<PAGE>
[LOGO] THE RESERVE FUNDS
Founders of "America's First Money Fund" Est. 1970
1250 Broadway, New York, NY 10001-3701
(212) 401-5500
GENERAL INFORMATION AND 24-HOUR YIELD AND BALANCE INFORMATION
800-637-1700
This literature is not authorized for distribution to prospective investors
unless preceded or accompanied by an appropriate current prospectus.
Distributor--Resrv Partners, Inc.
RTET/INTER/ANNUAL 07/99
[LOGO] THE RESERVE FUNDS
Founders of "America's First Money Fund"
Est. 1970
ANNUAL REPORT
INTERSTATE TAX-EXEMPT FUND
MAY 31, 1999
<PAGE>
RESERVE TAX-EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT TAX-EXEMPT OBLIGATIONS--99.7% (Note 1)
- ------------ ---------------------------------------------------------------------------------------- ------------
<S> <C> <C>
ARIZONA--5.8%
$ 900,000 Apache County IDA for Tucson Electric Power Company Series 83A, 3.25%, 12/15/18 (a)......... $ 900,000
500,000 Apache County IDA for Tucson Electric Power Company Series 83B, 3.40%, 12/15/18 (a)......... 500,000
1,100,000 Arizona HFA for Pooled Loan Program, 3.40%, 10/1/15 (a)..................................... 1,100,000
550,000 Avondale IDA for National Health INVS, 3.30%, 12/1/14 (a)................................... 550,000
1,985,000 Maricopa IDA for Orangewood CCRC Project, 3.35%, 2/1/29 (a)................................. 1,985,000
2,300,000 Maricopa Pollution Control for Arizona Public Serv. Co., Series A, 3.30%, 5/1/29 (a)........ 2,300,000
3,500,000 Pima County IDA PCR for Tucson Electric Project, 3.25%, 12/1/22 (a)......................... 3,500,000
4,100,000 Pima County IDA PCR for Tucson Electric Project, 3.40%, 10/1/22 (a)......................... 4,100,000
2,225,000 Yavapai IDA for Regional Medical Center, Series B, 3.25%, 12/1/26 (a)....................... 2,225,000
------------
17,160,000
------------
CALIFORNIA--.8%
2,000,000 California School District Cash Reserves Program GOB, 4.50%, 7/2/99......................... 2,001,243
500,000 Irvine Ranch IMPT BD ACT 1915 Assessment DIST 85-7-I, 3.00%, 9/2/11 (a)..................... 500,000
------------
2,501,243
------------
COLORADO--1.4%
4,000,000 Colorado HFA for North Colorado Medical Center, 3.20%, 5/15/20 (a).......................... 4,000,000
------------
CONNECTICUT--.9%
500,000 Connecticut HEF for Yale University Series T-1, 3.25%, 7/1/29 (a)........................... 500,000
2,000,000 Connecticut Special Tax Transportation Infrastructure Second Lien Revenue Bonds, 3.20%,
12/1/10 (a)................................................................................ 2,000,000
------------
2,500,000
------------
DISTRICT OF COLUMBIA--3.7%
7,500,000 Washington, D.C. George Washington University, 3.35%, 3/1/06 (a)............................ 7,500,000
2,200,000 Washington, D.C. Housing Finance Agency RAW, 3.85%, 7/1/27 (a).............................. 2,200,000
1,220,000 Washington, D.C. National Children's Center Inc., 3.25%, 2/1/20 (a)......................... 1,220,000
------------
10,920,000
------------
FLORIDA--4.6%
100,000 Dade County HFA for Miami Children's Hospital, 3.85%, 9/1/25 (a)............................ 100,000
400,000 Dade County IDA for Dolphin Stadium Project Series B, 3.20%, 1/1/16 (a)..................... 400,000
1,000,000 Dade County IDA for Dolphin Stadium Project Series D, 3.20%, 1/1/16 (a)..................... 1,000,000
1,500,000 Florida Local Gov't Financial Auth. for Lake Wales Medical Centers Series A, 3.25%,
3/1/15 (a)................................................................................. 1,500,000
10,000 Gulf Breeze Series 85 A Revenue Bonds, 3.25%, 12/1/15 (a)................................... 10,000
4,500,000 Manatee PCR for Florida Power and Light, 3.30%, 9/1/24 (a).................................. 4,500,000
2,000,000 Orange IDA for Lake Highland Prep School, 3.30%, 10/1/18 (a)................................ 2,000,000
700,000 Pinellas Industrial Council--Chi Chi Rodriguez Youth Foundation, 3.30%, 8/1/16 (a).......... 700,000
2,200,000 Port St. Lucie PCR for Florida Power and Light, 3.30%, 1/1/26 (a)........................... 2,200,000
1,000,000 Sarasota HFA for Bay Village Project, 3.30%, 12/1/23 (a).................................... 1,000,000
100,000 University of North Florida HEF for Capital Improvement Project, 3.30%, 11/1/24 (a)......... 100,000
------------
13,510,000
------------
GEORGIA--1.0%
1,000,000 Clayton Housing Auth. Multi Family for Rainwood Development, 3.47%, 5/1/06 (a).............. 1,000,000
1,800,000 Elbert County IDA for Seaboard Farms of Elberton, 3.25%, 7/1/05 (a)......................... 1,800,000
100,000 Hapeville IDA for Hapeville Hotel Partnership Project, 3.30%, 11/1/15 (a)................... 100,000
------------
