series 96A, 3.90%............................ 12/19/1997 4,000 4,073,677
NORTH CAROLINA -- .03%
North Carolina HEF for Guilford College Project,
4.10%(a)................................................ 9/1/2023 100 100,351
NORTH DAKOTA -- .36%
Minot IDR for Nash Finch Co. Project, 4.15%(a)............ 12/1/2002 1,100 1,100,125
OHIO -- 3.11%
Brunswick IDA for Kinder-Care Learning Centers Project
Series A, 4.15%(a)...................................... 6/1/2002 425 425,048
Columbus ERD Electric Systems Revenue Bonds, 3.60%(a)..... 9/1/2009 1,000 1,003,156
Cuyahoga IDA for Allen Group Project, 3.80%(a)............ 12/1/2015 1,000 1,002,841
Cuyahoga IDA for Edgecomb Metals Co., 3.95%(a)............ 9/1/2009 1,000 1,000,110
Franklin County Industrial Development Refunding Revenue
Bonds for Kinder-Care Learning Centers Project Series A,
4.15%(a)................................................ 6/1/2002 1,080 1,080,123
Montgomery IDA for Sister Chart Health Care, 3.85%(a)..... 5/15/2025 1,900 1,906,832
Sharonville IDA for Edgecomb Metals Inc., 3.85%(a)........ 11/1/2009 1,610 1,615,901
Toledo Special Obligation Assessment Notes, 3.90%(a)...... 12/1/1998 1,500 1,500,321
OKLAHOMA -- 1.64%
Tulsa IDA for University of Tulsa Project Series B,
4%(a)................................................... 10/1/2026 5,000 5,017,774
OREGON -- 0.69%
Medford HFA for Rogue Valley, 4.10%(a).................... 10/1/2016 100 100,011
Port of Portland IDR for Tyerson & Sons, 4.05%(a)......... 11/01/2007 2,000 2,007,400
PENNSYLVANIA -- 5.84%
Allegheny University Project Series 85, 3.75%(a).......... 7/1/2015 1,400 1,409,298
Berks TRAN, 4.375%........................................ 12/31/1997 2,500 2,555,421
Butler IDA for Lutheran Welfare Series A, 4.25%(a)........ 11/1/2026 1,700 1,710,461
Chartier Valley Industrial and Commercial Development
Authority Revenue Bonds for 1133 Penn Associates Project
Series A, 3.95%(a)...................................... 8/1/2007 1,664 1,670,129
Clarion County Industrial Development Authority Special
Development Revenue Bonds for Meritcare Project Series
A, 3.95%(a)............................................. 12/1/2012 2,100 2,107,756
Delaware Valley Regional Finance Authority Series 85A,
Revenue Bonds 3.90%(a).................................. 12/1/2020 2,000 2,007,279
Emmans GOB Local Government Revenue Bonds, 3.95%(a)....... 3/1/2024 1,900 1,907,004
Northeastern HEF Wyoming Valley HCS Revenue Bonds,
3.85%(a)................................................ 1/1/2024 1,000 1,003,618
Penn GOB, 3.70%........................................... 7/17/1997 2,000 2,006,488
Philadelphia Hospital Authority for Children's Hospital,
4.05%(a)................................................ 3/1/2027 1,000 1,003,479
University of Pittsburgh Capital Project Bonds,
3.75%(a)................................................ 1/1/2019 500 503,321
PUERTO RICO -- 1.25%
Puerto Rico Electric Power Authority Series 11,
4.10%(a)................................................ 7/1/2022 3,810 3,814,708
TENNESSEE -- 1.90%
Coster County IDB Seville Properties Series 1991,
4.30%(a)................................................ 6/15/2013 100 100,402
Chattanooga IDA for Baylor School Project, 3.95%(a)....... 11/1/2016 1,000 1,000,108
Knox IDB for Loews Investment Corp., 3.90%(a)............. 10/1/2005 500 501,710
Metropolitan Nashville/Davidson Lake Shore Estates,
4.30%(a)................................................ 9/1/2009 200 200,819
Tennessee School Bond Authority, 3.95%.................... 3/1/1998 4,000 4,014,482
TEXAS -- 1.11%
North Central HEF for YMCA for Metro Dallas, 3.95%(a)..... 6/1/2021 3,400 3,412,533
UTAH -- .28%
Bountiful DAI for Bountiful Gateway Park Project,
4.05%(a)................................................ 12/1/1997 865 868,071
WEST VIRGINIA -- 0.16%
Virginia Hospital Finance Authority Revenue Bonds for
Mid-Atlantic Capital Project 3.90%(a)................... 12/1/2025 500 501,847
</TABLE>
14
<PAGE> 70
RESERVE TAX-EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997--(CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
----------------------- -------- -------------- --------
<S> <C> <C> <C>
VIRGINIA -- 2.83%
Fairfax IDR for Kinder-Care Learning Centers Series E,
4.15%(a)................................................ 10/1/1999 $ 4,875 $ 4,875,554
Virginia HFR for AHC Service, 3.95%(a).................... 9/1/2017 3,800 3,800,411
WASHINGTON -- 1.05%
Port of Seattle DAI for Douglas Management Corporation,
4.05%(a)................................................ 12/1/2005 3,200 3,212,003
WISCONSIN -- 1.31%
Green Bay IDA for St. Mary Cement Company Ltd.,
4.05%(a)................................................ 11/1/2000 4,000 4,011,848
WYOMING -- 0.33%
Sweetwater IDA for Pacific Corp Project Series A,
3.90%(a)................................................ 7/1/2015 1,000 1,003,596
------------
Total Interstate Fund Investments (100.87%) (Cost
$306,924,758)............................................. 308,829,868
Other liabilities, less assets (-.87%)...................... (2,678,002)
------------
NET ASSETS (100%) equivalent to $1.00 net asset value,
offering and redemption prices per share on 306,151,866
shares of beneficial interest of $.001 par value
outstanding. $306,151,866
============
</TABLE>
- ---------------
(a) The interest rate is subject to change periodically. The rates shown were in
effect at May 31, 1997. Securities payable on demand are collateralized by
bank letters of credit or other bank credit agreements.
------------------------
SECURITY TYPE ABBREVIATIONS:
<TABLE>
<S> <C> <C>
BAN -- Bond Anticipation Notes
DAI -- Development Authority Industrial Development
Refunding Bonds
EDA -- Economic Development Authority Revenue Bonds
EDC -- Economic Development Corporation
ERD -- Energy Research and Development Authority
GOB -- General Obligation Bonds
HCF -- Health Care Facility
HCS -- Health Care Systems, Inc.
HEF -- Health and Educational Facilities Revenue Bonds
HFA -- Health Facilities Authority Revenue Bonds
HFR -- Health Facilities Revenue Bonds
IDA -- Industrial Development Authority Revenue Bonds
IDB -- Industrial Development Board Revenue Bonds
IDR -- Industrial Development Agency Revenue Bonds
IFA -- Industrial Finance Agency Revenue Bonds
MHR -- Multifamily Housing Revenue Bonds
PCR -- Pollution Control Revenue Bonds
TRAN -- Tax & Revenue Anticipation Notes
RAN -- Revenue Anticipation Notes
RAW -- Revenue Anticipation Warrants
USD -- Unified School District Bonds
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE> 71
RESERVE TAX-EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND
STATEMENT OF OPERATIONS
YEAR ENDED MAY 31, 1997
<TABLE>
<S> <C>
INTEREST INCOME (Note 1).................................... $10,956,203
-----------
EXPENSES (Note 2)
Management fee............................................ 1,532,970
Shareholder servicing, administration and general office
expenses................................................ 673,797
Distribution assistance (Note 3).......................... 577,267
Equipment expense......................................... 106,255
Professional fees......................................... 84,398
Occupancy costs........................................... 41,693
Stationery, printing and supplies......................... 84,093
Trustee fees.............................................. 12,315
Other expenses............................................ 80,920
-----------
Total Expenses.......................................... 3,193,708
-----------
NET INVESTMENT INCOME....................................... $ 7,762,495
===========
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MAY 31, 1997 MAY 31, 1996
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM INVESTMENT OPERATIONS:
Net investment income paid to shareholders as dividends
(Note 1)............................................... $ (7,762,495) $ (8,935,332)
--------------- ---------------
FROM CAPITAL SHARE TRANSACTIONS (at net asset value of $1
per share):
Net proceeds from sale of shares........................ 1,254,673,650 1,383,537,294
Net asset value of shares issued on reinvestment of
dividends.............................................. 7,762,495 8,935,332
--------------- ---------------
Subtotal.............................................. 1,262,436,145 1,392,472,626
Cost of shares redeemed................................. (1,248,351,729) (1,415,637,331)
--------------- ---------------
Net increase (decrease) in net assets derived from
capital share transactions and from investment
operations............................................. 14,084,416 (23,164,705)
NET ASSETS:
Beginning of year......................................... 292,067,450 315,232,155
--------------- ---------------
End of year............................................... $ 306,151,866 $ 292,067,450
=============== ===============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE> 72
RESERVE TAX EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND ("TRUST")
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
The Trust is registered under the Investment Company Act of 1940 as a
nondiversified, open-end investment company. The policies summarized below
are consistently followed in the preparation of its financial statements in
conformity with generally accepted accounting principles.
A. The Trust's shares of beneficial interest authorized are unlimited and
divided into six series, Interstate, Connecticut, Massachusetts, California,
New Jersey and Florida Funds. These financial statements and notes apply only
to the Interstate Fund ("Fund").
B. Securities are stated at value which represents amortized cost plus
interest accrued to date. Under Securities and Exchange Commission Rule 2a-7,
the Trust uses amortized cost to value the Fund, by which investments are
valued at cost and the difference between the cost of each instrument and its
value at maturity is accrued into income on a straight line basis over the
days to maturity, irrespective of intervening changes in interest rates or
market value of investments. The maturity of floating or variable rate
instruments in which the Trust may invest will be deemed to be, for floating
rate instruments (1) following, and for variable rate instruments the longer
of (1) or (2) following: (1) the notice period required before the Fund is
entitled to receive payment of the principal amount of the instrument; (2)
the period remaining until the instrument's next rate adjustment, for
purposes of Rule 2a-7 and for computing the portfolio's average weighted life
to maturity.
C. It is the Trust's policy to comply with the requirements of Subchapter M
of the Internal Revenue Code and to distribute all income to its
shareholders. Accordingly, no Federal income tax provision is required.
D. Investments are recorded as of the date of their purchase and sale.
Interest income is determined on the basis of interest accrued, premium
amortized, and discount accreted.
E. Net investment income on investments is distributed to shareholders daily
and automatically reinvested in additional shares.
F. The Fund is charged only for its direct or allocated (in proportion to net
assets or number of shareholder accounts) share of expenses.
G. The Fund had payables of $4,500,320 for securities purchased but not
received at May 31, 1997.
2. MANAGEMENT FEE, SHAREHOLDER SERVICING COSTS AND TRANSACTIONS WITH AFFILIATES:
Reserve Management Company, Inc. ("RMCI") manages the Interstate portfolio's
investments, as well as the investments of the Connecticut, Massachusetts,
California, New Jersey and Florida Funds of the Reserve Tax-Exempt Trust,
effects purchases and sales thereof, and absorbs certain promotional
expenses. For such services RMCI receives management fees at an annual rate
of .50% of the first $500 million, .475% of the next $500 million, .45% of
the next $500 million, .425% of the next $500 million, and .40% of any excess
over $2 billion of the average daily closing net assets of each Fund. Also,
under the current Service Agreement, RMCI was reimbursed $1,083,471 during
the year ended May 31, 1997 for expenditures made on behalf of the Fund for
personnel, office space and equipment and shareholder accounting and
administrative services, to conduct the Fund's business. At May 31, 1997, the
Fund had accrued expenses of $26,415 due to RMCI.
3. DISTRIBUTION ASSISTANCE:
Pursuant to a Distribution Plan, the Trust will make payments of up to .20%
per annum of the average net asset value of the Trust qualified shareholder
accounts as to which the payee or RMCI has rendered assistance in
distributing its shares.
4. INVESTMENT CONCENTRATION
The Interstate Fund invests substantially all of its assets in a portfolio of
tax-exempt debt obligations primarily consisting of issuers of various
states. The issuers' abilities to meet their obligations may be affected by
economic, regional or political developments. In order to reduce the credit
risk associated with such factors, 84.23% of the Interstate Funds investments
were backed by letters of credit, bond insurance of financial institutions
and financial guaranty assurance agencies.
17
<PAGE> 73
RESERVE TAX EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND ("TRUST")
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. MANAGEMENT'S USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the dates of
the financial statements and the reported amounts of income and expenses
during the reporting periods. Actual results could differ from those
estimates.
6. COMPONENTS OF NET ASSETS
At 5/31/97, the Interstate Fund's net assets consisted of $306,152 par-value
and $305,845,714 paid-in-capital.
------------------------
FEDERAL TAX INFORMATION
The dividends distributed by the Interstate Fund are exempt interest
dividends for Federal tax purposes.
------------------------
18
<PAGE> 74
[CAPTION]
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
PAGE
---
<S> <C>
Shareholder Expenses............................ 2
Financial Highlights............................ 3
Yield........................................... 3
Investment Objective and Policies............... 3
Management...................................... 5
How to Buy Shares............................... 6
Shares of Beneficial Interest................... 7
Daily Dividends................................. 7
Taxes........................................... 7
Redemptions..................................... 8
General Information............................. 9
Report of Independent Accountants............... 11
Financial Statements............................ 11
Investors are advised to read and retain
this Prospectus for future reference.
</TABLE>
Founders of
"America's
First
Money Fund"
810 Seventh Avenue, New York, NY 10019-5868
GENERAL INFORMATION AND 24 HOUR YIELD AND BALANCE INFORMATION
800-637-1700 M www.reservefunds.com
Distribution -- Resrv Partners, Inc.
RF/I-7/97
Founders of
"America's First
Money Fund"
INTERSTATE TAX-EXEMPT FUND
<PAGE> 75
RESERVE TAX-EXEMPT TRUST
CALIFORNIA TAX-EXEMPT FUND
CONNECTICUT TAX-EXEMPT FUND
FLORIDA TAX-EXEMPT FUND
MASSACHUSETTS TAX-EXEMPT FUND
NEW JERSEY TAX-EXEMPT FUND
OHIO TAX-EXEMPT FUND
PENNSYLVANIA TAX-EXEMPT FUND
RESERVE NEW YORK TAX-EXEMPT TRUST
NEW YORK TAX-EXEMPT FUND
810 SEVENTH AVENUE, NEW YORK, N.Y. 10019
(800) 637-1700
-----------------------------
YIELD AND BALANCE INFORMATION
TOLL FREE (800) 637-1700 -- TOUCH TONE PHONE
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information describes the California
Tax-Exempt, Connecticut Tax-Exempt, Massachusetts Tax-Exempt, New Jersey
Tax-Exempt, Ohio Tax-Exempt and Pennsylvania Tax-Exempt Funds of Reserve Tax-
Exempt Trust and the New York Tax-Exempt Fund of Reserve New York Tax-Exempt
Trust (the "Fund(s)"). This Statement is not a Prospectus, but provides detailed
information to supplement the Prospectus and should be read in conjunction
with the Prospectus. A copy of the Prospectus may be obtained from the Funds
at the above address. This Statement is dated July 31, 1997, as amended April
1, 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 4
Portfolio Turnover, Transaction
Charges and Allocation 7
Shares of Beneficial Interest 7
Purchase, Redemption and Pricing
of Shares 8
Distributions and Taxes 10
Fund Yield 11
Reserve Cash Performance Account 12
Municipal Obligations 12
Ratings 13
Risk Factors of Concentrating in California 14
Risk Factors of Concentrating in Connecticut 17
Risk Factors of Concentrating in Florida 18
Risk Factors of Concentrating in Massachusetts 19
Risk Factors of Concentrating in New Jersey 20
Risk Factors of Concentrating in New York 21
Risk Factors of Concentrating in Ohio 24
Risk Factors of Concentrating in Pennsylvania 25
Report of Independent Accountants 28
Financial Statements 29
</TABLE>
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.
