<PAGE> 1
General Information, Purchases and
Redemptions
---------------------------------------
24-Hour Yield and Balance Information
---------------------------------------
Nationwide
800-637-1700 M www.reservefunds.com
TAX-EXEMPT MONEY MARKET FUNDS
FOR RESIDENTS OF
CALIFORNIA, CONNECTICUT, FLORIDA, MASSACHUSETTS, MICHIGAN,
NEW JERSEY, NEW YORK, OHIO AND PENNSYLVANIA
The NEW YORK TAX-EXEMPT FUND of Reserve New York Tax-Exempt Trust and the
CALIFORNIA TAX-EXEMPT, CONNECTICUT TAX-EXEMPT, FLORIDA TAX-EXEMPT, MASSACHUSETTS
TAX-EXEMPT, MICHIGAN TAX-EXEMPT, NEW JERSEY TAX-EXEMPT, OHIO TAX-EXEMPT and
PENNSYLVANIA TAX-EXEMPT FUNDS of Reserve Tax-Exempt Trust (each a Fund, together
the "Fund(s)") are money-market funds whose investment objective is to seek as
high a level of short-term interest income exempt from federal income and state
and local personal income and/or property taxes, if any, for resident holders of
the particular state fund as is consistent with preservation of capital and
liquidity.
The Funds are designed for institutions and individuals as a convenient
alternative to the direct investment of temporary cash balances in short-term
money-market accounts or instruments. The Funds seek to employ idle cash at
yields competitive with yields of other comparable short-term investments, and
are designed to reduce or eliminate for the investor the mechanical problems of
direct investment in money-market instruments such as scheduling maturities,
evaluating the credit of issuers, investing in round lots, safeguarding receipt
and delivery of securities and reinvesting.
Each of the Funds invests principally in high-quality, tax-exempt
obligations issued by the specific state and its counties, municipalities,
authorities or other political subdivisions.
SHARES OF THE FUNDS ARE NEITHER GUARANTEED NOR INSURED BY THE U.S.
GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE FUNDS WILL BE ABLE TO MAINTAIN
A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
This Prospectus sets forth the information about the Funds which a
prospective investor should know before investing. A Statement of Additional
Information ("SAI") dated December 14, 1998, providing further details about the
Funds, has been filed with the Securities and Exchange Commission ("SEC") and is
incorporated herein by reference. It may be obtained without charge by writing
or calling the Funds. The SEC maintains a web site (http://www.sec.gov) that
contains the SAI, Prospectus, material incorporated by reference, and other
information regarding the Funds filed electronically with the SEC.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR OBLIGATIONS
GUARANTEED OR ENDORSED BY ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
Prospectus dated December 14, 1998.
Investors are advised to read and retain this Prospectus for future reference.
<PAGE> 2
SHAREHOLDER EXPENSES
The following tables illustrate all expenses and fees that a shareholder of
each Fund will incur directly or indirectly. The expenses and fees set forth in
the table are for the fiscal year ended May 31, 1998.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Load Imposed on Purchases............................. None
Sales Load Imposed on Reinvested Dividends.................. None
Redemption Fees*............................................ None
Exchange Fees............................................... None
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
NEW YORK CALIFORNIA CONNECTICUT FLORIDA MASSACHUSETTS MICHIGAN NEW JERSEY OHIO
TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT
FUND FUND FUND FUND FUND FUND(1)** FUND FUND
---------- ---------- ----------- ---------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fee.......... .50% .50% .50% .50% .50% -- .50% .50%
Comprehensive Fee....... -- -- -- -- -- .80% -- --
12b-1 Fee............... .17% .20% .16% .20% .03% .20% .19% .00%
Other Operating Expenses
Administration And
Operations
Expenses............. .22% .22% .20% .20% .17% None .26% .47%
Equipment............. .03% .03% .02% .03% .03% None .03% .01%
Other................. .02% .01% .01% .01% .02% None .01% .02%
--- --- --- --- --- ---- --- ----
Total Operating
Expenses.............. .94% .96% .89% .94% .75% 1.00% .99% 1.00%
=== === === === === ==== === ====
<CAPTION>
PENNSYLVANIA
TAX-EXEMPT
FUND
------------
<S> <C>
Management Fee.......... .50%
Comprehensive Fee....... --
12b-1 Fee............... .20%
Other Operating Expenses
Administration And
Operations
Expenses............. .26%
Equipment............. .03%
Other................. .01%
----
Total Operating
Expenses.............. 1.00%
====
</TABLE>
*A $2 fee will be charged on redemption checks issued by the Funds of less
than $100 and a $10 fee will be charged for wire redemption of less than
$10,000. (1) Michigan Tax-Exempt Fund is charged a comprehensive management fee
of 0.80% per annum of its average net assets for both advisory and ordinary
operating expenses during the year. ** Shares of the Michigan Tax-Exempt Fund
were not offered until December 14, 1998.
The purpose of these tables are to assist the investor in understanding the
costs and expenses that a shareholder in a Fund will bear directly or
indirectly.
The following examples illustrate the expenses that a shareholder would pay
on a $1,000 investment over various time periods assuming: (1) a 5% annual rate
of return and (2) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
New York Tax-Exempt Fund............................ $10 $30 $52 $115
California Tax-Exempt Fund.......................... $10 $31 $53 $118
Connecticut Tax-Exempt Fund......................... $ 9 $28 $49 $110
Florida Tax-Exempt Fund............................. $10 $30 $52 $115
Massachusetts Tax-Exempt Fund....................... $ 8 $24 $42 $ 93
Michigan Tax-Exempt Fund............................ $10 $32 $55 $122
New Jersey Tax-Exempt Fund.......................... $10 $32 $55 $121
Ohio Tax-Exempt Fund................................ $10 $32 $55 $122
Pennsylvania Tax-Exempt Fund........................ $10 $32 $55 $122
</TABLE>
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
2
<PAGE> 3
FINANCIAL HIGHLIGHTS
The following information applies to a share of the Reserve New York
Tax-Exempt Trust -- New York Tax-Exempt Fund and Reserve Tax-Exempt
Trust -- California, Connecticut, Florida, Massachusetts, New Jersey, Ohio and
Pennsylvania Tax-Exempt Funds outstanding throughout each period. The Reserve
Tax-Exempt Trust did not begin offering shares of the Michigan Tax-Exempt Fund
until December 14, 1998. As of that date, no other portfolios or classes of
shares were outstanding. This information should be read in conjunction with the
financial statements and related notes incorporated by reference. Such
information has been audited by PricewaterhouseCoopers LLP, whose report appears
in the Trusts' Annual Report to Shareholders, which is incorporated by reference
in the SAI. Further information concerning investment performance is contained
in the Trusts' Annual Report, which is available without charge.