2,900,000
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
2
<PAGE>
RESERVE TAX-EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1999--(Continued)
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT TAX-EXEMPT OBLIGATIONS--99.7% (Continued) (Note 1)
- ------------ ----------------------------- ------------
<S> <C> <C>
ILLINOIS--1.8%
$1,500,000 Chicago Emergency Telephone System GOB, 4.50%, 1/1/00............................................ $ 1,510,224
880,000 Illinois HFA for Community Hospital Center--B, 3.30%, 10/1/15 (a)................................ 880,000
1,400,000 Illinois HFA for Community Hospital Center--C, 3.30%, 10/1/15 (a)................................ 1,400,000
1,580,000 Streamwood IDA for Olde Church Centre Project, 3.40%, 12/1/14 (a)................................ 1,580,000
------------
5,370,224
------------
IOWA--.6%
415,000 Buffalo IDA for Linwood Mining & Minerals, 3.65%, 1/1/00 (a)..................................... 415,000
1,000,000 Des Moines HFR for Iowa Methodist Med. Center Project, 3.25%, 8/1/15 (a)......................... 1,000,000
200,000 Polk County IDA for Convalescence Center, 4.00%, 1/1/11 (a)...................................... 200,000
------------
1,615,000
------------
KANSAS--3.4%
6,000,000 Olathe GOB Temp Notes Series A, 4.13%, 6/1/99.................................................... 6,000,000
3,800,000 Overland Parks Temp Notes, 3.50%, 4/29/00........................................................ 3,810,718
------------
9,810,718
------------
KENTUCKY--.4%
1,210,000 Lexington Fayette RAW for Richmond Place Assoc. Project, 3.30%, 4/1/15 (a)....................... 1,210,000
------------
LOUISIANA--1.7%
700,000 Calcasieu Parish Sales Tax District 4A, 3.25%, 9/1/99............................................ 700,000
2,100,000 Louisiana Offshore Terminal Authority for Loop Inc., 1st Stage, 3.30%, 9/1/06 (a)................ 2,100,000
1,300,000 Louisiana Offshore Terminal Authority for Loop Inc., 1st Stage, 3.30%, 9/1/08 (a)................ 1,300,000
1,000,000 Louisiana Public Facilities Authority W. Kingston Med. Center, 3.40%, 9/1/25 (a)................. 1,000,000
------------
5,100,000
------------
MARYLAND--2.5%
1,200,000 Baltimore IDA for Baltimore Cap Acquisition, 3.20%, 8/1/16 (a)................................... 1,200,000
1,940,000 Baltimore Sheppard & Enoch Pratt Hospital, 3.30%, 7/1/21 (a)..................................... 1,940,000
1,900,000 Maryland IDA for Liberty Medical Center, 3.30%, 7/1/18 (a)....................................... 1,900,000
400,000 Montgomery County IDA for Info Systems and Network Corp., 3.95%, 4/1/14 (a)...................... 400,000
2,000,000 Prince George's County IDA for Frank Parsons Paper Co., 4.10%, 1/1/13 (a)........................ 2,000,000
------------
7,440,000
------------
MASSACHUSETTS--7.4%
200,000 Boston Water & Sewer Commission Rev. Bonds Series A, 3.25%, 11/1/24 (a).......................... 200,000
900,000 Massachusetts GOB Series 97, 3.25%, 8/1/15 (a)................................................... 900,000
1,400,000 Massachusetts HEF Brigham & Women's Hospital, 3.15%, 7/1/17 (a).................................. 1,400,000
1,000,000 Massachusetts HEF Capital Asset Program, 3.25%, 1/1/01 (a)....................................... 1,000,000
587,000 Massachusetts HEF for Harvard University, 3.15%, 2/1/16 (a)...................................... 587,000
1,000,000 Massachusetts HEF for Partners Health Care Systems, 3.25%, 7/1/27 (a)............................ 1,000,000
400,000 Massachusetts HEF for Partners Health Care Systems, 3.15%, 7/1/27 (a)............................ 400,000
500,000 Massachusetts HEFA for Hallmark Health System Series B, 3.15%, 7/1/27 (a)........................ 500,000
1,200,000 Massachusetts HEFA for Harvard University, 3.15%, 9/1/40 (a)..................................... 1,200,000
200,000 Massachusetts IFA for Goddard House, 3.15%, 11/1/25 (a).......................................... 200,000
700,000 Massachusetts IFA for Gordon College Series 97, 3.15%, 12/1/27 (a)............................... 700,000
800,000 Massachusetts IFA for Governor Dummer Academy, 3.15%, 7/1/26 (a)................................. 800,000
500,000 Massachusetts IFA for Milton Academy, 3.10%, 3/1/27 (a).......................................... 500,000
200,000 Massachusetts IFA for QUAMCO Inc., Series B, 3.25%, 9/1/01 (a)................................... 200,000
200,000 Massachusetts IFA for Whitehead Bio-Medical, 3.15%, 7/1/26 (a)................................... 200,000
1,500,000 Massachusetts Muni Wholesale Electric Co. Series C, 3.15%, 7/1/19 (a)............................ 1,500,000
</TABLE>
See notes to financial statements.