<PAGE> 76
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,
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" and the interest on them is exempt from federal income tax in the
opinion of bond counsel for the issuers ("Municipal Obligations"). Municipal
Obligations generally include debt obligations issued to obtain funds for
various public purposes, including the construction of a wide range of public
facilities such as airports, bridges, highways, housing, hospitals, mass
transportation, schools, streets and water and sewer works. Other public
purposes for which Municipal Obligations may be issued include refunding
outstanding obligations, obtaining funds for general operating expenses and
lending such funds to other public institutions and facilities. In addition,
certain types of industrial development bonds are issued by or on behalf of
public authorities to obtain funds to provide for the construction, equipment,
repair or improvement of privately operated housing facilities, sports
facilities, convention or trade show facilities, airport, mass transit,
industrial, port or parking facilities, air or water pollution control
facilities and certain local facilities for water supply, gas, electricity or
sewage or solid waste disposal; the interest paid on such obligations may be
exempt from federal income tax. At least 80% of 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 income taxes 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. 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 United States 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: (1)
invest in any security other than those discussed herein or in the Prospectus;
(2) borrow
<PAGE> 77
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 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; (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 Investment Company Act of 1940.
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
in advance 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, the
seller 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, President, Treasurer and Trustee, 810 Seventh Avenue, New
York, New York 10019.
Mr. Bent is President, Treasurer, and Trustee of The Reserve Fund
("RF"), Reserve Institutional Trust ("RIT"), Reserve Tax-Exempt Trust ("RTET")
and 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; and Chairman and
Director of Resrv Partners, Inc. Before 1968, he was associated with Stone &
Webster Securities Corp., and previously, with Teachers Insurance and Annuity
Association.
<PAGE> 78
EDWIN EHLERT, JR., Trustee, 125 Elm Street, Westfield, New Jersey 07091.
Mr. Ehlert is President and Director of Ehlert Travel Associates, Inc.
(travel agency formerly called Travelong of Westfield, Inc.) and Ehlert Travel
Associates of Florida, Inc. (travel agency), and Trustee of RF, RIT, RNYTET,
RTET and RPES.
HENRI W. EMMET, Trustee, 176 East 71st Street, New York, New York 10021.
Mr. Emmet is the Managing Director of Servus Associates, Inc, and U.S.A.
Representative of the First National Bank of Southern Africa and Trustee of RF,
RET, RNYTET, RTET and RPES. Until 1989, he was Senior Vice President of the
New York branch of Banque Nationale de Paris.
*DONALD J. HARRINGTON, C.M, Trustee, St. John's University, Jamaica, New
York 11439.
The Reverend Harrington is President of St. John's University (NY) and a
Trustee of RF, RIT, RNYTET, RTET and RPES. The Reverend Harrington served as
President of Niagara University from 1984 to 1989 and was Executive Vice
President of Niagara University from 1981 to 1984.
MICHELLE L. NEUFELD, Counsel and Secretary, 810 Seventh Avenue, New York,
NY 10019.
Ms. Neufeld is Counsel and Secretary of RF, RIT, RTET, RNYTET and
RPES. Before joining The Reserve Funds in 1997, Ms. Neufeld was a staff
attorney at NASD Regulation, Inc.
PAT A. COLLETTI, Controller, 810 Seventh Avenue, New York, New York 10019.
Mr. Colletti is Controller of RF, RIT, RTET, RNYTET and RPES. Prior to
joining The Reserve Funds in 1985, Mr. Colletti was Supervisor of Accounting of
Money Market Funds for the Dreyfus Corporation.
- --------------------------------------------------
*Interested Trustee within the meaning of the Investment Company Act of 1940.
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 fiscal year ended May 31, 1997, the Trustees received fees
from the Funds of $10,136. As of November 28, 1997, 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 and Pennsylvania
Tax-Exempt Funds. During the year ended May 31, 1997, each Fund held four
Board meetings and one Review Committee meeting.
<PAGE> 79
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM FUND AND FUND COMPLEX
NAME OF TRUSTEE FROM FUND* (4 ADDITIONAL TRUSTS) PAID TO TRUSTEE*
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Edwin Ehlert, Jr. $2,293 $22,197
Henri W. Emmet $2,293 $22,197
Rev. Donald J. Harrington $2,293 $22,197
* Amounts shown are for the Funds' Fiscal year Ending May 31, 1997.
</TABLE>
INVESTMENT MANAGEMENT, DISTRIBUTION, SERVICE
AND CUSTODIAN AGREEMENTS
INVESTMENT MANAGEMENT AGREEMENT. Reserve Management Company, Inc.
("RMCI"), 14 Locust Place, Manhasset, N.Y. 11030, of which Messrs. Henry B.R.
Brown and Bruce R. Bent are the Directors, manages each Fund and provides it
with investment advice pursuant to an Investment Management Agreement. Messrs.
Brown and Bent together with their children own RMCI. Under each 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 .50% of the first $500 million of average daily net assets, .475% of the
next $500 million of such assets, .45% of the next $500 million of such assets,
.425% per annum of the next $500 million of such assets, and .40% of such assets
in excess of $2 billion. For the fiscal years ended May 31, 1995, 1996 and 1997,
RMCI received management fees of $200,783, $155,027 and $166,430, respectively
from the Connecticut Fund; $52,248, $48,113 and $51,006 from the Massachusetts
Fund; $763,741, $775,398 and $786,904 from the New York Fund; for the period
October 17, 1994 to May 31, 1995 and fiscal years ending May 31, 1996 and 1997
received $24,072, $50,807 and $103,607, respectively in management fees from the
California Fund; for the period of June 21, 1994 to May 31, 1995 and fiscal
years ending May 31, 1996 and 1997. RMCI received $51,948, $154,727 and
$194,595, respectively in management fees from the New Jersey Tax-Exempt Fund;
for the period of June 24, 1996 to May 31, 1997 $19,304 in management fees from
the Florida Fund.
From time to time, RMCI may waive receipt of its fees and/or voluntarily
assume certain expenses of a 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 terminate automatically upon their
assignment and may be terminated without penalty upon 60 days' written notice by
a vote of the Board of Trustees of each Fund or by vote of a majority of
outstanding voting shares of a Fund or by RMCI.
<PAGE> 80
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 Fund 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 each
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, during the fiscal year ended May 31,
1997, Funds reimbursed RMCI $934,359, for expenses. For the fiscal years ended
May 31, 1995 and 1996, RMCI was reimbursed $1,062,207 and $1,081,664 for
expenses, respectively.
DISTRIBUTION AGREEMENT. The Funds' Distributors are Pacific Global Fund
Distributor Incorporated ("PGFDI"), 215 North Marengo Avenue, Pasadena,
California 91101 and Resrv Partners, Inc. ("RESRV"), 810 Seventh Avenue, New
York, N.Y. 10019. The Funds have authorized the Distributors, in connection
with that sale of Fund shares, to give only such information and to make only
such statements and representations as are contained in the Prospectus. Sales
may be made only by the Prospectus. The Distributors may offer and sell shares
of the Funds pursuant to a separate Prospectus applicable to such Distributor.
The Distributors are "principal underwriters" for the Funds within the meaning
of the Investment Company Act of 1940, and as such act as agent in arranging for
the continuous offering of Fund shares. The Distributors have the right to
enter into selected dealer agreements with brokers or other persons of 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 its own shares.
The Distribution Agreements may be renewed annually if specifically
approved by the Board of Trustees and by the vote of a majority of the
disinterested Trustees cast in person at a meeting called for the purpose of
voting on such renewal 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 Investment
Company Act of 1940, 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, each 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 .20% of the average net asset value of
qualified accounts. Such distribution assistance may include, but is not
limited to, establishment of shareholder accounts, delivering prospectuses to
prospective investors and processing automatic investment in Fund shares of
client account balances. Substantially all such monies (together with
significant amounts from RMCI's own resources) are paid by RMCI to payees for
their distribution assistance or administrative services with any remaining
amounts being used by RMCI to partially defray other expenses incurred by RMCI
in distributing Fund shares. In addition to the amounts required by the Plan,
RMCI may, in its discretion, pay additional amounts from its resources. The
rate of any additional amounts that may be paid will be based upon RESRV's and
RMCI's analysis of the contribution that 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
<PAGE> 81
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 investments and the
assistance payments received by such banks under the Plan may or may not
compensate the banks for their administrative and account maintenance services
for which the banks may also receive compensation from the bank accounts they
service. It is Fund management's position that payments to banks pursuant to
the Plan for activities not primarily intended to result in the sale of 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 re-registered in the name of
that customer. Financial institutions providing distribution assistance or
administrative services for a Fund may be required to register as securities
dealers in certain states.
Under the Plan, the Fund's Controller or Treasurer reports quarterly the
amounts and purposes of assistance payments. During the continuance of the Plan
the selection and nomination of the disinterested Trustees is at the discretion
of the disinterested Trustees currently in office.
During the fiscal year ended May 31, 1997, $455,982 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 such shareholder services.
During the fiscal year ended May 31, 1997, substantially all payments made by
the Funds were to brokers or other financial institutions and financial
intermediaries for share balances in the Funds.
The Plan and related agreements were duly approved by shareholders and
may be terminated at any time by a vote of a majority of the outstanding voting
securities of a Fund or by vote of the disinterested Trustees. The Plans and
related agreements may be renewed from year to year if specifically approved by
the Boards 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
renewal. The Plans may not be amended to increase materially the amount to be
spent for distribution without shareholder approval. All material amendments
to the Plans 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.
The Securities and Exchange Commission had proposed to amend Rule 12b-1
under the Investment Company Act of 1940 in a manner which, among other things,
would effectively prohibit the implementation of compensation plans or any
other plans that do not tie payments by a fund to specific distribution
activities. If such a proposal were implemented, the Board of Trustees would
determine, at such time and in light of the existing circumstances, the
appropriateness of continuing the Plan, recommending its modification or
discontinuance, or taking some other action.
CUSTODIAL SERVICES AND INDEPENDENT ACCOUNTANT. The Chase Manhattan
Bank, 4 New York Plaza, New York, N.Y. 10004 and Bankers Trust Company, One
Bankers Trust Plaza, New York, N.Y. 10015 are Custodians of the Funds
securities and cash pursuant to Custodian Agreements. Coopers & Lybrand L.L.P,
1301 Avenue of the Americas, New York, N.Y. 10019 is the Funds' independent
accountant.
PORTFOLIO TURNOVER, TRANSACTION CHARGES AND ALLOCATION
<PAGE> 82
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 Trustees 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. It is
possible, although considered highly unlikely in view of the method of
operation of mutual funds, that should assets of one class of shares be
insufficient to satisfy its liabilities, the assets of another class could be
subjected to claims arising from the operations of the first class of shares.
No changes can be made to a Fund's issued shares without shareholder approval.
Each Fund share, when issued, is fully paid, nonassessable (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, shareholders of a business trust may, under
certain circumstances, be held personally liable for the obligations of a
business trust. The Declaration of Trusts contains an express disclaimer of
shareholder liability for acts or obligations of a Fund and requires that
notices of such disclaimer be given in each agreement, obligation, or
instrument entered into or executed by the Fund or the Trustees. The
Declaration of Trusts provides for the indemnification out of the Fund property
of any shareholder held
<PAGE> 83
personally liable for the obligations of a Fund. The Declaration of Trusts
also provided that each Fund shall, upon request, assume the defense of any
claim made against any shareholder for any act or obligation of a Fund and
satisfy any judgment thereon. Thus, the risk of a shareholder incurring
financial loss on account of status as a shareholder is limited to
circumstances in which a Fund itself would be unable to meet its obligations.
The Declaration of Trusts further provides that the Trustees will not be
liable for errors of judgement or mistakes of fact or law; but nothing in the
Declarations protect a Trustee against any liability to which he would
otherwise be subject to by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
Regulations of the Securities and Exchange Commission provide that if a
class is separately affected by a matter requiring shareholder vote (election
of Trustees, ratification of independent auditor selection and approval of an
underwriting agreement are not considered to have such separate effect and may
be voted upon by the Fund as a whole), each class will vote separately. Each
class votes separately on such matters as approval of the Investment Management
Agreement, material amendments to the Plan of Distribution, and changes in the
fundamental policies of the Fund. These items require approval by a majority
of the affected shareholders. For this purpose a "majority" is constituted by
either 50 percent of all shares voting as a group or 67 percent of the shares
voted at an annual meeting of shareholders at which at least 50 percent of the
shares of each group are represented.
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 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 Investment Company Act of 1940
unless withdrawal is permitted by order of the Securities and Exchange
Commission. 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 WILL GENERALLY 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.
<PAGE> 84
NET ASSET VALUE. Shares are offered at net asset value. The net asset
value of the Funds is calculated at the close of each business day as defined
in the Prospectus. The net asset value is not calculated on New Year's Day,
Presidents' Day, Good Friday, Memorial Day observed, Independence Day, Labor
Day, Thanksgiving Day, Christmas Day on other days the New York Stock Exchange
is closed for trading, and on regional banking holidays, which may include
Martin Luther King's Birthday and Columbus Day. The net asset value of each
Fund is normally maintained at $1.00 per share. The Funds cannot guarantee
that their net asset value will always remain at $1.00 per share.
The net asset value per share of a Fund is determined by adding the
value of all of its securities, cash and other assets, subtracting its
liabilities, and dividing the results by the number of its shares outstanding.
The Boards of Trustees have determined the most practical method currently
available for valuing investment securities is the amortized cost method. This
procedure values a purchased security at cost at the time of purchase and
thereafter assumes a constant amortization to maturity of any discount or
premium and accrual of interest income, irrespective of intervening changes in
interest rates or security market values.
In order to maintain a $1.00 share price the Funds will utilize the
following practices: maintain a dollar-weighted average portfolio maturity of
90 days or less; purchase only instruments having remaining maturities of 397
days or less; and invest only in securities determined by the Boards of
Trustees to be of high quality with minimal credit risk. To assess whether
repurchase agreement transactions present more than minimal credit risk, the
Trustees have established guidelines and monitor the creditworthiness of all
entities, including banks and broker-dealers, with which a Fund proposes to
enter into repurchase agreements. In addition, the Funds' have adopted
procedures, taking into account current market conditions and the investment
objective, to attempt to maintain its net asset value as computed for the
purpose of sales and redemptions at $1.00 per share. Such procedures will
include review by the Trustees at such intervals as they may determine
reasonable, to ascertain the extent of any difference in the net asset value of
a Fund from $1.00 a share determined by valuing its assets at amortized cost as
opposed to valuing them based on market factors. If the deviation exceeds 1/2
of one percent, the Trustees will promptly consider what action if any should
be initiated. If they believe that the deviation may result in material
dilution or other unfair results to shareholders, the Trustees have undertaken
to apply appropriate corrective remedies which may include the sale of a Fund's
assets prior to maturity to realize capital gains or losses or to shorten the
average maturity of a Fund, withholding dividends, redemption of shares of a
Fund in kind, or reverting to valuation based upon market prices and estimates.
