1933 Act File No. 2-82592
1940 Act File No. 811-3696
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 29, 1999
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 / /
Pre-Effective Amendment No. / /
Post-Effective Amendment No. 33 /x/
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /
Amendment No. 35 /x/
(Check appropriate box or boxes.)
RESERVE TAX-EXEMPT TRUST
(Exact Name of Registrant as Specified in Charter)
1250 Broadway, 32nd Floor, New York, NY 10001-3701
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 401-5500
MaryKathleen Foynes, Esq.
Reserve Tax-Exempt Trust
1250 Broadway, 32nd Floor
New York, NY 10001-3701
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
- --------- Immediately upon filing pursuant to paragraph (b) of Rule 485
- --------- on date pursuant to paragraph (b) of Rule 485
- --------- 60 days after filing pursuant to paragraph (a) of Rule 485
- --------- on (date) pursuant to paragraph (a)(2) of Rule 485
X 75 days after filing pursuant to paragraph (a)(2)
- ---------
The Commission is requested to send copies of all communications to:
Sander M. Bieber, Esq.
Dechert Price & Rhoads
1775 Eye Street, NW
Washington, DC 20006
Title of Securities Being Registered: Reserve Tax Exempt Trust - Common
Stock (par value of $.001 per share).
<PAGE>
RESERVE TAX-EXEMPT TRUST
CROSS REFERENCE SHEET PURSUANT TO RULE 495A(a)
PART A. ITEM NO. AND CAPTIONS CAPTION IN PROSPECTUS
1. Cover Page Cover Page
2. Synopsis Not Applicable
3. Condensed Financial Financial Highlights
Information
4. General Description of Investment Objective and Policies
Registrant
5. Management of the Fund Management
6. Capital Stock and Other Shares of Beneficial Interest
Securities
7. Purchase of Securities Being How to Buy Shares
Offered
8. Redemption or Repurchase Redemptions
9. Legal Proceedings Not Applicable
PART B. ITEM NO. AND CAPTIONS CAPTION IN STATEMENT OF
ADDITIONAL INFORMATION
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and Not Applicable
History
13. Investment Objectives and Investment Objective and Policies
Policies
14. Management of Registrant Trustees and Executive Officers
15. Control Persons and Principal Shares of Holders of Securities
Holders of Securities
16. Investment Advisory and Other Investment Management,
Services Distribution, Service and
Custodian Agreements
17. Brokerage Allocation and Portfolio Turnover, Transaction
Other Practices Charges and Allocation
18. Capital Stock and Other Shares of Beneficial Interest
Securities
19. Purchase, Redemption, and Purchase, Redemption and Pricing
Pricing of Securities Being of Shares
Offered
20. Tax Status Distributions and Taxes
21. Underwriters Investment Management,
Distribution, Services and
Custodian Agreements
22. Calculation of Yield Questions Fund Yield
23. Financial Statements Financial Statements
<PAGE>
[THE RESERVE FUNDS LOGO]
General Information, Purchases and Redemptions
24-Hour Yield and Balance Information
Nationwide 800-637-1700 - 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, California II 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 evaluating the credit of
issuers, investing in round lots, scheduling maturities, 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 __________, 1999, 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 _________, 1999.
Investors are advised to read and retain this Prospectus for future
reference.
<PAGE>
SHAREHOLDER EXPENSES
The following tables illustrate all expenses and fees that a shareholder of
each Fund will incur directly or indirectly.
Shareholder Transaction Expenses
Sales Load Imposed on Purchases......... None
Sales Load Imposed on Reinvested None
Dividends...............................
Redemption Fees*........................ None
Exchange Fees........................... None
*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.
Annual Fund Operating Expenses*
(as a percentage of average net assets)
<TABLE>
<CAPTION>
New ConnecticFlorida CalifornCaliforniMassachuMichigan New Ohio Pennsylvania
York Tax-ExempTax-ExemTax-Exempt II Tax-ExemTax-ExempJersey Tax-ExemTax-Exempt
Tax-ExemptFund Fund Fund1 Tax-ExemptFund Fund3 Tax-ExempFund Fund
Fund Fund2 Fund
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management -- -- -- .50% -- -- -- -- -- --
Fee
Comprehensive .80% .80% .80% .80% .80% .80% .80% .80% .80%
Fee
12b-1 Fee .20% .20% .20% .20% .20% .20% .20% .20% .20% .20%
Other -- -- -- -- -- -- -- -- -- --
Expenses:+
Administration
and -- -- -- -- -- -- -- -- --
Operations .22%
Expenses
Equipment -- -- -- .03% -- -- -- -- -- --
Other -- -- -- .01% -- -- -- -- -- --
--------
Total
Operating 1.00% 1.00% 1.00% .96% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
===== ===== ===== ======== ===== ===== ===== ===== ===== =====
Expenses
<FN>
* The information for each Fund in the table above has been restated to
reflect current fees. Each of the Funds, except for the California Tax-Exempt
Fund has entered into a new investment management agreement effective
__________, 1999 under which each 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. See "Management--Investment Management
Agreement" on page __.
1 California Tax-Exempt Fund is charged an annual investment management fee
based on its average daily net assets calculated as (1) 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; (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. See
"Management--Investment Management Agreement" on page ___. The investment
management agreement for the California Tax-Exempt Fund will terminate effective
__________, 1999 as a result of a change in control of the investment adviser.
On an interim basis, the investment adviser for the California Tax-Exempt Fund
will provide advisory services at no cost to the Fund.
2 Shares of the California II Tax-Exempt Fund were not offered until
____________, 1999.
3 Shares of the Michigan Tax-Exempt Fund were not offered until December 14,
1998. + Fees paid pursuant to a Service Agreement. See "Management -- Investment
Management Agreement on page __. The Service Agreement continues in effect until
terminated on 120 days notice and will not be affected by the change in control.
</FN>
</TABLE>
The purpose of these tables is 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.
1 Year 3 Years 5 Years10 Years
New York Tax-Exempt Fund.............. $10 $32 $55 $122
Connecticut Tax-Exempt Fund........... $10 $32 $55 $122
Florida Tax-Exempt Fund............... $10 $32 $55 $122
California Tax-Exempt Fund......... $10 $31 $53 $118
California II Tax-Exempt Fund......... $10 $32 $55 $122
Massachusetts Tax-Exempt Fund......... $10 $32 $55 $122
Michigan Tax-Exempt Fund.............. $10 $32 $55 $122
New Jersey Tax-Exempt Fund............ $10 $32 $55 $122
Ohio Tax-Exempt Fund.................. $10 $32 $55 $122
Pennsylvania Tax-Exempt Fund.......... $10 $32 $55 $122
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.
<PAGE>
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
and the California II Tax-Exempt Fund until December 14, 1998 and __________,
1999, respectively. This information should be read in conjunction with the
financial statements and related notes incorporated by reference. Such
information for the periods through May 31, 1998 has been audited by
PricewaterhouseCoopers LLP, whose report appears in the Trusts' Annual Report to
Shareholders for the fiscal year ended May 31, 1998, 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.
Financial information for the period June 1, 1998 through November 30, 1998 is
unaudited.
<TABLE>
<CAPTION>
June 1,
1998
through For Fiscal Years Ended May 31,
New York Tax-Exempt Nov. 30, 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- ----------------------------- ----------------------------------------------- ---------------- -------- ------
Fund 1998
- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, (Unaudited)
beginning of $ 1.0000 $ 1.000$ 1.0000$ 1.0000$ 1.0000$ 1.0000$ 1.0000 $ 1.0000$ 1.0000 $ 1.0000 $ 1.0000
-------- ----------------------------------------------- ---------------- -------- --------
year..............
Income from
investment .0167 .0363 .0352 .0381 .0352 .0249 .0281 .0421 .0563 .0616 .0600
operations........
Expenses....... (.0050) .0095 .0105 .0105 .0099 .0099 .0103 .0104 .0105 .0100 .0103
--------- ----------------------------------------------- ---------------- -------- --------
Net investment .0117 .0268 .0247 .0276 .0253 .0150 .0178 .0317 .0458 .0516 .0497
income (1)........
Dividends from net
invest- (.0117) (.0268)(.0247) (.0276) (.0253) (.0150) (.0178) (.0317) (.0458) (.0516) (.0497)
-------- -------- ------ ------- ------- ------- ------- -------- ------- -------- --------
ment income
(loss) (1)........
Net asset value,
end $ 1.0000 $ 1.000$ 1.0000$ 1.0000$ 1.0000$ 1.0000$ 1.0000 $ 1.0000$ 1.0000 $ 1.0000 $ 1.0000
======== =============================================== ================ ======== ========
of year.........
Total Return...... 2.36% 2.68% 2.47% 2.76% 2.53% 1.50% 1.78% 3.17% 4.58% 5.16% 4.97%
Ratios/Supplemental
Data
Net assets in $181,400 $171,21$153,180$125,454$152,906$148,387$149,785 $156,567$148,079 $120,142 $90,378
thousands, end
of year........
Ratio of expenses
to 1.00%(2) .94% 1.04% 1.04% .98% .98% 1.02% 1.03% 1.01% .98% 1.00%
average net
assets............
Ratio of net
investment income 2.32%(2) 2.6% 2.43% 2.72% 2.48% 1.48% 1.76% 3.09% 4.43% 5.02% 4.86%
to average net
assets............
</TABLE>
<TABLE>
<CAPTION>
June 1, Oct. 17, 1994
1998 (Commencement
through For Fiscal Years Ended May 31, of Operations)
California Tax-Exempt Fund Nov. 30, 1998 1997 1996 through May
-- --------------------------- --------- --------- --------- --------- -----------
1998 31, 1996
---- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year. $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- -------
Income from investment operations.. .0160 .0358 .0341 .0379 .0243
Expenses........................... (.0050) .0098 .0102 .0106 .0062
------- ------- ------- ------- -------
Net investment income (1).......... .0110 .0260 .0239 .0273 .0181
Dividends from net investment (.0110) (.0260) (.0239) (.0273) (.0181)
------- ------- ------- ------- -------
income (loss) (1)..................
Net asset value, end of year....... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= =======
Total Return....................... 2.24%(2) 2.60% 2.39% 2.73% 1.81%(2)
Ratios/Supplemental Data
Net assets in thousands, end of year $123,800 $66,933 $30,952 $12,612 $11,088
Ratio of expenses to average net 1.00%(2) .96% 1.03% 1.04% 1.02%(2)
assets.............................
Ratio of net investment income to 2.19%(2) 2.55% 2.40% 2.67% 2.95%(2)
average net assets.................
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
June 1,
1998 For Fiscal Years Ended May 31,
-------------------------------- ------------------------------
through
Connecticut Tax-Exempt Nov. 30, 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- ----------------------- --------- ------- ------- ------- -------- --------- ------------------ --------- --------- -------
Fund 1998
- ---------- ----
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, $1.0000 $ 1.0000$ 1.0000 $ 1.0000$ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
------- ---------------- ---------------- -------- -------- -------- -------- -------- --------
beginning of year.........
Income from .0169 .0358 .0341 .0368 .0352 .0250 .0269 .0400 .0534 .0615 .0604
investment operations.....
Expenses.................. .0091 .0098 .0102 .0098(3) .0086(3) .0087(3) .0091(3) .0086(3) .0083(3) .0086(3)
---------------- ---------------- ------ ------- ------ ------- ------- -------
(.0050)
Net investment .0119 .0267 .0243 .0266 .0254 .0164 .0182 .0309 .0448 .0532 .0518
income(1).................
Dividends from net (.0119)
investment (.0267) (.0243) (.0266) (.0254) (.0164) (.0182) (.0309) (.0448) (.0532) (.0518)
-------- ------- -------- ------- -------- -------- -------- -------- -------- --------
income (loss)(1)........
Net asset value, end $1.0000 $ 1.0000$ 1.0000 $ 1.0000$ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
of year...................
Total Return..............2.41%(2) 2.67% 2.43% 2.66% 2.54% 1.64% 1.82% 3.09% 4.48% 5.32% 5.18%
Ratios/Supplemental
Data $ 39,600 $36,787 $33,497 $34,801 $26,626 $128,693 $157,115 $191,101 $241,790 $314,489 $247,929
Net assets in
thousands, end of year....
Ratio of expenses to
average net 1.00%(2) .89% .97% 1.01% .89%(3) .85%(3) .86%(3) .90%(3) .85%(3) .81%(3) .84%(3)
assets..................
Ratio of net
investment income 2.37%(2) 2.64% 2.39% 2.61% 2.33% 1.62% 1.81% 3.05% 4.41% 5.17% 5.05%
to average net
assets..............
</TABLE>
<TABLE>
<CAPTION>
June 1, ations)
1998
through June 24, 1996
Nov. 30, Year Ended (Commencement of Oper
Florida Tax-Exempt Fund 1998 May 31, 1998through May 31, 1997
------------------------------- ---- --------------------------------
(Unaudited)
<S> <C> <C> <C>
Net asset value, beginning of $1.0000 $1.0000 $1.0000
------- ------- -------
year...........................
Income from investment operations .0175 .0366 .0321
Expenses....................... (.0050) .0097 .0093
--------- ------- -------
Net investment income (1)...... .0125 .0269 .0228
Dividends from net investment (.0125) (.0269) (.0228)
------- ------- -------
income (1).....................
Net asset value, end of year... $1.0000 $1.0000 $1.0000
======= ======= =======
Total Return................... 2.53%(2) 2.69% 2.42%(2)
Ratios/Supplemental Data
Net assets in thousands, end of $ 21,100 $10,817 $4,109
year...........................
Ratio of expenses to average net 1.00%(2) .94% 1.04%(2)
assets.........................
Ratio of net investment income 2.47%(2) 2.62% 2.39%(2)
to average net assets..........
</TABLE>
<TABLE>
Jan. 22,
1990
(Commencement
of
<CAPTION>
June 1, For Fiscal Years Ended May 31, Operations)
1998 through
through
Nov. 30,
Massachusetts Tax-Exempt Fund 1998 1998 1997 1996 1995 1994 1993 1992 1991 May 31, 1990
- ------------------------------- ----- ----- -------- -------- -------- -------- -------- -------- -------- ------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning $1.0000 $ 1.00$01.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $1.0000
------- -------------- -------- -------- -------- -------- -------- -------- -------
of year...................
Income from investment .0165 .0361 .0338 .0362 .0335 .0227 .0257 .0386 .0551 .0209
operations..................
Expenses.................... (.0050) .0077 .0079(3) .0086(3) .0070(3) .0052(3) .0048(3) .0045(3) .0032(3) .0010
-------- -------------- ------ ------ ------ ------ ------ ------ -------
Net investment income (1)... .0115 .0284 .0259 .0276 .0265 .0175 .0209 .0341 .0519 .0199
Dividends from net investment
income (loss)(1).......... (.0115) (.0259) (.0276) (.0285) (.0175) (.0209) (.0341) (.0519) (.0199)(4)
------- -- -------- -------- -------- -------- -------- -------- -------- -------
(.0284)
Net asset value, end of year $1.0000 $ 1.00$01.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $1.0000
======= ============== ======== ======== ======== ======== ======== ======== =======
Total Return................ 2.34%(2) 2.84% 2.59% 2.76% 2.65% 1.75% 2.09% 3.41% 5.19% 5.59%(2)
Ratios/Supplemental Data
Net assets in thousands, end $ 27,700 $25,38$13,035 $8,955 $10,169 $14,824 $13,305 $7,186 $4,652 $2,140
of year....................
Ratio of expenses to average 1.00%(2) .75% .79%(3) .84%(3) .69%(3) .61%(3) .46%(3) .44%(3) .30%(3) .29%(2)
net assets..................
Ratio of net investment income
to average net assets..... 2.30%(2) 2.78% 2.58% 2.71% 2.80% 1.73% 2.04% 3.28% 4.79% 5.53%(2)
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
June 1, (Commencement
1998 For Fiscal Years Ended May 31, of Operations)
through
New Jersey Tax-Exempt Fund Nov. 30, 1998 1997 1996 through May 31,
-------------------------------- --------- --------- --------- --------- ---------------
1998 1995
---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- -------
year............................
Income from investment .0166 .0354 .0343 .0369 .0330
operations......................
Expenses........................ (.0050) .0100 .0107 .0106 .0087(3)
-------- ------- ------- ------- -------
Net investment income (1)....... .0116 .0254 .0236 .0263 .0243
Dividends from net investment (.0116) (.0254) (.0236) (.0263) (.0243)
------- ------- ------- ------- -------
income (loss)(1)................
Net asset value, end of year.... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= =======
Total Return.................... 2.35%(2) 2.54% 2.36% 2.63% 2.43%(2)
Ratios/Supplemental Data
------------------------
Net assets in thousands, end of $37,600 $39,452 $41,026 $21,607
year............................ $ 42,800
Ratio of expenses to average 1.00%(2) .99% 1.06% 1.04% 1.01%(2)(3)
net assets......................
Ratio of net investment income 2.31%(2) 2.50% 2.33% 2.59% 2.82%(2)
to average net assets...........
</TABLE>
<TABLE>
<CAPTION>
June 1,
1998 Apr. 1, 1998
through (Commencement of Operations)
Ohio Tax-Exempt Fund Nov. 30, through May 31, 1998
1998
(Unaudited)
<S> <C> <C>
Net asset value, beginning of year $1.0000 $1.0000
------- -------
Income from investment operations .0167 .0065
Expenses......................... (.0050) .0017
------- -------
Net investment income (1)........ .0117 .0048
Dividends from net investment (.0117) (.0048)
------- -------
income (loss) (1)................
Net asset value, end of year..... $1.0000 $1.0000
======= =======
Total Return..................... 2.37%(2) 2.87%(2)
Ratios/Supplemental Data
Net assets in thousands, end of $ 2,200 $2,507
year.............................
Ratio of expenses to average net 1.00%(2) 1.00%(2)
assets...........................
Ratio of net investment income to 2.33%(2) 2.86%(2)
average net assets...............
</TABLE>
<TABLE>
<CAPTION>
June 1,
1998 Sept. 12, 1997
through (Commencement of Operations)
Pennsylvania Tax-Exempt Fund Nov. 30, through May 31, 1998
1998
(Unaudited)
<S> <C> <C>
Net asset value, beginning of year $1.0000 $1.0000
------- -------
Income from investment operations .0173 .0261
Expenses......................... (.0050) .0072
-------- -------
Net investment income (1)........ .0123 .0189
Dividends from net investment (.0123) (.0189)
------- -------
income (loss)(1).................
Net asset value, end of year..... $1.0000 $1.0000
======= =======
Total Return..................... 2.39%(2) 2.64%(2)
Ratios/Supplemental Data
------------------------
Net assets in thousands, end of $13,187
year............................. $ 20,700
Ratio of expenses to average net 1.00%(2) 1.00%(2)
assets...........................
Ratio of net investment income to 2.43%(2) 2.62%(2)
average net assets...............
- ------------------------------------------
<FN>
(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
Tax-Exempt Fund would have been 0.10% higher and the actual expenses for the
Massachusetts Tax-Exempt Fund would have been 0.04%, 0.05%, 0.11%, 0.43%,
0.50%, 0.50%, 0.50% and 0.50% higher and the actual expenses for the New
Jersey Tax-Exempt Fund would have been 0.01% higher for the New Jersey
Tax-Exempt Fund.
(4) .01(cent) per share represents distributions of taxable income.
</FN>
</TABLE>
<PAGE>
YIELD
For the seven calendar days ended November 30, 1998, the current and
effective yields for the Funds were as follows:
Current Effective
Yield Yield
California Tax-Exempt Fund...... 2.1240% 2.1467%
Connecticut Tax-Exempt Fund..... 2.2111% 2.2356%
Florida Tax-Exempt Fund......... 2.3600% 2.3879%
Massachusetts Tax-Exempt Fund... 2.1197% 2.1423%
New Jersey Tax-Exempt Fund...... 2.2379% 2.2630%
New York Tax-Exempt Fund........ 2.1619% 2.1853%
Ohio Tax-Exempt Fund............ 2.1227% 2.1453%
Pennsylvania Tax-Exempt Fund.... 2.2692% 2.2950%
Michigan Tax-Exempt Fund and California II Tax-Exempt Fund did not begin
offering shares until December 14, 1998 and _____, 1999, respectively.
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, as amended ("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 total 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 total 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 and municipal bond insurers. The Funds
may invest any portion of their assets in floating and variable rate demand
notes secured by bank letters of credit or other credit support arrangements.
Use of letters of credit or other credit support arrangements will not adversely
affect the tax-exempt status of these Municipal Obligations. A Fund will not
invest more than 10% of the value of its assets in floating or variable rate
demand notes for which there is no secondary market if the demand feature on
such Municipal Obligations is exercisable on more than seven (7) days' notice.
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.
The Funds will purchase tax-exempt securities which are rated MIG-1 or MIG-2
by Moody's Investor Services, Inc. ("Moody's"), SP-1 or SP-2 by Standard &
Poor's Corporation ("S&P") or the equivalent thereof. Municipal Obligations
which are not rated may 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 the 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 on 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 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 ("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 Funds' 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 (California Tax-Exempt Fund and
California II Tax-Exempt Fund). You should consider carefully the special risks
inherent in the Funds' investments in California municipal obligations, which
result from 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 1930's. As a
result, between October 1991 and July 1994, all rating agencies lowered the
ratings on the State's general obligation bonds from AAA equivalent to A
equivalent. These and other factors may have the effect of impairing the ability
of California municipal issuers to make interest and or principal payments on
such obligations. However, since 1993, the State's financial condition has
improved. The General Fund ended fiscal 1998 with a positive GAAP balance of
$547 million, substantially better than the $2.5 million deficit at the end of
1997. The State's unemployment rate, though improved, remains above the national
average. California's general obligation bonds were upgraded to ratings of Aa3
by Moody's in October 1998 and to AA- by Fitch in October 1997. S&P has noted
the State's improving conditions in its credit reviews but has maintained it's
A+ rating.
Risk Factors of Concentrating in Connecticut. Specifically, the credit quality
of the Connecticut Tax-Exempt Fund will depend on the continued financial
strength of the State of Connecticut and its political subdivisions.
Connecticut's economy relies in part on activities that may be adversely
affected by cyclical change, and recent declines in defense spending have had a
significant impact on unemployment levels. Connecticut reported deficits from
its General Fund operations for the fiscal years 1988 through 1991. Together
with the deficit carried forward from the State's 1990 fiscal year, the total
General Fund deficit for the 1991 fiscal year was $965.7 million. The total
deficit was funded by the issuance of General Obligations Economic Recovery
Notes. Moreover, as of June 30, 1995 and 1996, the General Fund had cumulative
deficits under GAAP of $576.9 million and $639.9 million, respectively. As a
result of the recurring budgetary problems, S&P downgraded the State's general
obligation bonds from AA+ to AA in April 1990 and to AA- in September 1991. In
April 1990, Moody's downgraded Connecticut's bonds from Aa1 to Aa (since refined
to Aa3 in March 1997). In March 1995, Fitch downgraded Connecticut's bonds from
AA+ to AA.
Risk Factors of Concentrating in Florida. You should consider carefully the
special risks inherent in the Fund's investment in Florida Municipal
Obligations. The Florida Constitution and Statutes mandate that the State budget
as a whole, and each separate fund within the State budget, be kept in balance
from currently available revenues each fiscal year. Florida's Constitution
permits issuance of Florida Municipal Obligations pledging the full faith and
credit of the State, with a vote of the electors, to finance or refinance fixed
capital outlay projects authorized by the legislature provided that the
outstanding principal does not exceed 50% of the total tax revenues of the State
for the two preceding years. Florida's Constitution also provides that the
legislature shall appropriate monies sufficient to pay debt service on State
bonds pledging the full faith and credit of the State as the same becomes due.
All State tax revenues, other than trust funds dedicated by Florida's
Constitution for other purposes, would be available for such an appropriation,
if required. Revenue bonds may be issued by the State or its agencies without a
vote of Florida's electors only to finance or refinance the cost of State fixed
capital outlay projects which may be payable solely from funds derived directly
from sources other than State tax revenues. Fiscal year 1995-96 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 A- by S&P.
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"), 1250 Broadway, 32nd Floor, New York, NY 10001-3701
and its affiliates have provided investment advice to The Reserve Funds which,
as of the date of this Prospectus, has assets in excess of $5.7 billion. As a
result of the recent proxy votes, each of the Funds, except for the California
Tax Exempt Fund (see below), has entered into a new Investment Management
Agreement with the Adviser, which is substantially similar to the investment
management agreement previously in effect with regard to each Fund, except for a
new comprehensive management fee. The new Investment Management Agreements are
effective ____________, 1999. Under each Investment Management Agreement, the
Adviser manages the Fund and invests in furtherance of its objectives and
policies subject to the overall control and direction of the Trusts' Boards of
Trustees.
Under the Investment Management Agreements, each Fund pays the Adviser a
comprehensive management fee calculated on an annual basis at 0.80% of its
average daily net assets. Under the terms of the Investment Management
Agreements with each Fund, the Adviser pays all employee and ordinary operating
costs of the Funds. Excluded from the definition of ordinary operating costs are
interest, taxes, brokerage fees, extraordinary legal and accounting fees and
expenses, fees for Trustees who are not "interested persons" of the Trusts (as
defined in the 1940 Act) ("disinterested Trustees") and fees under the
Distribution Plan.
The Investment Management Agreements provide that the Adviser, its officers,
directors, employees or agents, shall not be liable for any act or omission in
connection with the matters as to which the Agreement relates, except a loss
resulting from the willful misfeasance, bad faith, gross negligence, or by
reason of reckless disregard, on the part of the Adviser.
Pursuant to an Investment Management Agreement, the California Tax-Exempt
Fund pays the Adviser a management fee which is a percentage of the average
daily net assets of the 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. The Investment
Management Agreement with respect to the California Tax-Exempt Fund will
terminate effective __________, 1999 as a result of a change in control of the
Adviser. On an interim basis, the Adviser will provide advisory services to the
Fund at no cost to the Fund.
Pursuant to a Service Agreement, the Adviser furnishes the California
Tax-Exempt Fund the services of all personnel required for the maintenance and
operation of the business affairs of the California Tax-Exempt Fund, including:
personnel necessary to the administrative, clerical, recordkeeping, bookkeeping,
shareholder accounting and servicing, as well as suitable office space and all
necessary office equipment and supplies used by such personnel in performing
these functions. The California Tax-Exempt Fund pays the Manager for such
services in an amount equal to its costs of operations, which consists of the
cost and expense of providing such services and facilities, including rent,
depreciation and amortization of equipment and facilities, salaries and other
overhead costs and expenses. Affiliates of the Adviser may provide some of these
services.