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
---------------------------------------------------------------
NEW YORK TAX-EXEMPT FUND 1998 1997 1996 1995 1994 1993
------------------------ -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of year................. $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
-------- -------- -------- -------- -------- --------
Income from investment
operations.............. .0363 .0352 .0381 .0352 .0249 .0281
Expenses.................. .0095 .0105 .0105 .0099 .0099 .0103
-------- -------- -------- -------- -------- --------
Net investment income
(1)..................... .0268 .0247 .0276 .0253 .0150 .0178
Dividends from net
investment income (loss)
(1)..................... (.0268) (.0247) (.0276) (.0253) (.0150) (.0178)
-------- -------- -------- -------- -------- --------
Net asset value, end of
year.................... $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
======== ======== ======== ======== ======== ========
Total Return.............. 2.68% 2.47% 2.76% 2.53% 1.50% 1.78%
RATIOS/SUPPLEMENTAL DATA
- -------------------
Net assets in thousands,
end of year............. $171,212 $153,180 $125,454 $152,906 $148,387 $149,785
Ratio of expenses to
average net assets...... .94% 1.04% 1.04% .98% .98% 1.02%
Ratio of net investment
income to average net
assets.................. 2.63% 2.43% 2.72% 2.48% 1.48% 1.76%
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
----------------------------------------
NEW YORK TAX-EXEMPT FUND 1992 1991 1990 1989
------------------------ -------- -------- -------- -------
<S> <C> <C> <C> <C>
Net asset value, beginning
of year................. $ 1.0000 $ 1.0000 $ 1.0000 $1.0000
-------- -------- -------- -------
Income from investment
operations.............. .0421 .0563 .0616 .0600
Expenses.................. .0104 .0105 .0100 .0103
-------- -------- -------- -------
Net investment income
(1)..................... .0317 .0458 .0516 .0497
Dividends from net
investment income (loss)
(1)..................... (.0317) (.0458) (.0516) (.0497)
-------- -------- -------- -------
Net asset value, end of
year.................... $ 1.0000 $ 1.0000 $ 1.0000 $1.0000
======== ======== ======== =======
Total Return.............. 3.17% 4.58% 5.16% 4.97%
RATIOS/SUPPLEMENTAL DATA
- -------------------
Net assets in thousands,
end of year............. $156,567 $148,079 $120,142 $90,378
Ratio of expenses to
average net assets...... 1.03% 1.01% .98% 1.00%
Ratio of net investment
income to average net
assets.................. 3.09% 4.43% 5.02% 4.86%
</TABLE>
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31, OCTOBER 17, 1994
------------------------------ (COMMENCEMENT OF OPERATIONS)
CALIFORNIA TAX-EXEMPT FUND 1998 1997 1996 THROUGH MAY 31, 1996
-------------------------- -------- -------- -------- ----------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year................... $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- -------
Income from investment operations.................... .0358 .0341 .0379 .0243
Expenses............................................. .0098 .0102 .0106 .0062
------- ------- ------- -------
Net investment income (1)............................ .0260 .0239 .0273 .0181
Dividends from net investment income (loss) (1)...... (.0260) (.0239) (.0273) (.0181)
------- ------- ------- -------
Net asset value, end of year......................... $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= =======
Total Return......................................... 2.60% 2.39% 2.73% 1.81%(2)
RATIOS/SUPPLEMENTAL DATA
- -------------------
Net assets in thousands, end of year................. $66,933 $30,952 $12,612 $11,088
Ratio of expenses to average net assets.............. .96% 1.03% 1.04% 1.02%(2)
Ratio of net investment income to average net
assets............................................. 2.55% 2.40% 2.67% 2.95%(2)
</TABLE>
3
<PAGE> 4
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
----------------------------------------------------------------------------
CONNECTICUT TAX-EXEMPT FUND 1998 1997 1996 1995 1994 1993 1992
--------------------------- ------- ------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
year......................... $1.0000 $1.0000 $1.0000 $1.0000 $ 1.0000 $ 1.0000 $ 1.0000
------- ------- ------- ------- -------- -------- --------
Income from investment
operations................... .0358 .0341 .0368 .0352 .0250 .0269 .0400
Expenses....................... .0091 .0098 .0102 .0098(3) .0086(3) .0087(3) .0091(3)
------- ------- ------- ------- -------- -------- --------
Net investment income(1)....... .0267 .0243 .0266 .0254 .0164 .0182 .0309
Dividends from net investment
income (loss)(1)............. (.0267) (.0243) (.0266) (.0254) (.0164) (.0182) (.0309)
------- ------- ------- ------- -------- -------- --------
Net asset value, end of year... $1.0000 $1.0000 $1.0000 $1.0000 $ 1.0000 $ 1.0000 $ 1.0000
======= ======= ======= ======= ======== ======== ========
Total Return................... 2.67% 2.43% 2.66% 2.54% 1.64% 1.82% 3.09%
RATIOS/SUPPLEMENTAL DATA
- -------------------
Net assets in thousands, end of
year......................... $36,787 $33,497 $34,801 $26,626 $128,693 $157,115 $191,101
Ratio of expenses to average
net assets................... .89% .97% 1.01% .89%(3) .85%(3) .86%(3) .90%(3)
Ratio of net investment income
to average net assets........ 2.64% 2.39% 2.61% 2.33% 1.62% 1.81% 3.05%
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
----------------------------------
CONNECTICUT TAX-EXEMPT FUND 1991 1990 1989
--------------------------- -------- -------- --------
<S> <C> <C> <C>
Net asset value, beginning of
year......................... $ 1.0000 $ 1.0000 $ 1.0000
-------- -------- --------
Income from investment
operations................... .0534 .0615 .0604
Expenses....................... .0086(3) .0083(3) .0086(3)
-------- -------- --------
Net investment income(1)....... .0448 .0532 .0518
Dividends from net investment
income (loss)(1)............. (.0448) (.0532) (.0518)
-------- -------- --------
Net asset value, end of year... $ 1.0000 $ 1.0000 $ 1.0000
======== ======== ========
Total Return................... 4.48% 5.32% 5.18%
RATIOS/SUPPLEMENTAL DATA
- -------------------
Net assets in thousands, end of
year......................... $241,790 $314,489 $247,929
Ratio of expenses to average
net assets................... .85%(3) .81%(3) .84%(3)
Ratio of net investment income
to average net assets........ 4.41% 5.17% 5.05%
</TABLE>
<TABLE>
<CAPTION>
JUNE 24, 1996
YEAR ENDED (COMMENCEMENT OF OPERATIONS)
FLORIDA TAX-EXEMPT FUND MAY 31, 1998 THROUGH MAY 31, 1997
----------------------- ------------ ----------------------------
<S> <C> <C>
Net asset value, beginning of year.......................... $1.0000 $1.0000
------- -------
Income from investment operations........................... .0366 .0321
Expenses.................................................... .0097 .0093
------- -------
Net investment income (1)................................... .0269 .0228
Dividends from net investment income (1).................... (.0269) (.0228)
------- -------
Net asset value, end of year................................ $1.0000 $1.0000
======= =======
Total Return................................................ 2.69% 2.42%(2)
RATIOS/SUPPLEMENTAL DATA
- -------------------
Net assets in thousands, end of year........................ $10,817 $ 4,109
Ratio of expenses to average net assets..................... .94% 1.04%(2)
Ratio of net investment income to average net assets........ 2.62% 2.39%(2)
</TABLE>
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
-----------------------------------------------------------------------------------------
MASSACHUSETTS TAX-EXEMPT FUND 1998 1997 1996 1995 1994 1993 1992 1991
----------------------------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
year.......................... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- ------- ------- ------- -------
Income from investment
operations.................... .0361 .0338 .0362 .0335 .0227 .0257 .0386 .0551
Expenses........................ .0077 .0079(3) .0086(3) .0070(3) .0052(3) .0048(3) .0045(3) .0032(3)
------- ------- ------- ------- ------- ------- ------- -------
Net investment income (1)....... .0284 .0259 .0276 .0265 .0175 .0209 .0341 .0519
Dividends from net investment
income (loss)(1).............. (.0284) (.0259) (.0276) (.0285) (.0175) (.0209) (.0341) (.0519)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of year.... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= ======= ======= ======= =======
Total Return.................... 2.84% 2.59% 2.76% 2.65% 1.75% 2.09% 3.41% 5.19%
RATIOS/SUPPLEMENTAL DATA
- -------------------
Net assets in thousands, end of
year........................... $25,383 $13,035 $ 8,955 $10,169 $14,824 $13,305 $ 7,186 $ 4,652
Ratio of expenses to average net
assets........................ .75% .79%(3) .84%(3) .69%(3) .61%(3) .46%(3) .44%(3) .30%(3)
Ratio of net investment income
to average net assets......... 2.78% 2.58% 2.71% 2.80% 1.73% 2.04% 3.28% 4.79%
<CAPTION>
JANUARY 22, 1990
(COMMENCEMENT OF
OPERATIONS) THROUGH
MASSACHUSETTS TAX-EXEMPT FUND MAY 31, 1990
----------------------------- -------------------
<S> <C>
Net asset value, beginning of
year.......................... $1.0000
-------
Income from investment
operations.................... .0209
Expenses........................ .0010
-------
Net investment income (1)....... .0199
Dividends from net investment
income (loss)(1).............. (.0199)(4)
-------
Net asset value, end of year.... $1.0000
=======
Total Return.................... 5.59%(2)
RATIOS/SUPPLEMENTAL DATA
- -------------------
Net assets in thousands, end of
year........................... $ 2,140
Ratio of expenses to average net
assets........................ .29%(2)
Ratio of net investment income
to average net assets......... 5.53%(2)
</TABLE>
4
<PAGE> 5
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31, OCTOBER 17, 1994
------------------------------ (COMMENCEMENT OF OPERATIONS)