SHAREHOLDER SERVICE POLICIES. The Funds' policies concerning
shareholder services are subject to change from time to time. The Funds
reserve the right to change the $1,000 minimum account size subject to the $5
monthly service charge or involuntary redemption. The Funds further reserve
the right to impose special service charges for services provided to individual
shareholders generally including, but not limited to, fees for returned checks,
stop payment orders on official checks and shareholder checks, and special
research services. The Funds' standard service charges as described in the
Prospectus are also subject to adjustment from time to time. In addition, the
Funds reserve the right to increase their minimum initial investment amount at
any time.
CREDITING OF INVESTMENTS. The Funds will only give credit for
investments in them on the day they become available in federal funds which is
normally within one or two days of receipt. 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 United States 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.
<PAGE> 85
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 SHARE PURCHASE MAY BE CANCELED
OR REDEEMED IMMEDIATELY. THE INVESTOR THAT GAVE NOTICE OF THE INTENDED WIRE OR
SUBMITTED THE CHECK WILL BE HELD FULLY RESPONSIBLE FOR ANY LOSSES INCURRED BY
THE FUND, THE INVESTMENT ADVISER OR THE DISTRIBUTOR. THE FUND MAY REDEEM
SHARES FROM ANY ACCOUNT REGISTERED IN THAT PURCHASER'S NAME AND MAY APPLY THE
PROCEEDS THEREFROM TO THE PAYMENT OF ANY AMOUNTS OWED THE FUND, THE INVESTMENT
ADVISER OR DISTRIBUTOR.
SHARE CERTIFICATES. Share certificates are not issued by the Funds.
DISTRIBUTIONS AND TAXES
Each of the Funds intend to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986 ("Code") so long as
such qualification is in the best interests of their shareholders. The status
of the Funds as regulated investment companies does not involve government
supervision of management or of investment practices or policies. If they so
qualify, in any fiscal year in which each distributes at least 90 percent of
its net income, a Fund will not be subjected to federal income tax on such
distributed amounts. Although interest derived from Municipal Obligations is
not subject to federal income taxation, any net capital gains realized by a
Fund and distributed to shareholders as regular or capital gains dividends,
whether distributed in cash or in the form of additional shares, will be
taxable to shareholders.
In order to qualify as a regulated investment company under the Code, a
Fund must, among other things, in each fiscal year distribute at least 90
percent of its investment company taxable income to shareholders; derive at
least 90 percent of its gross income from dividends, interest and gains from
the sale or disposition of securities; meet certain diversification
requirements; and derive less than 30 percent of the gross income from the sale
or disposition of securities held for less than three months.
Exempt interest dividends distributed to shareholders are not included
in the shareholder's gross income for federal income tax purposes. The
percentage of income that is tax exempt will be determined for each year and
will be applied uniformly to all dividends declared during that year. This
percentage may differ from the actual tax exempt percentage for any particular
day. Distributions of net investment income received by a Fund from
investments in debt securities other than Municipal Obligations and any net
realized capital gains distributed by a Fund will be taxable as ordinary
income. Shareholders will be advised annually as to the federal income tax
consequences of distributions made during the year.
If any dividends are not exempt from federal or state and local income
taxes shareholders will be advised of such percentage by January 31 of the
following year. Distributions will be reported under more than one tax
identification number only if a separate account is established for each
number. If a Fund has both tax-exempt and taxable interest income, it will use
the "actual earned method" for determining the percentage that is taxable
income. Under this method, the ratio of taxable income earned during the
period, for which a distribution was made, to total income earned during the
period determines the percentage of the distribution designated taxable and, as
a result, the percentage of the distribution that is tax-exempt may vary from
distribution to distribution.
The identification of the issuer of Municipal Obligations depends on the
terms and conditions of the security. When the assets and revenues of an
agency, authority, instrumentality, or other political subdivision are separate
from those of the government creating the subdivision, such subdivision would be
deemed to be the sole issuer. Similarly, in the case of an industrial
development bond, if that bond is backed only by the assets and revenues of the
non-governmental users, then such non-governmental user would be deemed to be
the sole issuer. However, in either case, if the creating government or some
other entity guarantees a security, such a guarantee would be considered a
separate security and is to be treated as an issue of such government or other
agency.
<PAGE> 86
The Tax Reform Act of 1986 ( the "Act") provides that in the event a
Fund should hold certain private activity bonds issued after August 7, 1986,
shareholders must include, as an item of tax preference, the portion of
dividends paid by the Fund that is attributable to interest on such bonds in
their federal alternative minimum taxable income for purposes of determining
any liability for the alternative minimum tax applicable to individuals and the
alternative minimum tax and the environmental tax applicable to corporations.
In the case of corporations, federal alternative minimum taxable income will
also include one-half the excess of the corporation's pre-tax book income
(including all exempt-interest dividends) over the corporation's other federal
alternative minimum taxable income. Shareholders receiving Social Security
benefits should note that all exempt-interest dividends will be taken into
account in determining the taxability of such benefits.
The Act also provides that, for taxable years beginning after December
31, 1986, every person required to file a tax return must report solely for
information purposes on such return the amount of exempt interest dividends
received from a Fund during the taxable year. In addition, with respect to a
shareholder who receives exempt interest dividends on shares held for less than
six months, any loss on the sale or exchange of such shares will, to the extent
of the amount of such exempt interest dividends, be disallowed.
The exemption from federal income tax of dividends derived from interest
on Municipal Obligations does not necessarily result in exemption under the tax
laws of any state or local taxing authority.
Shareholders are advised to consult with their tax advisers regarding
the applicability of state and local taxes to an investment or income therefrom
in a Fund which may differ from the federal income tax consequences described
above.
FUND YIELD
The current yield of a Fund may differ from the Fund's effective yield
and annualized dividends.
Current yield is calculated by determining the net change (exclusive of
capital changes) in the value of a hypothetical preexisting account having a
balance of one share at the beginning of the period, dividing the net change in
account value by the value of the account at the beginning of the base period
to obtain the base period return, and multiplying the base period return by a
fraction having 365 in the numerator and the number of days in the base period
in the denominator. The current yield stated in the prospectus utilizes a
seven day base period. Net change in account value must reflect (i) the value
of additional shares purchased with dividends from the original share and
dividends declared on by the original share and any such additional shares; and
(ii) any recurring fees charged to all shareholder accounts, in proportion to
the length of the base period and the Fund's average or median account size.
Net change in account value must exclude realized gains or losses and
unrealized appreciation or depreciation.
Effective yield is computed by adding one to 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 + 1)]365/7-1. Effective annual yields
are a representative of the effective annual rate of return produced by the
monthly compounding of Fund dividends.
Taxable equivalent yield is computed by dividing either current yield or
effective yield by a denominator equal to one minus a stated income tax rate
according to the following formula: Taxable Equivalent Yield = Current or
Effective Yield - /(1 - Income Tax Rate)
Yield information may be useful in reviewing the performance of a Fund,
but because of fluctuations, it may or may not provide a basis for comparison
with bank deposits, other money investments which pay a fixed yield for a
stated period of time, such as Treasury bills, bank certificates of deposit,
savings certificates and NOW accounts. When making comparisons, the investor
should also consider the quality and maturity of the portfolio securities of
the various money market funds. An investor's principal is not guaranteed by
the Fund, nor is it insured by a governmental agency.
<PAGE> 87
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
Primary, Government, and Treasury Funds for an additional fee. Reserve CPA is a
check arrangement with BankOne Columbus NA or the Chase Manhattan Bank whereby
checks are issued to Reserve shareholders which may be used to redeem shares in
the account in any amount. If a bank accepts a check, it will be paid in the
order received by redemption of shares from the investor's Reserve account.
Any check in an amount exceeding the Reserve account balance will be
returned to the payee. Reserve CPA checks can be used in the same manner as any
other bank checks. Paid checks will not be returned but complete statements
on such paid checks will be provided monthly. Reserve CPA Plus is a checking
facility described above plus a VISA Gold debit card. 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 establishing a CPA or CPA Plus account may be shared 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.
A Fund will charge a non-refundable annual CPA service fee (currently $60
which may be charged to the account monthly) and a transaction fee of $0.50 for
each additional check in excess of five presented for payment within the
statement period. Participants will also be charged for specific costs incurred
in placing stop payment orders, obtaining check copies and in processing
returned checks. The annual service fee and other charges may be changed at any
time upon 30 days notice. In addition, broker/dealers or other financial
institutions in the CPA Program may charge their own service fees in addition
to the annual fee.
VISA cardholders may be liable for the unauthorized use of their card up
to the amount set by the governing Federal regulations which is currently $500
if the Fund or the bank is not notified of the theft or loss within 2 business
days. Participants should refer to the VISA Account Shareholder Agreement for
complete information regarding responsibilities and liabilities with respect to
the VISA Gold card. If a card is lost or stolen, the CUSTOM PLAN participant
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 Agreements.
<PAGE> 88
MUNICIPAL OBLIGATIONS
Municipal bonds and municipal notes are the two major classifications of
Municipal Obligations. Such obligations are generally issued to obtain funds
for various public purposes, including the construction of public facilities
such as airports, bridges, highways, houses, hospitals, mass transportation,
schools, streets, and water and sewer works. In addition, Municipal
Obligations may be issued to refund outstanding debt and obtain funds for
general operating expenses.
Municipal bonds, which are long term instruments and generally have
maturities longer than one year when issued, may be either "general obligation"
or "revenue" issues. General obligation bonds are secured by the issuer's
pledge of its full faith, credit, and taxing power for the payment of principal
and interest. Revenue bonds are payable only from the revenues derived from a
particular facility or class of facilities, as in some cases, from the proceeds
of a special excise tax or other specific revenue source but not from the
general taxing power.
Certain kinds of industrial development bonds ("IDBs") are issued by or
on behalf of public authorities to provide funding for various privately
operated industrial facilities such as warehouse, office, plant, and store
facilities. IDBs are, in most cases, revenue bonds and do not generally
constitute the pledge of the credit of the issuer of such bonds. The payment
of the principal and interest on IDBs usually depends solely on the ability of
the user of the facilities financed by the bonds or other guarantor to meet its
financial obligations and, in certain instances, the pledge of real and
personal property as security for payment. If there is no established
secondary market for the IDBs, the IDBs or the participation interests
purchased by 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 United States Supreme Court in SOUTH CAROLINA V.
BAKER, overruled an 1895 case, POLLACK V. FARMERS' LOAN AND 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
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availability of tax-exempt securities might also cause a reevaluation of a
Fund's investment objective and policies.
VARIABLE RATE DEMAND INSTRUMENTS. Variable rate demand instruments that
the Funds may purchase are tax-exempt Municipal Obligations or participation
interests therein that provide for periodic adjustments in the interest rate
paid on the instrument and permit the holder to demand payment of the unpaid
principal balance plus accrued interest upon a specified number of days notice
either from the issuer or by drawing on a bank letter of credit or guarantee
issued with respect to such instrument. The issuer of the Municipal Obligation
may have a corresponding right to prepay in its discretion the outstanding
principal of the instrument plus accrued interest upon notice comparable to the
required for the holder to demand payment.
The variable rate demand instruments in which the Funds may invest will
comply with Rule 2a-7 under the Investment Company Act of 1940. The Funds will
determine the variable rate demand instruments it will purchase in accordance
with procedures prescribed by its Board to minimize credit risks. The Fund's
investment adviser may determine that an unrated variable rate demand
instrument meets the Fund's investment high quality criteria if it is backed by
a suitable bank letter of credit or guarantee.
The variable rate demand instruments that the Funds may invest in
include participation interests purchased from banks in variable rate tax
exempt Municipal Obligations owned by banks or affiliated organizations. A
participation interest gives the Fund an undivided interest in the Municipal
Obligation in the proportion that the Fund's participation interest bears to
the total principal amount of the Municipal Obligation and provides the
repurchase feature described above. Each participation is backed by an
irrevocable letter of credit or guarantee of an appropriately rated bank. The
Fund has the right to sell the instrument back to the bank and draw on the
letter of credit on demand, after seven days notice, for all or any part of the
full principal amount of the Fund's participation interest in the bond plus
accrued interest. Banks usually retain a service fee, a letter of credit fee
and a fee for issuing repurchase commitments in an amount equal to the excess
of the interest paid on the Municipal Obligations over the negotiated yield at
which the instrument was purchased by the Fund.
RATINGS
TAX-EXEMPT BOND RATINGS. The highest ratings for municipal bonds are
Aaa or Aa if rated by Moody's Investor Services, Inc. ("Moody's") and AAA or
AA if rated by Standard & Poor's Corporation ("S&P"). Such bonds are judged to
be a 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 nine months. Moody's employs the following
two designations all judged to be investment grade, to indicate the relative
repayment capacity of rated 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 of
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
<PAGE> 90
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 FACTOR 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 State's 1990-91 fiscal year, the State has faced the
worst economic, fiscal, and budget conditions since the 1930's. The State of
California's tax revenue experience in the past few years clearly reflects
sharp declines in employment, income and retail sales on a scale not seen in
over 50 years. However, the 1995-96 Governor's Budget, released January 10,
1995 (the "Governor's Budget"), indicates the State has embarked on a steady
economic recovery since late 1993, somewhat sooner than predicted in the May
1994 Revision of the 1994-95 Governor's Budget.
The recession seriously affected State tax revenues, which basically
mirror economic conditions. It also caused increased expenditures for health
and welfare programs. The State has also been facing a structural imbalance in
its budget with the largest programs supported by the General Fund - K-12
schools and community colleges, health, welfare and corrections - growing at
rates significantly higher than the growth rates for the principal revenue
sources of the General Fund. As a result, the State has experienced recurring
budget deficits; the State Controller reports that expenditures exceeded
revenues for four of the last five completed fiscal years ending with 1991-92;
the State had an operating surplus of about $109 million in 1992-93 and $836
million in 1993-94. However, at June 30, 1994, according to the Department of
Finance, the State's Special Fund for Economic Uncertainties still had an
accumulated deficit, on a budget basis, of approximately $1.8 billion.
A further consequence of the large budget imbalance over two fiscal
years was that the State used up all of its available cash resources. In late
June, 1992 the State was required to issue $475 million of short-term revenue
anticipation warrants to cover obligations coming due on June 30. Because the
1992-93 Budget Act was not adopted until September 2, 1992, the State was
delayed in carrying out its usual cash flow borrowing for the fiscal year. The
shortfall of cash forced the State Controller, after July 1, 1992, to issue
approximately $3.8 billion of interest-bearing "registered warrants" in lieu of
regular warrants which are redeemable for cash to many State vendors, suppliers
and employees and to local government agencies to pay valid obligations from
the prior fiscal year, and to pay continuing obligations after July 1 based on
special appropriations or court orders. Certain constitutionally mandated
obligations, such as debt service on bonds and revenue anticipation warrants,
were paid with available cash. Registered warrants had not been issued by the
State in the 1930s.
The 1992-93 Budget Act closed a "gap" of about $7.9 billion, but budgeted
a reserve at June 30, 1993 of only $28 million. However, the Governor's Budget
for 1993-94, released January 8, 1993 (the "1993-94 Governor's Budget"),
predicted revenues in the 1992-93 fiscal year will be $2.5 billion below 1992-93
Budget Act projections, and projected the State will have a $2.1 billion budget
deficit at June 30, 1993. This however, assumed favorable legislative action by
March 1993 on certain proposals to reduce health and welfare payments and
eliminate a renters' tax credit, which combined would have saved $475 million by
June 30, 1993. The Legislature has failed to enact these proposals. This,
combined with the impact of the State Franchise Tax Board's February 4, 1993
order to release the renters' tax credit refunds, will require at least another
$475 million in budget reductions in addition to those proposed in the 1993-94
Government's Budget. The 1993-94 Governor's Budget also projects that cash
resources will be depleted during May 1993, necessitating additional cash flow
borrowing. Actual performance for the balance of the 1992-93 Fiscal year will
depend on many factors, including economic conditions in the State and the
nation. As result of the deterioration in the State's budget and cash situation
in fiscal years 1991-92, and 1992-93, rating agencies reduced the State's credit
ratings. Between November 1991 and October 1992 the rating on the State's
general obligation bonds was reduced by S&P from AAA to AA, by Moody's from Aaa
to Aa, and by Fitch from AAA to AA.