The Trust also pays all other expenses incurred in the conduct of its
affairs, including: brokerage fees and commissions, interest charges, custodial
fees and expenses, taxes, the cost of registering for sale, issuing and
redeeming the California Tax-Exempt Fund's shares and of printing and mailing
all prospectuses, proxy statements and shareholder reports furnished to current
shareholders, overhead costs and expenses accounting and legal fees and
expenses, and fees for disinterested Trustees with regard to the California
Tax-Exempt Fund. The Adviser has agreed to repay the California Tax-Exempt 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 Fund. The Service Agreement is
nonassignable and continues until terminated by either party on 120 days'
notice.
The investment management agreement with respect to the California Tax-Exempt
Fund provides that the Adviser shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the 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.
For the fiscal year ended May 31, 1998, the Adviser received management fees,
under the investment management agreements previously in effect with regard to
each Fund, of 0.50% of the average net assets of the New York, California,
Connecticut, Florida, Massachusetts, New Jersey, Ohio and Pennsylvania
Tax-Exempt Funds.
Year 2000. Many computer software systems in use today cannot distinguish the
year 2000 from the Year 1900. Most of the services provided to the Trusts depend
on the smooth functioning of computer systems. Each of the Trusts 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 a comparable effort is being made by service
providers. There can, of course, be no assurance that these steps will be
sufficient to avoid any adverse impact to the Trusts. In addition, because the
Year 2000 issue affects virtually all organizations, the obligations of the
states, and their counties, municipalities, authorities or other political
subdivisions, in which the Funds invest could also be adversely impacted by the
Year 2000 issue. The extent of such impact cannot be predicted.
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:
o By check (drawn on a U.S. bank) payable to The Reserve Funds, 1250
Broadway, 32nd Floor, New York, NY 10001-3701. 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.
o By wire -- Prior to calling your bank, call the Funds for specific
instructions at 800-637-1700 or the broker, financial intermediary 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 and any cash or other assets, subtracting
liabilities and dividing by the total number of shares outstanding. Each Fund
uses the amortized cost method of valuing its securities pursuant to Rule 2a-7
under the 1940 Act. 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., 1250
Broadway, 32nd Floor, New York, NY 10001-3701, which is a wholly-owned
subsidiary of the Adviser.
Exchange Privilege. The shares offered by this Prospectus may be exchanged for
shares in other Reserve 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 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 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 ten (10) separate
series of Reserve Tax-Exempt Trust authorized and outstanding and one (1)
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 Declarations of Trust of Reserve Tax-Exempt Trust
and Reserve New York Tax-Exempt Trust provide, 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 a 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 shareholders.
TAXES
The following discussion is intended as general information only. Prospective
investors should consult their own tax advisers with regard to the federal tax
consequences of the purchase, ownership or disposition of Fund shares, as well
as the tax consequences arising under the laws of any state or other taxing
jurisdiction. 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 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.
Dividends paid out of a Fund's investment company taxable income (including
dividends, taxable interest and net short-term capital gains) will be taxable to
a U.S. shareholder as ordinary income. Because no portion of a Fund's income is
expected to consist of dividends paid by U.S. corporations, no portion of the
dividends paid by the Funds is expected to be eligible for the corporate
dividends-received deduction. Distributions of net capital gains (the excess of
net long-term capital gains over net short-term capital losses), if any,
designated as capital gain dividends are taxable to shareholders as long-term
capital gains, regardless of how long the shareholder has held the Fund's
shares. Dividends are taxable to shareholders in the same manner whether
received in cash or reinvested in additional Fund shares.
Upon the sale or other disposition of shares of a Fund, in the event that the
Fund fails to maintain a constant net asset value per share, a shareholder may
realize a capital gain or loss which will be long-term or short-term, generally
depending upon the shareholder's holding period for the shares.
Each Fund may be required to withhold U.S. federal income tax at the rate of
31% of all taxable distributions payable to shareholders who fail to provide the
Fund with their correct taxpayer identification number or to make required
certifications, or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. Backup withholding is not an additional
tax. Any amounts withheld may be credited against the shareholder's U.S. federal
income tax liability.
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 (30) days if all of the following conditions apply: if the
redemption check is (1) for $5,000 or less; (2) payable to the shareholder(s) of
record; and (3) mailed to the shareholder(s) at the address of record for the
last 120 days. 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. 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.
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.
---------------
<PAGE>
TABLE OF CONTENTS
Page
Shareholder Expenses. 2
Financial Highlights. 3
Yield................ 6
Investment Objective 6
and Policies.........
Management........... 10
How to Buy Shares.... 11
Shares of Beneficial 13
Interest.............
Daily Dividends...... 13
Taxes................ 13
Redemptions.......... 14
General Information.. 15
Investors are advised to read and retain
this Prospectus for future reference.
[THE RESERVE FUNDS LOGO]
Founders of
"America's First
Money Fund"
1250 Broadway, 32nd Floor, New York, NY 10001-3701
General Information and 24-Hour Yield and Balance Information
800-637-1700 - www.reservefunds.com
Distributor -- Resrv Partners, Inc. 4/99
[THE RESERVE FUNDS LOGO]
Founders of
"America's First
Money Fund"
NEW YORK TAX-EXEMPT FUND
CALIFORNIA TAX-EXEMPT FUND
CALIFORNIA II TAX-EXEMPT FUND
CONNECTICUT TAX-EXEMPT FUND
FLORIDA TAX-EXEMPT FUND
MASSACHUSETTS TAX-EXEMPT FUND
MICHIGAN TAX-EXEMPT FUND
NEW JERSEY TAX-EXEMPT FUND
OHIO TAX-EXEMPT FUND
PENNSYLVANIA TAX-EXEMPT FUND
<PAGE>
RESERVE TAX-EXEMPT TRUST
CALIFORNIA TAX-EXEMPT FUND
CALIFORNIA II 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
RESERVE NEW YORK TAX-EXEMPT TRUST
NEW YORK TAX-EXEMPT FUND
1250 BROADWAY, 32nd FLOOR, NEW YORK, NY 10001-3701
800-637-1700 212-977-9982
24-HOUR YIELD AND BALANCE INFORMATION
NATIONWIDE 800-637-1700 WWW.RESERVEFUNDS.COM
-------------------
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information ("SAI") describes the California
Tax-Exempt, California II Tax-Exempt, Connecticut Tax-Exempt, Florida
Tax-Exempt, Massachusetts Tax-Exempt, Michigan Tax-Exempt, New Jersey
Tax-Exempt, Ohio Tax-Exempt and Pennsylvania Tax-Exempt Funds of Reserve
Tax-Exempt Trust and the New York Tax-Exempt Fund of Reserve New York Tax-Exempt
Trust (each a fund, together the "Funds"). This SAI is not a Prospectus, but
provides detailed information to supplement the Prospectus dated __________,
1999 and should be read in conjunction with it. A copy of the Prospectus may be
obtained by writing or calling the Funds at the address or telephone number
shown above. The Securities and Exchange Commission ("SEC") maintains a web site
(http://www.sec.gov) that contains this SAI and other information regarding the
Funds electronically filed with the SEC. This SAI is dated __________, 1999.
TABLE OF CONTENTS PAGE
Investment Objective and Policies......... 2
Trustees and Executive Officers........... 4
Investment Management, Distribution,
Service and Custodian
Agreements................................ 5
Portfolio Turnover, Transaction Charges
and Allocation............................ 7
Shares of Beneficial Interest............. 8
Purchase, Redemption and Pricing of Shares 10
Distributions and Taxes................... 12
Fund Yield................................ 13
Reserve Cash Performance Account.......... 14
Municipal Obligations..................... 14
Ratings................................... 15
Risk Factors of Concentrating in California 16
Risk Factors of Concentrating in
Connecticut............................... 18
Risk Factors of Concentrating in Florida.. 20
Risk Factors of Concentrating in
Massachusetts............................ 20
Risk Factors of Concentrating in Michigan. 21
Risk Factors of Concentrating in New Jersey 22
Risk Factors of Concentrating in New York. 23
Risk Factors of Concentrating in Ohio..... 25
Risk Factors of Concentrating in
Pennsylvania.............................. 26
Financial Statements...................... 27
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
INVESTMENT OBJECTIVE AND POLICIES
The following information provides additional details about the Funds'
investment objectives and policies.
Each Fund's investment objective is to seek as high a level of short-term
interest income exempt from federal, state, and, with respect to the New York
Portfolio, local income taxes, and with respect to Florida Tax-Exempt Fund, the
Florida intangibles tax, and with respect to the Pennsylvania Tax-Exempt Fund,
the Pennsylvania county personal property tax, as is consistent with
preservation of capital and liquidity, by investing principally in municipal
securities.
These securities are generally known as "municipal bonds" or "municipal
notes" ("Municipal Obligations") and the interest on them is exempt from federal
income tax in the opinion of bond counsel for the issuers. Municipal Obligations
generally include debt obligations issued to obtain funds for various public
purposes, including the construction of a wide range of public facilities such
as airports, bridges, highways, housing, hospitals, mass transportation, school
streets, and water and sewer works. Other public purposes for which Municipal
Obligations may be issued include refunding outstanding obligations, obtaining
funds for general operating expenses and lending such funds to other public
institutions and facilities. In addition, certain types of industrial
development bonds are issued by or on behalf of public authorities to obtain
funds to provide for the construction, equipment, repair or improvement of
privately operated housing facilities, sports facilities, convention or trade
show facilities, airport, mass transit, industrial, port or parking facilities,
air or water pollution control facilities and certain local facilities for water
supply, gas, electricity or sewage or solid waste disposal; the interest paid on
such obligations may be exempt from federal income tax. At least 80% of each
Fund's assets will be invested in Municipal Obligations exempt from federal,
state, and with respect to the New York Tax-Exempt Fund, local personal income
taxes, and with respect to Florida Tax-Exempt Fund, the Florida intangibles tax,
and with respect to the Pennsylvania Tax-Exempt Fund, the Pennsylvania county
personal property tax, unless the Fund has adopted a defensive position. During
periods when a state's Municipal Obligations meeting a Fund's quality standards
are not available, a Fund may invest up to 20% of its assets, or a greater
percentage on a temporary basis, in Municipal Obligations exempt only from
federal income taxes.
The Funds will purchase tax-exempt securities which are rated MIG-1 or MIG-2
by Moody's Investor Services, Inc. ("Moody's"); SP-1 or SP-2 by Standard &
Poor's Corporation ("S&P") or the equivalent thereof. Municipal Obligations
which are not rated may 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 a Fund may invest pursuant to guidelines established
by the Boards of Trustees.
Subsequent to its purchase by a Fund, an issue of rated Municipal Obligations
may cease to be rated or its rating may be reduced below the minimum required
for purchase by the Fund. In the event a Municipal Obligation's rating falls
below the second highest rating category of any nationally recognized
statistical rating organization, the Municipal Obligation will be disposed of
within five Business Days of the date the investment adviser becomes aware of
the new rating absent a determination by the Board of Trustees that the sale of
the security would not be in the best interest of the Fund. Should a rated
Municipal Obligation cease to be rated, the investment adviser will promptly
reassess the quality and credit risk of the Municipal Obligation. The ratings of
Moody's and S&P represent their opinions as to the quality of the Municipal
Obligations which they rate. It should be emphasized, however, that ratings are
relative and subjective and are not absolute standards of quality.
TEMPORARY INVESTMENTS. From time to time, on a temporary basis other than for
temporary defensive purposes, the Funds may invest in taxable short term
investments ("Taxable Investments") consisting of obligations backed by the full
faith and credit of the U.S. Government, its agencies and instrumentalities
("U.S. Governments"); deposit-type obligations, acceptances, and letters of
credit of Federal Deposit Insurance Corporation member banks; or instruments
fully secured or collateralized by such obligations. The Funds will not invest
in foreign securities or in taxable commercial paper. Interest earned on Taxable
Investments will be taxable income to investors. Unless a Fund has adopted a
temporary defensive position, no more than 20% of the net assets of a Fund will
be invested in Taxable Investments at any time. A Fund may enter into repurchase
agreements with regard to the taxable obligations listed above.
TEMPORARY DEFENSIVE INVESTMENTS. A Fund may enter into repurchase and reverse
repurchase agreements for temporary defensive purposes. A repurchase agreement
transaction occurs when a Fund purchases and simultaneously contracts to resell
securities at fixed prices determined by the yields negotiated. Each Fund will
limit repurchase agreement transactions to those financial institutions and
securities dealers who are deemed credit-worthy pursuant to guidelines
established by each Trust's Board of Trustees. The investment adviser will
follow procedures intended to provide that all acquired repurchase agreements
are at least 100% collateralized as to principal and interest. A Fund will make
payment for such instruments only upon their physical delivery to, or evidence
of their book-entry transfer to, the account of a Fund's custodian. If the
seller defaults on the repurchase obligation, a Fund could incur a loss, and may
incur costs in disposing of the underlying security. The Funds will not hold
more than 10% of their net assets in illiquid securities, including repurchase
agreements with a term greater than seven (7) days.
The Funds may sell securities in a reverse repurchase agreement when it is
considered advantageous, such as to cover net redemptions or to avoid a
premature outright sale of its portfolio securities. In a typical reverse
repurchase agreement transaction, the seller (Fund) retains the right to receive
interest and principal payments on the security, but transfers title to and
possession of the security to a second party in return for a percentage of its
value. By paying back to this party the value received plus interest, a Fund
repurchases the transferred security. It is the Funds' policy that entering into
a reverse repurchase agreement will be for temporary purposes only, and, when
aggregated with other borrowing, may not exceed 5% of the value of the total
assets of a Fund at the time of the transaction.
SUPPLEMENTAL INVESTMENT POLICIES. The Funds' investment objective, and the
following supplemental policies may not be changed without the affirmative vote
of a majority of the outstanding shares of a Fund. A majority of the outstanding
shares of a Fund means the vote of the lesser of (i) 67% or more of the shares
of the Fund present at a meeting, if the holders of more than 50% of the
outstanding shares of the Fund are present or represented by proxy, or (ii) more
than 50% of the outstanding shares of a Fund. A Fund cannot:
(1) invest in any security other than those discussed herein or in the
Prospectus;
(2) borrow money except as a temporary or emergency measure (but not for the
purpose of purchasing investment securities), and not in an amount to
exceed 5% of the value of its total assets;
(3) issue senior securities except in compliance with the Investment Company
Act of 1940 ("1940 Act"); the California Tax-Exempt Fund cannot issue
securities senior to its capital stock;
(4) act as an underwriter with respect to the securities of others to the
extent that, in connection with the disposition of portfolio securities,
it may be deemed to be an underwriter under certain federal securities
laws; the California Tax-Exempt Fund cannot act as an underwriter with
respect to the securities of others;
(5) concentrate investments in any particular industry except to the extent
that its investments are concentrated exclusively in Municipal
Obligations, U.S. Governments or instruments secured by such obligations;
(6) purchase, sell or otherwise invest in real estate or commodities or
commodity contracts; however, a Fund may purchase Municipal Obligations
secured by interests in real estate;
(7) lend more than 33 1/3% of the value of its total assets except to the
extent its investments are considered loans;
(8) sell any security short or write, sell or purchase any futures contract
or put or call option; provided, however, a Fund shall have the authority
to purchase Municipal Obligations subject to a stand-by commitment, at
the Fund's option;
(9) invest in the securities of other investment companies except in
compliance with the 1940 Act; and
(10) make investments on a margin basis.
(11) purchase or sell any securities (other than securities of the Fund) from
or to any officer or Trustee of a Fund, the investment adviser or
affiliated person except in compliance with the 1940 Act.
(12) the California Tax-Exempt Fund cannot purchase or sell any securities
(other than securities of the Fund) from or to any officer or Trustee of
a Fund, the investment adviser or affiliated person except in compliance
with the 1940 Act;
Notwithstanding the foregoing investment restrictions, each Fund (except the
California Tax-Exempt Fund) may invest substantially all of its assets in
another open-end investment company with substantially the same investment
objective as the Fund.
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 on 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.
TRUSTEES AND EXECUTIVE OFFICERS
*BRUCE R. BENT, 61, President, Treasurer and Trustee, 1250 Broadway, 32nd
Floor, New York, NY 10001-3701-3701.
Mr. Bent is President, Treasurer, and Trustee of The Reserve Fund ("RF"),
Reserve Institutional Trust ("RIT"), Reserve Tax-Exempt Trust ("RTET"), Reserve
New York Tax-Exempt Trust ("RNYTET") and Reserve Private Equity Series ("RPES");
Director, Vice President and Secretary of Reserve Management Company, Inc.
("RMCI") and Reserve Management Corporation ("RMC") ; and Chairman and Director
of Resrv Partners, Inc.
("RESRV").
+EDWIN EHLERT, JR., 67, Trustee, 125 Elm Street, Westfield, NJ 07091.
Mr. Ehlert retired as Chief Executive Officer and Director of Ehlert Travel
Associates, Inc. (travel agency) and Ehlert Travel Associates of Florida, Inc.
(travel agency) in December 1996. He is currently Trustee of RF, RIT, RNYTET,
RTET and RPES.
+HENRI W. EMMET, 72, Trustee, 1535 Presidential Drive, Apt. 4A, Columbus, OH
43212. Mr. Emmet retired as the Managing Director of Servus Associates, Inc. in
1994 and U.S.A. Representative of the First National Bank of Southern Africa in
1996. He is currently Trustee of RF, RIT, RNYTET, RTET and RPES.
+DONALD J. HARRINGTON, C.M., 53, Trustee, St. John's University, Jamaica, NY
11439.
The Reverend Harrington is President of St. John's University (NY), a Trustee
of RF, RIT, RNYTET, RTET and RPES and a Director of Bear Stearns Companies since
1993.
+WILLIAM E. VIKLUND, 58, Trustee, 110 Grist Mill Lane, Plandome Manor, NY
11030-1110.
Mr. Viklund is formerly President and COO of Bancorp and President and CEO of
Long Island Savings (1980-1996). He is currently Trustee of RF, RIT, RTET,
RNYTET and RPES.
DIANA P. HERMANN, Trustee, 40, 380 Madison Avenue, Suite 2300, New York, NY
10017.
Ms. Hermann is President and COO of Aquila Management Corporation, sponsor of
14 mutual funds with over $3 billion in assets, as of October 5, 1998. She has
been employed at Aquila since 1986.
RICHARD BASSUK, 58, Trustee, 767 Third Avenue, 28th Floor, New York, NY
10017.
Mr. Bassuk is founding principal and President of The Singer & Bassuk
Organization (1995-present). He is also Chairman of R.E. Bases Enterprises
Corporation (1994-present).
*BRUCE R. BENT II, 33, Senior Vice President, Assistant Secretary and
Trustee, 1250 Broadway, 32nd Floor, New York, NY 10001-3701.
Mr. Bent II joined The Reserve Funds in 1992 and is Senior Vice President and
Assistant Secretary of RF, RIT, RNYTET, RTET and RPES.
ARTHUR T. BENT III, 30, Vice President and Assistant Secretary, 1250
Broadway, 32nd Floor, New York, NY 10001-3701.
Mr. Bent III joined The Reserve Funds in 1997 and is Vice President and
Assistant Secretary of RF, RIT, RTET, RNYTET and RPES. Before joining The
Reserve Funds, he was a private investor.
JAMES M. FREISEN, 41, Controller, 1250 Broadway, 32nd Floor, New York, NY
10001-3701.
Mr. Friesen joined The Reserve Funds in 1999 and is Controller of RF, RIT,
RNYTET, RTET, RPES and RESRV. Before joining The Reserve Funds in 1999, Mr.
Friesen was an Assistant Vice President at Paine Webber since August 1998. Prior
to that, he was Assistant Vice President, Bank of New York; Assistant Vice
President, Fifth Third Bank; Vice President, Smith Barney and Assistant Vice
President, Drexel Burnham Lambert.
MARYKATHLEEN FOYNES, 29, Counsel and Secretary, 1250 Broadway, 32nd Floor,
New York, NY 10001-3701.
Ms. Foynes joined The Reserve Funds in 1998 and is Counsel and Secretary of
RF, RIT, RNYTET, RTET and RPES. Before joining The Reserve Funds in 1998, Ms.
Foynes was a staff attorney for PaineWebber, Inc. Prior to that, Ms. Foynes
worked for the U.S. House of Representatives as a District Manager for a Member
of Congress.
- -------
+ Messrs. Ehlert, Emmet and Harrington are members of a Review Committee which
performs the functions of an Audit Committee and reviews compliance
procedures and practices. During the year ended May 31, 1998, each Fund held
four Board meetings and one Review Committee meeting
* Interested Trustee within the meaning of the 1940 Act. The members of the
Board of Trustees who are not interested trustees will be paid a stipend of
$3,500 for each joint Board meeting they attend and an annual fee of $16,000
for service to all of the Trusts in the complex.
As of __________, 1999, the Trusts' records reflect that the Trustees and
officers as a group owned less than 1% of the outstanding shares of the
California Tax-Exempt, Connecticut Tax-Exempt, Florida Tax-Exempt,
Massachusetts Tax-Exempt, Michigan Tax-Exempt, New Jersey Tax-Exempt, New
York Tax-Exempt, Ohio Tax-Exempt and Pennsylvania Tax-Exempt Funds.
COMPENSATION TABLE FOR FISCAL YEAR ENDING MAY 31, 1998
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM FUNDS AND FUND COMPLEX
NAME OF TRUSTEE FROM FUNDS (4 ADDITIONAL TRUSTS) PAID TO TRUSTEE
<S> <C> <C>
Bruce R. Bent, $ 0 $ 0
President & Trustee
Edwin Ehlert, Jr., $6600 $30,000
Trustee
Henri W. Emmet, $6600 $30,000
Trustee
Rev. Donald J. Harrington, $6600 $30,000
Trustee
</TABLE>
INVESTMENT MANAGEMENT, DISTRIBUTION, SERVICE AND CUSTODIAN AGREEMENTS
THE ADVISER. Reserve Management Company, Inc. ("RMCI" or "Adviser"), 1250
Broadway, 32nd Floor, New York, NY 10001-3701, a registered investment adviser,
manages the Fund and provides it with investment advice. As a result of the
recent proxy votes, each of the Funds, except for the California Tax Exempt Fund
(see below), has entered into a new Investment Management Agreement with the
Adviser, which is substantially similar to the investment management agreement
previously in effect with regard to each Fund, except for a new comprehensive
management fee, effective ____________, 1999. Under each Investment Management
Agreement, the Adviser manages the Fund and invests in furtherance of its
objectives and policies subject to the overall control and direction of the
Trusts' Board of Trustees.
Under the Investment Management Agreements, each Fund pays the Adviser a
comprehensive management fee calculated on an annual basis at 0.80% of its
average daily net assets. Under the terms of the Investment Management
Agreements with the Funds, the Adviser pays all employee and ordinary operating
costs of the Funds. Excluded from the definition of ordinary operating costs are
interest, taxes, brokerage fees, extraordinary legal and accounting fees and
expenses, fees of the Trustees who are not "interested persons" of the Trust (as
defined in the 1940 Act) ("disinterested Trustees"), and fees under the
Distribution Plan.
Under the investment management agreements previously in effect, for the
fiscal years ended May 31, 1996, 1997 and 1998 RMCI received management fees of
$155,027, $166,430 and $185,719, respectively, from the Connecticut Tax-Exempt
Fund; $48,113, $51,006 and $91,116, respectively, from the Massachusetts
Tax-Exempt Fund; $775,398, $786,904 and $889,437, respectively, from the New
York Tax-Exempt Fund; and $154,727, $194,595 and $197,592, respectively, from
the New Jersey Tax-Exempt Fund. For the period of June 24, 1996 to May 31, 1997
and for the fiscal year ended May 31, 1998, RMCI received $19,304 and $50,776,
respectively, in management fees from the Florida Tax-Exempt Fund. RMCI received
$45,755 in management fees from the Pennsylvania Tax-Exempt Fund for the period
September 15, 1997 to May 31, 1998; and $1,915 in management fees from the Ohio
Tax-Exempt Fund for the period April 1, 1998 to May 31, 1998.
The Investment Management Agreements were approved by shareholders of each of
the Funds, except the California Tax-Exempt Fund, in 1999 and may be renewed
annually if specifically approved by the Boards of Trustees and by the vote of a
majority of the disinterested Trustees cast in person at a meeting called for
the purpose of voting on such renewal. The agreement terminates automatically
upon their assignment and may be terminated without penalty upon 60 days'
written notice by a vote of the Boards of Trustees or by vote of a majority of
outstanding voting shares of the Fund or by RMCI.
The California Tax-Exempt Fund pays the Adviser a management fee which is a
percentage of the average daily net assets of the Fund, calculated at the annual
rate of 0.50% of the first $500 million of average daily net assets, 0.475% of
the next $500 million of such assets, 0.45% of the next $500 million of such
assets, 0.425% of the next $500 million of such assets, and 0.40% of such assets
in excess of $2 billion For the fiscal years ended May 31, 1996, 1997 and 1998,
RMCI received management fees of $50,807, $103,607 and $246,741, respectively,
in management fees from the California Tax-Exempt Fund. The Investment
Management with respect to the California Tax-Exempt Fund will terminate
effective __________, 1999 as a result of a charge in control of the Adviser. On
an interim basis, the Adviser will provide advisory services for the California
Tax-Exempt Fund at no cost to the Fund.
From time to time, RMCI may waive receipt of its fees and/or voluntarily
assume certain expenses of the Fund which would have the effect of lowering the
Fund's expense ratio and increasing yield to investors at the time such amounts
are assumed or waived, as the case may be.
SERVICE AGREEMENT. Pursuant to a Service Agreement, the Adviser furnishes the
California Tax-Exempt Fund, at cost, all personnel required for its maintenance
and operation of the California Tax-Exempt Fund, including, administrative,
clerical, recordkeeping, bookkeeping, shareholder accounting and servicing, as
well as suitable office space and necessary equipment and supplies used by such
personnel in performing these functions. Operating costs for which the
California Tax-Exempt Fund reimburses the Adviser includes salaries and other
expenses, rent, depreciation of equipment and facilities. Affiliates of the
Adviser may provide some of these services. The Trust also reimburses the
Adviser for: brokerage fees and commissions, interest charges, taxes, the cost
of registering for sale, issuing and redeeming the California Tax-Exempt Fund's
shares and of printing and mailing all prospectuses, proxy statements and
shareholder reports furnished to current shareholders, overhead costs and
expenses accounting and legal fees and expenses and disinterested Trustees fees
with regard to the California Tax-Exempt Fund. The Adviser has agreed to repay
the California Tax-Exempt 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 Fund.
The Service Agreement is nonassignable and continues until terminated by either
party on 120 days' notice.
A substantially similar Service Agreement was in effect with regard to each
of the other Funds until __________, 1999. Pursuant to the Service Agreements
during the fiscal years ended May 31, 1996, 1997 and 1998, the Funds reimbursed
RMCI $1,081,664, $934,359 and $914,100, respectively, for combined expenses.
DISTRIBUTION AGREEMENT. The Funds' Distributor is Resrv Partners, Inc.