3
<PAGE>
RESERVE TAX-EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1999--(Continued)
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT TAX-EXEMPT OBLIGATIONS--99.7% (Continued) (Note 1)
- ------------ ----------------------------- ------------
<S> <C> <C>
MASSACHUSETTS--7.4%--(Continued)
$1,300,000 Massachusetts Water Resource Authority, 3.15%, 4/1/28 (a)........................................ $ 1,300,000
9,063,000 Triton Regional School District BAN, 3.50%, 4/12/00.............................................. 9,089,503
------------
21,676,503
------------
MICHIGAN--4.6%
700,000 Bruce HFA for St. Joseph, Series A, 3.10%, 5/1/18 (a)............................................ 700,000
300,000 Delta EDC for Mead-Escanaba Paper, Series E, 3.35%, 12/1/23 (a).................................. 300,000
1,795,000 Garden City HFA for Garden City Hospital, 3.30%, 9/1/26 (a)...................................... 1,795,000
1,600,000 Grand Rapids Water Supply System, 3.20%, 1/1/20 (a).............................................. 1,600,000
3,100,000 Jackson EDC for Thrifty Leoni Inc. Project, 3.47%, 12/1/14 (a)................................... 3,100,000
300,000 Michigan HFA for St. Mary Hosp. of Livonia, 3.20%, 7/1/17 (a).................................... 300,000
1,900,000 Michigan HDA for Fairlane Meadows Harbortown Ltd., 3.47%, 6/1/04 (a)............................. 1,900,000
400,000 Michigan HDA for Fairlane Meadows, 3.25%, 12/1/07 (a)............................................ 400,000
1,900,000 Michigan Job Development Auth. for Gordon Food Service Project, 3.25%, 8/1/15 (a)................ 1,900,000
1,500,000 Royal Oak HFA for William Beaumont Hospital Series L, 3.35%, 1/1/27 (a).......................... 1,500,000
------------
13,495,000
------------
MINNESOTA--.3%
64,091 New Brighton IDA for Taylor Corp. Series 1988, 4.96%, 11/1/99.................................... 64,091
705,000 New Hope Comm. Dev. Bonds for Nat'l. Beauty Proj. Ser. 1994, 3.55%, 5/1/10 (a)................... 705,000
------------
769,091
------------
MISSOURI--1.1%
625,000 Kansas City IDA Hospital Revenue for Baptist Health, Series A, 3.30%, 8/1/18 (a)................. 625,000
2,500,000 Missouri Development Finance Board for Union Station Project , 3.50%, 12/1/03 (a)................ 2,500,000
------------
3,125,000
------------
MONTANA--.2%
515,000 Great Falls Comm. Dev. Bonds for Liberty Development Partners, 3.65%, 12/1/07 (a)................ 515,000
------------
NEBRASKA--.3%
390,000 Buffalo County IDR for AgRex Inc. Project, 4.10%, 2/1/15 (a)..................................... 390,000
500,000 Nebraska EFA for Creighton University Project, 3.40%, 12/15/12 (a)............................... 500,000
------------
890,000
------------
NEW HAMPSHIRE--1.5%
4,300,000 Strafford TAN, 3.18%, 12/31/99................................................................... 4,300,721
------------
NEW JERSEY--8.2%
3,100,000 Burlington BAN, 3.62%, 10/18/99.................................................................. 3,103,705
12,500,000 East Orange BAN, 4.38%, 7/1/99................................................................... 12,503,699
1,460,000 Englewood Temp Notes, 3.70%, 7/16/99............................................................. 1,460,173
1,500,000 Essex Improvement Authority for the Childrens Institute Project, 3.15%, 2/1/20 (a)............... 1,500,000
200,000 New Jersey EDA for Public Service Electric and Gas Co., Series A, 3.00%, 9/1/12 (a).............. 200,000
900,000 New Jersey EDA for Volvo of America Corp., 3.79%, 12/1/04 (a).................................... 900,000
500,000 New Jersey EFA for College of New Jersey, Series A, 3.17%, 7/1/29 (a)............................ 500,000
1,000,000 New Jersey Sports Exposition Authority, Series C, 3.00%, 9/1/24 (a).............................. 1,000,000
2,800,000 Vernon School District Temp Notes, Series B, 3.20%, 12/3/99...................................... 2,801,651
------------
23,969,228
------------
NEW MEXICO--1.2%
3,500,000 Farmington PCR for Arizona Public Service Co. Series B, 3.30%, 9/1/24 (a)........................ 3,500,000
------------
</TABLE>
See notes to financial statements.