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.
<PAGE> 91
The California personal income tax, which in 1990-91 contributed about
45% of General Fund revenues, is closely modeled after the federal income tax
law. It is imposed on net taxable income (gross income less exclusions and
deductions). The tax is progressive with rates ranging from 1% to 11%.
Personal, dependent, and other credits are allowed against the gross tax
liability. In addition, taxpayers may be subject to an alternative minimum tax
(AMT) which is much like the Federal AMT. This is designed to ensure that
excessive use of tax preferences does not reduce taxpayers' liabilities below
some minimum level. Legislation enacted in July 1991 added two new marginal
tax rates, at 10% and 11% effective for tax years 1991 through 1995. After
1995, the maximum personal income tax rate is scheduled to return to 9.3%, and
the AMT rate is scheduled to drop from 8.5% to 7%.
The personal income tax is adjusted annually by the change in the
consumer price index to prevent taxpayers from being pushed into higher tax
brackets without a real increase in income.
The sales tax is imposed upon retailers for the privilege of selling
tangible personal property in California. Most retail sales and leases are
subject to the tax. However, exemptions have been provided for certain
essentials such as food for home consumption, prescription drugs, gas,
electricity and water. Sales tax accounted for about 39% of General Fund
revenue in 1991-92. Bank and corporation tax revenues comprised about 11% of
General Fund revenue in 1991-92. In 1989, Proposition 99 added a 25 cents per
pack excise tax on cigarettes, and a new equivalent excise tax on other tobacco
products.
The 1995-96 Governor's Budget, issued January 10, 1995, contains a
reforecast of revenues and expenditures for the 1994-95 Fiscal Year. The
Department of Finance Bulletin for April 1995 reports that General Fund
revenues for March 1995 were $28 million, or 1.1 percent, below forecast, and
that year-to-date General Fund revenues were $110 million, or 0.4 percent,
below forecast. The largest component of the decrease is attributable to
personal income tax receipts, which were $134 million, or 1.1 percent, below
the year-to-date forecast. In addition, sales and use tax receipts were $117
million, or 1.1 percent, below the year-to-date forecast. The sales and
year-to-date bank and corporation tax receipts were as forecast, and that
miscellaneous revenues were $141 million above the year-to-date forecast. This
gain is mostly attributable to revenues such as those relating to trial courts,
state lands, and unclaimed property. The Department of Finance believes the
gain in unclaimed property revenues ($40 million above forecast) to be real,
and expects it to grow slightly by the end of the fiscal year.
Revised employment data indicate that California's recession ended in
1993, and following a period of stability, a recovery is now underway. The
State's unemployment rate fell last year, 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.
<PAGE> 92
Pursuant to the Budget Adjustment Law (the "Law," Government Code
Section 12467), the State Controller was required to make a report by November
15, 1994 on whether the projected cash resources for the General Fund as of
June 30, 1995 would decrease more than $430 million from the amount projected
by the State in its Official Statement in July, 1994 for the sale of
$4,000,000,000 of Revenue Anticipation Warrants. On November 15, 1994, the
State Controller issued the report on the State's cash position required by the
Budget Adjustment Law. The report indicated that the cash position of the
General Fund on June 30, 1995 would be $581 million better than was estimated
in the July, 1994 cash flow projections and therefore, no budget adjustment
procedures will be invoked for the 1994-95 Fiscal Year. As explained earlier,
the Law would only be implemented if the State Controller estimated that
borrowable resources on June 30, 1995 would be at least $430 million lower than
projected.
The 1995-96 Budget will be subject to the Budget Adjustment or
"Trigger" legislation enacted in June 1994. The Proposed Budget contains a cash
flow projection (based on all the assumptions described above) which shows
about $1 billion of unused borrowable resources at June 30, 1996, providing
this amount of "cushion" before the budget "trigger" would have to be invoked.
However, a report issued by the Legislative Analyst in February 1995
notes that the Proposed Budget (and hence the margin of cushion under the
"trigger") is subject to a number of major risks, including receipt of the
expected federal immigration aid and other federal actions to allow health and
welfare cuts, and the outcome of several lawsuits concerning previous budget
actions which the State has lost at the trial court level, and which are under
appeal. This Analyst's Report also estimates that, despite more favorable
revenues, the two-year budget estimates made in July 1994 are about $2 billion
out of balance, principally because federal immigration aid appears likely to be
much lower than previously estimated. This shortfall is much smaller than the
State has faced in recent years, and has been addressed in the Governor's
Budget.
The state has taken significant steps to restructure its budget, reduce
its accumulated deficit, and is in the fifth year of holding expenditures equal
to, or below, revenues. Continued spending pressures for education, corrections,
and, until recently, health and welfare have made it difficult for the State to
accumulate any significant contingency reserves. The State now projects a very
modest ending reserve for fiscal 1997, and has budgeted about a 1% reserve for
fiscal 1998. Overall, the General Fund GAAP-basis deficit has been reduced from
a peak of $4.6 billion in 1992-93 to $2.1 billion at fiscal 1996.
The Governor's proposed 1997-98 budget provides for moderate expenditure
growth of about 3.9%. Revenue growth is projected at 4.7%, including the
effects of a proposed 5% cut in the bank and corporate tax rate. Spending
levels continue to be driven by constitutional spending requirements of
Proposition 98, which requires about 40% of the general fund to be dedicated to
K-14 education. Overall funding for K-14 education is proposed to increase by
7.6% over fiscal 1997 levels, outpacing other spending categories.
On December 6, 1994, Orange County, California (the "County"), together
with its pooled investment funds (the "Funds") filed for bankruptcy protection
under Chapter 9, causing a liquidity crisis for the Funds and the County. More
than 180 other public entities, most of which, but not all, are located in the
County, were also depositors in the Funds. As of mid-January, 1995, following
a restructuring of most of the Funds' assets to increase their liquidity and
reduce their exposure to interest rate increases, the County estimated the
Funds' loss at about $1.69 billion, or about 23% of their initial deposits of
approximately $7.5 billion. Many of the entities which deposited moneys 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 United States 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 totalling approximately 90 percent of the schools' investment
balances.
Under existing legal precedent, the State is obligated to intervene
when a school district's fiscal problems would otherwise deny its students
basic educational equality. The State is not presently able to predict whether
any school districts will face insolvency because of their participation in the
Funds, and if so, the potential amount or form of aid which the State may have
to provide.
RISK FACTORS OF CONCENTRATING IN CONNECTICUT
The following concerns the risks of concentrating investments in
obligations of the State of Connecticut ("State") and its political
subdivisions, duly constituted authorities and corporations.
Connecticut's economy is diverse, with manufacturing, services and trade
accounting for approximately 70% of total nonagricultural employment.
Manufacturing employment has been on a downward trend since 1984 while
nonmanufacturing employment has risen significantly. From 1970 to 1992,
manufacturing employment has declined 30.8% while the number of persons
employed in service-related industries, such as trade, government, health,
education, recreation, utilities, finance, insurance, transportation, and real
estate increased 60.8%. Although agriculture remains significant to
Connecticut, the amount of land devoted to farming has declined over time.
These trends are expected to continue in the future. Tourism and summer
residency are also economic factors.
Manufacturing has traditionally been of prime economic importance to
Connecticut and remains the State's single most important economic activity.
The manufacturing industry is diversified, with transportation equipment
(primarily commercial and defense related) the dominant industry, followed by
fabricated metal products, non-electrical machinery and electrical machinery.
Defense-related business plays an important role in the Connecticut economy.
Economic activity has been affected by the volume of defense contracts awarded
to Connecticut firms. In the past ten years Connecticut has generally ranked
from 6th to 11th among all states in total defense contracts awards, receiving
2.8% of all such contracts in 1992. On a per capita basis, defense awards to
Connecticut have been among the highest in the nation. In recent years, the
federal government has reduced defense-related spending and this trend is
expected to continue. Both United Technologies Corporation and General
Dynamics Corporation's Electric Boat Division have announced substantial labor
force reduction. Any further decline in the federal defense budget could have
a detrimental affect on the Connecticut economy.
The industrial activity of the State is concentrated in two regions.
The first, the Naugatuck Valley extends from Bridgeport north through Ansonia
and Waterbury to Torrington, and has a high proportion of heavy industry. The
second, a belt extending from Hartford southwest through New Britain, Middleton
and Meriden to New Haven, is typified by highly skilled precision metal
products manufacturing. In addition, certain large submarine building activity
and chemical production exist in the Groton area.
Hartford, the capital of Connecticut, is a center of the insurance
industry and a major service center for business and commerce. The
southwestern portion of the State benefits from its proximity to New York City,
with a substantial amount of suburban commutation to New York. An important
factor in Connecticut's
<PAGE> 93
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 qual rank with
the outstanding bonds provided certain pledged revenue coverage requirements of
the STO indenture controlling the issuance of such bonds are met. The State
expects to continue to offer bonds for this program.
On November 3, 1992, Connecticut voters approved a constitutional
amendment which requires a balanced budget for each year and imposes a cap on
the growth of expenditures. The General Assembly is required by the
constitutional amendment to adopt by three-fifths vote certain spending cap
definitions, which has not yet occurred. Accordingly, the adopted budget
complies with the current statutory spending cap definitions enacted in 1991.
Expenditures for the payment of bonds, notes and other evidences of
indebtedness are excluded from the constitutional statutory definitions of
general budget expenditures.
In order to promote economic stability and provide a positive business
climate, several tax changes were adopted during the 1993 legislative session.
Among the most significant changes was a four year gradual rate reduction to
the Corporation Business Tax based on income. Additionally, the interest rate
for late payment of the Corporation Business Tax was reduced and additional tax
credits, including a research and development tax credit, were created. In
addition, several Sales Tax exemptions were added which include, among others,
amusements and recreation, certain tax preparation services and car washes.
Although the State recorded General Fund surpluses in its fiscal years
1985 through 1987, Connecticut reported deficits from its General Fund
operations for the fiscal years 1988 through 1991. Together with the deficit
carried forward from the State's 1990 fiscal year, the total General Fund
deficit for the 1991 fiscal year was $965.7 million. The total deficit was
funded by the issuance of General Obligation Economic Recovery Notes. The
Comptroller's annual reports for the fiscal years ended June 30, 1992, 1993 and
1994 reflected General Fund operating surpluses of $110 million, $113.5 million,
and $19.7 million, respectively. The Comptroller's monthly report for the
period ended August 31, 1994 stated that on a GAAP basis the cumulative deficit
is $531 million for fiscal 1994-95. While the enacted budget for fiscal 1997
relied on non-recurring measures to achieve balance, the State has chosen to
defer some $100 million of these measures, a decision made possible by
better-than-expected revenue performance which began in the final quarter of
fiscal 1996 and has continued to date in 1997.
There can be no assurance that general economic difficulties or the
financial circumstances of Connecticut or its towns and cities will not
adversely affect the ability of Connecticut issuers or obligors of State,
municipal and public authority debt obligations to meet their obligations
thereunder.
RISK FACTORS OF CONCENTRATING IN FLORIDA
The Fund invests in obligations of Florida issuers which results in the
Fund's performance being subject to the risks associated with the overall
conditions present within the state. The following information is a brief
summary of the recent prevailing economic conditions and a general summary of
the state's financial status. This information is based on official statements
relating to securities that have been offered by Florida issuers and from other
sources believed to be reliable but should not be relied upon as a complete
description of all relevant information.
Florida is the twenty-second largest state with an area of 54,136 square
miles and a water area of 4,424 square miles. The state is 447 miles long and
361 miles wide with a tidal shoreline of almost 2,300 miles. According to the
U.S. Census Bureau, Florida moved past Illinois in 1986 to become the fourth
most populous state, and as of 1990, had an estimated population of 13.2
million.
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.
Services and trade continue to be the largest components of the Florida
economy, reflecting the importance of tourism as well as the need to serve
Florida's rapidly growing population. Agriculture is also an important part of
the economy, particularly citrus fruits. Oranges have been the principal crop,
accounting for 70% of the nation's output. Manufacturing, although of less
significance, is a rapidly growing component of the economy. The economy also
has substantial insurance, banking, and export participation. Unemployment rates
have historically been below national averages, but have recently risen above
the national rate.
Section 215.32, Florida Statutes, provides that financial operations of
the State of Florida covering all receipts and expenditures must be maintained
through the use of three funds--the General Revenue Fund, the Trust Fund, and
the Working Capital Fund. The General Revenue Fund receives the majority of
State tax revenues. The Working Capital Fund receives revenues in excess of
appropriations and its balances are freely transferred to the General Revenue
Fund as necessary. In November, 1992, Florida voters approved a constitutional
amendment requiring the state to fund a Budget Stabilization Fund to 5% of
general revenues, with funding to be phased in over five years beginning in
fiscal 1995. The Working Capital Fund will become the Budget Stabilization
Fund. Major sources of tax revenues to the General Revenue Fund are the sale
and use tax, corporate income tax and beverage tax.
The over-dependence on the sensitive sales tax creates vulnerability to
recession. Accordingly, financial operations have been strained during the
past few years, but the state has responded in a timely manner to maintain
budgetary control.
Florida's debt structure is complex. Most state debt is payable from
specified taxes and additionally secured by the full faith and credit of the
state. Under the general obligation pledge, to the extent specified taxes are
insufficient, the state is unconditionally required to make payment on bonds
from all non-dedicated taxes.
The Fund's concentration in securities issued by the state and its
political subdivisions provides a greater level of risk than a fund which is
diversified across numerous states and municipal entities. The ability of the
state or its municipalities to meet their obligations will depend on the
availability of tax and other revenues; economic, political, and demographic
conditions within the state; and the underlying condition of the state, and its
municipalities.
RISK FACTORS OF CONCENTRATING IN MASSACHUSETTS
The following concerns the risks of concentrating investments in
obligations of the Commonwealth of Massachusetts and its political
subdivisions, duly constituted authorities and corporations.
There has been a significant improvement in the Massachusetts
unemployment rate since 1975 when it was 12 percent. The state has recovered
well from the decline of the apparel, textile and leather industries. Its
employment mix is now particularly strong in high technology, military
contractors, financial services, and education. In 1992, 33% of the work force
was in the service sector.
Boston is the transportation and commercial center for New England. It
has an improving seaport and extensive railroad and trucking facilities, and
its Logan International Airport is the tenth busiest airport in the United
States. 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 United States unemployment rate
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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 is, however,
growing at a rate lower than the national average. As of January 1997, the
unemployment rate was 4%.
Commonwealth spending exceeded revenues in each of the five fiscal years
commencing fiscal 1987 and the Commonwealth's tax revenues during this period
repeatedly failed to meet official forecasts. During the period, fund balances
in the budgeted operating funds declined from an operating balance of $1.072
billion in fiscal 1987 to an ending balance of negative $1.104 billion for
fiscal 1990. For fiscal 1991, these funds attained positive ending
balances of $237.1 million. Fiscal 1992 ended with positive fund balances of
$549.4 million, after carrying forward the fund balances from fiscal 1991.
Fiscal 1993 ended with positive fund balances of $562.5 million.