NEW JERSEY TAX-EXEMPT FUND 1998 1997 1996 THROUGH MAY 31, 1995
-------------------------- -------- -------- -------- ----------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year................... $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- -------
Income from investment operations.................... .0354 .0343 .0369 .0330
Expenses............................................. .0100 .0107 .0106 .0087(3)
------- ------- ------- -------
Net investment income (1)............................ .0254 .0236 .0263 .0243
Dividends from net investment income (loss)(1)....... (.0254) (.0236) (.0263) (.0243)
------- ------- ------- -------
Net asset value, end of year......................... $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= =======
Total Return......................................... 2.54% 2.36% 2.63% 2.43%(2)
RATIOS/SUPPLEMENTAL DATA
- -------------------
Net assets in thousands, end of year................. $37,600 $39,452 $41,026 $21,607
Ratio of expenses to average net assets.............. .99% 1.06% 1.04% 1.01%(2)(3)
Ratio of net investment income to average net
assets............................................. 2.50% 2.33% 2.59% 2.82%(2)
</TABLE>
<TABLE>
<CAPTION>
APRIL 1, 1998
(COMMENCEMENT OF OPERATIONS)
OHIO TAX-EXEMPT FUND THROUGH MAY 31, 1998
-------------------- ----------------------------
<S> <C>
Net asset value, beginning of year.......................... $1.0000
-------
Income from investment operations........................... .0065
Expenses.................................................... .0017
-------
Net investment income (1)................................... .0048
Dividends from net investment income (loss) (1)............. (.0048)
-------
Net asset value, end of year................................ $1.0000
=======
Total Return................................................ 2.87%(2)
RATIOS/SUPPLEMENTAL DATA
- -------------------
Net assets in thousands, end of year........................ $ 2,507
Ratio of expenses to average net assets..................... 1.00%(2)
Ratio of net investment income to average net assets........ 2.86%(2)
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 12, 1997
(COMMENCEMENT OF OPERATIONS)
PENNSYLVANIA TAX-EXEMPT FUND THROUGH MAY 31, 1998
---------------------------- ----------------------------
<S> <C>
Net asset value, beginning of year.......................... $1.0000
-------
Income from investment operations........................... .0261
Expenses.................................................... .0072
-------
Net investment income (1)................................... .0189
Dividends from net investment income (loss)(1).............. (.0189)
-------
Net asset value, end of year................................ $1.0000
=======
Total Return................................................ 2.64%(2)
RATIOS/SUPPLEMENTAL DATA
- -------------------
Net assets in thousands, end of year........................ $13,187
Ratio of expenses to average net assets..................... 1.00%(2)
Ratio of net investment income to average net assets........ 2.62%(2)
</TABLE>
- ---------------
(1) Based on compounding of daily dividends. Not indicative of future results.
(2) Annualized.
(3) During these periods the Manager waived all or a portion of fees and
expenses. If there were no reductions in expenses, the actual expenses for
the Connecticut Fund would have been 0.10% higher and the actual expenses
for the Massachusetts Fund would have been 0.04%, 0.05%, 0.11%, 0.43%,
0.50%, 0.50%, 0.50% and 0.50% higher and 0.01% higher for the New Jersey
Fund.
(4) .01c per share represents distributions of taxable income.
5
<PAGE> 6
YIELD
For the seven calendar days ended May 31, 1998, the current and effective
yields for the Funds were as follows:
<TABLE>
<CAPTION>
CURRENT YIELD EFFECTIVE YIELD
------------- ---------------
<S> <C> <C>
California Tax-Exempt Fund.................................. 2.67% 2.71%
Connecticut Tax-Exempt Fund................................. 2.66% 2.70%
Florida Tax-Exempt Fund..................................... 2.85% 2.89%
Massachusetts Tax-Exempt Fund............................... 2.72% 2.76%
New Jersey Tax-Exempt Fund.................................. 2.66% 2.69%
New York Tax-Exempt Fund.................................... 2.74% 2.78%
Ohio Tax-Exempt Fund........................................ 2.86% 2.90%
Pennsylvania Tax-Exempt Fund................................ 2.75% 2.79%
</TABLE>
Current yield refers to the income generated by an investment in a Fund over
a seven-day period. This income is then annualized, that is, the amount of
income generated by the investment during that week is assumed to be generated
each week over a 52-week period and is shown as a percentage of the investment.
The effective yield is calculated similarly but, when annualized, the income
earned is assumed to be reinvested. The effective yield will be higher than the
current yield because of this compounding effect.
The Funds may also quote tax-equivalent yields, which show the taxable
yields an investor would have to earn before taxes to equal a Fund's tax-free
yield. The tax-equivalent yield is calculated by dividing a Fund's current or
effective yield by the result of one minus a stated federal and/or state and
local tax rate.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of each of the Funds is to seek as high a level of
short-term interest income exempt from federal income and state and local
personal income taxes, if any, as is consistent with preservation of capital and
liquidity. However, achievement of this objective cannot be guaranteed. This
investment objective may not be changed without the vote of a majority of the
outstanding shares of each Fund as defined in the Investment Company Act of 1940
("1940 Act").
Each Fund seeks to attain its objective by investing principally in
tax-exempt obligations issued by the state for which it is named and the state's
counties, municipalities, authorities or other political subdivisions. There can
be no assurance that any of the Funds will achieve its investment objective.
These securities are generally known as "municipal bonds" or "municipal
notes" ("Municipal Obligations") and the interest on them is exempt from federal
income tax in the opinion of either bond counsel for the issuers or, in some
instances, the issuer itself. They may be issued to raise money for various
public purposes such as constructing public facilities. Certain types of
Municipal Obligations are issued to obtain funding for privately operated
facilities. General obligation bonds and notes are backed by the taxing power of
the issuer. Revenue bonds and notes are backed by the revenues of a project or
facility such as tolls from a toll road or, in some cases, from the proceeds of
a special excise tax, but not by the general taxing power. Industrial
development revenue bonds and notes are a specific type of revenue bond or note
backed by the credit of a private issuer. Each Fund may invest any portion of
its assets in industrial revenue bonds and notes. Municipal Obligations bear
fixed, variable or floating rates of interest. At least 80% of the value of each
Fund's assets will be invested in Municipal Obligations which are exempt from
federal income and state and, with respect to the New York Tax-Exempt Fund,
local personal income taxes and, with respect to the Florida Tax-Exempt Fund,
the Florida intangibles tax, and with respect to the Pennsylvania Tax-Exempt
Fund, the Pennsylvania county personal property tax, unless it has adopted a
temporary defensive position. In addition, during periods when the Funds'
Investment Adviser believes that Municipal Obligations meeting each respective
Fund's quality standards are not available, a Fund may invest up to 20% of the
value of its assets, or a greater percentage on a temporary basis, in Municipal
Obligations exempt only from federal income taxes.
Each Fund may purchase floating and variable rate demand notes, which are
Municipal Obligations normally having stated maturities in excess of one year,
but which permit the holder to demand payment of principal and accrued interest
at any time, or at specified intervals not exceeding one year, in each case
usually upon not more than seven (7) days' notice. The interest rates on these
floating and variable rate demand notes fluctuate from time to time. Frequently,
such Municipal Obligations are secured by letters of credit or other credit
support arrangements provided by banks. The Funds may invest any portion of
their assets in floating and variable rate demand notes secured by bank letters
of credit or other credit support arrangements. Use of letters of credit or
other credit support arrangements will not adversely affect the tax-exempt
status of these Municipal Obligations. A Fund will not invest more than 10% of
the
6
<PAGE> 7
value of its assets in floating or variable rate demand notes for which there is
no secondary market if the demand feature on such Municipal Obligations is
exercisable on more than seven (7) days' notice.
In view of the investment of each of the Funds in industrial revenue
development bonds and notes secured by letters of credit or guarantees of banks,
an investment in a Fund's shares should be made with an understanding of the
characteristics of the banking industry and the risks such an investment may
entail. Banks are subject to extensive government regulations which may limit
both the amounts and types of loans and other financial commitments which may be
made and interest rates and fees which may be charged. The profitability of the
banking industry is largely dependent upon the availability and cost of capital
funds for the purpose of financing lending operations under prevailing
money-market conditions. In addition, general economic conditions play an
important part in the operations of this industry, and exposure to credit losses
arising from possible financial difficulties of borrowers might affect a bank's
ability to meet its obligations under a letter of credit.