("RESRV"), 1250 Broadway, 32nd Floor, New York, NY 10001-3701-3701. The Funds
have authorized the Distributor, in connection with its sale of Fund shares, to
give only such information and to make only such statements and representations
as are contained in the Prospectus. Sales may be made only by the Prospectus.
The Distributor is a "principal underwriter" for the Funds within the meaning of
the 1940 Act, and as such acts as agent in arranging for the continuous offering
of Fund shares. The Distributor has the right to enter into selected dealer
agreements with brokers or other persons of its choice for the sale of the
Funds' shares. Parties to selected dealer agreements may receive assistance
payments, if they qualify for such payments, under the Distribution Plan
described below. RESRV's principal business is the distribution of mutual fund
shares. The Distributor has not retained any underwriting commissions on the
sale of Fund shares during the last three fiscal years. The Distributor does not
have the exclusive right to distribute Fund shares and the Funds may, therefore,
continue to distribute their own shares.
The Distribution Agreement may be renewed annually if specifically approved
by the Boards of Trustees and by the vote of a majority of the disinterested
Trustees cast in person at a meeting called for the purpose of voting on such
approval or by the vote of a majority of the outstanding voting securities of
the Funds.
PLAN OF DISTRIBUTION. Each Fund maintains a Plan of Distribution ("Plan") and
related agreements, as amended, under Rule 12b-1 of the 1940 Act, which provides
that investment companies may pay distribution expenses, directly or indirectly,
pursuant to a Plan adopted by the investment company's Board and approved by its
shareholders. Under the Plan, the Fund makes assistance payments to brokers,
financial institutions and other financial intermediaries ("payee(s)") for
shareholder accounts ("qualified accounts") as to which the payee has rendered
distribution assistance services at an annual rate of 0.20% of the average NAV
of qualified accounts. Such distribution assistance may include, but is not
limited to, establishment of shareholder accounts, delivering prospectuses to
prospective investors and processing automatic investment in Fund shares of
client account balances. Substantially all such monies (together with
significant amounts from RMCI's own resources) are paid by RMCI to payees for
their distribution assistance or administrative services with any remaining
amounts being used by RMCI to partially defray other expenses incurred by RMCI
in distributing Fund shares. In addition to the amounts required by the Plan,
RMCI may, at its discretion, pay additional amounts. The rate of any additional
amounts that may be paid will be based upon RESRV's and RMCI's analysis of the
contribution that the payee makes to the Fund by increasing assets under
management, reducing expense ratios and the cost to the Fund if such services
were provided directly by the Fund or other authorized persons. RMCI and RESRV
will also consider the need to respond to competitive offers of others, which
could result in assets being withdrawn from the Fund and an increase in the
expense ratio for the Fund. RMCI may elect to retain a portion of the
distribution assistance payments to pay for sales materials or other promotional
activities. The Trustees have determined that there is a reasonable likelihood
the Plan will benefit each Fund and its shareholders.
The Glass-Steagall Act prohibits all entities which receive deposits from
engaging to any extent in the business of issuing, underwriting, selling, or
distributing securities, although national and state chartered banks are
permitted to purchase and sell securities upon the order and for the account of
their customers. Those persons who wish to provide assistance in the form of
activities not primarily intended to result in the sale of Fund shares (such as
administrative and account maintenance services) may include banks, upon advice
of counsel that they are permitted to do so under applicable laws and
regulations, including the Glass-Steagall Act. In such event, no preference will
be given to securities issued by such banks as investment and the assistance
payments received by such banks under the Plan may or may not compensate the
banks for their administrative and account maintenance services for which the
banks may also receive compensation from the bank accounts they service. It is
Fund management's position that payments to banks pursuant to the Plan for
activities not primarily intended to result in the sale of a Fund's shares, such
as administrative and account maintenance services, do not violate the
Glass-Steagall Act. However, this is an unsettled area of the law and if a
determination contrary to management's position is made by a bank regulatory
agency or court concerning payments to banks contemplated by the Plan, any such
payments will be terminated and any shares registered in the bank's name, for
its underlying customer, will be registered in the name of that customer.
Financial institutions providing distribution assistance or administrative
services for the Fund may be required to register as securities dealers in
certain states.
Under the Plan, the Funds' Controller or Treasurer reports quarterly the
amounts and purposes of assistance payments. During the continuance of the Plan
the selection and nomination of the disinterested Trustees is at the discretion
of the disinterested Trustees currently in office.
During the fiscal year ended May 31, 1998, $580,881 was paid under the Plan
by the Funds. Any such payments are intended to benefit a Fund by maintaining or
increasing net assets to permit economies of scale in providing services to
shareholders and to contribute to the stability of shareholder services. During
the fiscal year ended May 31, 1998, substantially all payments made by the Funds
were to brokers or other financial institutions and intermediaries for share
balances in the Funds.
The Plan and related agreements were duly approved by shareholders and as to
any Fund may be terminated at any time by a vote of a majority of the
outstanding voting securities of such Fund or by vote of the disinterested
Trustees. The Plan and related agreements may be renewed from year to year, if
approved by a vote of a majority of the Boards of Trustees, and by the vote of
the disinterested Trustees cast in person at a meeting called for the purpose of
voting on such renewal. The Plan may not be amended to increase materially the
amount to be spent for distribution without shareholder approval. All material
amendments to the Plan must be approved by a vote of the Boards of Trustees and
of the disinterested Trustees, cast in person at a meeting called for the
purpose of such vote.
CUSTODIAL SERVICES AND INDEPENDENT ACCOUNTANT. The Chase Manhattan Bank, 4
New York Plaza, New York, NY 10004 is Custodian of the Funds' securities and
cash pursuant to a Custodian Agreement. PricewaterhouseCoopers LLP, 1301 Avenue
of the Americas, New York, NY 10019 is the Funds' independent accountant.
PORTFOLIO TURNOVER, TRANSACTION CHARGES AND ALLOCATION
As investment securities transactions made by each Fund are normally
principal transactions at net prices, the Funds do not normally incur brokerage
commissions. Purchases of securities from underwriters involve a commission or
concession paid by the issuer to the underwriter and aftermarket transactions
with dealers involve a spread between the bid and asked prices. During the past
three fiscal years the Funds have not paid any brokerage commissions.
The Funds' policy of investing in debt securities maturing within one year
results in high portfolio turnover. However, because the cost of these
transactions is minimal, high turnover does not have a materially adverse effect
upon the net asset value or yield of a Fund.
Subject to the overall supervision of each Fund's officers and the Boards of
Trustees, RMCI places all orders for the purchase and sale of a Fund's
investment securities. In general, in the purchase and sale of investment
securities, RMCI will seek to obtain prompt and reliable execution of orders at
the most favorable prices or yields. In determining best price and execution,
RMCI may take into account a dealer's operational and financial capabilities,
the type of transaction involved, the dealer's general relationship with RMCI,
and any statistical, research, or other services provided by the dealer to RMCI.
To the extent such non-price factors are taken into account, the execution price
paid may be increased, but only in reasonable relation to the benefit of such
non-price factors to the Funds as determined in good faith by RMCI. Brokers or
dealers who execute investment securities transactions may also sell shares of a
Fund; however, any such sales will not be either a qualifying or disqualifying
factor in the selection of brokers or dealers.
When orders to purchase or sell the same security on identical terms are
simultaneously placed for the Funds and other portfolios managed by RMCI, the
transactions are allocated as to amount in accordance with each order placed for
each portfolio. However, RMCI may not always be able to purchase or sell the
same security on identical terms for all portfolios affected.
SHARES OF BENEFICIAL INTEREST
The Declarations of Trust permit the Trusts to issue an unlimited number of
full and fractional shares of beneficial interest and to divide or combine the
shares into a greater or lesser number of shares without thereby changing the
proportionate beneficial interests in a Fund. If they deem it advisable and in
the best interests of shareholders, the Trustees may classify or reclassify any
unissued shares of each Fund by setting or changing the preferences, conversion
or other rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms and conditions of redemption of the stock. Any changes
would be required to comply with any applicable state and federal securities
laws. These currently require that each class be preferred over all other
classes with respect to assets specifically allocated to such class. It is
anticipated that under most circumstances, the rights of any additional class
would be comparable, unless otherwise required, to respond to the particular
situation. Upon liquidation of a Fund, shareholders are entitled to share, pro
rata, in its net assets of their respective Funds available for distribution to
such shareholders. It is possible, although considered highly unlikely in view
of the method of operation of mutual funds, that should assets of one class of
shares be insufficient to satisfy its liabilities, the assets of another class
could be subjected to claims arising from the operations of the first class of
shares. No changes can be made to a Fund's issued shares without shareholder
approval.
Each Fund share, when issued, is fully paid, non-assessable (except as set
forth below), and fully transferable or redeemable at the shareholder's option.
Each Fund share has an equal interest in the net assets of its portfolio, equal
rights to all dividends and other distributions from its portfolio, and one vote
for all purposes. Shares of all classes vote together for the election of
Trustees, and have noncumulative voting rights, meaning that the holders of more
than 50% of the shares voting for the election of Trustee could elect all
Trustees if they so chose, and in such event the holders of the remaining shares
could not elect any person to the Board of Trustees.
Under Massachusetts law, the shareholders and trustees of a business trust
can be personally liable for the Funds' obligations unless, as in this instance,
the Declarations of Trust provide, in substance, that no shareholder or Trustee
shall be personally liable for the Funds', and each investment portfolio's,
obligations to third parties, and requires that every written contract made by a
Fund contain a provision to that effect. The Declarations of Trust also require
the Fund to indemnify its shareholders and Trustees against such liabilities and
any related claims or expenses.
The Declaration of Trusts further provide that the Trustees will not be
liable for errors of judgment or mistakes of fact or law; but nothing in the
Trusts protect a Trustee against any liability to which he would otherwise be
subject to by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his office.
Regulations of the Securities and Exchange Commission provide that if a class
is separately affected by a matter requiring shareholder vote (election of
Trustees, ratification of independent auditor selection and approval of an
underwriting agreement are not considered to have such separate effect and may
be voted upon by the Fund as a whole), each class will vote separately. Each
class votes separately on such matters as approval of the Investment Management
Agreement, material amendments to the Plan of Distribution, and changes in the
fundamental policies of the Fund. These items require approval by a majority of
the affected shareholders. For this purpose a "majority" is constituted by
either 50% of all shares voting as a group or 67% of the shares voted at an
annual meeting of shareholders at which at least 50% of the shares of each group
are represented.
As of March 26, 1999, no persons owned beneficially or of record 5% or more
of the New Jersey Tax-Exempt Fund or the Michigan Tax-Exempt Fund, respectively.
As of March 26, 1999, the following persons owned beneficially or of record 5%
or more of the California Tax-Exempt Fund, Connecticut Tax-Exempt Fund, Florida
Tax-Exempt Fund, Massachusetts Tax-Exempt Fund, Ohio Tax-Exempt Fund,
Pennsylvania Tax-Exempt Fund or the New York Tax-Exempt Fund:
<PAGE>
I. RESERVE TAX-EXEMPT TRUST
A. CALIFORNIA TAX-EXEMPT FUND
SHARES PERCENT
Name and Address of BENEFICIALLY OUTSTANDING
Beneficial Owner OWNED (1) SHARES OWNED
Reserve Management Corp. $4,724,641 5.87%
Broker Account No. 0279083013517
1250 Broadway, 32nd Floor
New York, NY 10001-3701
Reserve Management Corp.
Broker Account No. 0274864052412 $5,621,062 6.98%
1250 Broadway, 32nd Floor
New York, NY 10001-3701
B. CONNECTICUT TAX-EXEMPT FUND
SHARES PERCENT
Name and Address of BENEFICIALLY OUTSTANDING
Beneficial Owner OWNED (1) SHARES OWNED
Reserve Management Corp.
Broker Account No. 30001668RSV $6,532,924 12.38%
1250 Broadway, 32nd Floor
New York, NY 10001-3701
Reserve Management Corp.
Broker Account No. 0272204437913 $11,969,657 22.69%
1250 Broadway, 32nd Floor
New York, NY 10001-3701
Reserve Management Corp.
Broker Account No. 50979145 $4,589,295 8.70%
1250 Broadway, 32nd Floor
New York, NY 10001-3701
Reserve Management Corp.
Broker Account No. 0272205593912 $6,466,431 12.26%
1250 Broadway, 32nd Floor
New York, NY 10001-3701
C. FLORIDA TAX-EXEMPT FUND
SHARES PERCENT
Name and Address of BENEFICIALLY OUTSTANDING
Beneficial Owner OWNED (1) SHARES OWNED
Reserve Management Corp.
Broker Account No. 46010537 $1,846,283 7.84%
1250 Broadway, 32nd Floor
New York, NY 10001-3701
Reserve Management Corp.
Broker Account No. 0279756370210 $1,389,213 5.89%
1250 Broadway, 32nd Floor
New York, NY 10001-3701
D. MASSACHUSETTS TAX-EXEMPT FUND
SHARES PERCENT
Name and Address of BENEFICIALLY OUTSTANDING
Beneficial Owner OWNED (1) SHARES OWNED
Reserve Management Corp.
Broker Account No. 0278952310517 $3,708,951 13.46%
1250 Broadway, 32nd Floor
New York, NY 10001-3701
Reserve Management Corp.
Broker Account No. 027895232951 $2,628,903 9.54%
1250 Broadway, 32nd Floor
New York, NY 10001-3701
Reserve Management Corp.
Broker Account No. 0276580073119 $4,562,244 16.56%
1250 Broadway, 32nd Floor
New York, NY 10001-3701
Reserve Management Corp.
Broker Account No. 0278731850114 $1,453,044 5/28%
1250 Broadway, 32nd Floor
New York, NY 10001-3701
F. OHIO TAX-EXEMPT FUND
SHARES PERCENT
Name and Address of BENEFICIALLY OUTSTANDING
Beneficial Owner OWNED (1) SHARES OWNED
Reserve Management Corp.
Broker Account No. 51589455 $1,217,964 99.97%
1250 Broadway, 32nd Floor
New York, NY 10001-3701
G. PENNSYLVANIA TAX-EXEMPT FUND
SHARES PERCENT
Name and Address of BENEFICIALLY OUTSTANDING
Beneficial Owner OWNED (1) SHARES OWNED
Reserve Management Corp.
Broker Account No. 0275660008912 $1,243,740 5.59%
1250 Broadway, 32nd Floor
New York, NY 10001-3701
Reserve Management Corp.
Broker Account No. 0275660030015 $1,133,179 5.09%
1250 Broadway, 32nd Floor
New York, NY 10001-3701
Reserve Management Corp.
Broker Account No. 73654100 $2,630,859 11.82%
1250 Broadway, 32nd Floor
New York, NY 10001-3701
Reserve Management Corp.
Broker Account No. 73654101 $2,486,110 11.17%
1250 Broadway, 32nd Floor
New York, NY 10001-3701
II. RESERVE NEW YORK TAX-EXEMPT TRUST
A. NEW YORK TAX-EXEMPT FUND
SHARES PERCENT
Name and Address of BENEFICIALLY OUTSTANDING
Beneficial Owner OWNED (1) SHARES OWNED
Reserve Management Corp.
Broker Account No. 0260-0792 $15,724,261 8.20%
1250 Broadway, 32nd Floor
New York, NY 10001-3701
(1) Fractional Shares have been omitted.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Redemption payments will normally be made by check or wire transfer but each
Fund is authorized to make payment of redemptions partly or wholly in kind (that
is, by delivery of investment securities valued at the same time as the
redemption net asset value ("NAV") is determined). The Funds have elected to
permit any shareholder of record to make redemptions wholly in cash to the
extent the shareholder's redemptions in any 90-day period do not exceed the
lesser of $250,000 or 1% of the net assets of the Fund. The election is
irrevocable pursuant to rules and regulations under the 1940 Act unless
withdrawal is permitted by order of the SEC. Redemptions in kind are further
limited by the Funds' intention to redeem in kind only when necessary to reduce
a disparity between amortized cost and market value. In disposing of such
securities, an investor might incur transaction costs and on the date of
disposition might receive an amount less than the net asset value of the
redemption.
IF SHARES OF A FUND ARE PURCHASED BY CHECK OR RESERVE AUTOMATIC TRANSFER, THE
FUND MAY DELAY TRANSMITTAL OF REDEMPTION PROCEEDS UNTIL SUCH TIME AS IT HAS
ASSURED ITSELF THAT GOOD PAYMENT HAS BEEN COLLECTED FOR THE PURCHASE OF SUCH
SHARES, WHICH MAY BE UP TO 10 BUSINESS DAYS.
PURCHASES AND REDEMPTIONS THROUGH OTHERS. Share purchases and redemptions may
also be made through brokers and financial institutions ("firms"). Firms may
provide varying arrangements for their clients with respect to the purchase and
redemption of Fund shares and may arrange with their clients for other
investment or administrative services. Some of these firms participate in the
Funds' Plans of Distribution ("Plans"). Under the Plans, payments are made to
persons who provide assistance in distributing Fund shares or other assistance
to a Fund.
NET ASSET VALUE. Shares of each Fund are offered at NAV which is calculated
at the close of each Business Day as defined in the Prospectus. The NAV is not
calculated on New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day (observed), Independence Day, Labor Day, Thanksgiving Day,
Christmas Day, days the New York Stock Exchange is closed for trading and on
regional banking holidays. The NAV of each Fund is normally maintained at $1.00
per share. The Funds cannot guarantee that their NAV will always remain at $1.00
per share.
The NAV per share of each Fund is determined by adding the value of all of
its securities, cash and other assets, subtracting its liabilities, and dividing
the results by the number of its shares outstanding. Each Fund uses the
amortized cost method of valuing its securities pursuant to Rule 2a-7 under the
1940 Act. The Boards of Trustees have determined the most practical method
currently available for valuing investment securities is the amortized cost
method. This procedure values a purchased security at cost at the time of
purchase and thereafter assumes a constant amortization to maturity of any
discount or premium and accrual of interest income, irrespective of intervening
changes in interest rates or security market values.
In order to maintain a $1.00 per share price the Funds will utilize the
following practices: maintain a dollar-weighted average portfolio maturity of 90
days or less; purchase only instruments having remaining maturities of 397 days
or less; and invest only in securities determined by the Boards of Trustees to
be of high quality with minimal credit risk. To assess whether repurchase
agreement transactions present more than minimal credit risk, the Trustees have
established guidelines and monitor the creditworthiness of all entities,
including banks and broker-dealers, with which a Fund proposes to enter into
repurchase agreements. In addition, the Funds have adopted procedures, taking
into account current market conditions and the investment objective, to attempt
to maintain NAV asset value as computed for the purpose of sales and redemptions
at $1.00 per share. Such procedures will include review by the Trustees at such
intervals as they may determine reasonable, to ascertain the extent of any
difference in the NAV of a Fund from $1.00 per share determined by valuing its
assets at amortized cost as opposed to valuing them based on market factors. If
the deviation exceeds 1/2 of one percent, the Trustees will promptly consider
what action if any should be initiated. If they believe that the deviation may
result in material dilution or other unfair results to shareholders, the
Trustees have undertaken to apply appropriate corrective remedies which may
include the sale of a Fund's assets prior to maturity to realize capital gains
or losses or to shorten the average maturity of a Fund, withholding dividends,
redemption of shares of a Fund in kind, or reverting to valuation based upon
market prices and estimates.
SHAREHOLDER SERVICE POLICIES. The Funds' policies concerning shareholder
services are subject to change from time to time. The Funds reserve the right to
change the $1,000 minimum account size subject to the $5 monthly service charge
or involuntary redemption. The Funds further reserve the right to impose special
service charges for services provided to individual shareholders generally
including, but not limited to, fees for returned checks, stop payment orders on
official checks and shareholder checks, and special research services. The
Funds' standard service charges as described in the Prospectus are also subject
to adjustment from time to time. In addition, the Funds reserve the right to
increase their minimum initial investment amount at any time.
CREDITING OF INVESTMENTS. The Funds will only give credit investments on the
day they become available in Federal funds. A Federal Reserve wire system
transfer ("Fed wire") is the only type of wire transfer that is reliably
available in Federal funds on the day sent. For a Fed wire to receive same day
credit, the Fund must be notified before 11:00 AM (New York time) of the amount
to be transmitted and the account to be credited. Checks and other items
submitted to the Funds for investment are only accepted when submitted in proper
form, denominated in U.S. dollars, and are credited to shareholder accounts only
upon their conversion into Federal funds, which normally takes one or two
Business Days following receipt. Checks delivered to the Funds after 11:00 AM
(New York time) are considered received on the following Business Day.
Checks drawn on foreign banks are normally not accepted by the Funds. In
addition, the Funds do not accept cash investments.
The Funds reserve the right to reject any investment in them for any reason
and may, at any time, suspend all new investment.
IF SHARES PURCHASED ARE TO BE PAID FOR BY WIRE AND THE WIRE IS NOT RECEIVED
BY A FUND OR IF SHARES ARE PURCHASED BY A CHECK WHICH, AFTER DEPOSIT, IS
RETURNED UNPAID OR PROVES UNCOLLECTABLE, THE PURCHASE MAY BE CANCELED OR
REDEEMED IMMEDIATELY. THE INVESTOR THAT GAVE NOTICE OF THE INTENDED WIRE OR
SUBMITTED THE CHECK WILL BE HELD FULLY RESPONSIBLE FOR ANY LOSSES INCURRED BY
THE FUND, THE INVESTMENT ADVISER OR THE DISTRIBUTOR. THE FUND MAY REDEEM SHARES
FROM ANY ACCOUNT REGISTERED IN THAT PURCHASER'S NAME AND MAY APPLY THE PROCEEDS
THEREFROM TO THE PAYMENT OF ANY AMOUNTS OWED THE FUND, THE INVESTMENT ADVISER OR
THE DISTRIBUTOR.
SHARE CERTIFICATES. Share certificates are not issued by the Funds.
DISTRIBUTIONS AND TAXES
Each Fund intends to qualify as a regulated investment company under the
Internal Revenue Code of 1986, as amended ("Code"), so long as such
qualification is in the best interests of their shareholders. To qualify as a
regulated investment company, the Fund must, among other things, (a) derive in
each taxable year at least 90% of its gross income from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of stock, securities or foreign currencies or other income derived
with respect to its business of investing in such stock, securities or
currencies; (b) diversify its holdings so that, at the end of each quarter of
the taxable year, (i) at least 50% of the market value of the Fund's assets is
represented by cash and cash items (including receivables), U.S. Government
securities, the securities of other regulated investment companies and other
securities, with such other securities of any one issuer limited for the
purposes of this calculation to an amount not greater than 5% of the value of
the Fund's total assets and not greater than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
assets is invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other regulated investment
companies); and (c) distribute at least 90% of its investment company taxable
income (which includes, among other items, dividends, interest and net
short-term capital gains in excess of net long-term capital losses) and its net
tax-exempt interest income each taxable year.
As a regulated investment company, each Fund generally will not be subject to
U.S. federal income tax on its investment company taxable income and net capital
gains (the excess of net long-term capital gains over net short-term capital
losses), if any, that it distributes to shareholders. Each Fund intends to
distribute to its shareholders, at least annually, substantially all of its
investment company taxable income and net capital gains. Amounts, other than
tax-exempt interest, not distributed on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4% excise
tax. To prevent imposition of the excise tax, each Fund must distribute during
each calendar year an amount equal to the sum of (1) at least 98% of its
ordinary income (not taking into account any capital gains or losses) for the
calendar year, (2) at least 98% of its capital gains in excess of its capital
losses for the one-year period ending on October 31 of the calendar year, and
(3) any ordinary income and capital gains for previous years that was not
distributed during those years. A distribution, including an "exempt-interest
dividend," will be treated as paid on December 31 of the current calendar year
if it is declared by a Fund in October, November or December with a record date
in such a month and paid by the Fund during January of the following calendar
year. Such distributions will be taxable to shareholders in the calendar year in
which the distributions are declared, rather than the calendar year in which the
distributions are received. To prevent application of the excise tax, the Fund
intends to make its distributions in accordance with the calendar year
distribution requirement.
Each Fund intends to qualify under the Code to pay "exempt-interest
dividends" to its shareholders. Each Fund will be so qualified if, at the close
of each quarter of its taxable year, at least 50% of the value of its total
assets consists of securities on which the interest payments are exempt from
federal income tax. To the extent that dividends distributed by a Fund to its
shareholders are derived from interest income exempt from federal income tax and
are designated as "exempt-interest dividends" by the Fund, they will be
excludable from the gross incomes of the shareholders for federal income tax
purposes. "Exempt-interest dividends," however, must be taken into account by
shareholders in determining whether their total incomes are large enough to
result in taxation of up to 85% of their social security benefits and certain
railroad retirement benefits. It should also be noted that tax-exempt interest
on private activity bonds in which the Fund may invest generally is treated as a
tax preference item for purposes of the alternative minimum tax for corporate
and individual shareholders. Each Fund will inform shareholders annually as to
the portion of the distributions from the Fund which constituted
"exempt-interest dividends."
Dividends paid out of a Fund's investment company taxable income will be
taxable to a U.S. shareholder as ordinary income. Because no portion of a Fund's
income is expected to consist of dividends paid by U.S. corporations, no portion
of the dividends paid by a Fund is expected to be eligible for the corporate
dividends-received deduction. Distributions of net capital gains, if any,
designated as capital gain dividends are taxable to shareholders as long-term
capital gains, regardless of how long the shareholder has held the Fund's
shares, and are not eligible for the dividends-received deduction. Shareholders
receiving distributions in the form of additional shares, rather than cash,
generally will have a cost basis in each such share equal to the NAV of a share
of the Fund on the reinvestment date. Shareholders will be notified annually as
to the U.S. federal tax status of distributions, and shareholders receiving
distributions in the form of additional shares will receive a report as to the
NAV of those shares.
Upon the sale or other disposition of shares of a Fund, in the event that the
Fund fails to maintain a constant NAV per share, a shareholder may realize a
capital gain or loss which will be long-term or short-term, generally depending
upon the shareholder's holding period for the shares. Any loss realized on a
sale or exchange will be disallowed to the extent the shares disposed of are
replaced (including shares acquired pursuant to a dividend reinvestment plan)
within a period of 61 days beginning 30 days before and ending 30 days after
disposition of the shares. In such a case, the basis of the shares acquired will
be adjusted to reflect the disallowed loss. Any loss realized by a shareholder
on a disposition of Fund shares held by the shareholder for six months or less
will be treated as a long-term capital loss to the extent of any distributions
of net capital gains received by the shareholder with respect to such shares.
Furthermore, a loss realized by a shareholder on the redemption, sale or
exchange of shares of a Fund with respect to which exempt-interest dividends
have been paid will, to the extent of such exempt-interest dividends, be
disallowed if such shares have been held by the shareholder for less than six
months.