In fiscal 1994, which ended June 30, 1994, the total revenues of the
budgeted operating funds of the Commonwealth during such fiscal year increased
by approximately 5.7% over the prior fiscal year, to $15.550 billion.
Expenditures increased by 5.6% over the prior year, to $15.523 billion. As a
result, the Commonwealth ended fiscal 1994 with a positive closing fund balance
of $589.3 million.
The Commonwealth's audited financial report for fiscal 1996 indicates a
continued trend of balanced financial operations and continued fund balance
surpluses. The undesignated General Fund balance (GAAP-basis) rose to $123
million in fiscal 1996, up from a $25 million deficit at the end of fiscal 1995,
while the Budgeted Operating Funds balance (GAAP-basis) increased to $709
million, up from $287 million in fiscal 1995.
Standard & Poor's and Moody's have upgraded their ratings of the
Commonwealth's general obligation bonds from A and Baa, respectively, to A+ and
A1, respectively. Fitch has recently upgraded its rating of the Commonwealth's
bonds from A to A+.
There can be no assurance that general economic difficulties or the
financial circumstances of Massachusetts or its political subdivisions will not
adversely affect the ability of Massachusetts issuers or obligors of State,
municipal and public authority obligations to meet those obligations.
RISK FACTOR 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
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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 United States.
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. At this time the effect of the tax reduction cannot be
evaluated.
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+ by
Standard & Poor's, Aa1 by Moody's, and AA+ by Fitch.
Prospects for New Jersey are favorable, although a return to pace of the
1980s is highly unlikely. Although growth is expected to be slower than in the
nation, the local advantages that have served the State well for many years
will remain. Structural changes that have been going on for years can be
expected to continue, with job creation primarily in the services sector.
Evidence of the State's improving economy can be found in increased
homebuilding, and other areas of construction activity, rising consumer
spending for new cars and light trucks and the decline in the unemployment
rate.
RISK FACTORS OF CONCENTRATING IN NEW YORK
The following concerns the risks of concentrating investments in
obligations of New York and its political subdivisions, duly constituted
authorities and corporations.
The financial condition of New York State ("State") may be affected by
various financial, social economic and political factors. Those factors can be
complex, may vary from fiscal year, and are frequently the result of actions
taken not only by the State and its agencies and instrumentalities but also by
entities that are not under the control of the State. The information set
forth below concerns the financing activities of the State, the activities of
the State's authorities and public benefit corporations (the "Authorities"),
the financial condition and projections of the Metropolitan Transit Authority
("MTA"), the financial condition of The City of New York (the "City"), and
certain information relating to the State's other localities. Adverse
developments affecting the State's financing activities, the Authorities, the
MTA, the City or other localities could adversely affect the State's financial
condition.
STATE FINANCING ACTIVITIES
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
<PAGE> 96
such payments is generally expressly made subject to appropriation by the
Legislature and the actual availability of money to the State for making the
payments.
The State also participates in the issuance of certificates of
participation in a pool of leases entered into by the State's Office of General
Service on behalf of several State departments and agencies and in the issuance
of certificates of participation which represent proportionate interests in
lease payments to be paid by the State, acting by and through the Commissioner
of the Commissioner of the Office of Mental Health of the State of New York.
Payments for principal and interest due on general obligation bonds,
interest due on tax and revenue anticipation notes, and contractual-obligation
and lease-purchase payments are estimated to be $2.167 billion in the aggregate
for the State's 1993-94 fiscal year and are projected to be $2.459 billion in
the aggregate for the 1994-95 fiscal year. These figures do not include
interest payable on State General Obligation Refunding Bonds issued in July
1992, to the extent that such interest is to be paid from an escrow fund
established with proceeds of such Refunding Bonds, or the State's installment
payments relating to the issuance of certificates of participation.
The State has never defaulted on any of its general obligation
indebtedness or its obligations under lease-purchase or contractual-obligation
financing arrangements and has never been called upon to make any direct
payments pursuant to its guarantees. There has never been a default on any
moral obligation debt of any Authority.
In addition to the arrangements described above, State law provides for
State municipal assistance corporations, which are Authorities authorized to
aid financially troubled localities. The Municipal Assistance Corporation For
The City of New York, ("MAC"), created to provide financing assistance to New
York City, is the only municipal assistance corporation created to date. To
enable MAC to pay debt service on its obligations, MAC receives, subject to
annual appropriation by the Legislature, receipts from the 4% New York Sales
Tax for the Benefits of New York City, the State-imposed Stock Transfer Tax
and, subject to certain prior liens, local assistance payments otherwise
payable to the City.
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 its 1995-1996 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
State Legislature enacted appropriations for disbursements considered to be
necessary for State operations and other purposes, including all necessary
appropriations for debt service. The 1995-1996 fiscal year budget includes a
planned three-year 20% reduction 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 orginally establishing the
rating, circumstances so warrant. A downward revision or withdrawal of such
ratings, or either of them, may have an effect on the market price of the State
Municipal Securities in which the New York Fund invests.
AUTHORITIES
The fiscal stability of the State is related to the fiscal stability of
its Authorities, which generally have responsibility for financing,
constructing and operating revenue-producing public benefit facilities.
Authorities are not subject to the constitutional restrictions on the
incurrence of debt which apply to the State itself, and issue bonds and notes
within the amounts of, and as otherwise restricted by, their legislative
authorization. As of September 30, 1994, the latest data available, there were
18 Authorities that had outstanding debt of $100 million or more. The
aggregate outstanding debt, including refunding bonds, of these 18 Authorities
was $70.3 billion as of September 30, 1994, of which approximately $7.01
billion was moral obligation debt and approximately $17.98 billion was financed
under lease-purchased or contractual-obligation financing arrangements.
<PAGE> 97
Authorities are generally supported by revenues generated by the
projects financed or operated, such as fares, user fees on bridges, highway
tolls and rentals for dormitory room and housing. In recent years, however the
State has provided financial assistance through appropriations, in some cases
of a recurring nature, to certain of the 18 Authorities for operating and other
expenses and, in fulfillment of its commitments on moral obligation
indebtedness or otherwise, for debt service. The operating assistance is
expected to continue to be required in future years.
The State's experience has been that if an Authority suffers serious
financial difficulties, both the ability of the State and the Authorities to
obtain financing in the public credit markets and the market price of the
State's outstanding bonds and notes may be adversely affected. The Housing
Finance Agency ("HFA") and the Urban Development Corporation ("UDC") have in
the past required substantial amounts of assistance from the State of meet debt
service costs or to pay operating expenses. Further assistance, possibly in
increasing amounts, may be required for these, or other, Authorities in the
future. In addition, certain statutory arrangements provide for State local
assistance payments otherwise payable to localities to be made under certain
circumstance to certain Authorities. The State has no obligation to provide
additional assistance to localities whose local assistance payments have been
paid to Authorities under these arrangements. However, in the event that such
local assistance payments are so diverted, the affected localities could seek
additional State funds.
METROPOLITAN TRANSPORTATION AUTHORITY ("MTA")
The MTA oversees the operation of New York City's subway and bus lines
by the New York City Transit Authority and the Manhattan and Bronx Surface
Transit Operating Authority (collectively, the "Transit Authority" or the
"TA"). Through its subsidiaries, the Long Island Rail Road Company, the
Metro-North Commuter Railroad Company and the Metropolitan Suburban Bus
Authority, the MTA operates certain commuter rail and bus lines in the New York
metropolitan area. In addition, the Staten Island Rapid Transit Operating
Authority, an MTA subsidiary, operates a rapid transit line on Staten Island.
Through its affiliated agency, the Triborough Bridge and Tunnel Authority (the
"TBTA"), the MTA operates certain intrastate toll bridges and tunnels. Because
fare revenues are not sufficient to finance the mass transit portion of these
operations, the MTA has depended, and will continue to depend, for operating
support upon a system of State, local government and TBTA support, and, to the
extent available, federal operating assistance, including loans, grants and
subsidies.
OTHER LOCALITIES
Certain localities in addition to New York City could also have
financial problems leading to requests for additional State assistance during
the State's 1993-94 and 1994-95 fiscal years and thereafter. The potential
impact on the State of such request by localities is not included in the
projections of the State receipts and disbursements in the State's 1994-95
fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the creation of the Financial Control Board for the City of Yonkers
(the "Yonkers Board") by the State in 1984. The Yonkers Board is charged with
oversight of the fiscal affairs of Yonkers. Future actions taken by the
Governor or the State Legislature to assist Yonkers could result in allocation
of State resources in amounts that cannot yet be determined.
CERTAIN MUNICIPAL INDEBTEDNESS
Municipalities and school districts have engaged in substantial
short-term and long-term borrowing. In 1992 the total indebtedness of all
localities in the State was approximately $35.2 billion, of which $19.5 billion
was debt of New York City (excluding $5.9 billion in MAC debt); a small portion
(approximately $71.6 million) of the $35.2 billion of indebtedness represented
borrowing to finance budgetary deficits and was issued pursuant to enabling
State legislation. State law requires the Comptroller to review and make
recommendations concerning the budgets of those local government units other
than New York City authorized by State law to issue debt to finance deficits
during the period that such deficit financing is outstanding. Seventeen
localities had outstanding indebtedness for deficit financing at the close of
their fiscal year ending in 1992.
<PAGE> 98
In 1992, an unusually large number of local government units requested
authorization for deficit financing. According to the Comptroller, nine local
government units were authorized to issue deficit financing in the aggregate
amount of $131.1 million, including Nassau County for $65 million in six-year
deficit bonds and Suffolk County for $36 million in six-year deficit bonds.
The current session of the Legislature may receive as many or more requests for
deficit-financing authorizations as a result of deficits previously incurred by
local governments. The Comptroller has indicated that the level of deficit
financing requests in 1992 was unprecedented, since in 1993 only five
localities were authorized to issue only $5.5 million in deficit financing
indebtedness.
Certain proposed federal expenditure reductions would reduce, or in some
cases eliminate, federal funding of some local programs and accordingly might
impose substantial increased expenditure requirements on affected local
programs and accordingly might impose substantial increased expenditure
requirements on affected localities. If the State, New York City or any of the
Authorities were to suffer serious financial difficulties jeopardizing their
respective access to the public credit markets, the marketability of notes and
bonds issued by localities within the State should be adversely affected.
Localities also face anticipated and potential problems resulting from certain
pending litigation, judicial decisions, and long-range economic trends. The
longer-range problems of declining urban population, increasing expenditures,
and other economic trends could adversely affect localities and require
increasing State assistance in the future.
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 form the State. The City's
independently audited operating results for each of its 1981 through 1993
fiscal years, which end on June 30, show a General Fund surplus reported in
accordance with GAAP. In addition, the City's financial statements for the
1993 fiscal year received an unqualified opinion from the City's independent
auditors, the eleventh consecutive year the City has received such an opinion.
However, there can be no assurance that the City will not have a sizable
deficit in the future.
In response to the City's fiscal crisis in 1975, the State took a number
of steps to assist the City in returning to fiscal stability. Among these
actions, the State created MAC to provide financing assistance to the City.
The State also enacted the New York State Financial Emergency Act for The City
of New York (the "Financial Emergency Act") which, among other things,
established the New York State Financial Control Board (the "Control Board") to
oversee the City's financial affairs. The State also established the Office of
the State Deputy Comptroller of the City of New York ("OSDC") to assist the
Control Board in exercising its powers and responsibilities.
The City operates under a four-year financial plan which is prepared
annually and is periodically updated. On June 30, 1986, the Control Board's
powers of approval over the City's financial plan were suspended pursuant to
the Financial Emergency Act. However, the Control Board, MAC and OSDC continue
to exercise various monitoring functions relating to the City's financial
position. The City submits its financial plans as well as the periodic updates
to the Control Board for its review.
Estimates of the City's revenues and expenditures are based on numerous
assumptions and are subject to various uncertainties. If expected federal or
State aid is not forthcoming, if unforeseen developments in the economy
significantly reduce revenues derived from economically sensitive taxes or
necessitate increased expenditures for public assistance, if the City should
negotiate wage increases for its employees greater than the amounts provided
for the City's financial plan or if other uncertainties materialized that
reduce expected revenues or increase projected expenditures, then, to avoid
operating deficits, the City may be 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 stablize conditions in the City. Employment losses moderated
toward year-end and real GCP increased, boosted by stong 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 additinal
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 aporoximately $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 though 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.
RISK FACTORS OF CONCENTRATING IN OHIO
Financial Operations continued to show improvement in fiscal year 1996.
The state achieved an operating surplus as total operating revenue grew more
rapidly than total expenditures. The state ended the biennium with an
estimated general revenue fund balance of $597.6 million. The state's reserves
have been restored to levels which now exceed those seen before the last
recession. General revenue spending increased in 1997, with increases in most
major spending categories except health and human services, which decreased
0.2%. Revenues and expenditures met target levels for the first six months of
fiscal 1996.
The state's current direct debt levels are relatively moderate,
representing, on a per capita basis, $592 or 2.5% of personal income. Debt
service payments to cover general obligations and lease obligations constitute
approximately 5% of the state's budget.
Over the past ten years, employment and earnings in Ohio have grown
steadily and become more diversified. Although manufacturing still provides
21% of the employment in the state, employment growth in the services and trade
sectors has created a more stable economy. Statewide employment was up 3% from
1990-1995, and employment gains in 1994 and 1995 were enough to offset losses in
recession years. Although manufacturing employment decreased 1.2% in the year
ending August 1997, growth in the services, trade and construction industries
should continue to produce strong economic growth.
The rate of personal income growth, however, has declined as
lower-paying service jobs have replaced those lost in manufacturing, with
income levels currently slightly below the national average. Personal income
per capita, which nearly equaled that of the U.S. in 1970, was 96% of the U.S.
figure in 1996.
RISK FACTORS OF CONCENTRATING IN PENNSYLVANIA
Pennsylvania may incur debt to rehabilitate areas affected by disaster,
debt approved by the electorate, debt for certain capital projects (such as
highways, public improvements, transportation assistance, flood control,
redevelopment assistance, site development and industrial development) and tax
anticipation debt payable in the fiscal year of issuance. Pennsylvania had
outstanding general obligation debt of $5.2 billion on June 30, 1996.
Pennsylvania is not permitted to fund deficits between fiscal years with any
form of debt. All year-end deficit balances must be funded within the
succeeding fiscal year's budget. On December 28, 1995, all outstanding general
obligation bonds of Pennsylvania were rated AA- by S & P and A1 by Moody's.
There can be no assurance that the current ratings will remain in effect in the
future. The Fund assumes no obligation to update this rating information. Over
the five-year period ending June 30, 2000. Pennsylvania has projected that it
will issue bonds totaling $2.1 billion and retire bonded debt in the principal
amount of $2.3 billion. Certain agencies created by Pennsylvania have
statutory authorization to incur debt for which Pennsylvania appropriations to
pay debt service thereon is not required. As of June 30, 1996, total combined
debt outstanding for these agencies was $3.6 billion. The debt of these
agencies is supported by assets of, or revenues derived from, the various
projects financed and is not an obligation of Pennsylvania. Some of these
agencies, however, are indirectly dependent on Pennsylvania appropriations.
The only obligations of agencies in Pennsylvania that bear a moral obligation
of Pennsylvania are those issued by the Pennsylvania Housing finance Agency
("PHFA"), a state-created agency which provides housing for lower and moderate
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 districts obligations are supported indirectly by Pennsylvania. the
issuance of non-electoral general obligation debt is limited by constitutional
and statutory provision. Electoral debt, i.e., that approved by the votes, 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
institutional, 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 United States for
the same period has grown by approximately 4% and 17%, respectively.