Each Fund will purchase tax-exempt securities which are rated MIG-1 or MIG-2
by Moody's Investor Services, Inc. ("Moody's"), SP-1 or SP-2 by Standard &
Poor's Corporation ("S&P") or the equivalent thereof. Municipal Obligations
which are not rated may also be purchased provided such securities are
determined to be of comparable quality by the Fund's Investment Adviser to those
rated securities in which the Funds may invest pursuant to guidelines
established by their Boards of Trustees.
OTHER POLICIES. Certain banks and other municipal securities dealers have
indicated a willingness to sell Municipal Obligations to the Funds accompanied
by a commitment to repurchase the securities at a Fund's option or at a
specified date, at an agreed upon price or yield within a specified period prior
to the maturity date of such securities at the amortized cost thereof. If a bank
or other municipal securities dealer were to default under such standby
commitment and fail to pay the exercise price, a Fund could suffer a potential
loss to the extent that the amount paid by the Fund, if any, for the Municipal
Obligation with a standby commitment exceeded the current value of the
underlying Municipal Obligation. If a bank or other municipal securities dealer
defaults under its standby commitment, the liquidity of the security subject to
such commitment may be adversely affected.
Municipal Obligations are sometimes offered on a "when-issued" or delayed
delivery basis. There is no limit on a Fund's ability to purchase municipal
securities on a when-issued basis. The price of when-issued securities, which is
generally expressed in yield terms, is fixed at the time the commitment to
purchase is made but delivery and payment for the when-issued securities takes
place at a later date. Normally, the settlement date occurs within one month of
the purchase of such Municipal Obligations. During the period between the
purchase and settlement dates, no payment is made by a Fund to the issuer and no
interest accrues to a Fund on such securities. To the extent that assets of a
Fund purchasing such securities are not invested prior to the settlement of a
purchase of securities, a Fund will earn no income, however, it is each Fund's
intent to be as fully invested as is practicable. While when-issued securities
may be sold prior to settlement date, the Funds intend to purchase such
securities with the purpose of actually acquiring them unless a sale appears
desirable for investment reasons. At the time a Fund makes the commitment to
purchase a Municipal Obligation on a when-issued basis, it will record the
transaction and reflect the value of the security in determining its net asset
value ("NAV"). Each Fund will also maintain readily marketable assets at least
equal in value to commitments for when-issued securities specifically for the
settlement of such commitments. The Investment Adviser does not believe that a
Fund's net asset value or income will be adversely affected by the purchase of
Municipal Obligations on a when-issued basis.
The Funds may purchase participation interests in Municipal Obligations from
financial institutions. A participation interest gives a Fund an undivided
interest in the Municipal Obligation in the proportion that the Fund's
participation interest bears to the total principal amount of the Municipal
Obligation. These instruments may have fixed, floating or variable rates of
interest. Frequently, such instruments are secured by letters of credit or other
credit support arrangements provided by banks.
Interest received on certain otherwise tax-exempt securities ("private
activity bonds") is subject to a federal Alternative Minimum Tax ("AMT"). It is
the position of the SEC that in order for a fund to call itself "tax-free", not
more than 20% of its net assets may be invested in municipal securities subject
to the AMT or at least 80% of its income will be tax-exempt. Income received on
such securities is classified as a "tax preference item," which could subject
certain shareholders of each Fund to the AMT. However, as of the date of this
Prospectus, each Fund does not purchase such securities, but reserves the right
to do so depending on market conditions in the future.
Yields on municipal securities depend on a variety of factors, including
general economic and monetary conditions, money-market factors, conditions in
the tax-exempt securities market, size of a particular offering, maturity of the
obligation and rating of the issue. The ability of each Fund to achieve its
investment objective is also dependent on the continuing ability of issuers of
municipal securities to meet their obligations for the payment of interest and
principal when due.
Although it is not the current intention, from time to time a Fund may
invest in taxable short-term investments ("Taxable Investments") consisting of
obligations backed by the full faith and credit of the U.S. government, its
agencies or instrumentalities
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("U.S. Governments"), deposit-type obligations, acceptances, letters of credit
of Federal Deposit Insurance Corporation member banks and instruments fully
collateralized by such obligations. Unless a Fund has adopted a temporary
defensive position, no more than 20% of the net assets of each Fund will be
invested in Taxable Investments at any time. A Fund may enter into repurchase
agreements with regard to the taxable obligations listed above.
The Fund's Investment Adviser uses its reasonable business judgment in
selecting investments in addition to considering the ratings of Moody's and S&P.
This analysis considers, among other things, the financial condition of the
issuer by taking into account present and future liquidity, cash flow and
capacity to meet debt service requirements. Since the market value of debt
obligations fluctuates as an inverse function of changing interest rates, each
Fund seeks to minimize the effect of such fluctuations by investing in
instruments with remaining maturities of 397 days or less and limiting its
average maturity to 90 days or less.
The principal risk factors associated with investment in each Fund are the
risk of fluctuations in short-term interest rates, the risk of default among one
or more issuers of securities which comprise a Fund's assets and the risk of
non-diversification. As a non-diversified investment company, each Fund is
permitted to have all its assets invested in a limited number of issuers.
Accordingly, since a relatively high percentage of a Fund's assets may be
invested in the securities of a limited number of issuers, a Fund's investment
securities may be more susceptible to any single economic, political or
regulatory occurrence than the investment securities of a diversified investment
company. However, each Fund intends to qualify as a "regulated investment
company" for purposes of the Internal Revenue Code. This limits the aggregate
value of all investments (except United States government securities, securities
of other regulated investment companies, cash and cash items) so that, with
respect to at least 50% of its total assets, not more than 5% of such assets are
invested in the securities of a single issuer.
Each Fund's concentration in securities issued by the respective state and
its political subdivisions involves greater risks than a fund broadly invested
across many states and municipalities.
RISK FACTORS OF CONCENTRATING IN CALIFORNIA. You should consider carefully the
special risks inherent in the Fund's investment in California Municipal
Obligations. These risks result from certain amendments to the California
Constitution and other statutes that limit the taxing and spending authority of
California governmental entities, as well as from the general financial
condition of the State of California. From mid-1990 to late 1993, the State
suffered a recession with the worst economic, fiscal and budget conditions since
the 1930s. As a result, the State was plagued by recurring budget deficits. As
of June 30, 1994, according to California's Department of Finance, the State's
special Fund for Economic Uncertainties had an accumulated deficit, on a budget
basis, of approximately $1.8 billion. A further consequence of the large budget
imbalances has been that the State depleted its available cash resources and has
had to use a series of external borrowings to meet its cash needs. As a result
of the deterioration in the State's budget and cash situation, between October
1991 and July 1994, the ratings on the State's general obligation bonds were
reduced by S&P from AAA to A, by Moody's from Aaa to A1 and by Fitch from AAA to
A. These and other factors may have the effect of impairing the ability of the
issuers of California Municipal Obligations to pay interest on or repay
principal of such obligations. However, since 1993 the State's financial and
economic condition suggests that California, following a period of stability, is
in the midst of a recovery. The General Fund GAAP-basis deficit has been reduced
from a peak of $4.6 billion in 1992-93 to $2.1 billion at fiscal 1996. In
addition, the gap between the national and California unemployment rate narrowed
from 3.4% in 1994 to 1.9% at the close of 1996. By June of 1998, the State's
general obligation bonds were rated A1, A+ and AA- by Moody's, S&P and Fitch,
respectively.
RISK FACTORS OF CONCENTRATING IN CONNECTICUT. Specifically, the credit quality
of the Connecticut Tax-Exempt Fund will depend on the continued financial
strength of the State of Connecticut and its political subdivisions.
Connecticut's economy relies in part on activities that may be adversely
affected by cyclical change, and recent declines in defense spending have had a
significant impact on unemployment levels. Connecticut reported deficits from
its General Fund operations for the fiscal years 1988 through 1991. Together
with the deficit carried forward from the State's 1990 fiscal year, the total
General Fund deficit for the 1991 fiscal year was $965.7 million. The total
deficit was funded by the issuance of General Obligations Economic Recovery
Notes. Moreover, as of June 30, 1995 and 1996, the General Fund had cumulative
deficits under GAAP of $576.9 million and $639.9 million, respectively. As a
result of the recurring budgetary problems, S&P downgraded the State's general
obligation bonds from AA+ to AA in April 1990 and to AA- in September 1991. In
April 1990, Moody's downgraded Connecticut's bonds from Aa1 to Aa (since refined
to Aa3 in March 1997). In March 1995, Fitch downgraded Connecticut's bonds from
AA+ to AA.
