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[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/CA/ANNUAL 07/99
[LOGO] THE
RESERVE
FUNDS
Founders of
"America's First Money Fund"
Est. 1970
ANNUAL REPORT
RESERVE TAX-EXEMPT TRUST
CALIFORNIA TAX-EXEMPT FUND
MAY 31, 1999
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RESERVE TAX-EXEMPT TRUST--CALIFORNIA TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT TAX-EXEMPT OBLIGATIONS--98.6% (NOTE 1)
- ------------ ----------------------------------------------------------------------------------------- -----------
<S> <C> <C>
$1,500,000 Alameda Contra Costa School Finance Authority Series A, 2.95%, 6/1/22 (a)......................... $ 1,500,000
1,000,000 Alameda Contra Costa School Finance Authority Series B, 2.95%, 7/1/23 (a)......................... 1,000,000
1,100,000 Alameda Contra Costa School Finance Authority Series C, 2.95%, 7/1/25 (a)......................... 1,100,000
3,675,000 Alameda Contra Costa School Finance Authority Series D, 2.95%, 7/1/18 (a)......................... 3,675,000
3,100,000 California Development Authority for House Ear Institute, 3.30%, 12/1/18 (a)...................... 3,100,000
2,500,000 California EDA for ISO Corp., Series A, 3.25%, 4/1/08 (a)......................................... 2,500,000
2,100,000 California PCR for Pacific Gas and Electric, Series A, 3.30%, 12/1/18 (a)......................... 2,100,000
1,000,000 California PCR for Pacific Gas and Electric, Series F, 3.30%, 11/1/26 (a)......................... 1,000,000
5,000,000 California RAN, 4.00%, 6/30/99.................................................................... 5,003,294
2,000,000 California School Cash Reserves Program, GOB, Series A, 4.50%, 7/2/99............................. 2,001,243
1,080,000 Central Union School District, 3.00%, 8/1/99...................................................... 1,080,000
1,500,000 Elk Grove USD Transportation, 4.50%, 6/30/99...................................................... 1,501,035
500,000 Foothill/Eastern Transportation Toll Road Revenue Bonds, 3.00%, 1/2/35 (a)........................ 500,000
1,500,000 Fremont Public Finance Auth. for Family Resource Center, 3.00%, 8/1/28 (a)........................ 1,500,000
1,500,000 Hemet MHR for Sunwest Resort Village, 2.95%, 7/1/06 (a)........................................... 1,500,000
1,400,000 Irvine Ranch IMPT BD Act 1915, 97-16, 3.25%, 9/2/22 (a)........................................... 1,400,000
2,000,000 Irvine Ranch Water District, 3.24%, 1/1/21........................................................ 2,000,000
500,000 Irvine Ranch Water District Series B, 3.20%, 10/1/04 (a).......................................... 500,000
1,000,000 Irvine Ranch Water District Series B, 3.20%, 10/1/09 (a).......................................... 1,000,000
3,075,000 Los Angeles CRA for Promenade Towers Series 1989, 3.10%, 4/1/09 (a)............................... 3,075,000
4,000,000 Los Angeles Custodial Receipts, 3.25%, 7/1/05 (a)................................................. 4,000,000
1,000,000 Los Angeles IDA for Wastewater Project, 7.00%, 6/1/21 (a)......................................... 1,020,000
2,500,000 Millbrae School District TRAN, 3.75%, 6/30/99..................................................... 2,500,287
1,000,000 Orange County Apartment Development Revenue Bonds, Series A of 1991, The Lakes Project, 2.95%,
12/1/06 (a)...................................................................................... 1,000,000
3,500,000 Orange County Sanitation District, Series C, 3.25%, 8/1/17 (a).................................... 3,500,000
1,100,000 Puerto Rico Highway and Transportation Authority, 3.00%, 7/1/28 (a)............................... 1,100,000
930,000 Redlands COP for Water Treatment Facility, 4.50%, 9/1/15 (a)...................................... 930,000
200,000 San Bernadino IDA for Gate City Beverage, 4.20%, 3/1/05 (a)....................................... 200,000
3,500,000 San Francisco MHR for Bayside Village Series 85D, 3.20%, 12/1/05 (a).............................. 3,500,000
300,000 Santa Clara Electric Revenue Bonds Series 85C, 2.90%, 7/1/10 (a).................................. 300,000
1,000,000 Southern California Public Power Authority, GOB, 5.30%, 7/1/99.................................... 1,001,277
485,000 Upland Community Redevelopment Agency GOB, 3.10%, 9/1/99.......................................... 485,000
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TOTAL INVESTMENTS (COST $56,572,136)..................................................... 98.6% 56,572,136
OTHER ASSETS, LESS LIABILITIES........................................................... 1.4 810,789
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NET ASSETS............................................................................... 100.0% $57,382,925
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NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE BASED ON 57,382,925 SHARES
OF BENEFICIAL INTEREST, $.001 PAR VALUE OUTSTANDING.............................................. $1.00
-----
-----
</TABLE>
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(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 bank credit agreements.