Pennsylvania's average annual unemployment rate for the years 1988, 1989 and
1990 remained slightly below the nation's annual average unemployment rate, and
Pennsylvania's average annual unemployment rate for the years 1992, 1993 and
1994 remained slightly above the nation's annual average unemployment rate. The
seasonally adjusted unemployment rate for Pennsylvania for January, 1996 was
6.1% compared to 5.3% for the United States. The unadjusted unemployment rate
for Pennsylvania and the United States 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 capital income in
Pennsylvania for calendar 1994 of $22,196 was higher than the per capita income
of the United States 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.
<PAGE> 99
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Trustees of Reserve New York Tax-Exempt
Trust -- New York Tax-Exempt Fund and Reserve Tax-Exempt Trust -- California,
Connecticut, Florida, Massachusetts and New Jersey Tax-Exempt Funds:
We have audited the accompanying statements of net assets of the Reserve New
York Tax-Exempt Trust -- New York Tax-Exempt Fund and the California,
Connecticut, Florida, Massachusetts and New Jersey Tax-Exempt Funds, (five of
the series constituting Reserve Tax-Exempt Trust) and the statement of assets
and liabilities of the Florida Tax-Exempt Fund as of May 31, 1997, and the
related statements of operations for the year then ended and the statements of
changes in net assets for each of the two years in the period then ended except
for the Florida Tax-Exempt Fund for which the period was from June 24, 1996
(commencement of operations) to May 31, 1997, and the financial highlights for
each of the periods presented. These financial statements and financial
highlights are the responsibility of the respective Trust's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1997, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Reserve New York Tax-Exempt Trust -- New York Tax-Exempt Fund and the
California, Connecticut, Florida, Massachusetts and New Jersey Tax-Exempt Funds
of Reserve Tax-Exempt Trust as of May 31, 1997, the results of their operations,
the changes in their net assets and their financial highlights for the periods
referred to above, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
New York, New York
June 27, 1997
RESERVE NEW YORK TAX-EXEMPT TRUST--NEW YORK TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
----------------------- -------- -------------- --------
<S> <C> <C> <C>
Bleecker HDC Terrace Apt Project S85, 3.85%(a).............. 7/1/2015 $2,515 $ 2,532,168
Brockport CSD GOB, 5.375%................................... 6/15/1997 900 922,973
Buffalo RAN, 4.25%.......................................... 7/15/1997 1,000 1,024,051
Eagle Tax-Exempt Trust COP Series 1994C-2 Class A,
4.01%(a).................................................. 6/15/2018 3,000 3,051,512
Erie County RAN, 4.25%...................................... 11/19/1997 2,000 2,051,014
Guilderland IDA for North Eastern Industrial Park Series
1993 A, 4%(a)............................................. 12/1/2008 3,600 3,613,468
Jefferson County IDA for Watertown Carthage, 3.75%(a)....... 12/1/2012 3,500 3,511,507
Metropolitan Transportation Authority Commuter Facilities
Revenue Bonds
Series 1991, 3.95%(a)................................... 7/1/2021 5,800 5,821,277
Monroe-Woodbury GOB, 5.625%................................. 5/15/1998 640 651,376
Montgomery County IDA for Service Merchandise Co.,
3.75%(a).................................................. 12/31/2024 1,600 1,602,959
Nassau County BAN, 4.50%.................................... 8/15/1997 2,000 2,066,924
New York City GOB, 3.75%(a)................................. 8/1/2014 1,500 1,503,082
New York City GOB Fiscal 96 Series J2, 3.75%(a)............. 2/15/2016 9,000 9,017,568
New York City GOB Custodial Receipts Series A31, 4%(a)...... 7/2/2000 4,000 4,049,375
New York City GOB Fiscal 1994 Series A, 4%(a)............... 8/1/2022 5,380 5,380,590
New York City GOB Series A, 4%(a)........................... 8/1/2023 2,800 2,800,307
New York City GOB Series B, 3.85%(a)........................ 8/15/2024 3,400 3,400,358
New York City GOB Series B1, 3.85%(a)....................... 8/15/2024 8,000 8,000,844
</TABLE>
16
<PAGE> 100
RESERVE NEW YORK TAX-EXEMPT TRUST--NEW YORK TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997--(CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
----------------------- -------- -------------- --------
<S> <C> <C> <C>
New York City GOB Series B4, 4.20%(a)....................... 8/15/2022 $ 700 $ 700,081
New York City GOB Series C4-97, 4%(a)....................... 8/1/1997 1,000 1,000,110
New York City GOB Series C4-98, 4%(a)....................... 8/1/1998 1,000 1,000,110
New York City GOB Series D, 3.85%(a)........................ 2/1/2020 300 300,032
New York City GOB Series E4, 4%(a).......................... 8/1/2021 1,000 1,000,110
New York City GOB Series E4, 4%(a).......................... 8/1/2022 3,800 3,800,416
New York City GOB Series E5, 4%(a).......................... 8/1/2010 1,000 1,000,110
New York City GOB Series E5, 4%(a).......................... 8/1/2017 1,000 1,000,110
New York City GOB Series E5, 4%(a).......................... 8/1/2019 1,000 1,000,110
New York City GOB Series E6, 4%(a).......................... 8/1/2019 1,900 1,900,208
New York City GOB Fiscal 1994 Series E2, 4%(a).............. 8/1/2020 2,000 2,000,219
New York City HDC for Carnegie Park Project Series A,
4.50%(a).................................................. 12/1/2016 1,410 1,410,176
New York City HDC for Columbus Green Project, 4.50%(a)...... 12/1/2009 900 900,113
New York City IDA for Goodwill Project, 3.80%(a)............ 3/1/2000 955 957,667
New York City IDA for Stroheim & Roman, 3.85%(a)............ 12/1/2015 1,500 1,513,759
New York State ERD for Brooklyn Union Gas, 3.80%(a)......... 12/1/2020 2,000 2,005,606
New York State ERD/PCR for LILCO Series 85B, 3.60%(a)....... 3/1/2016 3,000 3,027,230
New York State ERD/PCR for Niagara Mohawk Power Plant,
4.20%(a).................................................. 7/1/2015 2,100 2,100,242
New York State ERD/PCR for Rochester Gas & Electric
Corporation, 3.55%(a)..................................... 10/1/2014 3,000 3,009,337
New York State ERD/PCR for Rochester Gas & Electric R&D,
3.60%(a).................................................. 11/15/2015 3,000 3,005,283
New York State Job Development Authority Series F,
4.05%(a).................................................. 3/1/1999 495 496,758
New York State Local Government Assistance 1993A,
3.80%(a).................................................. 4/1/2022 10,000 10,035,370
New York State Local Government Assistance Series B,
3.80%(a).................................................. 4/1/2025 3,900 3,913,901
North Hempstead BAN, 4.25%.................................. 2/26/1998 4,287 4,348,117
Onondaga County IDR for Edgecomb Metals Project, 3.85%(a)... 11/1/2009 1,100 1,103,636
Onondaga County IDR for McLane Co. Project, 4.15%(a)........ 11/1/2004 2,100 2,107,747
Onondaga County IDR for McLane Co. Project, 4.35%(a)........ 11/1/2004 460 461,707
Onondaga County IDR for Pass and Seymour, Inc. Project,
3.55%(a).................................................. 6/15/1997 1,900 1,903,326
Oppenheim-Ephreta GOB, 5.125%............................... 6/15/1997 2,500 2,624,752
Oyster Bay BAN, 4%.......................................... 2/27/1998 675 682,178
Riverhead TAN, 4.25%........................................ 6/26/1997 3,000 3,119,685
Roslyn BAN, 4%.............................................. 10/15/1997 2,600 2,651,801
Sands Point BAN, 3.80%...................................... 11/20/1997 1,500 1,530,971
Suffolk County IDA for Target Rock Corporation Revenue
Bonds, 3.75%(a)........................................... 2/1/2007 1,500 1,500,154
Suffolk County IDA for Satellite Transmission Systems, Inc.,
4.05%(a).................................................. 11/1/2007 1,630 1,636,044
Syossett BAN, 4.25%......................................... 7/18/1997 1,700 1,763,573
Syracuse BAN, 3.90%......................................... 12/19/1997 2,000 2,036,838
Syracuse IDA for General Accident Insurance Co. Project,
3.80%(a).................................................. 12/1/2003 4,550 4,550,000
Triboro Bridge and Tunnel Authority Special Obligation
Series 1994, 3.85%(a)..................................... 1/1/2024 4,800 4,817,174
Yonkers IDA Civic Revenue Bonds for Consumers Union,
3.70%(a).................................................. 7/1/2019 1,400 1,403,823
Yonkers IDR for Consumers Union Facility, 3.70%(a).......... 7/1/2021 4,500 4,512,291
------------
Total New York Fund Investments (98.47%) (Cost
$149,922,624)............................................. 150,832,228
Other assets, less liabilities (1.53%)...................... 2,347,856
------------
NET ASSETS (100%) equivalent to $1.00 net asset value,
offering and redemption prices per share on 153,180,084
shares of beneficial interest of $.001 par value
outstanding............................................... $153,180,084
============
</TABLE>
- ------------
(a) The interest rate is subject to change periodically. The rates shown were in
effect at May 31, 1997. Securities payable on demand are collateralized by
bank letters of credit or other bank credit agreements.
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE> 101
RESERVE TAX-EXEMPT TRUST--CALIFORNIA TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
----------------------- -------- -------------- --------
<S> <C> <C> <C>
Anaheim COP, 3.70%(a)....................................... 8/1/2019 $ 250 $ 252,888
California Community Development Authority Series A3,
3.65%(a).................................................. 5/15/2025 2,200 2,204,069
California HFA for Sutter Health Series 1990 B, 3.85%(a).... 3/1/2020 400 400,042
California Modesto Santa Clara Redding Public Power,
3.25%(a).................................................. 7/1/2022 300 300,855
California RAN, 3.80%....................................... 6/30/1997 400 401,403
California School District Cash Reserve Program Series A,
4.75%..................................................... 7/2/1997 500 522,088
East Bay Municipal Water and Sewer Utility, 6%(a)........... 6/1/1998 500 510,318
Foothill/Eastern Transportation Toll Road Revenue Bonds
Series 95C, 3.70%(a)...................................... 1/2/2035 1,000 1,003,467
Foothill/Eastern Transportation Toll Road Revenue Bonds,
3.75%(a).................................................. 1/2/2035 500 501,755
Grand Terrace HFA for Community Redevelopment Agency,
3.95%(a).................................................. 12/1/2011 1,300 1,303,807
Hemet MHR for Sunwest Resort Village, 4%(a)................. 7/1/2006 1,500 1,510,570
Hermosa Beach EDA for Parking District Facility Project,
3.70%(a).................................................. 12/1/2023 2,000 2,005,444
Irvine Improvement Bond Assessment District 85, 3.70%(a).... 9/2/2011 2,000 2,000,203
Irvine Ranch PCR for Water District Election #282,
3.70%(a).................................................. 11/15/2013 500 500,051
Lancaster MHR for Westwood Park Apartments 1985, 3.70%(a)... 12/1/2007 500 501,766
Los Angeles Community Redevelopment Agency for Baldwin
Hills, 3.80%(a)........................................... 12/1/2014 400 401,129
Los Angeles Community Redevelopment for Promenade Towers
Series 1989, 3.85%(a)..................................... 4/1/2009 400 402,684
Los Angeles Custodial Receipts, 4%(a)....................... 7/1/2005 1,290 1,309,657
Los Angeles Housing Authority Malibu Meadows Project Series
91-A, 3.95%(a)............................................ 12/1/2015 200 200,735
Los Angeles IDA for International Airport Authority,
4%(a)..................................................... 12/1/2025 1,000 1,000,110
Los Angeles USD TRAN, 4.50%................................. 6/30/1997 500 520,970
Los Angeles Waste-Water Bond, 8.125%(a)..................... 11/1/1997 500 522,705
Orange County Apartment Development Revenue Bonds Issue A of
1991, the Lakes Project 3.80%, Letter of Credit with
Citibank(a)............................................... 12/1/2006 1,000 1,003,568
Orange County Sanitation District Capital Improvement
Program 1990-92, 3.75% Letter of Credit with National
Westminster(a)............................................ 8/1/2015 200 200,021
Pasadena IDA for Rose Bowl Improvement Project, 3.70%(a).... 12/1/2011 600 602,089
Pico Rivera Community Redevelopment Agency for Rainer Fund
Crossroads Plaza Project, 3.75%(a)........................ 12/1/2010 700 702,016
Puerto Rico GOB, 3.60%...................................... 6/12/1997 1,000 1,005,326
Redlands COP, 3.80%(a)...................................... 9/1/2015 1,000 1,003,536
San Bernadino HFR for Alta Park Project, 4%(a).............. 5/1/2006 500 501,849
San Bernadino IDA for Gate City, 4.45%(a)................... 3/1/2005 200 200,024
San Francisco HFR for Yerba Buena Gardens, 3.75%(a)......... 9/1/2006 1,000 1,003,474
San Joaquin USD TRAN, 4.50%................................. 1/15/1998 1,000 1,033,515
San Jose HFR Redevelopment Agency, 3.80%(a)................. 7/1/2026 1,700 1,705,878
San Mateo USD TRAN, 4.50%................................... 7/1/1997 500 520,922
Santa Clara Electric Revenue Bonds Series 85C, 3.80%(a)..... 7/1/2010 400 401,414
Santa Clara El Cammino Hospital District, 3.75%(a).......... 8/1/2015 200 200,681
Union City MHR for Skylark Apartments, 4%(a)................ 11/1/2007 1,200 1,202,398
Upland MHR Community Redevelopment Bonds Series B for
Northwood Project, 4.45%(a)............................... 3/1/2014 300 303,174
Vista MHR for Shadow Ridge Apartments Project, 3.90%(a)..... 5/1/2005 800 802,828
-----------
Total California Fund Investments (99.09%) (Cost
$30,495,520).............................................. 30,669,429
Other assets, less liabilities (.91%)....................... 282,967
-----------
NET ASSETS (100%) equivalent to $1.00 net asset value,
offering and redemption prices per share on 30,952,396
shares of beneficial interest of $.001 par value
outstanding............................................... $30,952,396
===========
</TABLE>
- ---------------
(a) The interest rate is subject to change periodically. The rates shown were in
effect at May 31, 1997. Securities payable on demand are collateralized by
bank letters of credit or other bank credit agreements.