4
<PAGE>
RESERVE TAX-EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1999--(Continued)
<TABLE>
<CAPTION>
Principal Value
Amount TAX-EXEMPT OBLIGATIONS--99.7%--(Continued) (Note 1)
- ------------ ---------------------------------------------------------------------------------------- ------------
<S> <C> <C>
NEW YORK--16.5%
$4,300,000 Babylon UFSD TAN, 3.75%, 6/28/99................................................................. $ 4,300,368
5,000,000 Harrison CSD TAN, 3.75%, 6/30/99................................................................. 5,000,457
1,300,000 Long Island Power Authority Series 5, 3.30%, 5/1/33 (a).......................................... 1,300,000
2,700,000 New York City GOB Series A4, 3.30%, 8/1/23 (a)................................................... 2,700,000
4,625,000 New York City GOB Series A7, 3.40%, 8/1/20 (a)................................................... 4,625,000
1,200,000 New York City GOB Series A7, 3.40%, 8/1/21 (a)................................................... 1,200,000
1,000,000 New York City GOB Series B, 3.30%, 10/1/20 (a)................................................... 1,000,000
2,600,000 New York City GOB Series E3, 3.40%, 8/1/23 (a)................................................... 2,600,000
1,700,000 New York City GOB Series E4, 3.40%, 8/1/21 (a)................................................... 1,700,000
3,200,000 New York City GOB Series E4, 3.40%, 8/1/22 (a)................................................... 3,200,000
1,300,000 New York City GOB Series E5, 3.40%, 8/1/10 (a)................................................... 1,300,000
1,800,000 New York City GOB Series E5, 3.40%, 8/1/15 (a)................................................... 1,800,000
2,600,000 New York City GOB Series E5, 3.40%, 8/1/18 (a)................................................... 2,600,000
1,400,000 New York City GOB Series E5, 3.40%, 8/1/19 (a)................................................... 1,400,000
1,000,000 New York City GOB Series E6, 3.40%, 8/1/19 (a)................................................... 1,000,000
3,234,405 North Hempstead BAN, 3.50%, 10/28/99............................................................. 3,238,421
6,000,000 Riverhead CSD TAN, 3.75%, 6/25/99................................................................ 6,000,415
3,300,000 Williamson CSD RAN, 3.70%, 6/25/99............................................................... 3,300,124
------------
48,264,785
------------
NORTH DAKOTA--.4%
1,100,000 Minot IDR for Nash Finch Co. Project, 4.20%, 12/1/02 (a)......................................... 1,100,000
------------
OHIO--6.2%
425,000 Brunswick IDR for Kinder-Care Learning Centers Project Series A, 3.60%, 6/1/02 (a)............... 425,000
900,000 Claremont HFR for Mercy Health Systems Series A, 3.20%, 12/1/21 (a).............................. 900,000
800,000 Columbus ERD for Electric Systems Revenue Bonds, 3.65%, 9/1/09 (a)............................... 800,000
900,000 Cuyahoga IDA for Allen Group Inc. Project, 3.20%, 12/1/15 (a).................................... 900,000
1,310,000 Cuyahoga IDA for Cleveland Clinic Series A, 3.30%, 1/1/16 (a).................................... 1,310,000
980,000 Franklin County Bonds for Kinder-Care Project Series A, 3.60%, 6/1/02 (a)........................ 980,000
3,465,000 Franklin County HRB for US Health Corp Series A, 3.25%, 12/1/21 (a).............................. 3,465,000
900,000 Lucas County HFR for Lutheran Homes Society Project, 3.25%, 11/1/19 (a).......................... 900,000
2,900,000 Mahoning HFR for Forum Health Group Series B, 3.25%, 12/1/28 (a)................................. 2,900,000
900,000 Ohio Air Quality Dev. Auth. Cincinnati Gas & Electric, 3.30%, 9/1/30 (a)......................... 900,000
2,100,000 Ohio Air Quality Dev. Auth. COP, 3.05%, 6/17/99.................................................. 2,100,000
1,655,000 Ottawa Hospital Facilities Luther Home of Mercy Project, 3.35%, 10/1/17 (a)...................... 1,655,000
1,010,000 Sharonville IDA for Edgecomb Metals Inc., 3.25%, 11/1/09 (a)..................................... 1,010,000
------------
18,245,000
------------
OKLAHOMA--1.2%
3,500,000 Oklahoma IDA for Christian College, 4.62%, 7/1/15 (a)............................................ 3,500,000
------------
PENNSYLVANIA--8.0%
1,000,000 Allegheny HDA for Allegheny General Hospital Series B, 4.30%, 9/1/20 (a)......................... 1,000,000
2,200,000 Allegheny HDA for Allegheny General Hospital Series B, 4.30%, 9/1/10 (a)......................... 2,200,000
400,000 Allegheny HDA for Children's Hospital Pittsburgh, Series B, 3.30%, 12/1/15 (a)................... 400,000
700,000 Allegheny University of Pittsburgh Project Series 85, 3.15%, 7/1/15 (a).......................... 700,000
500,000 Bucks IDA for Edgecomb Metals Co., 3.25%, 10/1/09 (a)............................................ 500,000
1,000,000 Chartier Valley IDR Bonds for 1133 Penn Ave. Assoc. Series A, 3.30%, 8/1/07 (a).................. 1,000,000
1,140,000 Clarion County IDA Bonds for Meritcare Project Series A, 3.30%, 12/1/12 (a)...................... 1,140,000
2,000,000 Dallastown Area School District GOB, 3.35%, 2/1/18 (a)........................................... 2,000,000
</TABLE>
See notes to financial statements.