Under the Code, a shareholder may not deduct that portion of interest on
indebtedness incurred or continued to purchase or carry shares of an investment
company paying exempt-interest dividends (such as those of the Funds) which
bears the same ratio to the total of such interest as the exempt-interest
dividends bear to the total dividends (excluding net capital gain dividends)
received by the shareholder. In addition, under rules issued by the Internal
Revenue Service for determining when borrowed funds are considered to be used to
purchase or carry particular assets, the purchase of shares may be considered to
have been made with borrowed funds even though the borrowed funds are not
directly traceable to such purchase.
The tax consequences to a foreign shareholder of an investment in a Fund may
be different from those described herein. Foreign shareholders are advised to
consult their own tax advisers with respect to the particular tax consequences
to them of an investment in a Fund.
Shareholders are advised to consult their own tax advisers with respect to
the particular tax consequences to them of an investment in a Fund. Persons who
may be "substantial users" (or "related persons" of substantial users) of
facilities financed by industrial development bonds should consult their tax
advisers before purchasing shares of a Fund. The term "substantial user"
generally includes any "non-exempt person" who regularly uses in his or her
trade or business a part of a facility financed by industrial development bonds.
Generally, an individual will not be a "related person" of a substantial user
under the Code unless the person or his or her immediate family owns directly or
indirectly in the aggregate more than a 50% equity interest in the substantial
user.
The exemption from federal income tax of dividends derived from interest on
Municipal Obligations does not necessarily result in exemption under the tax
laws of any state or local taxing authority.
Shareholders are advised to consult with their tax advisers regarding the
applicability of state and local taxes to an investment or income therefrom in a
Fund which may differ from the federal income tax consequences described above.
FUND YIELD
The current yield of a Fund may differ from the Fund's effective yield and
annualized dividends.
Current yield is calculated by determining the net change (exclusive of
capital changes) in the value of a hypothetical preexisting account having a
balance of one share at the beginning of the period, dividing the net change in
account value by the value of the account at the beginning of the base period to
obtain the base period return, and multiplying the base period return by a
fraction having 365 in the numerator and the number of days in the base period
in the denominator. The current yield stated in the prospectus utilizes a seven
day base period. Net change in account value must reflect (i) the value of
additional shares purchased with dividends from the original share and dividends
declared on by the original share and any such additional shares; and (ii) any
recurring fees charged to all shareholder accounts, in proportion to the length
of the base period and the Fund's average or median account size. Net change in
account value must exclude realized gains or losses and unrealized appreciation
or depreciation.
Effective yield is computed by adding one to the current yield, raising the
sum to a power equal to 365 divided by the number of days in the base period
(seven days), and subtracting one from the result according to the following
formula: Effective Yield = [(Base Period Return + 1) 365/7]- 1. Effective annual
yields are a representative of the effective annual rate of return produced by
the monthly compounding of Fund dividends.
Tax-equivalent yield is computed by dividing either current yield or
effective yield by a denominator equal to one minus a stated income tax rate
according to the following formula: Tax-Equivalent Yield = Current or Effective
Yield/(1 - Income Tax Rate).
Yield information may be useful in reviewing the performance of a Fund, but
because of fluctuations, it may or may not provide a basis for comparison with
bank deposits, other money investments which pay a fixed yield for a stated
period of time, such as Treasury bills, bank certificates of deposit, savings
certificates and NOW accounts. When making comparisons, the investor should also
consider the quality and maturity of the portfolio securities of the various
money-market funds. An investor's principal is not guaranteed by the Fund, nor
is it insured by a governmental agency.
RESERVE CASH PERFORMANCE ACCOUNT
The Reserve Cash Performance ("CPA") and Reserve "CPA" Plus accounts provide
a comprehensive package of additional services to investors in the Funds.
Reserve CPA and CPA Plus offers a check arrangement whereby checks are issued to
Reserve shareholders which may be used to redeem shares in the account in any
amount. If a bank accepts a check, it will be paid in the order received by
redemption of shares from the investor's Reserve account. Any check in an amount
exceeding the Reserve account balance will be returned to the payee. Reserve CPA
checks can be used in the same manner as any other bank checks. Paid checks will
not be returned but complete statements on such paid checks will be provided
monthly.
A VISA Gold Check Card (a debit card) is also available. The VISA card
functions exactly as does a conventional VISA credit card except that the
cardholder's Reserve account is automatically charged for all purchases and cash
advances, thus eliminating the usual monthly finance charges. As with the
checking facility, VISA charges are paid by liquidating shares in the Reserve
Fund account, but any changes that exceed the balance will be rejected. VISA
card issuance is subject to credit approval. Reserve, VISA or the bank may
reject any application for checks or cards and may terminate an account at any
time. Conditions for obtaining a VISA Check Card may be altered or waived by the
Funds either generally or in specific instances. The checks and VISA cards are
intended to provide investors with easy access to their account balances.
Each Fund will charge a non-refundable annual CPA Plus service fee (currently
$60 which may be charged to the account at the rate of $5 monthly). Participants
will also be charged for specific costs incurred in placing stop payment orders,
obtaining check copies and in processing returned checks. The annual service fee
and other charges may be changed at any time upon 30 days notice. In addition,
broker/dealers or other financial institutions in the CPA Program may charge
their own service fees in addition to the annual fee.
VISA cardholders may be liable for the unauthorized use of their card up to
the amount set by the governing Federal regulations, which is currently $500, if
the Fund or the bank is not notified of the theft or loss within two Business
Days. Participants should refer to the VISA Account Shareholder Agreement for
complete information regarding responsibilities and liabilities with respect to
the VISA Gold check card. If a card is lost or stolen, the cardholder should
report the loss immediately by telephoning the issuing bank, currently BankOne
at 614-248-4242 which can be reached 24 hours a day, seven days a week or the
Funds at 800-631-7784 or 212-977-9880 during normal business hours (9:00 A.M. to
5:00 P.M., New York time).
The use of checks and cards by participants will be subject to the terms of
your Reserve CPA Account Application and VISA Account Shareholder Agreement.
MUNICIPAL OBLIGATIONS
Municipal bonds and municipal notes are the two major classifications of
Municipal Obligations. Such obligations are generally issued to obtain funds for
various public purposes, including the construction of public facilities such as
airports, bridges, highways, houses, hospitals, mass transportation, schools,
streets, and water and sewer works. In addition, Municipal Obligations may be
issued to refund outstanding debt and obtain funds for general operating
expenses.
Municipal bonds, which are long term instruments and generally have
maturities longer than one year when issued, may be either "general obligation"
or "revenue" issues. General obligation bonds are secured by the issuer's pledge
of its full faith, credit, and taxing power for the payment of principal and
interest. Revenue bonds are payable only from the revenues derived from a
particular facility or class of facilities, in some cases, from the proceeds of
a special excise tax or other specific revenue source but not from the general
taxing power.
Certain kinds of industrial development bonds ("IDBs") are issued by or on
behalf of public authorities to provide funding for various privately operated
industrial facilities such as warehouse, office, plant, and store facilities.
IDBs are, in most cases, revenue bonds and do not generally constitute the
pledge of the credit of the issuer of such bonds. The payment of the principal
and interest on IDBs usually depends solely on the ability of the user of the
facilities financed by the bonds or other guarantor to meet its financial
obligations and, in certain instances, the pledge of real and personal property
as security for payment. If there is no established secondary market for the
IDBs, the IDBs or the participation interests purchased by a Fund will be
supported by repurchase commitments and bank letters of credit or guarantees of
banks that meet the quality criteria of the Fund and which may be exercised by
the Fund to provide liquidity.
Municipal notes are usually issued to obtain funds in anticipation of receipt
of taxes, receipt of proceeds of issuances of municipal bonds, or other revenue
which will provide funds to repay the notes, and generally have maturities of
one year or less.
On April 20, 1988, the U.S. Supreme Court in South Carolina v. Baker,
overruled an 1895 case, Pollock v. Farmers' Loan & Trust Company which held that
interest on Municipal Obligations was immune from Federal taxation. As a result,
proposals may be introduced before the Congress to eliminate or restrict the
Federal income tax exemption for interest on certain Municipal Obligations.
The Funds may purchase securities affected by these proposals. If such
proposals are enacted, the availability of Municipal Obligations by the Funds
would be adversely affected. In such event, the Funds would reevaluate their
investment objective and policies and submit possible changes in the structure
of the Funds for the consideration of shareholders. Investors should be aware
that the quantity of Municipal Obligations available for purchase by the Funds
may be limited, and that factor may affect the amount of tax-exempt income which
can be obtained from an investment in them. Substantial reductions in the
availability of tax-exempt securities might also cause a reevaluation of a
Fund's investment objective and policies.
VARIABLE RATE DEMAND INSTRUMENTS. Variable rate demand instruments that the
Funds may purchase are tax-exempt Municipal Obligations or participation
interests therein that provide for periodic adjustments in the interest rate
paid on the instrument and permit the holder to demand payment of the unpaid
principal balance plus accrued interest upon a specified number of days notice
either from the issuer or by drawing on a bank letter of credit or guarantee
issued with respect to such instrument. The issuer of the Municipal Obligation
may have a corresponding right to prepay in its discretion the outstanding
principal of the instrument plus accrued interest upon notice comparable to that
required for the holder to demand payment.
The variable rate demand instruments in which the Funds may invest will
comply with Rule 2a-7 under the 1940 Act. The Funds will determine the variable
rate demand instruments it will purchase in accordance with procedures
prescribed by its Board to minimize credit risks. The Fund's investment adviser
may determine that an unrated variable rate demand instrument meets the Fund's
investment criteria if it is backed by a suitable bank letter of credit or
guarantee.
The variable rate demand instruments that the Funds may invest in include
participation interests purchased from banks in variable rate tax-exempt
Municipal Obligations owned by banks or affiliated organizations. A
participation interest gives the Fund an undivided interest in the Municipal
Obligation in the proportion that the Fund's participation interest bears to the
total principal amount of the Municipal Obligation and provides the repurchase
feature described above. These instruments may have fixed, floating or variable
rates of interests. Frequently, such instruments are secured by credit support
arrangements provided by banks. The Fund has the right to sell the instrument
back to the bank and draw on the letter of credit on demand, after seven days'
notice, for all or any part of the full principal amount of the Fund's
participation interest in the bond plus accrued interest. Banks usually retain a
service fee, a letter of credit fee and a fee for issuing repurchase commitments
in an amount equal to the excess of the interest paid on the Municipal
Obligations over the negotiated yield at which the instrument was purchased by
the Fund.
RATINGS
TAX-EXEMPT BOND RATINGS. The highest ratings for municipal bonds are Aaa or
Aa if rated by Moody's Investor Services, Inc. ("Moody's") and AAA or AA if
rated by Standard & Poor's Corporation ("S&P"). Such bonds are judged to be of
high quality and are not considered speculative. Bonds rated A by Moody's are
considered to possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Such bonds have factors giving
security to principal and interest that are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future. Debt rated A by S&P is considered to have a strong capacity to pay
interest and repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
TAX-EXEMPT PAPER RATINGS. Moody's tax-exempt paper rating are opinions of the
ability of issuers to repay punctually promissory obligations not having an
original maturity in excess of twelve months. The highest quality obligations
are rated "Prime." Issuers rated Prime-1 have superior ability for repayment of
senior short-term debt obligations. Issuers rated Prime-2 have a strong ability
for repayment of senior short-term debt obligations. Moody's employs the
following two designations, all judged to be investment grade, to indicate the
relative repayment capacity of rated short-term issuers: MIG-1/VMIG-1, Best
Quality and MIG-2/VMIG-2, High Quality. The designation of MIG-1/VMIG-1
indicates there is strong protection by established cash flows, superior
liquidity support, or demonstrated broad-based access to the market for
refinancing. The designation of MIG-2/VMIG-2 indicates margins of protection
ample although not so large as in MIG-1/VMIG-1.
S&P's tax-exempt paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more that 365 days. The
highest quality obligations are rated "A". Issues assigned A rating for regarded
as having the greatest capacity for timely payment. Issues in this category are
further refined with designations to indicate the relative degree of safety. The
two top such designations are 1 and 2. The "A-1" designation indicates that the
degree of safety regarding timely payment is strong. The "A-2" designation
indicates that capacity for timely payment is satisfactory. Municipal note
ratings by Standard & Poor's are preceded by the designation SP. Those issues
determined to possess overwhelming safety characteristics are designated SP-1+.
Municipal notes designated SP-1 are considered to have a very strong or strong
capacity to pay principal and interest. Municipal notes designated SP-2 are
considered to have a satisfactory capacity to pay principal and interest.
RISK FACTORS OF CONCENTRATING IN CALIFORNIA
The following discusses the risks of concentrating investments in obligations
of the State of California ("California" or "State") and its political
subdivisions, duly constituted authorities and corporations.
The Funds' investments are susceptible to possible adverse effects of the
complex political, economic and regulatory matters affecting California issuers.
It is impossible to determine the impact of any legislation, voter initiatives
or other similar measures which have been or may be introduced to limit or
increase the taxing or spending authority of state and local governments or to
predict such governments' abilities to pay the interest on, or repay the
principal of, their obligations.
In the early 1990's, California experienced a prolonged recession coupled
with deteriorating fiscal and budget conditions. The State also contended with
natural disasters including fires, a prolonged drought and a major earthquake in
the Los Angeles area (January 1994), rapidly growing population, and increasing
social service requirements. Over the past years, the economy has begun to show
signs of renewed economic growth, albeit at a modest pace. However, it is
unlikely that the California economy will stage a major turnaround or expand at
rates equal to the mid-1980's.
In fiscal year ("FY") 1998, the economic recovery in California broadened and
continued to pick up momentum, again outpacing the nation and exceeding the
growth recorded during the previous four years. Nationally, the State retained
its first place ranking in employment creation by adding over 400,000 new jobs;
reflecting a growth of 3.5% and exceeding the national average by 0.9%. Although
the unemployment rate improved 0.4% and fell to an eight-year low of 5.8% in
July 1998, it still trails the national rate by over 1 point. Over the next
three years, projections call for non-farm employment to continue expansion of
about 2% annually and personal income to maintain a 5% growth rate. Both
forecasts place growth in California ahead of the national economy through 2000.
Any setbacks to continuation of economic growth or breakdowns in fiscal
discipline could produce budgetary pressures on State programs and local
governments.
Recovery from the prolonged recession of the early 1990's has produced a
steady increase in California tax and fee revenues. Coupled with disciplined
spending programs, revenue growth has outpaced the need for additional state
expenditures driven by the State's growing population. Over the last three
years, the largest General Fund program - K-12 schools and community colleges -
has been increasing by twice as fast revenues. For FY 1998 and FY 1999, these
programs will comprise over 50% of all General Fund expenditures. Efficiencies
gained from revamping key state services particularly in programs related to
health and welfare have allowed the state to maintain structural balance over
this period. Going forward, the increasing demands of a growing population
including needed infrastructure improvements may begin to produce structural
imbalances should the state's fiscal discipline or the pace of the recovery
begin to falter.
The principal sources of the State's General Fund revenues are the California
personal income tax (50% of total revenues) sales and use tax (32%) and bank and
corporation taxes (11%). The State maintains a Special Fund for Economic
Uncertainties ("SFEU") derived from General Fund revenues as a reserve to meet
cash needs of the General Fund but which is required to be replenished as soon
as sufficient revenues are available. The SFEU carried an estimated positive
balance of $1.8 billion at the end of FY 1998 and in the FY 1999 budget, the
Legislature expects to draw the balance down to $1.2 billion by year end.
The State has no existing obligation with respect to any obligations or
securities of Orange County, County of Los Angeles or other local entities.
However, the State may be obligated to intervene to ensure that school districts
have sufficient funds to operate or to maintain certain county-administered
State programs.
After filing for protection under Chapter 9 of the Federal Bankruptcy Code in
December 1994, Orange County, California ("Orange County") emerged from under
court supervision in June 1996 after the successful sale of $880 million in
municipal bonds allowed the county to pay off the last of its creditors. On
January 7, 1997, Orange County returned to the municipal bond market with a $136
million bond issue maturing in 13 years at an insured yield of 7.23%. In
December 1997, Moody's raised its ratings on $325 million of Orange County
pension obligation bonds to Baa3 from Ba. In February 1998, Fitch assigned
outstanding Orange County pension obligation bonds a BBB rating. The intervening
period has seen the lingering effects of this fiscal crisis which has required
the County to continue to explore opportunities to reduce spending and expand
its revenue base to balance meeting debt service, now comprising 20% of all the
County Funds and delivering essential services. In FY 1998-99, the County plans
to continue its strategy to reduce the debt load, upgrade the County credit
standing and meet essential capital improvements.
FY 1998 provided evidence of an on-going economic and fiscal recovery in the
County of Los Angeles, the nation's largest county, aided by the rebound of its
diverse economy and the effective implementation of health care restructuring
and welfare reform.
In August 1995, the credit rating of the county's long-term bonds was
downgraded for the third time since 1992 as a result of, and among other things,
severe operating deficits for the county's health care system. In addition, the
county was affected by an ongoing loss of revenue caused by state property tax
shift initiatives in 1993 through 1995. In April 1998, the Los Angeles County
Chief Administrative Officer proposed an approximately $13.2 billion 1998-1999
budget, which would be 5.4% larger than the 1997-1998 budget, reserving the
right to make further changes to reflect revenue allocation decisions in the
final State budget. In December 1998, Moody's raised the ratings on the County's
general obligation bonds to A1 from A2. The City of Los Angeles is the largest
city in the county and its general obligation bonds are rated AA by S&P and Aa
by Moody's.
The 1994-95 Budget Act provided for an estimated $41.9 billion of General
Fund revenues, and $40.9 billion of expenditures. The budget assumed receipt of
about $750 million of new federal assistance for the costs of undocumented
immigrants which was not received, as well as a plan to defer retirement of $1
billion of the accumulated budget deficit until the 1995-96 fiscal year.
However, the rebounding economy and sound fiscal restraints resulted in the
General Fund posting an operating surplus of $700 million on total revenues of
over $42.7 billion. Because of the accumulated budget deficit from prior years,
the payment of certain unbudgeted expenditures to schools to maintain constant
per-pupil aid levels, and a reduction of the level of available internal
borrowing, depleted the State's cash resources. The lack of liquidity resulted
in a series of external borrowings to pay its normal expenses, including
borrowings which were carried over into succeeding fiscal years.
The 1995-96 Budget projected General Fund revenues of $44.1 billion and
expenditures of $43.4 billion. Key components built into the budget included the
receipt of about $830 million of new Federal aid for undocumented immigrants'
costs and the successful resolution of litigation concerning previous budget
actions. This Budget eliminated the outstanding deficit including all short-term
borrowings and generated a significant surplus of $1.3 billion by year end. The
major tax sources (Income, Sales and Corporation Taxes) of the State grew by
over $3.7 billion in FY 1995-96. The tax revenue growth provided strong evidence
of the breadth of California's economic rebound and offset some reductions in
Federal aid.
The 1996-97 budget called for General Fund expenditures of $47.25 billion
against expected revenues of $47.64 billion, a general increase of 4% over FY
1995-96. Specific features of the proposal included additional investments in
infrastructure, educational technology and programs, reductions in welfare
expenditures and renter tax credits. Following enactment of the 1996-97 Budget,
a federal welfare reform act, the "Personal Responsibility and Work Opportunity
Act" ("Law")was signed into law. The Law included lifetime limits on certain
welfare assistance, denial of benefits to illegal immigrants, a reduction in
benefits to certain legal non-citizens and changes in the Food Stamp program,
including lower benefits and a work requirement. The Law provided California
with approximately $3.7 billion in block grant funds for FY 1996-97. The General
Fund results showed that final expenditures totaled over $48 billion with an
operating surplus of approximately $860 million. The SFEU projected a year end
balance of $639 million.
The 1997-98 budget provided for General Fund expenditures of $52.8 billion
against revenues of $52.5 billion. Significant features included: additional
investments in K-12 education, public safety and corrections, increased support
of higher education, reform of public welfare, no change in taxes and a $1.235
billion full payment of deferred contributions to the Public Employment
Retirement System. During FY 1997-98, additional legislation was passed that
increased educational expenditures and cut welfare spending. The year also saw
tax revenues exceed budgeted levels for the second consecutive year. These
changes produced an unexpected operating surplus in the General Fund from final
expenditures of $53.3 billion and revenues of $55.5 billion. At year end, the
SFEU projected to over $1.7 billion at year end.
Enacted on August 21, 1998, the 1998-99 Budget provided authority for $57.3
billion in General Fund expenditures, a 7.3% increase over FY 1997-98. Based
upon projected revenues of $56.9 billion, the budget projects a final balance
equal to 2.2% of General Fund expenditures in the SFEU, the highest level since
1986. Significant programs include: tax reductions featuring a 25% cut in
vehicle licensing fees, increases in dependent exemptions, and credits for
renters and businesses, increased education spending for K-12 programs,
additional higher education spending and increased funding for social service
agencies and the trial court system. The successful achievement of this budget
hinges upon continued economic growth throughout the State and the impact of a
variety of fiscal bills passed by the legislature after the enactment of the
budget.
California's reliance on information technology in every aspect of its
operations has made Year 2000-related ("Y2K") information technology issues a
high priority for California. The Department of Information Technology ("DOIT"),
an independent office reporting directly to the Governor, is responsible for
ensuring the State's information technology processes are fully functional
before the year 2000. In late August 1998, the State Auditor released a report
on "Year 2000 Computer Problems." The report noted concern that departments were
not making adequate plans to test remediated systems, were not focusing
sufficiently on problems associated with data interface with other governmental
and private bodies, and were not far enough along in developing "business
continuation plans" to ensure continued operations after January 1, 2000 in the
event of information technology problems. Although the DOIT reports that State
departments are making substantial progress overall toward the goal of Y2K
compliance, the task is very large and will likely encounter unexpected
difficulties. California cannot predict whether all mission critical systems
will be ready and tested by late 1999 or what impact failure of any particular
information technology system(s) or of outside interfaces with State information
technology systems might have.
The Governor's proposed budget for fiscal year 1999-2000 proposes total State
spending of $76.2 billion (excluding the expenditure of federal funds and
selected bond funds), which is up 4.1% from the 1998-1999 budget. This total
includes $60.5 billion in General Fund spending (a 3.8% increase) and $15.7
billion in special funds spending. The Governor's proposed budget anticipates a
$415 million reserve by the close of the fiscal year. The proposed budget
addresses an anticipated funding shortfall of $2.3 billion (which includes funds
to rebuild the reserve) through a combination of new state and federal
resources, the rescheduling of certain expenditures, under budgeting certain
expenditures, spending cutbacks, and savings assumptions.
As of November 1, 1998, the State had over $18.6 billion aggregate amount of
its general obligation bonds outstanding. General obligation bond authorizations
in an aggregate amount of approximately $5.7 billion remained unissued as of
November 1, 1998. At the November 3, 1998 election voters approved a bond
measure totaling $9.2 billion for public school construction and renovation, and
for higher education facilities. The State also builds and acquires capital
facilities through the use of lease purchase borrowing. As of November 1, 1998,
the State had approximately $6.5 billion of outstanding Lease-Purchase debt.
In addition to the general obligation bonds, State agencies and authorities
had approximately $24.6 billion aggregate principal amount of revenue bonds and
notes outstanding as of September 30, 1998. Revenue bonds represent both
obligations payable from State revenue-producing enterprises and projects, which
are not payable from the General Fund, and conduit obligations payable only from
revenues paid by private users of facilities financed by such revenue bonds.
Such enterprises and projects include transportation projects, various public
works and exposition projects, education facilities (including the California
State University and University of California systems), housing health
facilities, and pollution control facilities.
Changes in California laws during the last two decades have limited the
ability of California State and municipal issuers to obtain sufficient revenue
to pay their bond obligations. In 1978, California voters approved an amendment
to the California Constitution known as Proposition 13. Proposition 13 limits ad
valorem (according to value) taxes on real property and restricts the ability of
taxing entities to increase real property taxes and assessments, and limits the
ability of local governments to raise other taxes. In November 1996, the voters
also approved Proposition 218 which further defines and extends situations
limiting the ability of localities to impose taxes or change tax rates without
voter approval. The full impact of Prop 218 on outstanding and proposed taxes
will require further clarification through court rulings on specific legal tests
and challenges.
Article XIII B of the California Constitution ("Appropriation Limit") imposes
a limit on annual appropriations. Originally adopted in 1979, the Appropriation
Limit was modified by Proposition 98 in 1988 and Proposition 111 in 1990. The
appropriations subject to the Article consist of tax proceeds that include tax
revenues and certain other funds. Excluded from the Appropriation Limit are
prior (pre-1979) debt service and subsequent debt incurred as the result of
voter authorizations, court mandates, qualified capital outlay projects and
certain increases in gasoline taxes and motor vehicle weight fees. Certain civil
disturbance emergencies declared by the Governor and appropriations approved by
a two-thirds vote of the legislature are excluded from the determination of
excess appropriations, and the appropriations limit may be overridden by local
voter approval for up to a four-year period.
In 1998, California voters approved Proposition 98, a combined initiative
constitutional amendment and statute that changed school funding below the
university level by guaranteeing K-14 schools a minimum share of General Fund
Revenues. Suspension of the Proposition 98 funding formula requires a two-thirds
vote of Legislature and the Governor's concurrence. Proposition 98 also contains
provisions transferring certain funds in excess of the Appropriation Limit to
K-14 schools.
Substantially all of California is located within an active geologic region
subject to major seismic activity. Any California municipal obligation in the
Funds could be affected by an interruption of revenues because of damaged
facilities, or, consequently, income tax deductions for casualty losses or
property tax assessment reductions. Compensatory financial assistance could be
constrained by the inability of: (1) an issuer to have obtained earthquake
insurance coverage at reasonable rates; (2) an issuer to perform on its contract
of insurance in the event of widespread losses; or (3) the Federal or State
government to appropriate sufficient funds within their respective budget
limitations.
The January 1994 major earthquake in greater Los Angeles (Northridge) was
estimated to have resulted in up to $20 billion in property damage. Significant
damage was incurred by public and private facilities in four counties. Los
Angeles, Ventura, Orange and San Bernadino Counties were declared State and
Federal disasters. The Federal government approved a total of $9.5 billion in
earthquake relief funds for assistance to homeowners and small businesses, as
well as repair of damaged public facilities.
<PAGE>
RISK FACTORS OF CONCENTRATING IN CONNECTICUT
The following concerns the risks of concentrating investments in obligations
of the State of Connecticut ("State") and its political subdivisions, duly
constituted authorities and corporations.
Connecticut's economy is diverse, with manufacturing, services and trade
accounting for approximately 70% of total nonagricultural employment.