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE> 102
RESERVE TAX-EXEMPT TRUST--CONNECTICUT TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
----------------------- -------- -------------- --------
<S> <C> <C> <C>
Beacon Falls BAN, 4.25%..................................... 10/23/1997 $1,000 $ 1,027,880
Connecticut DAI for Allen Group Inc., 3.80%(a).............. 2/1/2013 1,400 1,404,664
Connecticut DAI for Conco Medical Co. Project Series 85,
3.85%(a).................................................. 11/1/2005 700 702,477
Connecticut DAI for General Accident Insurance Co.,
3.80%(a).................................................. 12/1/2013 1,700 1,700,000
Connecticut DAI for Martin Brower Corp. Series 1985,
3.65%(a).................................................. 5/1/2005 170 170,577
Connecticut DAI for Regional YMCA Project, 4.65%(a)......... 6/1/2008 550 551,648
Connecticut DAI for Trudy Corporation Project, 3.75%(a)..... 9/1/2009 600 601,973
Connecticut DAI for Zotos International Project, 4.05%(a)... 12/1/2004 1,655 1,660,876
Connecticut Development Authority Health Care Revenue Bonds
for
Independent Living Project 1990 Series, 3.70%(a)........ 7/1/2015 1,945 1,951,771
Connecticut Development Authority PCR for Central Vermont
Public
Service, 3.55%(a)....................................... 12/1/2015 1,400 1,404,357
Connecticut Development Authority PCR for Connecticut Light
and
Power Project Series 1993, 3.80%(a)..................... 9/1/2028 1,300 1,304,668
Connecticut Development Authority PCR for Western
Massachusetts
Electric Co. Series 1993A, 3.75%(a)..................... 9/1/2028 1,700 1,705,987
Connecticut HEF for Charlotte Hospital Series B, 3.60%(a)... 7/1/2010 600 602,026
Connecticut HEF for Kingswood Oxford School Issue Series A,
4.65%(a).................................................. 2/1/2009 490 491,998
Connecticut HEF for New Haven Hospital RAW Series E,
3.80%(a).................................................. 6/1/2012 500 500,000
Connecticut HEF for Pomfret School Issue Series A,
3.60%(a).................................................. 7/1/2024 1,385 1,388,738
Connecticut HFA BDS Project, 3.80%, (a)..................... 5/15/2018 1,400 1,402,718
Connecticut State GOB, 4.75%................................ 8/15/1997 500 508,004
Connecticut State GOB, 6%................................... 3/1/1998 1,000 1,032,975
Connecticut State GOB, 3.90%(a)............................. 5/15/2014 1,500 1,500,321
Connecticut State Special Assessment Unemployment
Compensation
RAW Series C, 3.90%(a).................................. 11/15/2001 1,500 1,524,564
Connecticut State Special Assessment Unemployment
Compensation
RAW Series 1993B Pre-refunded, 7.20%(a)................. 2/15/1998 460 489,183
Connecticut State Special Tax Transportation Infrastructure
2nd Lien
Revenue Bonds, 3.85%(a)................................. 12/1/2010 1,570 1,575,605
Hartford Redevelopment Agency MHR for Underwood Towers
Project,
3.65%(a)................................................ 6/1/2020 2,100 2,107,223
New Canaan BAN, 3.75%....................................... 3/10/1998 1,000 1,011,025
Puerto Rico Industrial, Medical and Environmental Higher
Education Facility Authority, 4.05%(a).................... 12/1/2015 400 401,454
Puerto Rico Industrial, Medical, and Environmental RAW for
Reynolds Metals, 3.80%(a)................................. 9/1/2013 1,200 1,211,524
Puerto Rico GOB, 3.60%...................................... 6/12/1997 2,000 2,010,652
Puerto Rico GOB, 3.85%...................................... 6/19/1997 590 590,871
Simsbury GOB, 4.60%......................................... 1/15/1998 410 419,661
Tolland BAN, 3.70%.......................................... 6/12/1997 650 673,340
Windsor Locks BAN, 3.90%.................................... 10/15/1997 1,000 1,001,490
Wollcott BAN, 4.25%......................................... 8/13/1997 704 728,535
-----------
Total Connecticut Fund Investments (105.56%) (Cost
$35,145,207).............................................. 35,358,785
Other liabilities, less assets, (-5.56%).................... (1,862,282)
-----------
NET ASSETS (100%) equivalent to $1.00 net asset value,
offering and redemption prices per share on 33,496,503
shares of beneficial interest of $.001 par value
outstanding............................................... $33,496,503
===========
</TABLE>
- ---------------
(a) The interest rate is subject to change periodically. The rates shown were in
effect at May 31, 1997. Securities payable on demand are collateralized by
bank letters of credit or other bank credit agreements.
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE> 103
RESERVE TAX-EXEMPT TRUST--FLORIDA TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
----------------------- -------- -------------- --------
<S> <C> <C> <C>
FLORIDA -- 82.47%
Boca Raton IDA for Parking Garage Project, 4.325%(a)...... 12/1/2014 $200 $ 200,024
Broward MHR for Welleby Apartment Project Series 1984,
4%(a)................................................... 12/1/2006 200 200,736
Collier IDA for Retirement Rental Housing Revenue Bonds
HFA, 3.95%(a)........................................... 12/1/2015 100 100,362
Dade IDA for Aviation Authority Facilities Series 84A,
4.30%(a)................................................ 10/1/2009 100 100,314
Dade IDA for Dolphin Stadium Project, 3.95%(a)............ 1/1/2016 300 301,095
Dade HFA for Hospital Revenue Bonds for Miami Children's
Hospital Project, 3.85%(a).............................. 3/1/2025 200 200,570
Duval HFA for Lakes of Mayport Apartment Project, 4%(a)... 12/1/2009 200 200,744
Florida MHR for Oaks at Mill Creek Series 85, 3.95%(a).... 11/1/2007 200 200,578
Hillsborough IDA for Tampa Electric Company Project,
4.15%(a)................................................ 9/1/2025 300 301,050
Jacksonville IDR for Coastal Islands Project, 4.05%(a).... 8/1/2008 180 180,020
Lee IDA For Charter Glade, 4.10%(a)....................... 8/1/2007 200 200,749
Manatee PCR for Florida Power and Light, 3.95%(a)......... 9/1/2024 200 200,022
Palm Beach PCR for Water and Sewer Project, 4.05%(a)...... 10/1/2011 200 200,022
Putnam PCR for Florida Power and Light, 3.95%(a).......... 9/1/2024 100 100,011
Port St. Lucie PCR for Florida Power and Light,
3.75%(a)................................................ 1/1/2011 200 200,658
Tampa Occupational License Tax Bonds, 3.90%(a)............ 5/1/2027 200 200,571
University of North Florida Capital Improvement Project,
3.90%(a)................................................ 11/1/2024 300 301,103
CHICAGO -- 2.43%
Chicago O'Hare International Airport American Airlines
Series 94, 4.05%(a)..................................... 12/1/2017 100 100,011
LOUISIANA -- 2.43%
LA Offshore Terminal Authority, 4.05%(a).................. 9/1/2008 100 100,011
MICHIGAN -- 2.46%
Michigan Strategic Fund for Detroit Edison Company Series
95C, 3.05%(a)........................................... 9/1/2030 100 100,996
----------
Total Florida Fund Investments (89.79%) (Cost $3,680,000)... 3,689,647
Other assets, less liabilities, (10.21%).................... 419,737
----------
NET ASSETS (100%) equivalent to $1.00 net asset value,
offering and redemption prices per share on 4,109,384
shares of beneficial interest of $.001 par value
outstanding............................................... $4,109,384
==========
</TABLE>
- ---------------
(a) The interest rate is subject to change periodically. The rates shown were in
effect at May 31, 1997. Securities payable on demand are collateralized by
bank letters of credit or other bank credit agreements.
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE> 104
RESERVE TAX-EXEMPT TRUST--MASSACHUSETTS TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
----------------------- -------- -------------- --------
<S> <C> <C> <C>
Arlington GOB, 6.30%........................................ 8/15/1997 $315 $ 325,919
Billerica GOB, 5.85%........................................ 10/15/1997 345 350,187
Boston Water and Sewer Commission Revenue Bonds 1994A,
3.80%(a).................................................. 11/1/2024 200 200,693
Chelmsford GOB, 6.90%....................................... 7/15/1997 100 103,018
Dennis GOB, 4.50%........................................... 3/1/1998 470 478,244
Dighton-Rehoboth Regional School District GOB, 6.50%........ 6/1/1998 190 194,653
Framingham IDA for Perrini Corp., 4.05%(a).................. 9/30/2005 300 301,112
Hingham BAN, 4%............................................. 12/19/1997 300 306,105
Massachusetts, Municipal Wholesale Electric Series 1994 C,
3.75%(a).................................................. 7/1/2019 300 301,042
Massachusetts Dedicated Income Tax Bonds Series B, 4%(a).... 12/1/1997 800 800,087
Massachusetts Dedicated Income Tax Bonds Series E, 4%(a).... 12/1/1997 100 100,010
Massachusetts HEF for Endicott College Series A, 3.75%(a)... 10/1/2011 400 401,411
Massachusetts HEF for Clark University, 3.80%(a)............ 12/1/2004 100 100,349
Massachusetts HEF for Boston University Series H,
3.85%(a).................................................. 12/1/2015 400 400,802
Massachusetts HEF for Harvard University, 3.65%(a).......... 2/1/2016 487 488,694
Massachusetts HEF for Harvard University, 3.65%(a).......... 8/1/2017 200 200,696
Massachusetts HEF for Mount College Series A, 3.75%(a)...... 7/1/2018 400 401,411
Massachusetts HEF Capital Assistance Program Series G-1,
3.60%(a).................................................. 1/1/2019 300 300,798
Massachusetts HEF Capital Asset Series D, 4%(a)............. 1/1/2035 400 401,375
Massachusetts HEF Capital Asset Series E, 4.05%(a).......... 1/1/2035 600 602,073
Massachusetts HEF for Williams College Series E, 3.75%(a)... 8/1/2014 400 401,401
Massachusetts HEF for Wellesley College Series B,
3.70%(a).................................................. 7/1/2022 400 400,041
Massachusetts IDA for KRH Rolls Inc. Project Series 1988,
4.40%(a).................................................. 5/1/2006 500 503,732
Massachusetts IFA for Composite Easy Day, 3.80%(a).......... 7/1/2006 170 170,596
Massachusetts IFA for Emerson College, 3.80%(a)............. 11/1/2025 500 501,805
Massachusetts IFA for Governor Dummer Academy, 3.80%(a)..... 7/1/2026 300 301,057
Massachusetts IFA for Griffin Realty Series B, 3.85%(a)..... 7/1/2008 465 466,650
Massachusetts IFA for Groton School, 3.75%(a)............... 6/1/2019 200 200,689
Massachusetts IFA for Holyoke Water Power Project,
3.90%(a).................................................. 5/1/2022 300 301,043
Massachusetts IFA for Quamco Series B, 3.70%(a)............. 9/1/2001 800 802,774
Massachusetts Showa Women's Institute of Boston, 3.90%(a)... 3/15/2004 500 500,052
Massachusetts State GOB Series C, 6.90%..................... 6/1/1997 300 300,000
Puerto Rico Industrial, Medical, Higher Education and
Environmental Bonds for PCR Facility Authority,
4.05%(a).................................................. 12/1/2015 300 301,090
Watertown BAN, 4.25%........................................ 5/13/1998 345 346,585
Westfield BAN, 4.50%........................................ 5/8/1998 500 503,332
-----------
Total Massachusetts Fund Investments (97.89%) (Cost
$12,721,412).............................................. 12,759,526
Other assets, less liabilities (2.11%)...................... 275,083
-----------
NET ASSETS (100%) equivalent to $1.00 net asset value,
offering and redemption prices per share on 13,034,609
shares of beneficial interest of $.001 par value
outstanding............................................... $13,034,609
===========
</TABLE>
- ---------------
(a) The interest rate is subject to change periodically. The rates shown were in
effect at May 31, 1997. Securities payable on demand are collateralized by
bank letters of credit or other bank credit agreements.
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE> 105
RESERVE TAX-EXEMPT TRUST--NEW JERSEY TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
----------------------- -------- -------------- --------
<S> <C> <C> <C>
Burlington BAN, 3.69%....................................... 6/13/1997 $1,000 $ 1,035,697
Cranford GOB, 4%............................................ 2/27/1998 1,291 1,306,982
East Rutherford BAN, 4.31%.................................. 1/23/1998 498 500,410
Eatontown BAN, 4.25%........................................ 12/17/1997 550 562,218
Essex County Improvement Authority GOB, 3.75%(a)............ 12/01/2025 2,000 2,006,964
Evesham Fire District BAN, 4.50%............................ 4/14/1998 675 678,979
Fair Lawn BAN, 4%........................................... 8/1/1997 1,000 1,033,577
Fairfield BAN, 4%........................................... 12/17/1997 600 611,006
Haddonfield Temp Notes, 4.25%............................... 7/3/1997 1,450 1,506,680
Millville BAN, 4.02%........................................ 9/4/1997 1,319 1,337,117
Monmouth BAN, 3.55%(a)...................................... 8/1/2016 100 100,311
Morristown GOB, 5.30%....................................... 7/15/1997 310 316,760
New Jersey EDA for Bayonne IMTT Docking Revenue Bonds,
3.70%(a).................................................. 12/1/2027 2,200 2,207,088
New Jersey EDA for Bayonne IMTT Docking Revenue Bonds,
3.75%(a).................................................. 12/1/2027 400 401,306
New Jersey EDA for Bayonne IMTT Docking Revenue Bonds,
3.75%(a).................................................. 12/1/2027 700 702,286
New Jersey EDA for Economic Growth Bond Series F,
3.75%(a).................................................. 8/1/2014 770 772,709
New Jersey EDA for Lawrenceville School, 3.70%(a)........... 7/1/2026 1,000 1,003,378
New Jersey EDA for PCR Series 95, 3.55%(a).................. 9/1/2012 1,000 1,003,296
New Jersey EDA for St. Peters School Series 1995,
3.80%(a).................................................. 1/1/2010 1,145 1,149,122
New Jersey EDA for Trailer Marine Corps Project, 3.70%(a)... 2/1/2002 400 400,041
New Jersey EDA for Volvo of American Corp, 4.40%(a)......... 12/1/2004 3,500 3,500,422
New Jersey EDA for RJB Associate Project, 3.90%(a).......... 8/1/2008 900 903,276
New Jersey HCF Hospital Capital Asset, 3.65%(a)............. 7/01/2035 400 401,368
New Jersey Sports Expo Authority Series 92C, 3.65%(a)....... 9/01/2024 2,400 2,421,495
New Jersey Transportation Series 1997A, 4%.................. 6/13/1997 2,000 2,003,945
New Jersey Turnpike Authority General Series 91D,
3.70%(a).................................................. 1/01/2018 3,700 3,751,901
Ocean County BAN, 4.25%..................................... 6/20/1997 1,000 1,040,594
Passaic BAN, 4%............................................. 9/26/1997 900 918,625
Port Authority of New York and New Jersey Special Versatile
Structure Obligation, 4%(a)............................. 5/1/2019 3,100 3,110,735
Puerto Rico Industrial, Medical, Environmental PCR,
3.85%(a).................................................. 6/19/1997 1,000 1,001,477
Rahway BAN, 4%.............................................. 12/23/1997 500 509,630
Trenton Temp Notes, 4%...................................... 12/18/1997 1,000 1,020,296
Vernon Board of Education Temp Notes, 4%.................... 1/16/1998 1,000 1,016,513
Washington GOB, 5.30%....................................... 10/1/1997 315 319,155
-----------
Total New Jersey Fund Investments (102.80%) (Cost
$40,160,883).............................................. 40,555,359
Other liabilities, less assets (-2.80%)..................... (1,103,259)
-----------
NET ASSETS (100%) equivalent to $1.00 net asset value,
offering and redemption prices per share on 39,452,100
shares of beneficial interest of $.001 par value
outstanding............................................... $39,452,100
===========
</TABLE>
- ---------------
(a) The interest rate is subject to change periodically. The rates shown were in
effect at May 31, 1997. Securities payable on demand are collateralized by
bank letters of credit or other bank credit agreements.