5
<PAGE>
RESERVE TAX-EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1999--(Continued)
<TABLE>
<CAPTION>
Principal Value
Amount TAX-EXEMPT OBLIGATIONS--99.7%--(Continued) (Note 1)
- ------------ ---------------------------------------------------------------------------------------- ------------
<S> <C> <C>
PENNSYLVANIA--8.0%--(Continued)
$500,000 Dauphin General Authority Revenue Bonds, 3.35%, 11/1/17 (a)...................................... $ 500,000
1,200,000 Delaware Valley Finance Authority Rev. Bonds Series B, 3.20%, 12/1/20 (a)........................ 1,200,000
2,000,000 Emmaus GOB Local Government Revenue Bonds, 3.25%, 12/1/28 (a).................................... 2,000,000
700,000 Lehigh IDA for Allentown Airport, 3.30%, 12/1/05 (a)............................................. 700,000
500,000 Mercersburg General Purpose Authority, 3.35%,11/1/27 (a)......................................... 500,000
900,000 Northeastern HEF for Wyoming Valley HCF, 3.20%, 1/1/24 (a)....................................... 900,000
2,640,000 Philadelphia MHR for Harbor View Tower Project, 3.30%, 11/1/27 (a)............................... 2,640,000
2,500,000 Philadelphia TRAN, 4.25%, 6/30/99................................................................ 2,501,177
1,500,000 Sayre HCF for Cap Financing Project, Series L, 3.30%, 12/1/20 (a)................................ 1,500,000
500,000 University of Pittsburgh Higher Education Capital Project Bonds, 3.15%, 1/1/19 (a)............... 500,000
1,500,000 York General Authority Pooled Financing, 3.25%, 9/1/26 (a)....................................... 1,500,000
------------
23,381,177
------------
PUERTO RICO--.1%
300,000 Puerto Rico Commonwealth Highway & Transportation, Series A, 3.00%, 7/1/28 (a)................... 300,000
------------
SOUTH CAROLINA--.9%
2,550,000 Piedmont Municipal Power Agency for S.C. Electric Series B, 3.30%, 1/1/19 (a).................... 2,550,000
------------
TENNESSEE--1.3%
335,000 Chattanooga IDA for Baylor School Project, 3.30%, 11/1/16 (a).................................... 335,000
1,000,000 Clarksville Public Building Authority Pooled Financing, 3.25% 10/1/25 (a)........................ 1,000,000
1,665,000 Clarksville Public Building Authority Pooled Financing, 3.25%, 6/1/24 (a)........................ 1,665,000
765,000 Franklin HEF for Franklin Health Care Center Inc., 5.25%, 6/1/05 (a)............................. 765,000
------------
3,765,000
------------
TEXAS--1.0%
330,000 Bexar HFA for Army Retirement Community, Series B, 3.25%, 7/1/11 (a)............................. 330,000
1,700,000 Harris County HCF for Greater Houston Project, 3.40%, 11/1/25 (a)................................ 1,700,000
900,000 Midlothian IDC for Box-Crow Cement Co. Project, 3.30%, 12/1/09 (a)............................... 900,000
------------
2,930,000
------------
UTAH--2.0%
5,975,000 Salt Lake City IDR for Parkview Plaza Project, 3.40%, 12/1/14 (a)................................ 5,975,000
------------
VIRGINIA--4.6%
800,000 Alexandria Redevelopment & Housing Authority Residental Care, 3.40%, 10/1/06 (a)................. 800,000
2,145,000 Alexandria IDA for Pooled Loan Project Series A, 3.25%, 7/1/26 (a)............................... 2,145,000
375,000 Bristol IDA for Healthcare Center Inc., 4.90%, 3/1/10 (a)........................................ 375,000
1,000,000 Capital Region Airport Comm. for Richmond International Airport, 3.20%, 7/1/25 (a)............... 1,000,000
2,960,000 Hampton MHR for Avalon at Hampton I-A Project, 3.15%, 6/15/26 (a)................................ 2,960,000
1,600,000 Louisa IDA for Pooled Financing Municipal Bond Fund, 3.25%, 1/1/20 (a)........................... 1,600,000
1,000,000 Lynchburg IDA HRB for VHA Mid Atlantic States Inc., 3.35%, 12/1/25 (a)........................... 1,000,000
1,500,000 Newport News MHR for Newport--Oxford Project, 3.25%, 11/1/06 (a)................................. 1,500,000
100,000 Port Authority of Cincinnati and Hamilton for Kenwood Office Assn., 3.30%, 9/1/25 (a)............ 100,000
1,000,000 Roanoke IDA for Roanoke Memorial Hospital Series B, 3.40%, 7/1/19 (a)............................ 1,000,000
900,000 Roanoke IDA for Southern States Project, 3.75%, 8/1/04 (a)....................................... 900,000
------------
13,380,000
------------
</TABLE>
See notes to financial statements.
6
<PAGE>
RESERVE TAX-EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1999--(Continued)
<TABLE>
<CAPTION>
Principal Value
Amount TAX-EXEMPT OBLIGATIONS--99.7%--(Continued) (Note 1)
- ------------ ---------------------------------------------------------------------------------------- ------------
<S> <C> <C>
WASHINGTON--2.9%
$1,700,000 Port of Seattle IDC for Douglas Management Corp., 3.45%, 12/1/05 (a)............................. $ 1,700,000
6,800,000 Washington HCF for Sunnyside Community Hospital, 3.40%, 10/1/17 (a).............................. 6,800,000
------------
8,500,000
------------
WISCONSIN--1.2%
3,500,000 Green Bay IDA for St. Mary's Holdings, Inc., 3.60%, 11/1/00 (a).................................. 3,500,000
------------
Total Investments (Cost $291,668,690)................................................... 99.7% 291,668,690
Other Assets, Less Liabilities.......................................................... .3 960,228
----- ------------
Net Assets.............................................................................. 100.0% $292,628,918
----- ------------
----- ------------
Net asset value, offering and redemption price per share, based on 292,628,918 shares of
beneficial interest, $.001 par value outstanding................................................ $1.00
=====
</TABLE>
- ------------------
(a) The interest rates, as reported on May 31, 1999, are subject to change
periodically. Securities payable on demand are collateralized by bank
letters of credit or other credit agreements.