Manufacturing employment has been on a downward trend since 1984 while
nonmanufacturing employment has risen significantly. From 1970 to 1992,
manufacturing employment has declined 30.8% while the number of persons employed
in service-related industries, such as trade, government, health, education,
recreation, utilities, finance, insurance, transportation, and real estate
increased 60.8%. Although agriculture remains significant to Connecticut, the
amount of land devoted to farming has declined over time. These trends are
expected to continue in the future. Tourism and summer residency are also
economic factors.
Manufacturing has traditionally been of prime economic importance to
Connecticut and remains the State's single most important economic activity. The
manufacturing industry is diversified, with transportation equipment (primarily
commercial and defense related) the dominant industry, followed by fabricated
metal products, non-electrical machinery and electrical machinery.
Defense-related business plays an important role in the Connecticut economy.
Economic activity has been affected by the volume of defense contracts awarded
to Connecticut firms. In the past ten years Connecticut has generally ranked
from 6th to 11th among all states in total defense contracts awards, receiving
2.8% of all such contracts in 1992. On a per capita basis, defense awards to
Connecticut have been among the highest in the nation. In recent years, the
federal government has reduced defense-related spending and this trend is
expected to continue. Both United Technologies Corporation and General Dynamics
Corporation's Electric Boat Division have announced substantial labor force
reduction. Any further decline in the federal defense budget could have a
detrimental affect on the Connecticut economy.
The industrial activity of the State is concentrated in two regions. The
first, the Naugatuck Valley, extends from Bridgeport north through Ansonia and
Waterbury to Torrington, and has a high proportion of heavy industry. The
second, a belt extending from Hartford southwest through New Britain, Middleton
and Meriden to New Haven, is typified by highly skilled precision metal products
manufacturing. In addition, certain large submarine building activity and
chemical production exist in the Groton area.
Hartford, the capital of Connecticut, is a center of the insurance industry
and a major service center for business and commerce. The southwestern portion
of the State benefits from its proximity to New York City, with a substantial
amount of suburban commutation to New York. An important factor in Connecticut's
overall economic and employment picture is the influx of major business
organizations that are relocating corporate headquarters or executive offices in
Connecticut. Major employers in Connecticut include United Technologies
Corporation, General Dynamics Corporation, Aetna Life and Casualty Company, The
Travelers Insurance Company and Yale University.
General Fund budgets for the biennium ending June 30, 1997, were adopted in
1995 anticipating expenditures of $8,987,907,123 and revenues of $8,988,180,000
for the 1995-96 fiscal year and anticipating expenditures of $9,311,125,170 and
revenues of $9,311,700,000 for the 1996-97 fiscal year.
The primary method for financing capital projects by the State is through the
sale of the general obligation bonds of the State. These bonds are backed by the
full faith and credit of the State. As of March 1, 1995, there was a total
legislatively authorized bond indebtedness of $10,194,811,925, of which
$8,673,257,677 had been approved for issuance by the State Bond Commission and
$7,334,468,663 had been issued.
To meet the need for reconstructing, repairing, rehabilitating and improving
the State transportation system (except Bradley International Airport), the
State adopted legislation which provides for, among other things, the issuance
of special tax obligation ("STO") bonds, the proceeds of which will be used to
pay for improvements to the State's transportation system. The STO bonds are
special tax obligations of the State payable solely from specified motor fuel
taxes, motor vehicle receipts, and license, permit and fee revenues pledged
therefor and deposited in the special transportation fund. The cost of the
infrastructure program for the twelve years beginning in 1984, to be met from
federal, state, and local funds, was recently estimated at $9.4 billion. To
finance a portion of the State's $4.1 billion share of such cost, the State
expects to issue $3.7 billion of STO bonds over the twelve-year period.
As of March 1, 1995, the General Assembly has authorized STO bonds for the
program in the aggregate amount of $3,794,938,104, of which $3,144,650,752 had
been issued. It is anticipated that additional STO bonds will be authorized by
the General Assembly annually in an amount of equal rank with the outstanding
bonds provided certain pledged revenue coverage requirements of the STO
indenture controlling the issuance of such bonds are met. The State expects to
continue to offer bonds for this program.
On November 3, 1992, Connecticut voters approved a constitutional amendment
which requires a balanced budget for each year and imposes a cap on the growth
of expenditures. The General Assembly is required by the constitutional
amendment to adopt by three-fifths vote certain spending cap definitions, which
has not yet occurred. Accordingly, the adopted budget complies with the current
statutory spending cap definitions enacted in 1991. Expenditures for the payment
of bonds, notes and other evidences of indebtedness are excluded from the
constitutional statutory definitions of general budget expenditures.
In order to promote economic stability and provide a positive business
climate, several tax changes were adopted during the 1993 legislative session.
Among the most significant changes was a four year gradual rate reduction to the
Corporation Business Tax based on income. Additionally, the interest rate for
late payment of the Corporation Business Tax was reduced and additional tax
credits, including a research and development tax credit, were created. In
addition, several Sales Tax exemptions were added which include, among others,
amusements and recreation, certain tax preparation services and car washes.
Although the State recorded General Fund surpluses in its fiscal years 1985
through 1987, Connecticut reported deficits from its General Fund operations for
the fiscal years 1988 through 1991. Together with the deficit carried forward
from the State's 1990 fiscal year, the total General Fund deficit for the 1991
fiscal year was $965.7 million. The total deficit was funded by the issuance of
General Obligation Economic Recovery Notes. The Comptroller's annual reports for
the fiscal years ended June 30, 1992, 1993 and 1994 reflected General Fund
operating surpluses of $110 million, $113.5 million, and $19.7 million,
respectively. The Comptroller's monthly report for the period ended August 31,
1994 stated that on a GAAP basis the cumulative deficit is $531 million for
fiscal 1994-95. The deficit continued to narrow in fiscal 1996 from $496 million
to $399 million. As of June 1998, S&P, Moody's and Fitch rated Connecticut's
bonds AA-, Aa3 and AA, respectively.
While the enacted budget for fiscal 1997 relied on non-recurring measures to
achieve balance, the State has chosen to defer some $100 million of these
measures, a decision made possible by better-than-expected revenue performance
which began in the final quarter of fiscal 1996 and has continued to date in
1997.
There can be no assurance that general economic difficulties or the financial
circumstances of Connecticut or its towns and cities will not adversely affect
the ability of Connecticut issuers or obligors of State, municipal and public
authority debt obligations to meet their obligations thereunder.
RISK FACTORS OF CONCENTRATING IN FLORIDA
The following concerns the risks of concentrating investments in obligations
of the State of Florida ("State") and its political subdivisions, duly
constituted authorities and corporations.
The Fund invests in obligations of Florida issuers which results in the
Fund's performance being subject to the risks associated with the overall
conditions present within the State. The following information is a brief
summary of the recent prevailing economic conditions and a general summary of
the State's financial status. This information is based on official statements
relating to securities that have been offered by Florida issuers and from other
sources believed to be reliable but should not be relied upon as a complete
description of all relevant information.
Florida is the twenty-second largest state with an area of 54,136 square
miles and a water area of 4,424 square miles. The State is 447 miles long and
361 miles wide with a tidal shoreline of almost 2,300 miles. According to the
U.S. Census Bureau, Florida moved past Illinois in 1986 to become the fourth
most populous state, and as of 1990, had an estimated population of 13.2
million. The State's debt reflects its rapid population growth, which has
created sustained spending pressure for basic governmental infrastructure and
services. Management restraint and budgetary control have enabled the State to
balance its budget through periods of economic weakness while meeting the needs
of this growing population.
Services and trade continue to be the largest components of the Florida
economy, reflecting the importance of tourism as well as the need to serve
Florida's rapidly growing population. Agriculture is also an important part of
the economy, particularly citrus fruits. Oranges have been the principal crop,
accounting for 70% of the nation's output. Manufacturing, although of less
significance, is a rapidly growing component of the economy. The economy also
has substantial insurance, banking, and export participation. Unemployment rates
have historically been below national averages, but have recently risen above
the national rate.
Section 215.32, Florida Statutes, provides that financial operations of the
State of Florida covering all receipts and expenditures must be maintained
through the use of three funds--the General Revenue Fund, the Trust Fund, and
the Working Capital Fund. The General Revenue Fund receives the majority of
State tax revenues. The Working Capital Fund receives revenues in excess of
appropriations and its balances are freely transferred to the General Revenue
Fund as necessary. In November, 1992, Florida voters approved a constitutional
amendment requiring the State to fund a Budget Stabilization Fund to 5% of
general revenues, with funding to be phased in over five years beginning in
fiscal 1995. The Working Capital Fund will become the Budget Stabilization Fund.
Major sources of tax revenues to the General Revenue Fund are the sale and use
tax, corporate income tax and beverage tax.
The over-dependence on the sensitive sales tax creates vulnerability to
recession. Accordingly, financial operations have been strained during the past
few years, but the state has responded in a timely manner to maintain budgetary
control.
Florida's debt structure is complex. Most state debt is payable from
specified taxes and additionally secured by the full faith and credit of the
state. Under the general obligation pledge, to the extent specified taxes are
insufficient, the state is unconditionally required to make payment on bonds
from all non-dedicated taxes.
Currently, the State's general obligation bonds are rated Aa2, AA+ and AA by
Moody's, S&P and Fitch, respectively.
The Fund's concentration in securities issued by the State and its political
subdivisions provides a greater level of risk than a fund which is diversified
across numerous states and municipal entities. The ability of the State or its
municipalities to meet their obligations will depend on the availability of tax
and other revenues; economic, political, and demographic conditions within the
State; and the underlying condition of the State, and its municipalities.
RISK FACTORS OF CONCENTRATING IN MASSACHUSETTS
The following concerns the risks of concentrating investments in obligations
of the Commonwealth of Massachusetts ("Commonwealth") and its political
subdivisions, duly constituted authorities and corporations.
There has been a significant improvement in the Massachusetts unemployment
rate since 1975 when it was 12 percent. The Commonwealth has recovered well from
the decline of the apparel, textile and leather industries. Its employment mix
is now particularly strong in high technology, military contractors, financial
services, and education. In 1992, 33% of the work force was in the service
sector.
Boston is the transportation and commercial center for New England. It has an
improving seaport and extensive railroad and trucking facilities, and its Logan
International Airport is the tenth busiest airport in the U.S. Boston is also a
substantial world financial center, the home of major banking, insurance, mutual
fund and investment institutions. The concentration of educational institutions
in Boston, and Massachusetts generally, has contributed greatly to the growing
strength of the Massachusetts economy.
Between 1991 and 1992, the state has lost 22,900 manufacturing jobs, from
485,000 to 462,100 (4.7%), and the unemployment rate in January 1994 was 7.2%
while the U.S. unemployment rate was 6.7%. Increasing unemployment claims have
also caused a deficit in the unemployment compensation trust fund of $120
million as of December 31, 1993. Between January 1993 and November 1993, 2,547
businesses failed; a slight decrease of 273 (9.68%) from the same period in
1992. Further, it is estimated by the Defense Budget Project that civilian
defense related employment will decline to 90,000 in 1993 from 107,000 in 1990.
As of June, 1995, however, the Commonwealth's unemployment rate was 5.6% as
compared to a national average of 5.6%. Per capita personal income in the
Commonwealth is currently higher than the national average, but, however,
growing at a rate lower than the national average. As of January 1997, the
unemployment rate was 4%.
Commonwealth spending exceeded revenues in each of the five fiscal years
commencing fiscal 1987 and the Commonwealth's tax revenues during this period
repeatedly failed to meet official forecasts. During the period, fund balances
in the budgeted operating funds declined from an operating balance of $1.072
billion in fiscal 1987 to an ending balance of negative $1.104 billion for
fiscal 1990. For fiscal 1991, these funds attained positive ending balances of
$237.1 million. Fiscal 1992 ended with positive fund balances of $549.4 million,
after carrying forward the fund balances from fiscal 1991. Fiscal 1993 ended
with positive fund balances of $562.5 million.
In fiscal 1994, which ended June 30, 1994, the total revenues of the budgeted
operating funds of the Commonwealth during such fiscal year increased by
approximately 5.7% over the prior fiscal year, to $15.550 billion. Expenditures
increased by 5.6% over the prior year, to $15.523 billion. As a result, the
Commonwealth ended fiscal 1994 with a positive closing fund balance of $589.3
million.
The Commonwealth's audited financial report for fiscal 1996 indicates a
continued trend of balanced financial operations and continued fund balance
surpluses. The undesignated General Fund balance (GAAP-basis) rose to $123
million in fiscal 1996, up from a $25 million deficit at the end of fiscal 1995,
while the Budgeted Operating Funds balance (GAAP-basis) increased to $709
million, up from $287 million in fiscal 1995.
The current ratings of the Commonwealth's general obligation bonds are Aa3,
AA- and AA- by Moody's, S&P and Fitch, respectively.
There can be no assurance that general economic difficulties or the financial
circumstances of Massachusetts or its political subdivisions will not adversely
affect the ability of Massachusetts issuers or obligors of Commonwealth,
municipal and public authority obligations to meet those obligations.
RISK FACTORS OF CONCENTRATING IN MICHIGAN
The following discusses the risks of concentrating investments in obligations
of the State of Michigan (the "State") and its political subdivisions, duly
constituted authorities and corporations.
The State's financial management will continue to be tested by its dependence
on the inherently cyclical auto industry. While the State's employment base has
diversified away from durable goods manufacturing to trade and services, it
remains auto-dependent. Auto industry employment in the State has been stable
and should prove less cyclical than in the past as a result of corporate
restructuring and reinvestment which has improved its competitive position. In
addition, recent industry investments in the State should enable it to retain a
significant share of vehicle manufacturing as well as a primary role in research
and development. The State's economy, however, is likely to be more cyclical
than other states over the long term.
The State's unemployment rate was 4.0% through January 1998 versus a national
rate of 4.7%. The State's unemployment rate has remained below the national
average for the past 2.5 years. Prior to 1998, the State's unemployment rate had
exceeded the national rate for the past 15 years. Personal income grew 9.4% in
1994 and 6.5% in 1995, but slowed to 4.3% in 1996 and 4.6% in 1997. The national
economic recovery has continued to be robust in Michigan.
The State constitution limits the State's general obligation debt to (i)
short-term debt for State operating purposes; (ii) short and long-term debt for
the purpose of making loans to school districts; and (iii) long-term debt for
voter-approved purposes. The State has issued and has outstanding general
obligation full-faith and credit bonds and notes for Water Resources,
Environmental Protection, Recreation Programs and School Loan purposes. As of
September 30, 1997, the outstanding principal amount of State general obligation
bonds was approximately $655,184,000 with annual debt service requirements of
approximately $63,760,000 and $63,617,000 for the fiscal years ending September
30, 1998 and 1999, respectively. The State issued between $500 million and $900
million in short-term general obligation notes in each fiscal year from 1990-91
through 1997-98, except during the 1993-94 fiscal year when no notes were
issued. These notes were issued for cash-flow purposes and were fully paid at
maturity.
In 1977, the State enacted legislation which created the Counter-Cyclical
Budget and Economic Stabilization Fund ("BSF"). This fund is designed to
accumulate balances during years of significant economic growth which may be
utilized in years when the State's economy experiences cyclical downturns or
unforeseen fiscal emergencies. Calculated on an accrual basis, the unreserved
ending accrued balance of the BSF on September 30, 1995 was $987.9 million, on
September 30, 1996 was $614.5 million and estimated to be $646.3 million on
September 30, 1997. The balance is net of a reserve for future education funding
of $529.1 million on September 30, 1996 and $572.6 million on September 30 1997.
The State's economic forecast for calendar years 1998 and 1999 projects
healthy growth. Real GDP is projected to grow 3.1 % in 1998 and 2.0 % in 1999,
on a calendar year basis. Car and light truck sales are expected to total 14.9
million units in 1998 and 14.8 million units in 1999. Total wage and salary
employment is projected to grow 1.7% in 1998 and 0.8% in 1999. The unemployment
rate is projected to average 4.1% in 1998 and 4.4% in 1999. These forecasts
reflect the ongoing diversification of the Michigan economy.
The State has made significant progress in achieving a strengthened financial
position and long-term structural budget balance through aggressive management
controls and conservative fiscal practices. This progress is evident in the
State's buildup and maintenance of a large "rainy day" cash reserve. Continued
conservative fiscal management practices should enable the State to keep
finances balanced over the course of future economic cycles.
At present, the State's general obligation bonds are rated AA+ and Aa1by
Standard & Poors and Moody's.
There can be no assurance that general economic difficulties or the financial
circumstances of Michigan or its political subdivisions will not adversely
affect the ability of Michigan issuers or obligors of State, municipal and
public authority debt obligations to meet those obligations.
<PAGE>
RISK FACTORS OF CONCENTRATING IN NEW JERSEY
The following discusses the risks of concentrating investments in obligations
of the State of New Jersey ("State") and its political subdivisions, duly
constituted authorities and corporations.
New Jersey is the ninth largest state in population and fifth smallest in
land area. With an average of 1,050 persons per square mile, it is the most
densely populated of all the states. The State's economy is diversified
consisting of a variety of manufacturing, construction and service industries,
supplemented by rural areas with selective commercial agriculture.
After enjoying an extraordinary boom during the mid-1980s, New Jersey as well
as the rest of the Northeast slipped into an economic slowdown well before the
onset of the national recession which officially began in 1990 (according to the
National Bureau of Economic Research). Initially, this slowdown was an expected
response to the State's tight labor market and the fewer number of young persons
from the "baby bust" generation born in the late 1960s and early 1970s, entering
the labor force.
By the beginning of the national recession, construction activity had already
been declining in New Jersey for nearly two years. As the rapid acceleration of
real estate prices forced many would-be homeowners out of the market and high
non-residential vacancy rates reduced new commitments for offices and commercial
facilities, construction employment began to decline; also growth had tapered
off markedly in the services sectors and the long-term downtrend of factory
employment had accelerated, partly because of a leveling off of industrial
demand nationally. The onset of recession caused an acceleration of New Jersey's
job losses in construction and manufacturing, as well as an employment downturn
in such previously growing sectors as wholesale trade, retail trade, finance,
utilities and trucking. Reflecting the downturn, the rate of unemployment in the
State rose from a peace time low of 3.6% during the first quarter of 1989 to an
estimated 6.6% in 1991. In 1992 the State's unemployment rate moved ahead of the
nation's for the first time in a decade to an annual average of 8.4% versus 7.4%
in the U.S.
Unemployment in the State has been declining since July 1992, when it peaked
at 9.6% according to U.S. Bureau of Labor Statistics estimates based on the
federal government's monthly household survey. The same survey shows joblessness
dropping to an average of 8.4% during the fourth quarter of 1992, to an average
of 7.8% in the first quarter of 1993 before declining to 6.9% in June 1993.
Since then, the unemployment rate fell to 6.9% during the first quarter of 1995.
Effective January 1, 1994, personal income tax rates in the State of New
Jersey (the "State") were cut by 5% for all taxpayers. Effective January 1,
1995, the personal income tax rates were cut by an additional 10% for most
taxpayers. By a bill signed into law on July 4, 1995, New Jersey personal income
tax rates have been further reduced so that coupled with the prior rate
reductions, beginning with tax year 1996, personal income tax rates will be,
depending on a taxpayer's level of income and filing status, 30%, 15% or 9%
lower than 1993 rates.
The State ended fiscal 1996 with estimated undesignated balances of $873
million, down from the prior year's $950.2 million. Fiscal 1997 appropriations
total $15.978 billion, down $211 million or 1.3% from the prior year. The 1997
budget will accommodate the final stage of the State's $1.25 billion multi-year
personal income tax cut, which rolled back nearly half of $2.8 billion in sales
and income tax increases enacted in fiscal 1991. At present, there is no evident
threat to the stability of this budget.
Currently, the State's general obligation bonds are rated AA+, Aa1 and AA+ by
S&P, Moody's and Fitch, respectively.
Prospects for New Jersey are favorable, although a return to pace of the
1980s is highly unlikely. Although growth is expected to be slower than in the
nation, the local advantages that have served the State well for many years will
remain. Structural changes that have been going on for years can be expected to
continue, with job creation primarily in the services sector. Evidence of the
State's improving economy can be found in increased homebuilding, and other
areas of construction activity, rising consumer spending for new cars and light
trucks and the decline in the unemployment rate.
RISK FACTORS OF CONCENTRATING IN NEW YORK
The following concerns the risks of concentrating investments in obligations
of the State of New York ("State") and its political subdivisions, duly
constituted authorities and corporations.
The financial condition of the State may be affected by various financial,
social, economic and political factors. Those factors can be complex, may vary
from fiscal year, and are frequently the result of actions taken not only by the
State and its agencies and instrumentalities but also by entities that are not
under the control of the State. The information set forth below concerns the
financing activities of the State, the activities of the State's authorities and
public benefit corporations (the "Authorities"), the financial condition and
projections of the Metropolitan Transit Authority ("MTA"), the financial
condition of The City of New York (the "City"), and certain information relating
to the State's other localities. Adverse developments affecting the State's
financing activities, the Authorities, the MTA, the City or other localities
could adversely affect the State's financial condition.
There are a number of methods by which the State may incur debt. In addition
to tax and revenue anticipation notes, the State may issue general obligation
bonds and notes in anticipation of such bonds. Except for certain general
obligation bonds that may be issued for specifically enumerated emergency
purposes, all general obligation bonds must be authorized by the voters. The
State may also, pursuant to specific constitutional authorization, directly
guarantee certain Authority obligations. Payments of debt service on State
general obligation and State-guaranteed bonds and notes are legally enforceable
obligations of the State.
The State also employs two other types of long-term financing mechanisms
which are State-supported but are not general obligations of the State: moral
obligation and lease-purchase or contractual-obligation financing. Moral
obligation financing generally involves the issuance of debt by an Authority to
finance a revenue-producing project or other activity. The Authority's debt is
secured by project revenues and statutory provisions for the State, subject to
appropriation by the Legislature, to make up any deficiencies which may occur in
the issuer's debt service reserve fund. Under lease-purchase or
contractual-obligation financial arrangements, Authorities and certain
municipalities have issued obligations to finance the construction and
rehabilitation of facilities or the acquisition and rehabilitation of equipment
and expect to cover debt service and amortization of the obligations through the
receipt of rental or other contract payments made by the State. State
lease-purchase or contractual-obligation financing arrangements involve a
contractual undertaking to make payments to an authority, municipality, or other
entity, but the State's obligation to make such payments is generally expressly
made subject to appropriation by the Legislature and the actual availability of
money to the State for making the payments.
The State also participates in the issuance of certificates of participation
in a pool of leases entered into by the State's Office of General Service on
behalf of several State departments and agencies and in the issuance of
certificates of participation which represent proportionate interests in lease
payments to be paid by the State, acting by and through the Commissioner of the
Office of Mental Health of the State of New York.
Payments for principal and interest due on general obligation bonds, interest
due on tax and revenue anticipation notes, and contractual-obligation and
lease-purchase payments are estimated to be $2.167 billion in the aggregate for
the State's 1993-94 fiscal year and are projected to be $2.459 billion in the
aggregate for the 1994-95 fiscal year. These figures do not include interest
payable on State General Obligation Refunding Bonds issued in July 1992, to the
extent that such interest is to be paid from an escrow fund established with
proceeds of such Refunding Bonds, or the State's installment payments relating
to the issuance of certificates of participation.
The State has never defaulted on any of its general obligation indebtedness
or its obligations under lease-purchase or contractual-obligation financing
arrangements and has never been called upon to make any direct payments pursuant
to its guarantees. There has never been a default on any moral obligation debt
of any Authority.
In addition to the arrangements described above, State law provides for State
municipal assistance corporations, which are Authorities authorized to aid
financially troubled localities. The Municipal Assistance Corporation for The
City of New York, ("MAC"), created to provide financing assistance to New York
City, is the only municipal assistance corporation created to date. To enable
MAC to pay debt service on its obligations, MAC receives, subject to annual
appropriation by the Legislature, receipts from the 4% New York Sales Tax for
the Benefits of New York City, the State-imposed Stock Transfer Tax and, subject
to certain prior liens, local assistance payments otherwise payable to the City.
The national economy began the current expansion in 1991 and has added over 7
million jobs since early 1992. Although the State has added approximately
185,000 jobs since November 1992, employment growth in the State has been
hindered during recent years by significant cutbacks in the computer and
instrument manufacturing, utility, defense and banking industries.
The State's budget for the 1995-96 fiscal year (April 1, 1995-March 31, 1996)
was enacted by the State Legislature on June 7, 1995, more than two months after
the start of the fiscal year. Prior to adoption of the budget, the Legislature
enacted appropriations for disbursements considered to be necessary for State
operations and other purposes, including all necessary appropriations for debt
service. The 1995-96 fiscal year budget includes a planned three-year 20%
reduction of the State's personal income tax and is the first budget in over 50
years which projects a decline in General Fund disbursements and spending on
State operations.
Audited financial statements for fiscal 1996 indicate that New York's
accumulated deficit was not reduced in fiscal 1996, despite the State's ending
cash balance of $445 million. Accounting treatment of other actions in the
fiscal 1996 budget offset the positive effect of the cash surplus, showing that
the State made no progress in reducing this sizable accrued liability.
In January, the State projected that the fiscal 1997 budget would end with a
cash surplus of $1.3 billion and a GAAP-basis operating surplus of $886 million.
However, the benefit of this improvement is lost due to the drawdown of the
surplus for fiscal 1998, with the State projecting a fiscal 1998 deficit at
about the same level as the close of fiscal 1996.
Currently, Moody's, Standard & Poor's and Fitch rate New York State's
outstanding general obligation bonds A2, A and A+, respectively. Ratings reflect
only the respective views of such organizations, and explanation of the
significance of such ratings must be obtained from the rating agency furnishing
the same. There is no assurance that a particular rating will continue for any
given period of time or that any such rating will not be revised downward or
withdrawn entirely if, in the judgment of the agency originally establishing the
rating, circumstances so warrant. A downward revision or withdrawal of such
ratings, or either of them, may have an effect on the market price of the State
Municipal Securities in which the New York Tax-Exempt Fund invests.
THE CITY OF NEW YORK
The fiscal health of the State is closely related to the fiscal health of its
localities, particularly, the City of New York ("the City"), which has required
and continues to require significant financial assistance from the State. The
City's independently audited operating results for each of its 1981 through 1993
fiscal years, which end on June 30, show a General Fund surplus reported in
accordance with GAAP. In addition, the City's financial statements for the 1993
fiscal year received an unqualified opinion from the City's independent
auditors, the eleventh consecutive year the City has received such an opinion.
However, there can be no assurance that the City will not have a sizable deficit
in the future.
In response to the City's fiscal crisis in 1975, the State took a number of
steps to assist the City in returning to fiscal stability. Among these actions,
the State created MAC to provide financing assistance to the City. The State
also enacted the New York State Financial Emergency Act for The City of New York
(the "Financial Emergency Act") which, among other things, established the New
York State Financial Control Board (the "Control Board") to oversee the City's
financial affairs. The State also established the Office of the State Deputy
Comptroller of the City of New York ("OSDC") to assist the Control Board in
exercising its powers and responsibilities.