SECURITY TYPE ABBREVIATIONS:
COP -- Certificate of Participation
CRA -- Community Redevelopment Authority
EDA -- Economic Development Authority Revenue Bonds
GOB -- General Obligation Bonds
IDA -- Industrial Development Authority Revenue Bonds
MHR -- Multifamily Housing Revenue Bonds
PCR -- Pollution Control Revenue Bonds
RAN -- Revenue Anticipation Notes
TRAN -- Tax & Revenue Anticipation Notes
USD -- Unified School District
SEE NOTES TO FINANCIAL STATEMENTS.
2
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RESERVE TAX-EXEMPT TRUST--CALIFORNIA TAX-EXEMPT FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 1999
<TABLE>
<S> <C>
INTEREST INCOME (Note 1).................................................................................... $3,000,518
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EXPENSES (Note 2)
Management fee............................................................................................ 487,880
Shareholder servicing, administration and general office expenses......................................... 177,314
Distribution assistance................................................................................... 196,371
Equipment expense......................................................................................... 22,030
Professional fees......................................................................................... 35,297
Occupancy costs........................................................................................... 17,439
Stationery, printing and supplies......................................................................... 23,336
Trustee fees.............................................................................................. 2,023
Other expenses............................................................................................ 12,299
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Total Expenses............................................................................................ 973,989
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NET INVESTMENT INCOME....................................................................................... $2,026,529
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</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MAY 31, 1999 MAY 31, 1998
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<S> <C> <C>
INCREASE IN NET ASSETS FROM INVESTMENT OPERATIONS:
Net investment income.................................................................. $ 2,026,529 $ 1,260,626
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DIVIDENDS PAID TO SHAREHOLDERS FROM:
Net investment income (Note 1)......................................................... (2,026,529) (1,260,626)
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FROM CAPITAL SHARE TRANSACTIONS (at net asset value of $1.00 per share):
Net proceeds from sale of shares....................................................... 838,612,182 332,373,143
Dividends reinvested................................................................... 2,026,529 1,260,626
Cost of shares redeemed................................................................ (850,188,498) (297,653,453)
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Net increase (decrease) in net assets derived from capital share transactions and from
investment operations.................................................................. (9,549,787) 35,980,316
NET ASSETS:
Beginning of year...................................................................... 66,932,712 30,952,396
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End of year............................................................................ $ 57,382,925 $ 66,932,712
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</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
3
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NOTES TO FINANCIAL STATEMENTS
(1) SIGNIFICANT ACCOUNTING POLICIES:
Reserve Tax-Exempt Trust (the "Trust") is registered under the Investment
Company Act of 1940 as a non-diversified, open-end management 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. The
Reserve Tax-Exempt Trust shares are divided into ten (10) series:
California, California II, Connecticut, Florida, Interstate,
Massachusetts, Michigan, New Jersey, Ohio and Pennsylvania Tax-Exempt
Funds (collectively the "Funds"). These financial statements and notes
apply only to Reserve California Tax-Exempt 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, until June 25,
1999, 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 computed at annual rates 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% in excess of $2 billion
of the average daily net assets of the funds.