RISK FACTORS OF CONCENTRATING IN FLORIDA. You should consider carefully the
special risks inherent in the Fund's investment in Florida Municipal
Obligations. The Florida Constitution and Statutes mandate that the State budget
as a whole, and each separate fund within the State budget, be kept in balance
from currently available revenues each fiscal year. Florida's Constitution
permits issuance of Florida Municipal Obligations pledging the full faith and
credit of the State, with a vote of the electors, to finance or refinance fixed
capital outlay projects authorized by the legislature provided that the
outstanding principal does not exceed 50% of the total tax revenues of the State
for the two preceding years. Florida's Constitution also provides that the
legislature shall appropriate monies sufficient to pay debt service on State
bonds pledging the full faith and credit of the State as the same becomes due.
All State tax revenues, other than trust
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funds dedicated by Florida's Constitution for other purposes, would be available
for such an appropriation, if required. Revenue bonds may be issued by the State
or its agencies without a vote of Florida's electors only to finance or
refinance the cost of State fixed capital outlay projects which may be payable
solely from funds derived directly from sources other than State tax revenues.
Fiscal year 1995-96 estimated General Revenue and Working Capital and Budget
Stabilization funds available totaled $15.311 billion, a 3.3% increase over
1994-95, resulting in unencumbered reserves of approximately $502.7 million at
the end of fiscal 1995-96. General Revenue and Working Capital and Budget
Stabilization funds available for fiscal 1996-97 are estimated to total $16.095
billion, a 5.1% increase over 1995-96, resulting in unencumbered reserves of
approximately $518.2 million at the end of fiscal 1996-97.
RISK FACTORS OF CONCENTRATING IN MASSACHUSETTS. Specifically, the credit
quality of the Massachusetts Tax-Exempt Fund will depend on the continued
financial strength of the Commonwealth of Massachusetts and its political
subdivisions. Since 1989, Massachusetts has experienced growth rates
significantly below the national average and an economic recession in 1990 and
1991 caused negative growth rates. Massachusetts' economic and fiscal problems
in the late 1980s and early 1990s caused several rating agencies to lower their
ratings of Massachusetts Municipal Obligations. A return of persistent serious
financial difficulties could adversely affect the market values and
marketability of, or result in default in payment on, outstanding Massachusetts
Municipal Obligations. The State's operating losses in fiscal 1989 and 1990,
which totaled $672 million and $1.25 billion, respectively, were covered
primarily through deficit borrowings and a fiscal 1991 operating loss of $21
million was covered by drawing on the adjusted 1990 fund balance of $258
million. However, Massachusetts ended fiscal years 1992 through 1996 with a
positive fiscal balance in its general operating funds. At present,
Massachusetts' general obligation bonds are rated by S&P, Fitch and Moody's AA-,
AA- and Aa3, respectively.
RISK FACTORS OF CONCENTRATING IN MICHIGAN. Specifically, the credit quality of
the Michigan Tax-Exempt Fund will depend on the continued financial strength of
the State of Michigan and its political subdivisions. Michigan's fiscal
condition continues to be tested by its dependence on the inherently cyclical
auto industry. While the State's employment base has diversified away from
durable goods manufacturing to trade and services, it remains auto-dependent.
Michigan's unemployment rate of 4.0% remained below the national rate of 4.7%
through January 1998. The State unemployment rate has remained below the
national average for the past 2.5 years. Prior to 1998, the State had exceeded
the national unemployment rate for 15 years. Personal income grew 4.6% in 1997
while the State maintained its traditionally low debt levels. All debt ratios in
the State are below the medians. Michigan has made significant progress in
achieving a strengthened financial position and long-term structural budget
balance through aggressive management controls and conservative fiscal
practices. These practices are evident in the State's establishment and
maintenance of a large "rainy day" cash reserve. Continued conservative
management should enable state finances to remain balanced over the course of
longer economic cycles. At present, Michigan's general obligation bonds are
rated AA+ and Aa1 by S&P and Moody's respectively.
RISK FACTORS OF CONCENTRATING IN NEW JERSEY. The State's economy performed
strongly for much of the 1980s. Like much of the Northeast in the 1980s, the
State's economy outpaced national trends. However, from 1989 to 1992, the
State's economic performance trailed the rest of the nation. Reflecting the
economic downturn, the State's unemployment rate rose from a low of 3.6% in the
first quarter of 1989 to a peak of 8.5% during 1992. Since then, the State's
unemployment rate fell to an average of 6.4% during 1995 and 6.1% for the
four-month period from May 1996 through August 1996. In July 1991, S&P lowered
its rating for the State's general obligation debt from AAA to AA+. The State's
general obligation debt is rated AA+ and Aa1 by Fitch and Moody's, respectively.
RISK FACTORS OF CONCENTRATING IN NEW YORK. You should consider carefully the
special risks inherent in investing in New York Municipal Obligations. These
risks result from the financial condition of New York State, certain of its
public bodies and municipalities, and New York City. Beginning in early 1975,
New York State, New York City and other State entities faced serious financial
difficulties which jeopardized the credit standing and impaired the borrowing
abilities of such entities and contributed to high-interest rates on, and lower
market prices for, debt obligations issued by them. A recurrence of such
financial difficulties or a failure of certain financial recovery programs could
result in defaults or declines in the market values of various New York
Municipal Obligations in which the Fund may invest. If there should be a default
or other financial crisis relating to New York State, New York City, a State or
City agency, or a State municipality, the market value and marketability of
outstanding New York Municipal Obligations in the Fund's portfolio and the
interest income to the Fund could be adversely affected. Moreover, the national
recession and the significant slowdown in the New York and regional economies in
the early 1990s added substantial uncertainty to estimates of the State's tax
revenues, which, in part, caused the State to incur cash-basis operating
deficits in the General Fund and issue deficit notes during the fiscal years
1989 through 1992. The State's financial operations have improved, however,
during recent fiscal years. For its fiscal years 1993 through 1996, the State
recorded balanced budgets on a cash-basis, with substantial fund balances in the
General Fund in fiscal 1992-93 and 1993-94 and smaller fund balances in fiscal
1994-95 and 1995-96. There can be no assurance that New York will not face
substantial potential budget gaps in future years. In January 1992, Moody's
lowered from A to Baa1 the ratings on certain appropriation-backed debt of New
York State and its agencies. The State's general obligation, State-guaranteed
and New York State Local Government Assistance Corporation bonds continued to be
rated A by Moody's (since refined to A2 in 1997). The State's general obligation
debt is rated A by S&P. At present, the general obligation debt of New York City
is rated A3 by Moody's. The City's debt is rated BBB+ by S&P with a positive
credit watch.
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RISK FACTORS OF CONCENTRATING IN OHIO. Specifically, the credit quality of the
Ohio Tax-Exempt Fund will depend on the continued financial strength of the
State of Ohio and its political subdivisions. Ohio is an industrialized state
with a diverse economy. While manufacturing jobs in the state have been
declining steadily, Ohio remains a leading exporter of manufactured goods. In an
effort to minimize the state's exposure to cyclical downturns in the
manufacturing sector, Ohio has diversified. The 1997 operating surplus of the
General Fund was $155 million, down from $548 million in 1996. However, Ohio has
made productivity improvements and has expanded into the high-tech and business
service industries. The estimated cash balance for the biennium ending 1996-97
is $596.7 million. The state's reserves have been restored to levels which now
exceed those seen before the last recession. At present, Ohio's general
obligation bonds are rated Aa1, AA+ and AA+ by Moody's, S&P, and Fitch,
respectively.
RISK FACTORS OF CONCENTRATING IN PENNSYLVANIA. Many different social,
environmental and economic factors may affect the financial condition of
Pennsylvania and its political subdivisions. From time to time, Pennsylvania and
certain of its political subdivisions have encountered financial difficulties
which have adversely affected their respective credit standings. For example,
the financial condition of the City of Philadelphia had impaired its ability to
borrow and resulted in its obligations generally being downgraded below
investment grade by the major rating services. Other factors which may
negatively affect economic conditions in Pennsylvania include adverse changes in
employment rates, Federal revenue sharing or laws governing tax-exempt
financing. Currently, Pennsylvania's general obligation bonds are rated AA-, AA
and Aa3 by S&P, Fitch and Moody's, respectively. The Adviser does not believe
that the current economic conditions in Pennsylvania will have a significant
adverse effect on the Fund's ability to invest in high-quality Pennsylvania
Municipal Obligations.