Security Type Abbreviations:
BAN -- Bond Anticipation Notes
COP -- Certificate of Participation
CSD -- Central School District
EDA -- Economic Development Authority Revenue Bonds
EDC -- Economic Development Corporation
EFA -- Economic Finance Authority
ERD -- Energy Research and Development Authority
GOB -- General Obligation Bonds
HCF -- Health Care Facility
HDA -- Hospital Development Authority
HEF -- Health and Educational Facilities Revenue Bonds
HEFA -- Health & Education Facilities Authority
HFA -- Health Facilities Authority Revenue Bonds
HFR -- Health Facilities Revenue Bonds
HRB -- Hospital Revenue Bonds
IDA -- Industrial Development Authority Revenue Bonds
IDC -- Industrial Development Corporation Revenue Bonds
IDR -- Industrial Development Agency Revenue Bonds
IFA -- Industrial Finance Agency Revenue Bonds
MHR -- Multi-family Housing Revenue Bonds
PCR -- Pollution Control Revenue Bonds
RAN -- Revenue Anticipation Notes
RAW -- Revenue Anticipation Warrants
TAN -- Tax Anticipation Notes
TRAN -- Tax & Revenue Anticipation Notes
UFSD -- Union Free School District
See notes to financial statements.
7
<PAGE>
RESERVE TAX-EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 1999
<TABLE>
<S> <C>
Interest Income (Note 1)................................................................................. $ 12,194,696
------------
Expenses (Note 2)
Management fee......................................................................................... 1,801,995
Shareholder servicing fee.............................................................................. 732,644
Distribution assistance................................................................................ 694,614
Equipment expense...................................................................................... 90,497
Professional fees...................................................................................... 92,722
Occupancy costs........................................................................................ 69,202
Stationery, printing and supplies...................................................................... 105,528
Trustee fees........................................................................................... 7,355
Other expenses......................................................................................... 9,433
------------
Total Expenses....................................................................................... 3,603,990
------------
NET INVESTMENT INCOME, representing Net Increase in Net Assets from Investment Operations................ $ 8,590,706
------------
------------
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1999 May 31, 1998
---------------- ----------------
<S> <C> <C>
Increase (Decrease) in Net Assets From Investment Operations:
Net investment income............................................................. $ 8,590,706 $ 9,250,843
---------------- ----------------
Dividends Paid to Shareholders From:
Net investment income (Note 1).................................................... (8,590,706) (9,250,843)
---------------- ----------------
From Capital Share Transactions (at net asset value of $1.00 per share):
Net proceeds from sale of shares.................................................. 1,500,543,145 1,583,012,502
Dividends reinvested.............................................................. 8,590,706 9,250,843
Cost of shares redeemed........................................................... (1,569,373,790) (1,545,546,354)
---------------- ----------------
Net increase (decrease) in net assets derived from capital share transactions and
from investment Operations...................................................... (60,239,939) 46,716,991
Net Assets:
Beginning of year................................................................. 352,868,857 306,151,866
---------------- ----------------
End of year....................................................................... $ 292,628,918 $ 352,868,857
---------------- ----------------
---------------- ----------------
</TABLE>
See notes to financial statements.
8
<PAGE>
RESERVE TAX-EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND
NOTES TO FINANCIAL STATEMENTS
(1) SIGNIFICANT ACCOUNTING POLICIES:
The Reserve Tax-Exempt Trust (the "Trust") is registered under the
Investment Company Act of 1940 as a non-diversified, 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 authorized shares of beneficial interest are unlimited. As
of July 31, 1999 Reserve Tax-Exempt Trust shares are divided into nine (9)
series: Interstate, California II, Connecticut, Florida, Massachusetts,
Michigan, New Jersey, Ohio and Pennsylvania Tax-Exempt Funds. The
financial statements and notes apply only to the Interstate Tax-Exempt
Fund ("Fund").
B. Securities are valued at amortized cost which approximates market
value. The amortized cost method values a security at cost plus accrued
interest at the time of purchase, and thereafter assumes a constant
amortization to maturity of any discount or premium irrespective of
intervening changes in interest rates or market values. The maturity of
floating or variable rate instruments in which the Fund may invest will be
deemed to be, for floating rate instruments (1) the notice period required
before the Fund is entitled to receive payment of the principal amount of
the instrument; and for variable rate instruments the longer of (1) above
or (2) the period remaining until the instrument's next rate adjustment,
for purpose 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 Subchapter M of the Internal
Revenue Code and to distribute all income to its shareholders.
Accordingly, no Federal income tax provision is required.
D. Security transactions are recorded on a trade date basis; interest
income is accrued daily and security premium or discount is amortized or
accreted daily. Net investment income is distributed to shareholders daily
and automatically reinvested in additional shares.
E. The Fund is charged only for its direct and/or allocated share of
expenses (in proportion to net assets or number of shareholder accounts).