The City operates under a four-year financial plan which is prepared annually
and is periodically updated. On June 30, 1986, the Control Board's powers of
approval over the City's financial plan were suspended pursuant to the Financial
Emergency Act. However, the Control Board, MAC and OSDC continue to exercise
various monitoring functions relating to the City's financial position. The City
submits its financial plans as well as the periodic updates to the Control Board
for its review.
Estimates of the City's revenues and expenditures are based on numerous
assumptions and are subject to various uncertainties. If expected federal or
State aid is not forthcoming, if unforeseen developments in the economy
significantly reduce revenues derived from economically sensitive taxes or
necessitate increased expenditures for public assistance, if the City should
negotiate wage increases for its employees greater than the amounts provided for
the City's financial plan or if other uncertainties materialized that reduce
expected revenues or increase projected expenditures, then, to avoid operating
deficits, the City may be required to implement additional actions, including
increases in taxes and reductions in essential City services. The City might
also seek additional assistance from the State.
More than any other municipality, the fiscal health of the City has a
significant effect on the fiscal health of the State. The national economic
downturn which began in July 1990 adversely affected the local economy, which
had been declining since late 1989. As a result, the City experienced job losses
in 1990 and 1991 and real Gross City Product ("GCP") fell in those two years.
Beginning in calendar year 1992, the improvement in the national economy helped
stabilize conditions in the City. Employment losses moderated toward year-end
and real GCP increased, boosted by strong wage gains. In 1993 and 1994, the City
experienced job gains of 2,000 and 21,000, respectively. The City now projects,
and its current four-year financial plan assumes, that economic growth will slow
in calendar years 1995 and from one year to the next and the City budget for
fiscal year 1996 reduces City-funded spending for the second consecutive year.
There can be no assurance that the City will continue to maintain a balanced
budget as required by State law without additional reductions in City services
or entitlement programs or tax or other revenue increases which could adversely
affect the City's economic base.
In July 1995, the City published the City Financial Plan for the 1996-1999
fiscal years. The 1996-1999 Financial Plan projects revenues and expenditures
for the 1996 fiscal year (July 1, 1995-June 30, 1996) balanced in accordance
with GAAP. The City Financial Plan sets forth proposed actions to close a
previously projected budget gap of approximately $3.1 billion for the 1996
fiscal year. Such gap-closing actions for the 1996 fiscal year include, among
others, substantial reductions in entitlement programs, City service and
personnel reductions, saving initiatives related to labor and pension costs,
increases in federal and State aid, the sale of certain City assets and
increases in certain lease and fee payments due the City.
The City Financial Plan also sets forth projections for the 1997 through 1999
fiscal years and outlines a proposed gap-closing program to close projected
budget gaps of $888 million, $1.46 billion and $1.44 billion for the 1997
through 1999 fiscal years, respectively, after the successful implementation of
the $3.1 billion gap-closing program for the 1996 fiscal year. Proposed
gap-closing actions for the 1997 through 1999 fiscal years include additional
service and expenditure reductions, labor productivity gains and fee
initiatives.
Implementation of the City Financial Plan is also dependent upon the City's
ability to market its securities successfully in the public credit markets. The
City's financing program for fiscal years 1996 through 1999 contemplates the
issuance of $9.3 billion of general obligation bonds primarily to reconstruct
and rehabilitate the City's infrastructure and physical assets and to make
capital investments. In addition, the City issues revenue notes and tax
anticipation notes to finance its seasonal working capital requirements. The
success of projected public sales of City bonds and notes will be subject to
prevailing market conditions. If the City were unable to sell its general
obligation bonds and notes, it would be prevented from meeting its planned
operating and capital expenditures.
As of March 22, 1995, Moody's Investors Services, Inc. ("Moody's") rated the
City's general obligation bonds Baa1 and Fitch Investors Service, Inc. ("Fitch")
rated such bonds A-. On July 10, 1995, Standard & Poor's revised downward its
rating on City general obligation bonds from A- to BBB+. Standard & Poor's
stated that the downgrade was a reflection of the City's inability to eliminate
a structural budget imbalance due to persistent softness in the City's economy,
weak job growth, a trend of using nonrecurring budget devices, optimistic
projections of State and federal aid and high levels of debt service. There is
no assurance that such ratings will continue for any given period of time or
that they will not be revised downward or withdrawn entirely. Any such downward
revision or withdrawal could have an adverse effect on the market prices of City
bonds. By June of 1998, Moody's had upgraded the City's general obligation debt
to a rating of A3.
RISK FACTORS OF CONCENTRATING IN OHIO
The following concerns the risks of concentrating investments in obligations
of the State of Ohio ("State") and its political subdivision, duly constituted
authorities and corporations.
Financial Operations continued to show improvement in fiscal year 1996. The
State achieved an operating surplus as total operating revenue grew more rapidly
than total expenditures. The State ended the biennium with an estimated general
revenue fund balance of $597.6 million. The State's reserves have been restored
to levels which now exceed those seen before the last recession. General revenue
spending increased in 1997, with increases in most major spending categories
except health and human services, which decreased 0.2%. Revenues and
expenditures met target levels for the first six months of fiscal 1996.
The State's current direct debt levels are relatively moderate, representing,
on a per capita basis, $592 or 2.5% of personal income. Debt service payments to
cover general obligations and lease obligations constitute approximately 5% of
the State's budget.
Over the past ten years, employment and earnings in Ohio have grown steadily
and become more diversified. Although manufacturing still provides 21% of the
employment in the State, employment growth in the services and trade sectors has
created a more stable economy. Statewide employment was up 3% from 1990-1995,
and employment gains in 1994 and 1995 were enough to offset losses in recession
years. Although manufacturing employment decreased 1.2% in the year ending
August 1997, growth in the services, trade and construction industries should
continue to produce strong economic growth.
The rate of personal income growth, however, has declined as lower-paying
service jobs have replaced those lost in manufacturing, with income levels
currently slightly below the national average. Personal income per capita, which
nearly equaled that of the U.S. in 1970, was 96% of the U.S. figure in 1996.
Currently, Ohio's general obligation bonds are rated Aa1, AA+ and AA+ by
Moody's, S&P and Fitch, respectively.
RISK FACTORS OF CONCENTRATING IN PENNSYLVANIA
The following concerns the risks of concentrating investments in obligations
of the State of Pennsylvania ("State") and its political subdivision, duly
constituted authorities and corporations.
Pennsylvania may incur debt to rehabilitate areas affected by disaster, debt
approved by the electorate, debt for certain capital projects (such as highways,
public improvements, transportation assistance, flood control, redevelopment
assistance, site development and industrial development) and tax anticipation
debt payable in the fiscal year of issuance. the Commonwealth had outstanding
general obligation debt of $5.2 billion on June 30, 1996. the Commonwealth is
not permitted to fund deficits between fiscal years with any form of debt. All
year-end deficit balances must be funded within the succeeding fiscal year's
budget. Pennsylvania's general obligation bonds are rated Aa3, AA- and AA by
Moody's, S&P and Fitch, respectively. There can be no assurance that the current
ratings will remain in effect in the future. The Fund assumes no obligation to
update this rating information. Over the five-year period ending June 30, 2000,
the Commonwealth has projected that it will issue bonds totaling $2.1 billion
and retire bonded debt in the principal amount of $2.3 billion. Certain agencies
created by the Commonwealth have statutory authorization to incur debt for which
Pennsylvania appropriations to pay debt service thereon is not required. As of
June 30, 1996, total combined debt outstanding for these agencies was $3.6
billion. The debt of these agencies is supported by assets of, or revenues
derived from, the various projects financed and is not an obligation of
Pennsylvania. Some of these agencies, however, are indirectly dependent on
Pennsylvania appropriations. The only obligations of agencies in Pennsylvania
that bear a moral obligation of the Commonwealth are those issued by the
Pennsylvania Housing Finance Agency ("PHFA"), a state-created agency which
provides housing for lower and moderate income families, and The Hospitals and
Higher Education Facilities Authority of Philadelphia (the "Hospital
Authority"), an agency created by the City of Philadelphia to acquire and
prepare various sites for use as intermediate care facilities for the mentally
retarded. As of June 30, 1996, PHFA had $2.3 billion of revenue bonds and notes
outstanding.
Numerous local government units in Pennsylvania issue general obligation
debt, including counties, cities, boroughs, townships and school districts.
School district obligations are supported indirectly by the Commonwealth. The
issuance of non-electoral general obligation debt is limited by constitutional
and statutory provision. Electoral debt, i.e., that approved by the voters, is
unlimited. In addition, local government units and municipal and other
authorities may issue revenue obligations that are supported by the revenues
generated from particular projects or enterprises. Examples include municipal
authorities (frequently operating water and sewer systems), municipal
authorities formed to issue obligations benefiting hospitals and educational
institutions, and industrial development authorities, whose obligations benefit
industrial or commercial occupants. In some cases, sewer or water revenue
obligations are guaranteed by taxing bodies. The major new sources of growth are
in the service sector, including trade, medical and health services, education
and financial institutions. Manufacturing has fallen behind both the services
sector and the trade sector as the largest single source of employment in
Pennsylvania.
Since 1985 employment in Pennsylvania has grown by approximately 10%, while
employment for the Middle Atlantic region and for the U.S. for the same period
has grown by approximately 4% and 17%, respectively. the Commonwealth's average
annual unemployment rate for the years 1988, 1989 and 1990 remained slightly
below the nation's annual average unemployment rate, and the Commonwealth's
average annual unemployment rate for the years 1992, 1993 and 1994 remained
slightly above the nation's annual average unemployment rate. The seasonally
adjusted unemployment rate for Pennsylvania for January, 1996 was 6.1% compared
to 5.3% for the U.S. The unadjusted unemployment rate for Pennsylvania and the
U.S. for January, 1996 was 6.7% and 6.3%, respectively. The population of
Pennsylvania, 12,052 million people as of July 1, 1994, according to the U.S.
Bureau of the Census, represents an increase from the July 1, 1985 estimate of
11,772 million. Per capita income in Pennsylvania for calendar 1994 of $22,196
was higher than the per capita income of the U.S. of $21,699. As of June 30,
1996, Pennsylvania's Tax Stabilization Reserve Fund (GAAP Basis) had a surplus
of $183.6 million.
Pennsylvania is currently involved in certain litigation where adverse
decisions could have an adverse impact on its ability to pay debt service. In
Baby Neal v. Commonwealth of Pennsylvania, the American Civil Liberties Union
filed a lawsuit against the Commonwealth seeking an order that would require the
Commonwealth to provide additional funding for child welfare services. County Of
Allegheny v. Commonwealth of Pennsylvania involves litigation regarding the
state constitutionality of the statutory scheme for county funding of the
judicial system. In Pennsylvania Association of Rural and Small Schools v.
Casey, the constitutionality of Pennsylvania's system for funding local school
districts has been challenged. No estimates for the amount of these claims are
available.
FINANCIAL STATEMENTS
Financial Statements (audited) for the Trusts for the fiscal year ended May
31, 1998, including notes thereto, are incorporated by reference in the SAI from
the Trusts' Annual Report to Shareholders dated May 31, 1998 filed with the SEC
on July 31, 1998. Financial Statements (unaudited) for the Trusts for the fiscal
period beginning June 1, 1998 through November 30, 1998 are incorporated by
reference in the SAI from the Trust's semi-annual report filed with the SEC on
January 27, 1999.
<PAGE>
PART C
Item 24. Financial Statements and Exhibits
(a) Financial Statements
Included in Part A of the Registration Statement:
Financial Highlights
Included in Part B of the Registration Statement:
Financial statements (audited) for the year ended may 31, 1998,
including notes thereto, are incorporated by reference in the
statement of additional information ("sai") from the registrant's
annual report dated may 31, 1998 filed with the sec on july 31,
1998. Financial statements (unaudited) for the fiscal period
beginning june 1, 1998 through november 30, 1998 are incorporated
by reference in the sai from the registrant's semi-annual report
filed with the sec on january 29, 1999.
(b) Exhibits
(1) Declaration of Trust (filed as an exhibit to Registrant's
Initial Registration Statement dated March 23, 1983 and
incorporated by reference herein)
(2) Bylaws (filed as an exhibit to Registrant's Initial
Registration Statement dated March 23, 1983 and
incorporated by reference herein)
Amendment No. 2 (filed as an exhibit to Post-Effective
Amendment No. 15 dated July 31, 1990 and incorporated by
reference herein)
(3) Not Applicable
(4) Not Applicable
(5) Form of Investment Management Agreement between Registrant
and Reserve Management Company, Inc.*
(6) Form of Distribution Agreement and Plan of Distribution
(filed as an exhibit to Registrant's Pre-Effective
Amendment No. 1 dated July 22, 1983 and incorporated by
reference herein)
Amendment to Plan of Distribution (filed as exhibit to
Post-Effective Amendment No. 11 dated August 1, 1988 and
incorporated by reference herein)
(7) Pension Plan of Reserve Management Corporation (filed as
an exhibit to Post-Effective Amendment No. 9 dated
September 30, 1986 and incorporated by reference herein)
Amendments to Pension Plan (filed as an exhibit to
Post-Effective Amendment No. 45 of The Reserve Fund (File
No. 811-2033) dated July 31, 1989 and incorporated by
reference herein)
(8) (a) Custodian Agreement with Chemical Bank (filed as an
exhibit to Registrant's Initial Registration Statement
dated March 23, 1983 and incorporated by reference herein)
(b) Global Custody Agreement with Chase Manhattan Bank
dated January 6, 1998*
(9) Form of Service Agreement (filed as an exhibit to
Post-Effective Amendment No. 14 dated November 1, 1989 and
incorporated by reference herein)
(10) Opinion of counsel**
(11) Consent of auditors**
(12) Not Applicable
(13) Form of Subscription Agreement between the Registrant and
Reserve Management Company, Inc. (filed as an exhibit to
Post-Effective Amendment dated January 26, 1983 and
incorporated by reference herein)
(14) Not Applicable
(15) See item No. 6
(16) Not Applicable
(17) Financial Data Schedules*
(18) Not Applicable
(19) Powers of Attorney*
- -------------------------------------
* Filed herewith
** To be filed by further post-effective amendment
Item 25. Persons Controlled by or Under Common Control with Registrant
Not Applicable
Item 26. Number of Holders of Securities
Number of Record Holders at
Title of Class March 26, 1999
Interstate Tax-Exempt Fund 11,272
Connecticut Tax-Exempt Fund 5,153
California Tax-Exempt Fund 2,974
California II Tax-Exempt Fund 0
Florida Tax-Exempt Fund 1,165
Massachusetts Tax-Exempt Fund 1,020
Michigan Tax-Exempt Fund 0
New Jersey Tax-Exempt Fund 884
Ohio Tax-Exempt Fund 7
Pennsylvania Tax-Exempt Fund 527
Item 27. Indemnification
Each Trustee, officer, employee or agent of the Registrant, and any person who
has served at its request as a Director, Trustee, officer or employee of another
business entity, shall be entitled to be indemnified by the Registrant to the
fullest extent permitted by the laws of the Commonwealth of Massachusetts,
subject to the provisions of the Investment Company Act of 1940 and the rules
and regulations thereunder.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to Trustees, officers and controlling persons of the
Registrant pursuant to the Declaration of Trust or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of any expenses
incurred or paid by a Trustee, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed the final adjudication of
such issue.
Item 28. Business and Other Connections of Investment Adviser
<TABLE>
<CAPTION>
Name Position with the Adviser Other Businesses
<S> <C> <C>
Bruce R. Bent Vice President, Secretary Vice President,
and Director Secretary and Director
of Reserve Management
Corporation and Director
of Resrv Partners, Inc.
both of the
same address as the
Trust.
Henry B.R. Brown President, Treasurer and Director and Treasurer
Director of Transfer Agent Inc.,
5 Cornwall Street, N.W.
Leesburg, VA 22075
</TABLE>
Item 29. Principal Underwriters
(a) Resrv Partners, Inc., a principal underwriter of the Registrant,
also acts as principal underwriter to The Reserve Fund, Reserve
Institutional Trust, Reserve New York Tax-Exempt Trust and Reserve
Private Equity Series.
<TABLE>
<CAPTION>
Name and Principal Positions and Positions and
Business Address Offices with Resrv Offices with
Partners, Inc. Registrant
<S> <C> <C>
Bruce R. Bent Chairman and President, Treasurer
1250 Broadway, 32nd Floor Director & Trustee
New York, NY 10001-3701
James M. Freisen Controller Controller
1250 Broadway, 32nd Floor
New York, NY 10001-3701
Mary Belmonte President None
1250 Broadway, 32nd Floor
New York, NY 10001-3701
</TABLE>
Item 30. Location of Accounts and Records
All records required to be maintained by Section 31(a) of the 1940 Act and the
Rules promulgated thereunder are maintained at 1250 Broadway, 32nd Floor, New
York, NY 10001-3701 except those relating to receipts and deliveries of
securities, which are maintained by the Registrant's Custodian.
Item 31. Management Services
See "Investment Management, Distribution, Service and Custodian Agreements" in
the Statement of Additional Information.
Item 32. Undertakings
Not Applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that this
Post-Effective Amendment to its Registration Statement meets all of the
requirements for effectiveness pursuant to Rule 485(a) under the Securities Act
of 1933 and Registrant has duly caused this Post-Effective Amendment No. 33 to
its Registration Statement to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of New York, and State of New York, on the
28th day of April, 1999.
RESERVE TAX-EXEMPT TRUST
By: /s/ Bruce R. Bent
-------------------------------------
Bruce R. Bent, President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 33 to Registrant's Registration Statement has been
signed below by the following persons in the capacities and on the dates
indicated.
Signature Title Date
/s/ Bruce R. Bent President, Treasurer and April 28, 1999
- ------------------------------ Trustee (principal
Bruce R. Bent executive operating and
financial officer)
* Trustee April 28, 1999
- ------------------------------
Edwin Ehlert Jr.
* Trustee April 28, 1999
- ------------------------------
Henri W. Emmet
* Trustee April 28, 1999
- ------------------------------
Donald J. Harrington
* Trustee April 28, 1999
- ------------------------------
Bruce R. Bent II
* Trustee April 28, 1999
- ------------------------------
William E. Viklund
* Trustee April 28, 1999
- ------------------------------
Diana P. Hermann
* Trustee April 28, 1999
- ------------------------------
Richard Bassuk
/s/ MaryKathleen Foynes Counsel and Secretary April 28, 1999
- ------------------------------
MaryKathleen Foynes
*Attorney-in-Fact
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
(5) Form of Investment Management Agreement between the
Registrant and Reserve Management Company, Inc.
(8)(b) Global Custody Agreement with Chase Manhattan Bank dated
January 6, 1998
(17) Financial Data Schedules
(19) Powers of Attorney
"COMPREHENSIVE FEE"
INVESTMENT MANAGEMENT AGREEMENT
THIS AGREEMENT ("Agreement"), dated the ____ day of April, 1999, made and
entered into by and between Reserve Tax-Exempt Trust, a Massachusetts business
trust (the "Trust"), on behalf of the _______________ Fund (the "Portfolio"),
and RESERVE MANAGEMENT COMPANY, INC., a New Jersey corporation having its
principal place of business in New York (the "Manager").
WHEREAS, the Trust is a non-diversified management investment company and
is registered as such under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Trust is authorized to issue an unlimited number of shares of
beneficial interest, par value of $.001 per share, in separate series or classes
of series, with each such separate series representing an interest in a separate
portfolio of investment securities and other assets;
The parties agree as follows:
1. Investment Services. The Manager shall select and manage the
Portfolio's investments and shall determine what investments shall be made or
disposed of by the Portfolio and shall effect such acquisitions and
dispositions, all in furtherance of the Portfolio's investment objective and
policies, subject to the overall control and direction of the Trust's Board of
Trustees. The Manager shall report on such activities to the Board of Trustees
of the Trust and shall submit such reports and other information thereon as the
Board of Trustees shall from time to time request. Notwithstanding any other
provision hereof, the Manager, with the approval of the Board of Trustees, may
contract with one or more Sub-Investment Managers to perform any of the
investment management services; provided, however, any compensation paid will be
the sole responsibility of the Manager.
2. Other Services and Assumption of Certain Expenses. The Manager shall
furnish to the Trust, on behalf of the Portfolio: (i) the services of a
President and such other executive officers as may be requested by the
Portfolio, (ii) office space and customary office facilities to the extent that
the Portfolio's activities occur in New York, (iii) maintain Portfolio records
not otherwise maintained by the Portfolio's custodian, distributor or
sub-investment managers, and (iv) all accounting, administrative, clerical,
secretarial and statistical services as may be required by the Portfolio for the
operation of its business and compliance with applicable laws. The Manager shall
pay the compensation of all officers of the Trust on behalf of the Portfolio and
all operating and other expenses of the Portfolio except interest charges,
taxes, brokerage fees and commissions, extraordinary legal and accounting fees
and other extraordinary expenses including expenses incurred in connection with
litigation proceedings, other claims and the legal obligations of the Trust to
indemnify its trustees, officers, employees, shareholders, distributors and
other agents of the Trust, payments made pursuant to the Trust's Distribution
Plan, and the fees of the disinterested Trustees. The Manager may contract with
other parties to perform any of the ordinary administrative services required of
the Manager; provided, however any such compensation will be the responsibility
of the Manager.
3. Compensation of the Manager. The Portfolio shall pay to the Manager as
compensation for the services rendered hereunder and as full reimbursement for
all officers compensation and ordinary operating expenses of the Portfolio paid
by the Manager under paragraph 2 hereof, a management fee at an annual rate of
0.80% of the average daily net asset value of the Portfolio (the "Management
Fee").
The Management Fee shall be computed and accrued daily and shall be paid
by the Portfolio to the Manager monthly.
4. Compliance with Applicable Requirements. This Agreement will be
performed in accordance with the requirements of the 1940 Act and the Investment
Advisers Act of 1940, as amended, and the rules and regulations under such acts,
to the extent that the subject matter of the Agreement is within the purview of
such acts and such rules and regulations. The Manager will assist the Trust on
behalf of the Portfolio in complying with the requirements of the 1940 Act, and
the Securities Act of 1933, as amended (the "1933 Act"), and the rules and
regulations under such acts and in qualifying as a regulated investment company
under the Internal Revenue Code of 1986, as amended, and applicable regulations
of the Internal Revenue Service thereunder. In carrying out its obligations
under this Agreement the Manager shall at all times conform to the provisions of
the Declaration of Trust and By-Laws, the provisions of the currently effective
Registration Statement of the Trust under the 1940 Act and the 1933 Act, and any
other applicable provisions of state or Federal law.
5. Termination. This Agreement shall be in effect until the close of
business on June 30, 2000 and shall continue in effect from year to year
thereafter, but only so long as such continuance is specifically approved at
least annually by (i) either the Board of Trustees of the Trust or a majority
vote of the outstanding voting securities of the Portfolio, provided, however,
that if the shareholders of the Portfolio fail to approve the Agreement, as
provided herein, the Manager may continue to serve in such capacity in the
manner and to the extent permitted by the 1940 Act, and the rules thereunder,
and (ii) the vote of a majority of the Trustees of the Trust who are not parties
to this Agreement or interested persons (as defined in the 1940 Act) of either
party of this Agreement, cast in person at a meeting called for the purpose of
voting on such approval.
Notwithstanding anything herein to the contrary, this Agreement may be
terminated at any time, without payment of any penalty, by the Board of Trustees
of the Trust or by vote of a majority of the outstanding voting securities of
the Portfolio, on 60 days' written notice to the Manager, or by the Manager on
like notice to the Trust.
The name "Reserve" shall be deemed to have been licensed to the Trust by
the Manager. In the event of termination of this Agreement, the Manager may
terminate or revoke such license on 90 days' written notice to the Trust. On or
before the date of such revocation or termination, the Trust will change its
name to another name which does not include the word "Reserve."
6. Non-Assignability. This Agreement shall not be assignable by either
party hereto and shall automatically terminate forthwith in the event of such
assignment (within the meaning of the 1940 Act).
7. Approval of Agreement and Amendments. This Agreement and any material
amendments hereto shall be approved by vote of the holders of a majority of the
outstanding voting securities (as defined in the 1940 Act) of the Portfolio;
provided, however, that if the shareholders of the Portfolio fail to approve the
Agreement as provided herein, the Manager may continue to serve in such capacity
in the manner and to the extent permitted by the 1940 Act and the rules
thereunder.
8. Non-Exclusivity. The services of the Manager to the Trust are not to be
deemed exclusive and the Trust agrees that the Manager is free to act as
investment manager to various investment companies and other managed accounts.
For purposes of this Agreement and the undertakings provided for herein, the
Manager shall at all times be considered as an independent contractor, and shall
not be considered as an agent of the Trust and shall have no authority to act
for or represent the Trust in any way.
9. Liability of the Manager. In performing its duties hereunder, the
Manager may rely on all documentation and information furnished it by the Trust.
Except as may otherwise be provided by the 1940 Act, neither the Manager nor its
officers, directors, employees or agents shall be subject to any liability for
any act or omission in the course of, connected with or arising out of any
services to be rendered hereunder, except by reason of willful misfeasance, bad
faith or gross negligence in the performance of the Manager's duties or by
reason of reckless disregard of the Manager's obligations and duties under this
Agreement.
10. Notices. Any notices and communications required hereunder shall be in
writing and shall be deemed given when delivered in person or when sent by
first-class, registered or certified mail to the Manager or to the Trust at 1250
Broadway, 32nd Floor, New York, New York 10001, or at such addresses as either
party may from time to time specify by notice to the other.
11. Definitions. The terms "assignment," "interested person," and
"majority of the outstanding voting securities," when used in this Agreement,
shall have the respective meanings specified under the 1940 Act and the rules
thereunder.
12. Governing Law. The terms and provisions of this Agreement shall be
construed and interpreted in accordance with the laws of the State of New York
as at the time in effect and the applicable provisions of the 1940 Act. To the
extent that the applicable law of the State of New York, or any of the
provisions herein, conflict with the applicable provisions of the 1940 Act, the
latter shall control.
13. Severability. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall be deemed to be severable.
14. Shareholder Liability. The Manager understands and agrees that the
obligations of the Trust under this Agreement are not binding upon any
shareholder of the Trust personally, but bind only the Trust and the Trust's
property. The Manager represents that it has notice of the provisions of the
Declaration of Trust of the Trust disclaiming shareholder liability for acts or
obligations of the Trust.
IN WITNESS WHEREOF, the parties hereto have caused this instrument
to be executed on the day and year first above written.
RESERVE TAX-EXEMPT TRUST, on behalf of
__________________ Fund
By ________________________________
President
ATTEST:
- -------------------------
Secretary
RESERVE MANAGEMENT COMPANY, INC.