The SAI further discusses risk factors in concentrating in securities issued
by the respective states and their political subdivisions for each Fund.
MANAGEMENT
INVESTMENT MANAGEMENT AGREEMENT. Since November 15, 1971, Reserve Management
Company, Inc. ("Adviser") and its affiliates have provided investment advice to
The Reserve Funds, which, as of the date of this prospectus, has assets in
excess of $5.3 billion. Under the Investment Management Agreement, the Adviser
manages the Funds and invests in furtherance of its objectives and policies
subject to the overall control and direction of the Funds' Board of Trustees.
As compensation for these services, the Adviser receives a management fee
which is a percentage of the average daily net assets of each Fund, calculated
as follows: (i) 0.50% per annum of the first $500 million of average daily net
assets, (ii) 0.475% per annum of the next $500 million of such assets; (iii)
0.45% per annum of the next $500 million of such assets; (iv) 0.425% per annum
of the next $500 million of such assets; and (v) 0.40% per annum of such assets
in excess of $2 billion. For the fiscal year ended May 31, 1998, the Adviser
received management fees of 0.50% of the average net assets of the New York,
California, Connecticut, Florida, Massachusetts, New Jersey, Ohio and
Pennsylvania Tax-Exempt Funds. The Michigan Tax-Exempt Fund pays the Adviser a
comprehensive management fee calculated at 0.80% per annum of the average daily
net assets.
The Investment Management Agreements provide that the Adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered by a
Fund in connection with the matters as to which the Agreement relates, except a
loss resulting from the willful misfeasance, bad faith or gross negligence on
the part of the Adviser.
SERVICE AGREEMENTS. The Adviser furnishes to each Fund pursuant to a Service
Agreement, at cost, all personnel required for the operations of each Fund such
as executive, administrative, clerical, recordkeeping, bookkeeping, shareholder
accounting and servicing, as well as suitable office space and necessary
equipment and supplies used by such personnel in performing these functions.
Operating costs for which each Fund reimburses the Adviser includes salaries and
other personnel expense, rent, depreciation of equipment and facilities,
interest and amortization on loans which finance equipment used by the Funds,
and all other expenses for the conduct of each Fund's affairs. Affiliates of the
Adviser may provide some of these services. Each Fund also reimburses the
Adviser for: brokerage fees and commissions, interest charges and taxes, the
cost of registering for sale, issuing and redeeming the Fund's shares and of
printing and mailing all prospectuses, proxy statements and shareholder reports
furnished to current shareholders, and the fees and expenses of the Funds'
custodians, auditors, lawyers and disinterested Trustees.
The Adviser has agreed to repay each Fund promptly any amount which a
majority of disinterested Trustees reasonably determines in its discretion is in
excess of or not properly attributable to the cost of operations or expenses of
the Funds. The Service Agreements are nonassignable and continue until
terminated by either party on 120 days' notice.
YEAR 2000. The Trust could be adversely affected if the computer systems and
other service providers that interface with it are unable to process data from
January 1, 2000 and after. However, steps are being taken by the Adviser to
reasonably address this issue and to obtain assurance that comparable effort is
being made by service providers. There can be no assurance that these steps will
be sufficient to avoid any adverse impact to the Trust.
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TRUSTEES. The Trustees serve indefinite terms (subject to certain removal
procedures) and they appoint their own successors, provided that at least a
majority of the Trustees have been elected by shareholders. A Trustee may be
removed at any meeting of shareholders by a vote of a majority of the
shareholders of Reserve Tax-Exempt Trust or Reserve New York Tax-Exempt Trust.
TRANSFER AGENT AND DIVIDEND-PAYING AGENT. Reserve Tax-Exempt Trust and Reserve
New York Tax-Exempt Trust act as their own transfer agent and dividend-paying
agent.
HOW TO BUY SHARES
METHOD OF PAYMENT. The minimum initial investment is $1,000 with no minimum
subsequent investments (denominated in U.S. dollars). An initial purchase must
be accompanied by an Application or equivalent information. For clients of
certain broker-dealers and financial institutions, shares may be purchased
directly through such Firm. You can buy shares of the Funds each Business Day at
the net asset value ("NAV") determined after receipt by the Funds of a properly
completed order and payment in Federal Funds (member bank deposits with the
Federal Reserve Bank System). Payments must be made:
- By check (drawn on a U.S. bank) payable to The Reserve Funds, 810
Seventh Avenue, New York, NY 10019-5868. You must include your account
number (or Taxpayer Identification Number) on the "pay to the order
of" line for each check-made payable to The Reserve Funds or within
the endorsement for each check endorsed to The Reserve Funds.
- By wire -- Prior to calling your bank, call the Funds for specific
instructions at 800-637-1700 or the broker-dealer or financial
institution ("Firm") from whom you received this Prospectus.
Checks and wires which do not correctly identify the Fund and account to be
credited may be returned or delay the purchase of shares. Because each Fund must
pay for its securities purchases on the same day in Federal Funds, only Federal
Funds wires and checks drawn on the Fund's bank are eligible for entry as of the
Business Day received. For Federal Funds wires to be eligible for same-day order
entry, a Fund must be notified before 11:00 AM (New York time) of the amount to
be transmitted and the account to be credited. Payment by check not immediately
convertible into Federal Funds will be entered as of the business day when
covering Federal Funds are received or bank checks are converted into Federal
Funds. This usually occurs within two (2) business days, but may take longer.
Checks delivered to the Fund's offices after 11:00 AM will be considered
received until the next Business Day. A fee will be charged if any check used
for investment in your account does not clear.
Any monies which cannot be credited to an account by the end of the business
day following that on which Federal Funds become available will be returned as
promptly as possible to the sender or, if this cannot be readily determined, to
the bank from which they came or were drawn. The Funds reserve the right, with
respect to any person or class of persons, under certain circumstances to waive
investment minimums and redemption requirements. The Funds also reserve the
right to suspend the offering of shares from time to time and to reject any
purchase order for any reason. The Funds will only accept purchase checks in
excess of $100 which are payable to The Reserve Funds or payable to the
shareholder/payee of the check and endorsed to The Reserve Funds. The Funds do
not accept travelers checks.
RESERVE AUTOMATIC ASSET-BUILDER PLAN. If you have an account balance of $5,000
or more, you may purchase shares of a Fund ($25 minimum) from a checking, NOW,
or bank money-market deposit account or from a U.S. government distribution ($25
minimum) such as Social Security, federal salary, or certain veterans' benefits,
or other payments from the federal government. Call the Funds at 800-637-1700
for an application.
NET ASSET VALUE. Shares are sold to the public at NAV which is calculated at
the close of each Business Day (normally 4:00 PM New York time) by taking the
sum of the value of each Fund's investments (amortized cost value is used for
this purpose) and any cash or other assets, subtracting liabilities and dividing
by the total number of shares outstanding. A "business day" is Monday through
Friday exclusive of days the New York Stock Exchange ("NYSE") is closed for
trading and bank holidays in New York State. It is the policy of each Fund to
seek to maintain a stable NAV of $1.00 per share although this share price is
not guaranteed.
DISTRIBUTOR. The Distributor of the Funds is Resrv Partners, Inc., 810 Seventh
Avenue, New York, NY 10019-5868, which is a wholly-owned subsidiary of the
Adviser. Pacific Global Fund Distributors, Inc., 206 North Jackson Street, Suite
201, Glendale, CA 91206 is also a distributer of the Funds.
EXCHANGE PRIVILEGE. The shares offered by this Prospectus may be exchanged for
shares in other Reserve funds at NAV. Shares to be acquired in an exchange must
be registered for sale in the investor's state. The exchange privilege described
under this heading may not be available to clients of some Firms and some Firms
may impose conditions on their clients which are different from those described
in
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<PAGE> 12
this Prospectus. In addition, this exchange privilege may be modified or
terminated at any time, or from time to time, upon sixty (60) days' notice to
shareholders.