(2) MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES:
Pursuant to an Investment Management Agreement (the "Agreement") between
Reserve Management Company, Inc. ("RMCI") and the Fund, RMCI serves as the
Fund's Investment Adviser subject to the direction of the Board of
Trustees. Under the Agreement, RMCI is responsible for the supervision of
the day-to-day operations, manages the Fund's investments, effects
purchases and sales thereof, and absorbs certain promotional expenses. For
its services as Investment Adviser, RMCI receives a management fee,
calculated 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 average daily net
assets of the Fund. Please read Note 7 "Subsequent Event" regarding a
change in the Management Agreement.
Distribution Assistance:
Pursuant to a Plan of Distribution, the Trust may make assistance payments
at an annual rate of .20% per annum of the average net asset value of the
Fund's qualified shareholder accounts as to which the payee or RMCI has
rendered assistance in distributing its shares. For the year ended May 31,
1999, the Fund paid $694,614 in distribution assistance.
(3) INVESTMENT CONCENTRATION:
The Fund invests substantially all of its assets in a portfolio of
tax-exempt debt obligations issued by states, territories and possessions
of the United States and their subdivisions. The issuers' ability to meet
their obligations may be affected by economic, regional or political
developments. In order to reduce the credit risk associated with such
factors, 75% of the Fund's investments were backed by letters of credit,
bond insurance of financial institutions and financial guaranty assurance
agencies.
(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.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(Continued)
(5) COMPOSITION OF NET ASSETS:
At May 31, 1999, the Fund's net assets consisted of $292,629 par-value and
$292,336,289 paid-in-capital.
(6) FINANCIAL HIGHLIGHTS:
Contained below is per share operating performance data for a share of
beneficial interest outstandingfor each of the periods indicated.
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year........................... $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
-------- -------- -------- -------- --------
Net investment income from investment operations............. .0242 .0279 .0256 .0285 .0265
Dividends from net investment income......................... (.0242) (.0279) (.0256) (.0285) (.0265)
-------- -------- -------- -------- --------
Net asset value, end of year................................. $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total Return................................................. 2.42% 2.79% 2.56% 2.85% 2.65%
RATIOS/SUPPLEMENTAL DATA
------------------------
Net assets end of year (millions)............................ $ 292.6 $ 352.9 $ 306.2 $ 292.1 $ 315.2
Ratio of expenses to average net assets...................... 1.00% .97% 1.04% 1.04% 1.00%
Ratio of net investment income to average net assets......... 2.38% 2.75% 2.52% 2.80% 2.59%
</TABLE>
(7) SUBSEQUENT EVENTS:
On June 26, 1999, a new Investment Management Agreement between the Fund
and RMCI went into effect. Under the new Agreement, for its services to
the Fund, RMCI will charge the Fund a comprehensive management fee
calculated at an annual rate of .80% of average daily net assets. The
comprehensive fee is an all-inclusive fee, and the Fund will no longer be
charged for all other expenses as described in Note 1 E, but it will not
include brokerage fees and commissions, interest charges, taxes and
extraordinary legal fees and expenses, and the fees of the disinterested
Trustees.
------------------
FEDERAL TAX INFORMATION
The dividends distributed by the Fund are "exempt interest dividends" for
Federal tax purposes.
------------------
10
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
--------------------------------------
To the Shareholders and the Board of Trustees of Reserve Tax-Exempt
Trust--Interstate Tax-Exempt Fund:
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and financial highlights
present fairly, in all material respects, the financial position of Interstate
Tax-Exempt Fund (one of ten series constituting Reserve Tax-Exempt Trust) (the
"Fund") at May 31, 1999, and the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended, and the financial highlights for the five years in the period then
ended, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at May 31,
1999 by correspondence with the custodian, provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
July 23, 1999
11
<PAGE>
SUPPLEMENTAL PROXY INFORMATION (UNAUDITED)
The Special Meeting of Shareholders of the Reserve Tax-Exempt Trust (and
seven of its Funds: California Tax-Exempt Fund, Connecticut Tax-Exempt Fund,
Florida Tax-Exempt Fund, Massachusetts Tax-Exempt Fund, New Jersey Tax-Exempt
Fund, Pennsylvania Tax-Exempt Fund and Interstate Tax-Exempt Fund) was held on
January 15, 1999 at the offices of The Reserve Funds, 810 Seventh Avenue, New
York, NY. The meeting was adjourned until February 17, 1999, at which time it
was held. The Meeting was held for the following purposes:
<TABLE>
<CAPTION>
PROPOSAL WHO WILL VOTE
- --------------------------------------------------------------------------------------------------------- -------------
<S> <C>
PROPOSAL 1
To provide for the election of Trustees Trust Vote
PROPOSAL 2
To approve new Investment Management Agreements All Funds
PROPOSAL 3
To approve amendments to the Trusts' Declaration of Trust to permit the issuance of multiple classes of
shares Trust Vote
PROPOSAL 4
To approve the following proposed amendments:
A. To amend the Declaration of Trust to eliminate the policy on pricing securities; Trust Vote
B. To amend the Declaration of Trust to permit non-material amendments; Trust Vote
C. To amend the Declaration of Trust concerning the right to vote portfolio securities; Trust Vote
D. To amend the Declaration of Trust concerning termination or reorganization of the Trust; Trust Vote
E. To amend the Trusts' fundamental investment policy on the issuance of senior securities; All Funds
F. To amend the Trusts' fundamental investment policy regarding underwriting; All Funds
G. To change the designation of the Trusts' fundamental investment policy on investing for control of
portfolio companies; All Funds
H. To eliminate the Trusts' fundamental investment policies regarding certain portfolio transactions; All Funds
I. To eliminate the Trusts' fundamental investment policy on investing in the securities of other
investment companies; All Funds
J. To amend the Trusts' By-Laws concerning amendments thereto Trust Vote
PROPOSAL 5
To approve changes to the Trusts' Fundamental Investment Policies to Permit a Master Fund/Feeder Fund
Structure All Funds
PROPOSAL 6
To approve the authorization of the Board of Trustees to appoint, replace or terminate sub-advisers
recommended by the adviser or amend the terms of any sub-advisory agreement for the Funds without
shareholder approval All Funds
PROPOSAL 7
To ratify the selection of PricewaterhouseCoopers LLP as independent public accountants for the fiscal
year ending May 31, 1999; and Trust Vote
PROPOSAL 8
To transact such other business as may properly come before the Meeting Such Funds
as Necessary
</TABLE>
12
<PAGE>
SUPPLEMENTAL PROXY INFORMATION (UNAUDITED) (CONTINUED)
A Quorum of the shares of the Trust and the Funds, with exception of the
Reserve California Tax-Exempt Fund, was present at the Meeting.