By ________________________________
President
ATTEST
- -------------------------
Secretary
CHASE GLOBAL CUSTODY AGREEMENT
This AGREEMENT is effective January 6, 1998, and is between THE CHASE
MANHATTAN
BANK ("Bank") and each of the funds set forth in Schedule A hereto (with each
fund a "Customer").
It is hereby agreed as follows:
1. Customer Accounts.
Bank shall establish and maintain the following accounts ("Accounts"):
(a) A custody account in the name of Customer ("Custody Account") for any
and all stocks, shares, bonds, debentures, notes, mortgages or other obligations
for the payment of money, bullion, coin and any certificates, receipts, warrants
or other instruments representing rights to receive, purchase or subscribe for
the same or evidencing or representing any other rights or interests therein and
other similar property whether certificated or uncertificated as may be received
by Bank or its Subcustodian (as defined in Section 3) for the account of
Customer ("Securities"); and
(b) A deposit account in the name of Customer ("Deposit Account") for any
and all cash in any currency received by Bank or its Subcustodian for the
account of Customer, which cash shall not be subject to withdrawal by draft or
check.
Customer warrants its authority to: 1) deposit the cash and Securities
("Assets") received in the Accounts and 2) give Instructions (as defined in
Section 11) concerning the Accounts. Bank may deliver securities of the same
class in place of those deposited in the Custody Account.
Upon written agreement between Bank and Customer, additional Accounts may
be established and separately accounted for as additional Accounts hereunder.
2. Maintenance of Securities and Cash at Bank and Subcustodian Locations.
Unless Instructions specifically require another location acceptable to
Bank:
(a) Securities shall be held in the country or other jurisdiction in
which the principal trading market for such Securities is located, where such
Securities are to be presented for payment or where such Securities are
acquired; and
(b) Cash shall be credited to an account in a country or other
jurisdiction in which such cash may be legally deposited or is the legal
currency for the payment of public or private debts.
Cash may be held pursuant to Instructions in either interest or
non-interest bearing accounts as may be available for the particular currency.
To the extent Instructions are issued and Bank can comply with such
Instructions, Bank is authorized to maintain cash balances on deposit for
Customer with itself or one of its "Affiliates" at such reasonable rates of
interest as may from time to time be paid on such accounts, or in non-interest
bearing accounts as Customer may direct, if acceptable to Bank. For purposes
hereof, the term "Affiliate" shall mean an entity controlling, controlled by, or
under common control with, Bank.
If Customer wishes to have any of its Assets held in the custody of an
institution other than the established Subcustodians as defined in Section 3 (or
their securities depositories), such arrangement must be authorized by a written
agreement, signed by Bank and Customer.
3. Subcustodians and Securities Depositories.
Bank may act hereunder through the subcustodians listed in Schedule B
hereof with which Bank has entered into subcustodial agreements
("Subcustodians"). Customer authorizes Bank to hold Assets in the Accounts in
accounts which Bank has established with one or more of its branches or
Subcustodians. Bank and Subcustodians are authorized to hold any of the
Securities in their account with any securities depository in which they
participate.
Bank reserves the right to add new, replace or remove Subcustodians.
Customer shall be given reasonable notice by Bank of any amendment to Schedule
B. Upon request by Customer, Bank shall identify the name, address and principal
place of business of any Subcustodian of Customer's Assets and the name and
address of the governmental agency or other regulatory authority that supervises
or regulates such Subcustodian.
4. Use of Subcustodian.
(a) Bank shall identify the Assets on its books as belonging to Customer.
(b) A Subcustodian shall hold such Assets together with assets belonging
to other customers of Bank in accounts identified on such subcustodian's books
as custody accounts for the exclusive benefit of customers of Bank.
(c) Any Assets in the Accounts held by a Subcustodian shall be subject
only to the instructions of Bank or its agent. Any Securities held in a
securities depository for the account of a Subcustodian shall be subject only to
the instructions of such Subcustodian.
(d) Any agreement Bank enters into with a Subcustodian for holding Bank's
customers' assets shall provide that such assets shall not be subject to any
right, charge, security interest, lien or claim of any kind in favor of such
Subcustodian except for safe custody or administration, and that the beneficial
ownership of such assets shall be freely transferable without the payment of
money or value other than for safe custody or administration or, in the case of
cash deposits, except for liens or rights in favor of creditors of the
Subcustodian arising under bankruptcy, insolvency or similar laws. Where
Securities are deposited by a Subcustodian with a securities depository, Bank
shall cause the Subcustodian to identify on its books as belonging to Bank, as
agent, the Securities shown on the Subcustodian's account on the books of such
securities depository. The foregoing shall not apply to the extent of any
special agreement or arrangement made by Customer with any particular
Subcustodian.
5. Deposit Account Transactions.
(a) Bank or its Subcustodians shall make payments from the Deposit
Account upon receipt of Instructions which include all information required by
Bank.
(b) In the event that any payment to be made under this Section 5 exceeds
the funds available in the Deposit Account, Bank, in its discretion, may advance
Customer such excess amount which shall be deemed a loan payable on demand,
bearing interest at the rate customarily charged by Bank on similar loans.
(c) If Bank credits the Deposit Account on a payable date, or at any time
prior to actual collection and reconciliation to the Deposit Account, with
interest, dividends, redemptions or any other amount due, Customer shall
promptly return any such amount upon oral or written notification: (i) that such
amount has not been received in the ordinary course of business or (ii) that
such amount was incorrectly credited. If Customer does not promptly return any
amount upon such notification, Bank shall be entitled, upon oral or written
notification to Customer, to reverse such credit by debiting the Deposit Account
for the amount previously credited. Bank or its Subcustodian shall have no duty
or obligation to institute legal proceedings, file a claim or a proof of claim
in any insolvency proceeding or take any other action with respect to the
collection of such amount, but may act for Customer upon Instructions after
consultation with Customer.
6. Custody Account Transactions.
(a) Securities shall be transferred, exchanged or delivered by Bank or
its Subcustodian upon receipt by Bank of Instructions which include all
information required by Bank. Settlement and payment for Securities received
for, and delivery of Securities out of, the Custody Account may be made in
accordance with the customary or established securities trading or securities
processing practices and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivery of Securities to a
purchaser, dealer or their agents against a receipt with the expectation of
receiving later payment and free delivery. Delivery of Securities out of the
Custody Account may also be made in any manner specifically required by
Instructions acceptable to Bank.
(b) Bank, in its discretion, may credit or debit the Accounts on a
contractual settlement date with cash or Securities with respect to any sale,
exchange or purchase of Securities. Otherwise, such transactions shall be
credited or debited to the Accounts on the date cash or Securities are actually
received by Bank and reconciled to the Account.
(i) Bank, upon oral or written notice to Customer, may reverse
credits or debits made to the Accounts in its discretion if the related
transaction fails to settle within a reasonable period, determined by
Bank in its discretion, after the contractual settlement date for the
related transaction.
(ii) If any Securities delivered pursuant to this Section 6 are
returned by the recipient thereof, Bank may reverse the credits and
debits of the particular transaction at any time.
7. Actions of Bank.
Bank shall follow Instructions received regarding Assets held in the
Accounts. However, until it receives Instructions to the contrary, Bank shall:
(a) Present for payment any Securities which are called, redeemed or
retired or otherwise become payable and all coupons and other income items which
call for payment upon presentation, to the extent that Bank or Subcustodian is
actually aware of such opportunities.
(b) Execute in the name of Customer such ownership and other certificates
as may be required to obtain payments in respect of Securities.
(c) Exchange interim receipts or temporary Securities for definitive
Securities.
(d) Appoint brokers and agents for any transaction for which Bank has
received Instructions involving the Securities, including, without limitation,
Affiliates of Bank or any Subcustodian.
(e) Issue statements to Customer, at times mutually agreed upon,
identifying the Assets in the Accounts.
Bank shall send Customer an advice or notification of any transfers of
Assets to or from the Accounts. Such statements, advices or notifications shall
indicate the identity of the entity having custody of the Assets. Unless
Customer sends Bank a written exception or objection to any Bank statement
within sixty (60) days of receipt, Customer shall be deemed to have approved
such statement. In such event, or where Customer has otherwise approved any such
statement, Bank shall, to the extent permitted by law, be released, relieved and
discharged with respect to all matters set forth in such statement or reasonably
implied therefrom and based on information which Customer knew or reasonably
should have known as though it had been settled by the decree of a court of
competent jurisdiction in an action where Customer and all persons having or
claiming an interest in Customer or Customer's Accounts were parties.
Provided that Bank has acted in accordance with the standard of care in
Section 12 (a) hereof, all collections of funds or other property paid or
distributed in respect of Securities in the Custody Account shall be made at the
risk of Customer. Provided that Bank has acted in accordance with the standard
of care in Section 12(a) hereof, Bank shall have no liability for any loss
occasioned by delay in the actual receipt of notice by Bank or by its
Subcustodians of any payment, redemption or other transaction regarding
Securities in the Custody Account in respect of which Bank has agreed to take
any action hereunder.
8. Corporate Actions; Proxies; Tax Reclaims.
(a) Corporate Actions. Whenever Bank receives information concerning the
Securities which requires discretionary action by the beneficial owner of the
Securities (other than a proxy), such as subscription rights, bonus issues,
stock repurchase plans and rights offerings, or legal notices or other material
intended to be transmitted to securities holders ("Corporate Actions"), Bank
shall give Customer prompt notice of such Corporate Actions to the extent that
Bank has received actual notice of the Corporate Action from the relevant issuer
or issuer's agent or as to which notice is published in publications routinely
utilized by Bank for this purpose.
When a rights entitlement or a fractional interest resulting from a
rights issue, stock dividend, stock split is received which bears an expiration
date, Bank shall endeavor to obtain Instructions from Customer or its Authorized
Person (as defined in Section 10 hereof), but if Instructions are not received
in time for Bank to take timely action, or actual notice of such Corporate
Action was received too late to seek Instructions, Bank is authorized but need
not sell such rights entitlement or fractional interest and to credit the
Deposit Account with the proceeds, if Bank, in good faith, deems such action to
be appropriate in which case it shall be held harmless for any such action.
(b) Proxy Voting. Bank shall provide proxy voting services, if elected by
Customer, in accordance with the terms of the proxy voting services rider
hereto. Proxy voting services may be provided by Bank or, in whole or in part,
by one or more third parties appointed by Bank (which may be Affiliates of
Bank).
(c) Tax Reclaims.
(i) Subject to the provisions hereof, Bank shall apply for a
reduction of withholding tax and any refund of any tax paid or tax credits
which apply in each applicable market in respect of income payments on
Securities for the benefit of Customer which Bank believes may be
available to such Customer.
(ii) The provision of tax reclaim services by Bank is conditional
upon Bank receiving from the beneficial owner of Securities (A) a
declaration of its identity and place of residence and (B) certain other
documentation (pro forma copies of which are available from Bank).
Customer acknowledges that, if Bank does not receive such declarations,
documentation and information, additional United Kingdom taxation shall be
deducted from all income received in respect of Securities issued outside
the United Kingdom and that U.S. non-resident alien tax or U.S. backup
withholding tax shall be deducted from U.S. source income. Customer shall
provide to Bank such documentation and information as it may require in
connection with taxation, and warrants that, when given, this information
shall be true and correct in every respect, not misleading in any way, and
contain all material information. Customer undertakes to notify Bank
immediately if any such information requires updating or amendment.
(iii) Provided that Bank has acted in accordance with the standard
of care in Section 12(a) hereof, Bank shall not be liable to Customer or
any third party for any taxes, fines or penalties payable by Bank or
Customer, and shall be indemnified accordingly, whether these result from
the inaccurate completion of documents by Customer or any third party
acting as agent for Customer, or as a result of the provision to Bank or
any third party of inaccurate or misleading information or the withholding
of material information by Customer or any other third party, or as a
result of any delay of any revenue authority or any other matter beyond
the control of Bank.
(iv) Customer confirms that Bank is authorized to deduct from any
cash received or credited to the Deposit Account any taxes or levies
required by any revenue or governmental authority for whatever reason in
respect of the Securities or Cash Accounts.
(v) Bank shall perform tax reclaim services only with respect to
taxation levied by the revenue authorities of the countries notified to
Customer from time to time and Bank may, by notification in writing, at
its absolute discretion, supplement or amend the markets in which the tax
reclaim services are offered. Other than as expressly provided in this
sub-clause, Bank shall have no responsibility with regard to Customer's
tax position or status in any jurisdiction.
(vi) Customer confirms that Bank is authorized to disclose any
information requested by any revenue authority or any governmental body in
relation to Customer or the Securities and/or Cash held for Customer.
(vii) Tax reclaim services may be provided by Bank or, in whole or
in part, by one or more third parties appointed by Bank (which may be
Affiliates of Bank); provided that. Bank shall be liable for the
performance of any such third party to the same extent as Bank would have
been if it performed such services itself
9. Nominees.
Securities which are ordinarily held in registered form may be registered
in a nominee name of Bank, Subcustodian or securities depository, as the case
may be. Bank may without notice to Customer cause any such Securities to cease
to be registered in the name of any such nominee and to be registered in the
name of Customer. In the event that any Securities registered in a nominee name
are called for partial redemption by the issuer, Bank may allot the called
portion to the respective beneficial holders of such class of security in any
manner Bank deems to be fair and equitable. Customer shall hold Bank,
Subcustodians, and their respective nominees harmless from any liability arising
directly or indirectly from their status as a mere record holder of Securities
in the Custody Account.
10. Authorized Persons.
As used herein, the term "Authorized Person" means employees or agents
including investment managers as have been designated by written notice from
Customer or its designated agent to act on behalf of Customer hereunder. Such
persons shall continue to be Authorized Persons until such time as Bank receives
Instructions from Customer or its designated agent that any such employee or
agent is no longer an Authorized Person.
11. Instructions.
The term "Instructions" means instructions of any Authorized Person
received by Bank, via telephone, telex, facsimile transmission, bank wire or
other teleprocess or electronic instruction or trade information system
acceptable to Bank which Bank believes in good faith to have been given by
Authorized Persons or which are transmitted with proper testing or
authentication pursuant to terms and conditions which Bank may specify. Unless
otherwise expressly provided, all Instructions shall continue in full force and
effect until canceled or superseded. I
Any Instructions delivered to Bank by telephone shall promptly thereafter
be confirmed in writing by an Authorized Person (which confirmation may bear the
facsimile signature of such Person), but Customer shall hold Bank harmless for
the failure of an Authorized Person to send such confirmation in writing, the
failure of such confirmation to conform to the telephone instructions received
or Bank's failure to produce such confirmation at any subsequent time. Bank may
electronically record any Instructions given by telephone, and any other
telephone discussions with respect to the Custody Account. Customer shall be
responsible for safeguarding any testkeys, identification codes or other
security devices which Bank shall make available to Customer or its Authorized
Persons.
12. Standard of Care; Liabilities.
(a) Bank shall be responsible for the performance of only such duties as
are set forth herein or expressly contained in Instructions which are consistent
with the provisions hereof as follows:
(i) Bank shall use reasonable care with respect to its obligations
hereunder and the safekeeping of Assets. Bank shall be liable to Customer
for any loss which shall occur as the result of the failure of a
Subcustodian to exercise reasonable care with respect to the safekeeping
of such Assets to the same extent that Bank would be liable to Customer
if Bank were holding such Assets in New York. In the event of any loss to
Customer by reason of the failure of Bank or its Subcustodian to utilize
reasonable care (including, but not limited to, as respects corporate
actions), Bank shall be liable to Customer only to the extent of
Customer's direct damages, to be determined based on the market value of
the property which is the subject of the loss at the date of discovery of
such loss and without reference to any special conditions or
circumstances. Bank shall have no liability whatsoever for any
consequential, special, indirect or speculative loss or damages
(including, but not limited to, lost profits) suffered by Customer in
connection with the transactions contemplated hereby and the relationship
established hereby even if Bank has been advised as to the possibility of
the same and regardless of the form of the action.
(ii) Bank shall not be responsible for the insolvency of any
Subcustodian which is not a branch or Affiliate of Bank. Bank shall not be
responsible for any act, omission, default or the solvency of any broker
or agent which it or a Subcustodian appoints unless such appointment was
made negligently or in bad faith.
(iii) Bank shall be indemnified by, and without liability to
Customer for any action taken or omitted by Bank whether pursuant to
Instructions or otherwise within the scope hereof if such act or omission
was in good faith, without negligence. In performing its obligations
hereunder, Bank may rely on the genuineness of any document which it
believes in good faith to have been validly executed.
(iv) Customer shall pay for and hold Bank harmless from any
liability or loss resulting from the imposition or assessment of any taxes
or other governmental charges, and any related expenses with respect to
income from or Assets in the Accounts.
(v) Bank shall be entitled to rely, and may act, upon the advice of
counsel (who may be counsel for Customer) on all matters and shall be
without liability for any action reasonably taken or omitted pursuant to
such advice.
(vi) Bank need not maintain any insurance for the benefit of
Customer.
(vii) Without limiting the foregoing, Bank shall not be liable for
any loss which results from: 1) the general risk of investing, or 2)
investing or holding Assets in a particular country including, but not
limited to, losses resulting from malfunction, interruption of or error in
the transmission of information caused by any machines or system or
interruption of communication facilities, abnormal operating conditions,
nationalization, expropriation or other governmental actions; regulation
of the banking or securities industry; currency restrictions, devaluations
or fluctuations; and market conditions which prevent the orderly execution
of securities transactions or affect the value of Assets; except that,
with respect to the failure of machines, systems, interruption of
communication facilities or abnormal operating conditions on Bank or a
Subcustodian's premises or otherwise within the control of Bank or a
Subcustodian, Bank shall not be so excused to the extent that such failure
was on account of Bank's or the Subcustodian's (as the case may be)
negligence (such as a failure to have had routine maintenance performed or
to have selected equipment reasonably suitable for the purposes
contemplated hereby given, in the case of Subcustodians, local market
practices with respect to such matters). Bank confirms that it has in
place backup procedures, periodically tested by it, that would permit
continued operation of its Brooklyn, New York and Bournemouth, England
data centers in the event of a failure of its systems or equipment.
(viii) Neither party shall be liable to the other for any loss due
to forces beyond their control including, but not limited to strikes or
work stoppages, acts of war (whether declared or undeclared) or terrorism,
insurrection, revolution, nuclear fusion, fission or radiation, or acts of
God.
(b) Consistent with and without limiting the first paragraph of this
Section 12, it is specifically acknowledged that Bank shall have no duty or
responsibility to:
(i) question Instructions or make any suggestions to Customer or an
Authorized Person regarding such Instructions;
(ii) supervise or make recommendations with respect to investments
or the retention of Securities;
(iii) advise Customer or an Authorized Person regarding any default
in the payment of principal or income of any security other than as
provided in Section 5(c) hereof;
(iv) evaluate or report to Customer or an Authorized Person
regarding the financial condition of any broker, agent or other party to
which Securities are delivered or payments are made pursuant hereto; and
(v) review or reconcile trade confirmations received from brokers.
Customer or its Authorized Persons issuing Instructions shall bear any
responsibility to review such confirmations against Instructions issued
to and statements issued by Bank.
(c) Customer authorizes Bank to act hereunder notwithstanding that Bank
or any of its divisions or Affiliates may have a material interest in a
transaction, or circumstances are such that Bank may have a potential conflict
of duty or interest including the fact that Bank or any of its Affiliates may
provide brokerage services to other customers, act as financial advisor to the
issuer of Securities, act as a lender to the issuer of Securities, act in the
same transaction as agent for more than one customer, have a material interest
in the issue of Securities, or earn profits from any of the activities listed
herein.
13. Fees and Expenses.
Customer shall pay Bank for its services hereunder the fees set forth in
Schedule C hereto or such other amounts as may be agreed upon in writing,
together with Bank's reasonable out-of-pocket or incidental expenses, such as,
but not limited to, scrip and stamp fees, legal fees registration fees, and
other costs that Bank pays on behalf of Customer. Bank shall have a lien on and
is authorized to charge any Accounts of Customer for any amount owing to Bank
under any provision hereof upon oral or written notice to Customer.
14. Miscellaneous.
(a) Foreign Exchange Transactions. To facilitate the administration of
Customer's trading and investment activity, subject to Instructions (which may
be standing Instructions) Bank is authorized to enter into spot or forward
foreign exchange contracts with Customer and may also provide foreign exchange
through its subsidiaries, Affiliates or Subcustodians. Instructions, including
standing instructions, may be issued with respect to such contracts but Bank may
establish rules or limitations concerning any foreign exchange facility made
available. In all cases where Bank, its subsidiaries, Affiliates or
Subcustodians enter into a foreign exchange contract related to Accounts, the
terms and conditions of the then current foreign exchange contract of Bank, its
subsidiary, Affiliate or Subcustodian and, to the extent not inconsistent, this
Agreement shall apply to such transaction.
(b) Certification of Residency, etc. Customer certifies that it is a
resident of the United States and shall notify Bank of any changes in residency.
Bank may rely upon this certification or the certification of such other facts
as may be required to administer Bank's obligations hereunder. Customer shall
indemnify Bank against all losses, liability, claims or demands arising directly
or indirectly from any such certifications.
(c) Access to Records. Bank shall allow Customer's independent public
accountant reasonable access to the records of Bank relating to the Assets as is
required in connection with their examination of books and records pertaining to
Customer's affairs. Subject to restrictions under applicable law, Bank shall
also obtain an undertaking to permit Customer's independent public accountants
reasonable access to the records of any Subcustodian which has physical
possession of any Assets as may be required in connection with the examination
of Customer's books and records.
(d) Governing Law Successors and Assigns, Captions THIS AGREEMENT SHALL
BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE
AND TO BE PERFORMED IN NEW YORK and shall not be assignable by either party, but
shall bind the successors in interest of Customer and Bank. The captions given
to the sections and subsections of this Agreement are for convenience of
reference only and are not to be used to interpret this Agreement.
(e) Entire Agreement: Applicable Riders. Customer represents that the
Assets deposited in the Accounts are (Check one):
- Employee Benefit Plan or other assets subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA");
X Investment Company assets subject to certain U.S. Securities and
Exchange Commission rules and regulations;
Neither of the above.
This Agreement consists exclusively of this document together with
Schedules A-C, and the following Rider(s) [Check applicable rider(s)]:
ERISA
X INVESTMENT COMPANY.
X PROXY VOTING
X SPECIAL TERMS AND CONDITIONS
There are no other provisions hereof and this Agreement supersedes any
other agreements, whether written or oral, between the parties. Any amendment
hereto must be in writing, executed by both parties.
(f) Severability. In the event that one or more provisions hereof are
held invalid, illegal or unenforceable in any respect on the basis of any
particular circumstances or in any jurisdiction, the validity, legality and
enforceability of such provision or provisions under other circumstances or in
other jurisdictions and of the remaining provisions shall not in any way be
affected or impaired.
(g) Waiver. Except as otherwise provided herein, no failure or delay on
the part of either party in exercising any power or right hereunder operates as
a waiver, nor does any single or partial exercise of any power or right preclude
any other or further exercise, or the exercise of any other power or right. No
waiver by a party of any provision hereof, or waiver of any breach or default,
is effective unless in writing and signed by the parry against whom the waiver
is to be enforced.
(h) Representations and Warranties. (i) Customer hereby represents and
warrants to Bank that: (A) it has full authority and power to deposit and
control the Securities and cash deposited in the Accounts; (B) it has all
necessary authority to use Bank as its custodian; (C) this Agreement constitutes
its legal, valid and binding obligation, enforceable in accordance with its
terms; (D) it shall have full authority and power to borrow moneys and enter
into foreign exchange transactions; and (E) it has not relied on any oral or
written representation made by Bank or any person on its behalf, and
acknowledges that this Agreement sets out to the fullest extent the duties of
Bank. (ii) Bank hereby represents and warrants to Customer that: (A) it has the
full power and authority to perform its obligations hereunder, (B) this
Agreement constitutes its legal, valid and binding obligation; enforceable in
accordance with its terms; (C) that it has taken all necessary action to
authorize the execution and delivery hereof.
(i) Notices. All notices hereunder shall be effective when actually
received. Any notices other communications which may be required hereunder are
to be sent to the parties at the following address or such other addresses as
may subsequently be given to the other party in writing: (a) Bank: The Chase
Manhattan Bank, 4 Chase MetroTech Center, l8th Floor, Brooklyn, N.Y. 11245,
Attention: Global Investor Services, Investment Management Group (Reserve Funds
Relationship Manager) and to The Chase Manhattan Bank, 3 Chase MetroTech Center,
8th floor, Brooklyn, N.Y. 11245, Attention: Reserve Funds Service Manager; and
(b) Customer: [Fund name) c/o The Reserve Funds, 810 Seventh Avenue, New York,
10019-5868. Attn: Operations Manager.
(j) Termination. This Agreement may be terminated by Customer or Bank by
giving ninety (90) days written notice to the other, provided that such notice
to Bank shall specify the names of the persons whom Bank shall deliver the
Assets in the Accounts. If notice of termination is given by Bank, Customer
shall within ninety (90) days following receipt of the notice, deliver to Bank
Instructions specifying the name of the persons to whom Bank shall deliver the
Assets. In either case Bank shall deliver the Assets to persons so specified,
after deducting any amounts which Bank determines in good faith to be owed to it
under Section 13, an explanation for any such deductions shall be furnished to
Customer. If within ninety (90) days following receipt of a notice of
termination by Bank, Bank does not receive Instructions from Customer specifying
the names of the persons to whom Bank shall deliver the Assets, Bank, at its
election, may deliver the Assets to a bank or trust company doing business in
the State of New York to be held and disposed pursuant to the provisions hereof,
or to Authorized Persons, or may continue to hold the Assets Instructions are
provided to Bank.
(k) Imputation of certain information. Bank shall not be held responsible
for and shall not required to have regard to information held by any person by
imputation or information of which Bank not aware by virtue of a "Chinese Wall"
arrangement. If Bank becomes aware of confidential information which in good
faith it feels inhibits it from effecting a transaction hereunder Bank may
refrain from effecting it.
(l) Year 2000. Bank confirms that it is aware of the problem that may be
presented for certain computer systems by use of date fields and the like on and
after January 1, 2000 and that Bank has developed and is implementing a plan to
help assure that Bank's systems as the same relate to services provided
hereunder will be unaffected by such problems.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first-above written.
THE RESERVE FUNDS THE CHASE MANHATTAN BANK
Title: Title:
Date Date:
<PAGE>
STATE OF NY )
: ss
COUNTY OF NY )
On this 9th day of January 1998 before me personally came Michelle L.
Neufield, to me known, who being by me duly sworn, did depose and say that
he/she resides in Fairfield , Ct. at 325 Romanock Rd., that her/she is General
Counsel & Secy of The Reserve Funds & all affiliates, the entity described in
and which executed the foregoing instrument; that he/she knows the seal of said
entity, that the seal affixed to said instrument is such seal, that it was so
affixed by order of said entity, and that he/she signed his/her name thereto by
like order.