DISTRIBUTION AND SERVICE PLAN. Accounts may be opened through brokers,
financial intermediaries and institutions ("Firms"), some of which participate
in each Fund's Plan of Distribution ("Plan"). Under Rule 12b-1 of the 1940 Act,
each Fund makes assistance payments at an annual rate of 0.20% of net assets,
substantially all of which are paid to those Firms for distribution assistance
and administrative services provided to the Funds. The Adviser is required by
the Plan to pay an equivalent amount and may, at its discretion, pay additional
amounts based upon assets committed to the Funds by such Firms. The Plan does
not permit the carrying over of payments from year to year. The Adviser also
reimburses Firms for a portion of their costs for advertising and marketing of a
Fund. All such arrangements are designed to facilitate the sale of a Fund's
shares.
CLIENTS OF FIRMS. Firms provide varying arrangements for their clients with
respect to the purchase and redemption of a Fund's shares and may arrange with
their clients for other investment or administrative services. Firms are
responsible for the prompt transmission of purchase and redemption orders. Some
Firms may independently establish and charge additional fees for their services,
which would reduce their clients' yield or return. Firms may also hold a Fund's
shares in nominee or street name on behalf of their clients. In such instances,
the Fund's transfer agent will have no information with respect to or control
over the accounts of specific shareholders. Such shareholders may obtain access
to their accounts and information about their accounts only from their Firm.
Some Firms may receive compensation for recordkeeping and other services
relating to these nominee accounts. In addition, certain privileges with respect
to the purchase and redemption of shares (such as check writing redemptions) or
the reinvestment of dividends may not be available through such Firm or may only
be available subject to certain conditions and limitations. Some Firms may
participate in a program allowing them access to their clients' accounts for
servicing including, without limitation, changes of registration and
dividend-payees, and may perform functions such as generation of confirmations
and periodic statements and disbursement of cash dividends. The Prospectus
should be read in connection with such Firm's material regarding its fees and
services.
SHARES OF BENEFICIAL INTEREST
Reserve Tax-Exempt Trust and Reserve New York Tax-Exempt Trust were
organized as Massachusetts business trusts on January 25, 1983, and July 12,
1983, respectively, and are open-end management investment companies commonly
known as mutual funds. At the date of this Prospectus, there were nine (9)
separate series of Reserve Tax-Exempt Trust authorized and outstanding and one
separate series of Reserve New York Tax-Exempt Trust ("Trust(s)") authorized and
outstanding. Additional series may be added in the future by each Trust's Board
of Trustees. Each Trust is authorized to issue an unlimited number of shares of
beneficial interest which may be issued in any number of series. Shares issued
will be fully paid and non-assessable and will have no preemptive rights. The
shareholders of each Trust are entitled to a full vote for each full share held
(and fractional votes for fractional shares) and have equal rights with respect
to earnings, dividends, redemption and in the net assets of their respective
series upon liquidation. The Trustees do not intend to hold annual meetings but
will call such special meetings of shareholders as may be required under the
1940 Act (e.g. to approve a new investment advisory agreement or changing the
fundamental investment policies of a Fund) or by a Declaration of Trust.
Under Massachusetts law, the shareholders and trustees of a business trust
may, in certain circumstances, be personally liable for the trust's obligations
to third parties. However, the Declaration of Trust of Reserve Tax-Exempt Trust
and Reserve New York Tax-Exempt Trust provides, in substance, that no
shareholder or a Trustee shall be personally liable for a Trust's, and each
separate investment portfolio's obligations to third parties, and that every
written contract made by the Trust or a Fund shall contain a provision to that
effect. Each Declaration of Trust also requires a Trust to indemnify
shareholders and Trustees against such liabilities and any related claims or
expenses.
DAILY DIVIDENDS
Each Fund declares dividends each Business Day. Dividends are distributed
daily as additional shares to shareholder accounts except for shareholders who
elect in writing to receive cash dividends, in which case monthly dividend
checks are sent to the shareholder.
TAXES
To maintain its regulated investment company status for federal income tax
purposes, each Fund intends to satisfy certain requirements imposed by the
Internal Revenue Code, so as to avoid any federal income or excise tax
liability. Dividends derived from the interest earned on Municipal Obligations
and designated by a Fund as "exempt interest dividends" and are not subject to
federal income
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taxes. To the extent a Fund invests in Municipal Obligations issued by its
respective state or political subdivision thereof, exempt-interest dividends
derived from the interest thereon generally is not subject to state and, with
respect to the New York Tax-Exempt Fund, local personal income taxes.
Shareholders of the Florida Tax-Exempt Fund that are subject to the Florida
intangibles tax will not be required to include the value of their Fund shares
in their taxable intangible property if all of the Fund's investments on the
annual assessment date are obligations that would be exempt from such tax if
held directly by such shareholders, such as Florida and U.S. government
obligations. As described earlier, the Fund will normally attempt to invest
substantially all of its assets in securities which are exempt from the Florida
intangibles tax. If the portfolio consists of any assets which are not so exempt
on the annual assessment date, only the portion of the shares of the Fund which
relate to securities issued by the U.S. and its possessions and territories will
be exempt from the Florida intangibles tax, and the remaining portions of those
shares will be fully subject to the intangibles tax, even if they partly relate
to Florida tax-exempt securities and the same is true with respect to the
Pennsylvania Tax-Exempt Fund and the Pennsylvania county personal property tax.
Shareholders are advised to retain all statements to maintain accurate
records of their investments. If any dividends are not exempt from federal,
state or local income taxes, shareholders will be advised of the percentage by
February of the following year. Shareholders should consult their tax advisers
regarding specific questions as to federal, state or local taxes.
Further information relating to tax consequences is contained in the SAI.
REDEMPTIONS
TIME AND METHOD OF REDEMPTION. Shares of each Fund are redeemed at their NAV
determined after receipt by the Fund of a request in proper form. Each Fund
usually transmits payment the same day when requests are received before 11:00
AM (New York time) and the next day for requests received after the specified
time to enable shareholders to receive additional dividends. This is not always
possible, and transmission of redemption proceeds may be delayed. Payment will
normally be made by check or bank transfer. Shares do not earn dividends on the
day a redemption is effected, regardless of what time the order is received.
WRITTEN AND TELEPHONE REDEMPTION REQUESTS. The Funds strongly suggest (but do
not require) that each redemption, written or by telephone, be at least $1,000,
except for redemptions which are intended to liquidate the account. A
shareholder will be charged $2 for redemption checks issued for less than $100.
The Funds assume no responsibility for delays in the receipt of wired or mailed
funds. The use of a predesignated financial institution, such as a savings bank,
credit union or savings and loan association, which is not a member of the
Federal Reserve wire system could cause such a delay. If a Fund has previously
been advised in writing of your brokerage or bank account, telephone requests
will be accepted by calling 800-637-1700. A Fund may be liable for any losses
caused by its failure to employ reasonable procedures. To reduce the risk of
loss, proceeds of telephone redemptions may be sent only to (1) the bank or
brokerage account designated by the shareholder on the Application or in a
letter with the signature(s) guaranteed; or (2) to the address of record if all
the conditions listed below are met. To change the designated brokerage or bank
account it is necessary to contact the Firm through which shares of a Fund were
purchased or, if purchased directly from a Fund it is necessary to send a
written request to the Fund with signature(s) guaranteed as described below.
Other redemption orders must be in writing with the necessary signature(s)
guaranteed by a domestic commercial bank; a domestic trust company; a domestic
savings bank, credit union or savings association or a member firm of a national
securities exchange. Guarantees from notaries public are unacceptable. The Funds
will waive the signature guarantee requirement on a redemption request once
every thirty days if ALL of the following conditions apply: if the redemption
check is (1) for $5,000 or less; (2) payable to the shareholder(s) of record;
and (3) mailed to the shareholder(s) at the address of record. The requirement
of a guaranteed signature protects against an unauthorized person redeeming
shares and obtaining the redemption proceeds. Redemption instructions and
election of the plans described below may be made when your account is opened.
Subsequent elections and changes in instructions must be in writing with the
signature(s) guaranteed. Changes in registration or authorized signatories may
require additional documentation.