The results of the proxy solicitation as to the Trust and the Interstate
Tax-Exempt Fund on the above matters were as follows:
<TABLE>
<CAPTION>
VOTES WITHHELD/
(1) Board of Trustees VOTES FOR VOTES AGAINST BROKER NON-VOTES ABSTENTIONS
------------- ------------- ---------------- -----------
<S> <C> <C> <C> <C>
Reserve Tax-Exempt Trust
Bruce R. Bent 319,777,868 -- 41,542,335 --
Edwin Ehlert, Jr. 319,681,769 -- 41,638,434 --
Henri Emmet 320,006,295 -- 41,313,908 --
Donald Harrington 319,478,161 -- 41,842,042 --
Bruce R. Bent II 319,816,779 -- 41,503,424 --
William Viklund 320,076,613 -- 41,243,590 --
Vincent Mattone 320,086,191 -- 41,234,012 --
Diana Herrmann 320,086,191 -- 41,234,012 --
Richard Bassuk 320,086,270 -- 41,233,933 --
<CAPTION>
Investment Management VOTES WITHHELD/
(2) Agreement VOTES FOR VOTES AGAINST BROKER NON-VOTES ABSTENTIONS
------------- ------------- ---------------- -----------
<S> <C> <C> <C> <C>
Interstate Tax-Exempt 182,755,289 8,882,072 -- 21,236,576
<CAPTION>
VOTES WITHHELD/
(3) Multiple Classes VOTES FOR VOTES AGAINST BROKER NON-VOTES ABSTENTIONS
------------- ------------- ---------------- -----------
<S> <C> <C> <C> <C>
Reserve Tax-Exempt Trust 313,266,028 17,144,286 -- 36,677,907
<CAPTION>
VOTES WITHHELD/
(4) VOTES FOR VOTES AGAINST BROKER NON-VOTES ABSTENTIONS
------------- ------------- ---------------- -----------
(A) Pricing Securities
<S> <C> <C> <C> <C>
Reserve Tax-Exempt Trust 305,813,404 18,076,660 -- 37,430,132
(B) Non-material amendments
Reserve Tax-Exempt Trust 307,125,146 17,340,679 -- 36,854,371
(C) Vote portfolio securities
Reserve Tax-Exempt Trust 308,392,525 14,724,613 -- 38,203,060
(D) Termination or Reorganization
Reserve Tax-Exempt Trust 307,039,997 16,546,710 -- 37,733,490
(E) Senior securities
Interstate Tax-Exempt 178,867,593 11,011,193 -- 22,995,151
(F) Underwriting
Interstate Tax-Exempt 177,828,643 11,489,297 -- 23,555,998
(G) Control of portfolio companies
Interstate Tax-Exempt 179,402,905 10,635,404 -- 22,835,629
(H) Portfolio transactions
Interstate Tax-Exempt 177,690,181 11,559,788 -- 23,623,967
(I) Investing in investment companies
Interstate Tax-Exempt 178,699,225 10,856,615 -- 23,318,097
(J) By-Law amendments
Reserve Tax-Exempt Trust 308,502,924 15,675,265 -- 37,142,008
<CAPTION>
VOTES WITHHELD/
(5) Master Fund/Feeder Fund VOTES FOR VOTES AGAINST BROKER NON-VOTES ABSTENTIONS
------------- ------------- ---------------- -----------
<S> <C> <C> <C> <C>
Interstate Tax-Exempt 180,200,820 9,988,782 -- 22,684,335
<CAPTION>
VOTES WITHHELD/
(6) Trustee Authorization VOTES FOR VOTES AGAINST BROKER NON-VOTES ABSTENTIONS
------------- ------------- ---------------- -----------
<S> <C> <C> <C> <C>
Interstate Tax-Exempt 182,356,800 8,576,403 -- 21,940,734
<CAPTION>
VOTES WITHHELD/
(7) PricewaterhouseCoopers LLP VOTES FOR VOTES AGAINST BROKER NON-VOTES ABSTENTIONS
------------- ------------- ---------------- -----------
<S> <C> <C> <C> <C>
Reserve Tax-Exempt Trust 320,959,901 6,815,617 -- 33,544,679
</TABLE>
13
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