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE> 106
RESERVE TAX-EXEMPT TRUST--NEW JERSEY TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997--(CONTINUED)
SECURITY TYPE ABBREVIATIONS:
<TABLE>
<S> <C> <C>
BAN -- Bond Anticipation Notes
COP -- Certificate of Participation
CSD -- Central School District
DAI -- Development Authority Industrial Development Refunding
Bonds
EDA -- Economic Development Authority Revenue Bonds
ERD -- Energy Research and Development Authority
GOB -- General Obligation Bonds
HCF -- Health Care Facilities Revenue Bonds
HDC -- Housing Development Corporation Bonds
HEF -- Health and Educational Facilities Revenue Bonds
HFA -- Health Facilities Authority Revenue Bonds
IDA -- Industrial Development Authority Revenue Bonds
IDR -- Industrial Development Agency Revenue Bonds
IFA -- Industrial Finance Authority
MHR -- Multifamily Housing Revenue Bonds
PCR -- Pollution Control Revenue Bonds
RAN -- Revenue Anticipation Notes
RAW -- Revenue Anticipation Warrants
TAN -- Tax Anticipation Notes
TRAN -- Tax & Revenue Anticipation Notes
USD -- Unified School District
</TABLE>
RESERVE TAX-EXEMPT TRUST--FLORIDA TAX-EXEMPT FUND
STATEMENT OF ASSETS AND LIABILITIES--MAY 31, 1997
<TABLE>
<CAPTION>
JUNE 24, 1996
(COMMENCEMENT OF
OPERATIONS) THROUGH
MAY 31, 1997
-------------------
<S> <C>
ASSETS:
Investments, at value (identified cost--$3,680,000)....... $3,689,647
Cash...................................................... 420,058
----------
Total Assets............................................ 4,109,705
----------
LIABILITIES:
Accrued expenses.......................................... 321
----------
Total Liabilities....................................... 321
----------
NET ASSETS.................................................. $4,109,384
==========
NET ASSETS CONSIST OF:
Shares of beneficial interest, $.001 par value, unlimited
number of shares authorized............................. $ 4,109
Paid-in capital in excess of par.......................... 4,105,275
----------
NET ASSETS--Equivalent to $1.00 per share based on 4,109,384
shares of beneficial interest outstanding................. $4,109,384
==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE> 107
STATEMENTS OF OPERATIONS--YEAR ENDED MAY 31, 1997
<TABLE>
<CAPTION>
RESERVE
NEW YORK
TAX-EXEMPT TRUST RESERVE TAX-EXEMPT TRUST
---------------- ----------------------------------------------------------------
NEW YORK CALIFORNIA CONNECTICUT FLORIDA MASSACHUSETTS NEW JERSEY
FUND FUND FUND FUND * FUND FUND
---------------- ---------- ----------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME (Note 1).................. $5,477,002 $711,345 $1,121,367 $130,782 $372,093 $1,321,959
---------- -------- ---------- -------- -------- ----------
EXPENSES (Note 2)
Management fee.......................... 786,904 103,607 166,430 19,304 55,173 194,595
Shareholder servicing, administration
and general office expenses........... 383,457 43,265 67,635 8,681 19,844 94,664
Distribution assistance (Note 3)........ 278,860 40,979 51,730 5,627 3,232 75,554
Equipment expense....................... 56,426 7,437 11,105 1,450 3,516 13,976
Professional fees....................... 44,566 6,806 9,706 1,116 2,987 12,332
Occupancy costs......................... 22,032 2,841 4,359 550 1,344 5,470
Stationery, printing and supplies....... 41,554 4,200 7,116 671 2,018 9,335
Trustee fees............................ 6,048 701 1,328 98 372 1,589
Other expenses.......................... 18,237 3,410 3,991 512 2,588 5,026
---------- -------- ---------- -------- -------- ----------
Total Expenses........................ 1,638,084 213,246 323,400 38,009 91,074 412,541
Less: Management fees and other expenses
voluntarily waived by Investment
Manager............................... (4,167)
---------- -------- ---------- -------- -------- ----------
Net Expenses............................ 1,638,084 213,246 323,400 38,009 86,907 412,541
---------- -------- ---------- -------- -------- ----------
NET INVESTMENT INCOME..................... $3,838,918 $498,099 $ 797,967 $ 92,773 $285,186 $ 909,418
========== ======== ========== ======== ======== ==========
</TABLE>
- ---------------
* The Florida Tax-Exempt Fund commenced operations on June 24, 1996.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
RESERVE NEW YORK
TAX-EXEMPT TRUST RESERVE TAX-EXEMPT TRUST
----------------------------- ----------------------------------------------------------
NEW YORK FUND CALIFORNIA FUND CONNECTICUT FUND
----------------------------- ---------------------------- ---------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, 1997 MAY 31, 1996 MAY 31, 1997 MAY 31, 1996 MAY 31, 1997 MAY 31, 1996
------------- ------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS FROM INVESTMENT
OPERATIONS:
Net investment income paid to
shareholders as dividends
(Note 1).................... $ (3,838,918) $ (4,189,736) $ (498,099) $ (269,905) $ (797,967) $ (804,738)
------------- ------------- ------------ ------------- ------------ ------------
FROM CAPITAL SHARE
TRANSACTIONS (at net asset
value of $1 per share):
Net proceeds from sale of
shares...................... 676,647,327 636,980,296 153,856,260 51,508,091 104,926,291 98,890,288
Net asset value of shares
issued on reinvestment of
dividends................... 3,838,918 4,189,736 498,099 269,905 797,967 804,738
------------- ------------- ------------ ------------- ------------ ------------
Subtotal.................... 680,486,245 641,170,032 154,354,359 51,777,996 105,724,258 99,695,026
Cost of shares redeemed..... (652,760,567) (668,621,594) (136,013,932) (50,253,639) (107,029,059) (91,519,680)
------------- ------------- ------------ ------------- ------------ ------------
Net increase (decrease) in net
assets derived from capital
share transactions and from
investment operations....... 27,725,678 (27,451,562) 18,340,427 1,524,357 (1,304,801) 8,175,346
NET ASSETS:
Beginning of year............. 125,454,406 152,905,968 12,611,969 11,087,612 34,801,304 26,625,958
------------- ------------- ------------ ------------- ------------ ------------
End of year................... $ 153,180,084 $ 125,454,406 $30,952,396 $ 12,611,969 $33,496,503 $ 34,801,304
============= ============= ============ ============= ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE> 108
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
RESERVE TAX-EXEMPT TRUST
-------------------------------------------------------------------------------
FLORIDA FUND MASSACHUSETTS FUND NEW JERSEY FUND
------------------- --------------------------- ---------------------------
JUNE 24, 1996
(COMMENCEMENT OF
OPERATIONS) THROUGH YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, 1997 MAY 31, 1997 MAY 31, 1996 MAY 31, 1997 MAY 31, 1996
------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
INVESTMENT OPERATIONS:
Net investment income paid to
shareholders as dividends (Note 1)..... $ (92,773) $ (285,186) $ (288,434) $ (909,418) $ (797,253)
----------- ----------- ----------- ------------ ------------
FROM CAPITAL SHARE TRANSACTIONS
(at net asset value of $1 per share):
Net proceeds from sale of shares....... 38,626,682 52,472,123 44,175,742 223,428,579 189,336,696
Net asset value of shares issued on
reinvestment of dividends............ 92,773 285,186 288,434 909,418 797,253
----------- ----------- ----------- ------------ ------------
Subtotal............................. 38,719,455 52,757,309 44,464,176 224,337,997 190,133,949
Cost of shares redeemed.............. (34,610,071) (48,678,063) (45,677,798) (225,911,698) (170,715,398)
----------- ----------- ----------- ------------ ------------
Net increase (decrease) in net assets
derived from capital share transactions
and from investment operations......... 4,109,384 4,079,246 (1,213,622) (1,573,701) 19,418,551
NET ASSETS:
Beginning of year........................ 0 8,955,363 10,168,985 41,025,801 21,607,250
----------- ----------- ----------- ------------ ------------
End of year.............................. $ 4,109,384 $13,034,609 $ 8,955,363 $39,452,100 $ 41,025,801
=========== =========== =========== ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
25
<PAGE> 109
RESERVE NEW YORK TAX-EXEMPT TRUST ("NY TRUST")
RESERVE TAX-EXEMPT TRUST (CALIFORNIA, CONNECTICUT, FLORIDA,
MASSACHUSETTS AND NEW JERSEY FUNDS) ("TRUST")
(THE NY TRUST AND TRUST ARE COLLECTIVELY REFERRED TO AS "TRUSTS")
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
The Trusts are registered under the Investment Company Act of 1940 as
nondiversified, open-end management investment companies. The policies
summarized below are consistently followed in the preparation of their
financial statements in conformity with generally accepted accounting
principles.
A. The Trust and NY Trust shares of beneficial interest authorized are
unlimited. The Trust's shares are divided into six series, California Fund,
Connecticut Fund, Florida Fund, Interstate Fund, Massachusetts Fund, and New
Jersey Fund. These financial statements and notes apply only to the
California, Connecticut, Florida, Massachusetts and New Jersey Funds of
Reserve Tax-Exempt Trust and to the New York Fund of Reserve New York
Tax-Exempt Trust.
B. Securities are stated at value which represents amortized cost plus
interest accrued to date. Under Securities and Exchange Commission Rule 2a-7,
the Trusts use amortized cost to value each Fund, by which investments are
valued at cost and the difference between the cost of each instrument and its
value at maturity is accrued into income on a straight line basis over the
number of days to maturity, irrespective of intervening changes in interest
rates or market values of investments. The maturity of floating or variable
rate instruments in which the Trusts may invest will be deemed to be, for
floating rate instruments (1) following, and for variable rate instruments
the longer of (1) or (2) following: (1) the notice period required before the
Fund is entitled to receive payment of the principal amount of the
instrument; (2) the period remaining until the instrument's next rate
adjustment, for purposes of Rule 2a-7 and for computing each portfolio's
average weighted life to maturity.
C. It is the Trusts' policy to comply with the requirements of Subchapter M
of the Internal Revenue Code and to distribute all income to its
shareholders. Accordingly, no Federal income tax provision is required.
D. Investments are recorded as of the date of their purchase and sale.
Interest income is determined on the basis of interest accrued, premium
amortized, and discount accreted.
E. Net investment income on investments is distributed to shareholders daily
and automatically reinvested in additional shares.
F. Each Fund is charged only for its direct or allocated (in proportion to
net assets or number of shareholder accounts) share of expenses.
G. The New York and Massachusetts Funds had purchases of $4,550,000 and
$194,653, respectively, not delivered at May 31, 1997.
2. MANAGEMENT FEE, SHAREHOLDER SERVICING COSTS AND TRANSACTIONS WITH AFFILIATES:
Reserve Management Company, Inc. ("RMCI") manages the Trusts' investments,
effects purchases and sales thereof, and absorbs certain promotional
expenses. For such services RMCI receives management fees from each Fund at
an annual rate of .50% of the first $500 million, .475% of the next $500
million, .45% of the next $500 million, .425% of the next $500 million and
.40% of any excess over $2 billion of the average daily closing net assets.
Also, under the current Service Agreement, RMCI was reimbursed $572,320 (New
York Fund), $68,660 (California Fund), $105,240 (Connecticut Fund), $13,078
(Florida Fund), $32,669 (Massachusetts Fund) and $142,392 (New Jersey Fund)
during the year ended May 31, 1997 for expenditures made on behalf of the
Trusts' for personnel, office space and equipment and shareholder accounting
and administrative services, to conduct the Trusts' business. The manager
waived management fees and expenses of $4,167 on the Massachusetts Fund. At
May 31, 1997, the New York, California, Connecticut, Florida, Massachusetts
and New Jersey Funds, had accrued expenses of $12,713, $2,543, $2,532, $321,
$803 and $3,436, respectively, due to RMCI.
3. DISTRIBUTION ASSISTANCE:
Pursuant to a Distribution Plan, each Trust will make payments of up to .20%
per annum of the average net asset value of the Trust qualified shareholder
accounts as to which the payee or RMCI has rendered assistance in
distributing its shares.
26
<PAGE> 110
RESERVE NEW YORK TAX-EXEMPT TRUST ("NY TRUST")
RESERVE TAX-EXEMPT TRUST (CALIFORNIA, CONNECTICUT, FLORIDA,
MASSACHUSETTS AND NEW JERSEY FUNDS) ("TRUST")
(THE NY TRUST AND TRUST ARE COLLECTIVELY REFERRED TO AS "TRUSTS")
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. MANAGEMENT'S USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the dates of
the financial statements and the reported amounts of income and expenses
during the reporting periods. Actual results could differ from those
estimates.
5. INVESTMENT CONCENTRATION
The New York, California, Connecticut, Florida, Massachusetts and New Jersey
Funds invest substantially all of their assets in portfolios of tax-exempt
debt obligations primarily consisting of issuers of each of the respective
states. The issuers' abilities to meet their obligations may be affected by
economic, regional or political developments. In order to reduce the credit
risk associated with such factors, 83.89%, 84.15%, 71.04%, 100%, 80.51% and
67.83% of the New York, California, Connecticut, Florida, Massachusetts and
New Jersey Funds' investments, respectively, were backed by letters of
credit, bond insurance of financial institutions and financial guaranty
assurance agencies.
6. COMPONENTS OF NET ASSETS
At 5/31/97, the following funds had these components of net assets:
<TABLE>
<CAPTION>
NEW YORK CONNECTICUT CALIFORNIA MASSACHUSETTS NEW JERSEY
-------- ----------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Par Value.................................. $ 153,180 $ 33,497 $ 30,952 $ 13,035 $ 39,452
Paid-in-Capital............................ 153,026,904 33,463,006 30,921,444 13,021,574 39,412,648
------------ ----------- ----------- ----------- -----------
Net Assets................................. $153,180,084 $33,496,503 $30,952,396 $13,034,609 $39,452,100
============ =========== =========== =========== ===========
</TABLE>
---------------------
FEDERAL TAX INFORMATION
The dividends distributed by each Fund are exempt interest dividends for Federal
tax purposes.
27
<PAGE> 111
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, 1997
(2) Statements of Operations for the year ended May 31, 1997
(3) Statements of Changes in Net Assets for the years ended
May 31, 1995 and 1996
(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> 112
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 March 31, 1998
-------------- ------------------------
<S> <C>
Interstate Tax-Exempt Fund 12,276
Connecticut Tax-Exempt Fund 1,481
California Tax-Exempt Fund 1,140
Massachusetts Tax-Exempt Fund 318
New Jersey Tax-Exempt Fund 3,469
Florida Tax-Exempt Fund 387
Pennsylvania Tax-Exempt Fund 255
Ohio Tax-Exempt Fund 0
</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> 113
<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> 114
<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
215 North Marengo Ave.
Suite 115
Pasadena, CA 91101
Kathleen Scott President None
215 North Marengo Ave.
Suite 115
Pasadena, CA 91101
Thomas H. Hanson Executive Vice President None
1900 State Street
Suite H
Santa Barbara, CA 93101
Eileen P. Hannemann Financial Principal None
600 Hampshire Road
Westlake Village, CA 91361
</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> 115
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. 27 to
its Registration Statement to be signed on its behalf by the undersigned
thereunto duly authorized, in the City of New York and State of New York, on
the 31st day of July, 1997.
/s/ Bruce R. Bent
----------------------------------------
Bruce R. Bent, President
Attest:
/s/ William Goodwin
- -----------------------------------------
William Goodwin, Counsel
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 27 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 4/1/98
- ----------------------------------------------- -------------------
Bruce R. Bent, President, Treasurer
and Board Member (principal executive,
operating and financial officer)
* Date
- ---------------------------------------------- -----------------
Edwin Ehlert Jr., Board Member
* Date
---------------------------------------------- -----------------
Henri W. Emmet, Board Member
* Date
---------------------------------------------- -----------------
Donald J. Harrington, Board Member
/s/ William Goodwin Date 4/1/98
- ---------------------------------------------------- -----------------
William Goodwin, Counsel
<PAGE> 116
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
</TABLE>
* To be filed by amendment
**Previously filed