Each Fund reserves the right to refuse a telephone redemption if it believes
it is advisable to do so. Procedures for telephone redemptions may be modified
or terminated by the Fund at any time. During times of drastic economic or
market conditions shareholders may experience difficulty in contacting the Funds
by telephone to request a redemption or exchange of a Fund's shares. In such
cases shareholders should consider using another method of redemption, such as a
written request or a redemption by check.
CHECKING, VISA AND ATM ACCESS. The Funds offer a comprehensive package of
services which enhance access to your account. By completing the Application or
a signature card (for existing accounts) and certain other documentation if the
owner of record is a fiduciary, corporation, partnership, trust or other
organization, you can write checks in any amount against your account.
Redemptions by check lengthen the time your money earns dividends, since
redemptions are not made until the check is processed by the Funds.
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Because of this, you cannot write a check to completely liquidate your account,
nor may a check be presented for certification or immediate payment, otherwise,
you may use your Reserve checking account as you would any checking account.
Your checks will be returned (bounced) and a fee charged if they are postdated,
contain an irregularity in the signature, amount or otherwise, or are written
against accounts with insufficient funds. All transaction activity, including
check redemptions, will be reported on your account statement. A fee will be
charged for providing check copies. Upon proper notice, the Funds may choose to
impose a fee if it deems a shareholder's actions to be burdensome. Checking may
not be available to clients of some Firms and a Firm may establish its own
minimum check amount. Reserve VISA cards provide access to your Reserve balances
and margin line for worldwide purchasing power and cash at over 250,000 ATMs.
For more information, call 800-637-1700.
STOP PAYMENTS. The Funds will honor stop payment requests on unpaid shareholder
checks provided they are advised of the correct check number, payee, check
amount, and date. Stop payment requests received by the Funds by 2:00 PM (New
York time) in proper form will be effective the next Business Day. Oral stop
payment requests are effective for fourteen (14) calendar days, at which time
they will be canceled unless confirmed in writing. Written stop payment requests
will remain in effect for one year. A fee will be charged for this service.
AUTOMATIC WITHDRAWAL PLANS. If you have an account with a balance of at least
$5,000, you may, upon written notice, participate in either of the following:
(i) an Income Distribution Plan providing for monthly, quarterly or annual
payments by redemption of shares from reinvested dividends or distributions paid
to your account during the preceding period; or (ii) a Fixed Amount Withdrawal
Plan providing for the automatic redemption of a sufficient number of shares
from your account to make a specified monthly, quarterly or annual payment of a
fixed amount. In order for such payments to continue under either Plan, there
must be a minimum of $25 available from reinvested dividends or distributions.
Payments can be made to you or your designee. An application for the Automatic
Withdrawal Plans can be obtained from the Funds. The amount, frequency and
recipient of the payments may be changed by giving proper written notice to the
Fund. The Funds may impose a charge, modify or terminate any Automatic
Withdrawal Plan at any time after the participant has been duly notified. This
privilege may not be available to clients of some Firms or may be available
subject to conditions or limitations.
AUTOMATIC TRANSFER PLANS. You may redeem shares of a Fund by telephone (minimum
$100) if you have filed a separate Reserve Automatic Transfer application with
the Fund. The proceeds will be transferred between your Fund account and the
checking, NOW or bank money-market deposit account (as permitted) designated in
the application. Only such an account maintained in a domestic financial
institution which is an Automated Clearing House member may be so designated.
Redemption proceeds will be on deposit in your account at the Automated Clearing
House member bank ordinarily two (2) business days after receipt of the
redemption request. The Funds may, in the future, impose a charge, modify or
terminate this privilege at any time after the participant has been duly
notified. This privilege may not be available to clients of some Firms or may be
available subject to conditions or limitations.
RESTRICTIONS. The right of redemption may be suspended or the date of payment
postponed for more than seven (7) days only (a) when the NYSE is closed (other
than for customary closings), (b) when, as determined by the SEC, trading on the
Exchange is restricted or an emergency exists making it not reasonably
practicable to dispose of securities owned by a Fund or for it to determine
fairly the value of its net assets, or (c) for such periods as the SEC may
permit. If shares of a Fund are purchased by check or Reserve Automatic
Transfer, the Fund may delay transmittal of redemption proceeds until such time
as it has assured itself that good payment has been collected for the purchase
of such shares, which may generally take up to ten (10) business days.
Shareholder checks written against funds which are not yet considered collected
will be returned and a fee charged against the account. When a purchase is made
by wire and subsequently redeemed, the proceeds from such redemption normally
will not be transmitted until two (2) business days after the purchase.
GENERAL INFORMATION
JOINT OWNERSHIP. When an account is registered in the name of one person or
another, for example a husband or wife, either person is entitled to redeem
shares in the account. The Application provides that persons so registering
their account indemnify and hold the Funds harmless for actions taken by either
party.
USE OF JOINT PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION. Although each
Fund is offering only its own shares, it is possible that a Fund might become
liable for any misstatement in the Prospectus and SAI about the other Funds.
However, each Fund has acknowledged that it, and not any of the other Funds, is
liable for any material misstatement or omission about it in the Prospectus or
SAI.
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REPORTS AND STATEMENTS. Shareholders receive an annual report containing
audited financial statements and an unaudited semi-annual report. A statement is
sent to each shareholder at least quarterly. Shareholders who are clients of
some Firms will receive a statement combining transactions in Fund shares with
statements covering other brokerage or mutual fund accounts.
SMALL BALANCES. Because of the expense of maintaining accounts with small
balances (less than $1,000), the Funds may either levy a monthly charge
(currently $5) or redeem the account and remit the proceeds. Some Firms may
establish variations of minimum balances and fee amounts if those variations are
approved by the Funds.
RESERVE EASY ACCESS. Easy Access is The Reserve Funds' 24-hour toll-free
telephone service that lets customers use a touch-tone telephone to obtain
yields and account balances. To use it, call 800-637-1700 and follow the
instructions. Clients may also access full account activity for the previous six
months on the Internet at www.reservefunds.com.
INQUIRIES. Shareholders should direct their inquiries to the Firm from which
they received this Prospectus or to The Reserve Funds.
SPECIAL SERVICES. The Funds reserve the right to charge shareholder accounts
for specific costs incurred in processing unusual transactions for shareholders.
Such transactions include, but are not limited to, stop payment requests, copies
of Fund redemption or shareholder checks and special research services.
PERFORMANCE. The Funds may compare its performance to other income producing
alternatives such as (i) money-market funds (based on yields cited by IBC's
Money Fund Report and other industry publications); and (ii) various bank
products (based on average rates of bank and thrift institution certificates of
deposit, money-market deposit accounts and NOW accounts as reported by the Bank
Rate Monitor and other industry publications). An investment in shares of any
Fund is not insured by the Federal Deposit Insurance Corporation.
Yield information is useful in reviewing each Fund's performance relative to
other funds that hold investments of similar quality. Because yields will
fluctuate, yield information may not provide a basis for comparison with bank
and thrift certificates of deposit which normally pay a fixed rate for a fixed
term and are subject to a penalty for withdrawals prior to maturity which will
reduce their return.
------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
------------------------
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
<CAPTION>
PAGE
---
<S> <C>
Shareholder Expenses............................ 2
Financial Highlights............................ 3
Yield........................................... 6
Investment Objective and Policies............... 6
Management...................................... 10
How to Buy Shares............................... 11
Shares of Beneficial Interest................... 12
Daily Dividends................................. 12
Taxes........................................... 12
Redemptions..................................... 13
General Information............................. 14
</TABLE>
Investors are advised to read and retain
this Prospectus for future reference.
Founders of
"America's First
Money Fund"
810 Seventh Avenue, New York, NY 10019-5868
GENERAL INFORMATION AND 24-HOUR YIELD AND BALANCE INFORMATION
800-637-1700 M www.reservefunds.com
Distributor -- Resrv Partners, Inc.
12/98
LOGO Founders of
"America's First
Money Fund"
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NEW YORK TAX-EXEMPT FUND
CALIFORNIA TAX-EXEMPT FUND
CONNECTICUT TAX-EXEMPT FUND
FLORIDA TAX-EXEMPT FUND
MASSACHUSETTS TAX-EXEMPT FUND
MICHIGAN TAX-EXEMPT FUND
NEW JERSEY TAX-EXEMPT FUND
OHIO TAX-EXEMPT FUND
PENNSYLVANIA TAX-EXEMPT FUND