Under the current Service Agreement in effect until June 25, 1999, the
Fund reimburses RMCI for expenditures made by RMCI on behalf of the Trust.
During the year ended May 31, 1999, the Fund reimbursed RMCI $289,738
pursuant to the Service Agreement.
DISTRIBUTION ASSISTANCE:
Pursuant to a Plan of Distribution, the Fund may make payments at an
annual rate of .20% per annum of the average net asset value, of the
Trust's qualified shareholder accounts as to which the payee or RMCI has
rendered assistance in distributing its shares.
(3) MANAGEMENT'S USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities on
the dates of the financial statements and the reported amounts of income
and expenses during the reporting periods. Actual results could differ
from those estimates.
(4) INVESTMENT CONCENTRATION:
The Fund invests substantially all of its assets in portfolios of
tax-exempt debt obligations primarily consisting of issuers in the State
of California. 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, 74% of the Fund's net
assets were backed by letters of credit, bond insurance of financial
institutions, or financial guaranty assurance agencies.
4
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NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) COMPONENTS OF NET ASSETS:
At May 31, 1999, the Fund's net assets consisted of $57,383 in par value
and $57,325,542 in paid-in capital.
(6) FINANCIAL HIGHLIGHTS:
Contained below is per share operating performance data for a share of
beneficial interest outstanding for each of the periods as indicated.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MAY 31,
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1999 1998 1997 1996 1995(A)
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period............................ $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- -------
Net investment income........................................... .0211 .0260 .0239 .0273 .0181
Dividends from net investment income............................ (.0211) (.0260) (.0239) (.0273) (.0181)
------- ------- ------- ------- -------
Net asset value, end of period.................................. $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Total Return.................................................... 2.11% 2.60% 2.39% 2.73% 2.91%(b)
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (millions).......................... $ 57.4 $ 66.9 $ 31.0 $ 12.6 $ 11.1
Ratio of expenses to average net assets......................... 1.00% .96% 1.03% 1.04% 1.02%(b)
Ratio of net investment income to average net assets............ 2.08% 2.55% 2.40% 2.67% 2.95%(b)
</TABLE>
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(a) For the period October 17, 1994 (Commencement of Operations) to May 31,
1995.
(b) Annualized.
(7) SUBSEQUENT EVENT:
The Trustees agreed to close the California Tax-Exempt Fund effective July
31, 1999.
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FEDERAL TAX INFORMATION
The dividends distributed by the Fund are "exempt interest
dividends" for Federal tax purposes.
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5
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REPORT OF INDEPENDENT ACCOUNTANTS
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To the Shareholders and the Board of Trustees of Reserve Tax-Exempt
Trust--California 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 California
Tax-Exempt Fund (one of ten series constituting Reserve Tax-Exempt Trust) (the
"Fund") at May 31, 1999, 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 periods presented, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the 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
6
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SUPPLEMENTAL PROXY INFORMATION (UNAUDITED)
Due to an absence of a quorum of the Reserve California Tax-Exempt Fund
("Fund"), the Chairman adjourned the Meeting with respect to this Fund until
March 1, 1999. For the same reason, the Chairman subsequently adjourned the
Meeting to March 5, 1999; March 15, 1999; June 1, 1999 and June 17, 1999. At
June 17, 1999 Meeting, the Chairman announced that the Fund failed to reach
quorum and proposals 2, 4e, 4f, 4g, 4h, 4i, 5 and 6 with respect to California
Tax-Exempt Fund failed. As such, the proxy solicitation as to the Fund was
closed.
7
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