Sworn to before me this 9th Day of January, 1998.
Notary
/s/ PATRICIA Maldonado
Notary Public, State of New York
No. 01MA5014011
Qualified in Bronx County
Commission Expires July 6, 1999.
<PAGE>
Investment Company Rider to Global Custody Agreement
Between The Chase Manhattan Bank and
The Reserve Funds
Effective January 6, 1998
The following modifications are made to the Agreement:
The following modifications are made to the Agreement:
A. Add a new Section 15 to the Agreement as follows:
15. Compliance with SEC rule 17f-5.
(a) Customer's board of directors (or equivalent body) (hereinafter
'Board') hereby delegates to Bank, and, except as to the country or countries as
to which Bank may, from time to time, advise Customer that it does not accept
such delegation, Bank hereby accepts the delegation to it, of the obligation to
perform as Customer's 'Foreign Custody Manager' (as that term is defined in SEC
rule l7f-5 (a)(2)), both for the purpose of selecting Eligible Foreign
Custodians (as that term is defined in SEC rule l7f-5(a)(1), and as the same may
be amended from time to time, or that have otherwise been made exempt pursuant
to an SEC exemptive order) to hold Assets and of evaluating the contractual
arrangements with such Eligible Foreign Custodians (as set forth in SEC rule
17f-5(c)(2)); provided that, the term Eligible Foreign Custodian shall not
include any 'Compulsory Depository. A Compulsory Depository shall mean a
securities depository or clearing agency the use of which is compulsory because:
(1) its use is required by law or regulation, (2) securities cannot be withdrawn
from the depository, or (3) maintaining securities outside the depository is not
consistent with prevailing custodial practices in the country which the
depository serves. Compulsory Depositories used by Chase as of the date hereof
are set forth in Appendix 1-A hereto, and as the same may be amended on notice
to Customer from time to time.
(b) In connection with the foregoing, Bank shall:
(i) provide written reports notifying Customer's Board of the
placement of Assets with particular Eligible Foreign Custodians and of
any material change in the arrangements with such Eligible Foreign
Custodians, with such reports to be provided to Customer's Board at
such times as the Board deems reasonable and appropriate based on the
circumstances of Customer's foreign custody arrangements (and until
further notice from Customer such reports shall be provided not less
than quarterly with respect to the placement of Assets with particular
Eligible Foreign Custodians and with reasonable promptness upon the
occurrence of any material change in the arrangements with such
Eligible Foreign Custodians);
(ii) exercise such reasonable care, prudence and diligence in
performing as Customer's Foreign Custody Manager as a person having
responsibility for the safekeeping of Assets would exercise;
(iii) in selecting an Eligible Foreign Custodian, first have determined
that Assets placed and in the safekeeping of such Eligible Foreign
Custodian shall be subject to reasonable care, based on the standards
applicable to custodians in the relevant market, after having
considered all factors relevant to the safekeeping of such Assets,
including, without limitation, those factors set forth in SEC rule
l7f-5(c)(l)(i)-(iv);
(iv) determine that the written contract with the Eligible Foreign
Custodian (or, in the case of an Eligible Foreign Custodians that is a
securities depository or clearing agency, such contract, the rules or
established practices or procedures of the depository, or any
combination of the foregoing) requires that the Eligible Foreign
Custodian will provide reasonable care for Assets based on the
standards applicable to custodians in the relevant market. In making
this determination, Bank shall consider the provisions of Rule
l7f-5(c)(2), together with whether Bank shall be liable to Customer for
any loss which shall occur as the result of the failure of the Eligible
Foreign Custodian to exercise reasonable ca with respect to the
safekeeping of such Assets to the same extent that Bank would be liable
to Customer if Bank were holding such Assets in New York; and
(v) have established a system to monitor the continued appropriateness
of maintaining Assets with particular Eligible Foreign Custodians and
of the governing contractual arrangements; it being understood,
however, that in the event that Bank shall have determined that the
existing Eligible Foreign Custodian in a given country would no longer
afford Assets reasonable care and that no other Eligible Foreign
Custodian in that country would afford reasonable care, Bank shall
promptly so advise Customer and shall then act in accordance with the
Instructions of Customer with respect to the disposition of the
affected Assets.
Subject to (b)(i)-(v) above, Bank is hereby authorized to place and maintain
Assets on behalf of Customer with Eligible Foreign Custodians pursuant to a
written contract deemed appropriate by Bank.
(c) Except as expressly provided herein, Customer shall be solely
responsible to assure that the maintenance of Assets hereunder complies with the
rules, regulations, interpretations and exemptive orders promulgated by or under
the authority of the SEC.
(d) Bank represents to Customer that it is a U.S. Bank as defined in Rule
l7f-5(a)(7). Customer represents to Bank that: (1) the Assets being placed and
maintained in Bank's custody are subject to the Investment Company Act of 1940,
as amended (the '1940 Act'), as the same may be amended from time to time; (2)
its Board: (i) has determined that it is reasonable to rely on Bank to perform
as Customer's Foreign Custody Manager (ii) or its investment advisor shall have
determined that Customer may maintain Assets in each country in which Customer's
Assets shall be held hereunder and determined to accept the risks arising
therefrom (including, but not limited to, a country's financial infrastructure
(and including any Compulsory Depository operating in such country), prevailing
custody and settlement practices, laws applicable to the safekeeping and
recovery of Assets held in custody, and the likelihood of nationalization,
currency controls and the like)."
B. Add the following after the first sentence of Section 3 of the
Agreement: "At the request of Customer, Bank may, but need not, add to Schedule
B an Eligible Foreign Custodian that is either a bank or a non-Compulsory
Depository where Bank has not acted as Foreign Custody Manager with respect to
the selection thereof. Bank shall notify Customer in the event that it elects
not to add any such entity."
C. Add the following language to the end of Section 3 of the Agreement:
The term Subcustodian as used herein shall mean the following:
(a) a U.S. Bank, which shall mean a U.S. bank as defined in SEC rule
l7f-5(a)(7);
(b) an 'Eligible Foreign Custodian,' which shall mean (i) a banking
institution or trust company, incorporated or organized under the laws of
a country other than the United States, that is regulated as such by that
country's government or an agency thereof, (ii) a majority-owned direct
or indirect subsidiary of a U.S. bank or bank holding company which
subsidiary is incorporated or organized under the laws of a country other
than the United States; (iii) a securities depository or clearing agency,
incorporated or organized under the laws of a country other than the
United States, that acts as a system for the central handling of
securities or equivalent book-entries in that country and that is
regulated by a foreign financial regulatory authority as defined under
section 2(a)(5) of the 1940 Act, (iv) a securities depository or clearing
agency organized under the laws of a country other than the United States
to the extent acting as a transnational system for the central handling
of securities or equivalent book-entries, and (v) any other entity that
shall have been so qualified by exemptive order, rule or other
appropriate action of the SEC.
For purposes of clarity, it is agreed that as used in Section 12(a)(i), the term
Subcustodian shall include neither any Eligible Foreign Custodian as to which
Bank has not acted as Foreign Custody Manager nor any Compulsory Depository."
D. Insert the following language at the beginning of the second sentence
of Section 12(a)(i):
"Except with respect to those countries as to which the parties may from
time to time agree in writing otherwise".
E. In recognition of the fact that compliance with amended Rule l7f-5 is
in an early stage of development and of the importance to Bank of the
relationship between Bank and Customer, Bank hereby agrees that, if prior to
June 15, 1998, Bank makes any material change to this rider for its mutual fund
customers, Customer shall be given the option of continuing to operate under
this rider or pursuant to the changed rider. Customer shall promptly notify Bank
of whether or not it elects to operate pursuant to the changed rider, and if it
does so elect, such election shall be effective on and after the date that Bank
receives such notice.
<PAGE>
GLOBAL PROXY SERVICE RIDER
To Global Custody Agreement
Between
THE CHASE MANHATTAN BANK
AND
THE RESERVE FUNDS
January 6, 1998
1. Global Proxy Services ("Proxy Services") shall be provided for the
countries listed in the procedures and guidelines ("Procedures") furnished
to Customer, as the same may be amended by Bank from time to time on prior
notice to Customer. The Procedures are incorporated by reference herein
and form a part of this Rider.
2. Proxy Services shall consist of those elements as set forth in the
Procedures, and shall include (a) notifications ("Notifications") by Bank
to Customer of the dates of pending shareholder meetings, resolutions to
be voted upon and the return dates as may be received by Bank or provided
to Bank by its Subcustodians or third parties, and (b) voting by Bank of
proxies based on Customer directions. Original proxy materials or copies
thereof shall not be provided. Notifications shall generally be in English
and, where necessary, shall be summarized and translated from such
non-English materials as have been made available to Bank or its
Subcustodian. In this respect Bank's only obligation is to provide
information from sources it believes to be reliable and/or to provide
materials summarized and/or translated in good faith. Bank reserves the
right to provide Notifications, or parts thereof, in the language
received. Upon reasonable advance request by Customer, backup information
relative to Notifications, such as annual reports, explanatory material
concerning resolutions, management recommendations or other material
relevant to the exercise of proxy voting rights shall be provided as
available, but without translation.
3. While Bank shall attempt to provide accurate and complete Notifications,
whether or not translated, Bank shall not be liable for any losses or
other consequences that may result from reliance by Customer upon
Notifications where Bank prepared the same in good faith.
4. Notwithstanding the fact that Bank may act in a fiduciary capacity with
respect to Customer under other agreements or otherwise under the
Agreement, in performing Proxy Services Bank shall be acting solely as the
agent of Customer, and shall not exercise any discretion with regard to
such Proxy Services.
5. Proxy voting may be precluded or restricted in a variety of circumstances,
including, without limitation, where the relevant Securities are: (i) on
loan; (ii) at registrar for registration or reregistration; (iii) the
subject of a conversion or other corporate action; (iv) not held in a name
subject to the control of Bank or its Subcustodian or are otherwise held
in a manner which precludes voting; (v) not capable of being voted on
account of local market regulations or practices or restrictions by the
issuer; or (vi) held in a margin or collateral account.
6. Customer acknowledges that in certain countries Bank may be unable to vote
individual proxies but shall only be able to vote proxies on a net basis
(e.g. a net yes or no vote given the voting instructions received from all
customers).
7. Customer shall not make any use of the information provided hereunder,
except in connection with the funds or plans covered hereby, and shall in
no event sell, license, give or otherwise make the information provided
hereunder available, to any third party, and shall not directly or
indirectly compete with Bank or diminish the market for Proxy Services by
provision of such information, in whole or in part, for compensation or
otherwise, to any third party.
8. The names of Authorized Persons for Proxy Services shall be furnished to
Bank in accordance with ss.10 of the Agreement. Proxy Services fees shall
be as set forth in ss.13 of the Agreement or as separately agreed.
<PAGE>
Appendix 1-A
Compulsory Depositories
As of January 6, 1998
<TABLE>
<CAPTION>
COUNTRY DEPOSITORY INSTRUMENT
<S> <C> <C>
Argentina Caja de Valores Equity Corporate & Government
Debt
Australia Austraclear Ltd. Corporate Debt, Money Market &
Semi Government Debt
CHESS Equity
(Clearing House Electronic
Sub-register System)
RITS Government Debt
(Reserve Bank Information and
Transfer System)
Austria Oesterreichischer Kontrolbank Equity, Corporate + Government
AG Debt
Belgium CIK Equity + Corporate Debt
(Caiss Interprofessionnelle
de Deposits de Virements de
Titres)
Bank Nationale de Belgique Treasury Bills + Government
Debt
Brazil BOVESPA Equity
(Bolsa de Valores de Sao
Paolo)
BVRJ Equity
(Bolsa de Valores de Rio de
Janeiro)
Bulgaria BNB Government Debt
(Bulgaria National Bank)
Canada CDS Equity, Corporate + Government
(Canadian Depository for Debt
Securities)
China, SSCCRC Equity
Shanghai (Shanghai Securities Central
Clearing and Registration
Corp.)
China, SSCC Equity
Shenzhen (Shenzhen Securities
Registration Co., Ltd.)
Czech SCP Equity + Long-Term Government
Republic (Securities Center) Debt
TKD Treasury Bills + Money Market
(Trh Kratkododich Dlluhopisu
or Short-Term Bond Market)
Denmark VP Equity, Corporate + Government
(Vaerdipapircentralen) Debt
Egypt Misr Clearing & Sec. Dep. Equity
Estonia EVK Equity
(Estonian Central Depository
for Securities Ltd.)
Euromarket Cedel & Euroclear Euro-Debt
Finland CSR Equity + Government Debt
(Central Share Registry
Finland)
Helsinki Money Market Center Money Market
Ltd.
France SICOVAM Equity + Corporate Debt.
(Banque de France)
France SATURNE Government Debt
(Banque de France)
Germany DKV Equity, Corporate + Government
(Deutscher Kassenverein) Debt
Greece Apothetirio Titlon A.E. Equity
Bank of Greece Government Debt
Hong Kong CCASS Equity
(Central Clearing and
Settlement System)
CMU Corporate + Government Debt
(Central Money-markets Unit)
Hungary Keler Ltd. Equity + Government Debt
India NSDL Equity + Corporate Debt
(National Securities
Depository Ltd)
Ireland CREST Equity
GSO Government Debt
(Gilt Settlement Office)
Israel TASE Clearing House Equity, Corporate + Government
(Tel Aviv Stock Exchange Debt
Clearing House)
Italy Monte Titoli Equity + Corporate Debt
Bank of Italy Government Debt
Japan Bank of Japan Registered Government Debt
Latvia LCD Equity + Government Debt
(Latvian Central Depository)
Lebanon Midclear Equity
(Custodian and Clearing
Center of Lebanon and the
Middle East)
Luxenbourg Cedel Equity
Malaysia MCD Equity
(Malaysian Central Depository
Snd Bhd)
Mauritius CDS Equity
(Central Depository System)
Mexico Indeval Equity, Corporate + Government
(Institucion para el Deposito Debt.
de Valores
Morocco Maroclear Equity + Corporate Debt
Morroco, cont. Bank Al'Maghrib Government Debt
Netherlands NECIGEF/KAS Associate NV Equity, Corporate + Government
Debt
De Nederlandsche Bank N.V. Money-Market
NIEC Premium Bonds
(Nederlands
Interprofessioneel
Effectencentrum B.V.)
New Zealand Austraclear New Zealand Equity, Corporate + Government
Debt
Norway VPS Equity, Corporate + Government
(Verdipapiresentralen) Debt
Pakistan CDC Equity
(Central Depository Company
of Pakistan Ltd.)
Peru CAVALI Equity
(Caja de Valores)
Philippines PCD Equity
(Philippine Central Depository
Poland NDS Equity, Long-Term Government
(National Securities Debt + Vouchers
Depository)
CRT Treasury Bills
(Central Registry of Treasury
Bills)
Portugal Interbolsa Equity, Corporate + Government
Debt
Romania SNCDD - RASDAQ Equity
(National Company for
Clearing, Settlement and
Depository for Securities)
Bucharest Stock Exchange Equity
Registry
National Bank of Romania Treasury Bills
Russia MICEX GKO's (Gosudarstvennye
(Moscow Interbank Currency Kratkosrochnye
Exchange) Obyazatelstva [T-Bills])
OFZ's
(obligatsyi Federalnogo Zaima
[Federal Loan Bonds])
Singapore CDP Equity + Corporate Debt and
(Central Depository Pte. Ltd.) Malaysian equities traded on
CLOB
Monetary Authority of Government Debt
Singapore
Slovak SCP Equity + Government Debt
Republic (Stredisko Cennych Papiru)
National Bank of Slovakia Treasury Bills
So. Africa CD Corporate + Government Debt
(Central Depository)
So. Korea KSD Equity, Corporate + Government
Debt
Spain SCLV Equity, + Corporate Debt
(Servicio de Compensacion y
Liquidacion de Valores)
Spain CBEO Government Debt
(Central Book Entry Office)
Sri Lanka CDS Equity
(Central Depository System
(Private) Ltd.)
Sweden VPC Equity, Corporate + Government
(Vardepapperscentralen AB) Debt
Switzerland SEGA Equity, Corporate + Government
(Schweizerische Debt
Effekten-GiroAG)
Taiwan TSCD Equity + Government Debt
(Taiwan Securities Central
Depository Co., Ltd.)
Thailand TSDC Equity, Corporate + Government
(Thailand Securities Debt
Depository Company Ltd.)
Tunisia STICODEVAM Equity
(Societe Tunisienne
Interprofessionnelle pour la
Compensation et le Depot des
Valeurs Mobilieres)
Ministry of Finance Government Debt tradable on
the stock exchange (BTNBs)
Central Bank of Tunisia Government Debt tradable on
the stock exchange (BTCs)
Turkey Takas Bank Equity + Corporate Debt
Central Bank of Turkey Government Debt
United CREST Equity + Corporate Debt
Kingdom (Clearing & settlement system)
CMO Sterling CD's & CP
(Central Money-market Office)
CGO Gilts
(Central Gilts Office)
United States DTC Equity + Corporate Debt
(Depository Trust Company)
PTC Mortgage Back Debt
(Participants Trust Company)
Fed Book-Entry Government Debt
Zambia LuSE Equity + Government Debt
(LuSE Central Shares
Depository Ltd.)
</TABLE>
<PAGE>
DOMSTIC AND GLOBAL
SPECIAL TERMS AND CONDITIONS RIDER
Domestic Corporate Actions and Proxies
With respect to domestic U.S. and Canadian Securities (the latter if held in
DTC), the following provisions shall apply rather than the pertinent provisions
of Section 8 of the Agreement and the Global Proxy Service rider:
Bank shall send to Customer or the Authorized Person for a Custody
Account, such proxies (signed in blank, if issued in the name of Bank's
nominee or the nominee of a central depository) and communications with
respect to Securities in the Custody Account as call for voting or relate
to legal proceedings within a reasonable time after sufficient copies are
received by Bank for forwarding to its customers. In addition, Bank shall
follow coupon payments, redemptions, exchanges or similar matters with
respect to Securities in the Custody Account and advise Customer or the
Authorized Person for such Account of rights issued, tender offers or any
other discretionary rights with respect to such Securities, in each case,
of which Bank has received notice from the issuer of the Securities, or as
to which notice is published in publications routinely utilized by Bank
for this purpose
<PAGE>
Schedule A
Portfolios of the Reserve Funds:
Reserve Primary Fund
Reserve Government Fund
Reserve Interstate Fund
Reserve New York Tax-Exempt Fund
Reserve Connecticut Tax-Exempt Fund Reserve Massachusetts Tax-Exempt Fund
Reserve New Jersey Tax-Exempt Fund Reserve U.S. Treasury Fund Reserve
Convertible Securities Fund Reserve Florida Tax-Exempt Fund Reserve
Offshore Fund Reserve Mid-Cap Growth Fund Reserve Large-Cap Value Fund
Reserve Strategist Money-Market Fund Reserve Small-Cap Growth Fund
Reserve California Tax-Exempt Fund Reserve, Blue Chip Growth Fund Reserve
Informed Investor Growth Fund Reserve Pennsylvania Tax-Exempt Fund
Reserve International Equity Fund Reserve Primary Institution Fund
Reserve U.S. Government Institutional Fund Reserve U.S. Treasury
Institutional Fund Reserve Interstate Tax-Exempt Institutional Fund
Reserve Ohio Tax-Exempt Fund Reserve Michigan Tax-Exempt Fund The
InterVest Fund
- InverVest Fixed-Rate Fund
- InterVest Variable-Rate Fund
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> Interstate Tax-Exempt Fund
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> NOV-30-1998
<INVESTMENTS-AT-COST> 376,899,416
<INVESTMENTS-AT-VALUE> 376,771,600
<RECEIVABLES> 2,324,736
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 379,096,336
<PAYABLE-FOR-SECURITIES> 10,818,048
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,236,894
<TOTAL-LIABILITIES> 12,054,942
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 367,041,394
<SHARES-COMMON-STOCK> 367,041,394
<SHARES-COMMON-PRIOR> 352,868,857
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 367,041,394
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6,583,225
<OTHER-INCOME> 0
<EXPENSES-NET> 1,869,787
<NET-INVESTMENT-INCOME> 4,713,438
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 4,713,438
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (4,713,438)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 740,895,658
<NUMBER-OF-SHARES-REDEEMED> 731,436,559
<SHARES-REINVESTED> 4,713,438
<NET-CHANGE-IN-ASSETS> 14,172,537
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 934,893
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,869,787
<AVERAGE-NET-ASSETS> 372,985,515
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .013
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.013)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> Connecticut Tax-Exempt Fund
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> NOV-30-1998
<INVESTMENTS-AT-COST> 37,917,154
<INVESTMENTS-AT-VALUE> 37,888,808
<RECEIVABLES> 278,394
<ASSETS-OTHER> 1,387,746
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 39,554,948
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,083
<TOTAL-LIABILITIES> 1,083
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 39,553,865
<SHARES-COMMON-STOCK> 39,553,865
<SHARES-COMMON-PRIOR> 36,786,677
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 37,888,808
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 754,493
<OTHER-INCOME> 0
<EXPENSES-NET> 224,164
<NET-INVESTMENT-INCOME> 530,329
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 530,329
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (530,329)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 90,242,774
<NUMBER-OF-SHARES-REDEEMED> 88,005,915
<SHARES-REINVESTED> 530,329
<NET-CHANGE-IN-ASSETS> 2,767,188
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 112,082
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 224,164
<AVERAGE-NET-ASSETS> 44,721,459
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .012
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.012)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> Massachusetts Tax-Exempt Fund
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> NOV-30-1998
<INVESTMENTS-AT-COST> 27,337,933
<INVESTMENTS-AT-VALUE> 27,190,440
<RECEIVABLES> 181,050
<ASSETS-OTHER> 310,255
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 27,681,745
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,061
<TOTAL-LIABILITIES> 3,061
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 27,678,684
<SHARES-COMMON-STOCK> 27,678,684
<SHARES-COMMON-PRIOR> 25,382,988
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 27,678,684
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 428,336
<OTHER-INCOME> 0
<EXPENSES-NET> 129,829
<NET-INVESTMENT-INCOME> 298,507
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 298,507
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (298,507)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 34,282,194
<NUMBER-OF-SHARES-REDEEMED> 32,285,005
<SHARES-REINVESTED> 298,507
<NET-CHANGE-IN-ASSETS> 2,295,696
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 64,915
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 129,829
<AVERAGE-NET-ASSETS> 25,898,007
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .012
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.012)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> New Jersey Tax-Exempt Fund
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> NOV-30-1998
<INVESTMENTS-AT-COST> 44,300,842
<INVESTMENTS-AT-VALUE> 44,260,727
<RECEIVABLES> 338,878
<ASSETS-OTHER> 1,172,268
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 45,771,873
<PAYABLE-FOR-SECURITIES> 3,004,860
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,172
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 42,765,841
<SHARES-COMMON-STOCK> 42,765,841
<SHARES-COMMON-PRIOR> 37,600,440
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 42,765,841
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 716,639
<OTHER-INCOME> 0
<EXPENSES-NET> 216,629
<NET-INVESTMENT-INCOME> 500,010
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 500,010
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (500,010)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 119,084,351
<NUMBER-OF-SHARES-REDEEMED> 114,418,960
<SHARES-REINVESTED> 500,010
<NET-CHANGE-IN-ASSETS> 5,165,401
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 108,315
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 216,629
<AVERAGE-NET-ASSETS> 43,212,770
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .012
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.012)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> California Tax-Exempt Fund
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> NOV-30-1998
<INVESTMENTS-AT-COST> 122,684,520
<INVESTMENTS-AT-VALUE> 122,637,355
<RECEIVABLES> 638,175
<ASSETS-OTHER> 576,827
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 123,852,357
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,393
<TOTAL-LIABILITIES> 3,393
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 123,848,964
<SHARES-COMMON-STOCK> 123,848,964
<SHARES-COMMON-PRIOR> 66,932,712
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 123,848,964
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,641,131
<OTHER-INCOME> 0
<EXPENSES-NET> 513,927
<NET-INVESTMENT-INCOME> 1,127,204
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 1,127,204
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,127,204)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 438,083,016
<NUMBER-OF-SHARES-REDEEMED> 382,293,968
<SHARES-REINVESTED> 1,127,204
<NET-CHANGE-IN-ASSETS> 56,916,252
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 257,780
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 513,927
<AVERAGE-NET-ASSETS> 102,840,318
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .011
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.011)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 6
<NAME> Florida Tax-Exempt Fund
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> NOV-30-1998
<INVESTMENTS-AT-COST> 21,615,847
<INVESTMENTS-AT-VALUE> 21,599,784
<RECEIVABLES> 117,484
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 5,250
<TOTAL-ASSETS> 21,722,518
<PAYABLE-FOR-SECURITIES> 623,517
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,328
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 21,096,673
<SHARES-COMMON-STOCK> 21,096,673
<SHARES-COMMON-PRIOR> 10,817,239
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 21,096,673
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 305,916
<OTHER-INCOME> 0
<EXPENSES-NET> 88,051
<NET-INVESTMENT-INCOME> 217,865
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 217,865
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (217,865)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 51,187,570
<NUMBER-OF-SHARES-REDEEMED> 41,126,001
<SHARES-REINVESTED> 217,865
<NET-CHANGE-IN-ASSETS> 10,729,434
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 44,026
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 88,051
<AVERAGE-NET-ASSETS> 17,564,408
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .013
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.013)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 7
<NAME> Pennsylvania Tax-Exempt Fund
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> NOV-30-1998
<INVESTMENTS-AT-COST> 20,259,584
<INVESTMENTS-AT-VALUE> 20,257,273
<RECEIVABLES> 79,690
<ASSETS-OTHER> 353,344
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 20,690,307
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,240
<TOTAL-LIABILITIES> 2,240
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 20,688,067
<SHARES-COMMON-STOCK> 20,688,067
<SHARES-COMMON-PRIOR> 13,187,138
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 20,688,067
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 287,408
<OTHER-INCOME> 0
<EXPENSES-NET> 83,774
<NET-INVESTMENT-INCOME> 203,634
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 203,634
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (203,634)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 33,850,248
<NUMBER-OF-SHARES-REDEEMED> 26,552,953
<SHARES-REINVESTED> 203,634
<NET-CHANGE-IN-ASSETS> 7,500,929
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 41,887
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 83,774
<AVERAGE-NET-ASSETS> 16,711,249
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .012
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.012)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 8
<NAME> Ohio Tax-Exempt Fund
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> NOV-30-1998
<INVESTMENTS-AT-COST> 1,695,000
<INVESTMENTS-AT-VALUE> 1,695,000
<RECEIVABLES> 4,989
<ASSETS-OTHER> 538,993
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,238,982
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 61
<TOTAL-LIABILITIES> 61
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,238,921
<SHARES-COMMON-STOCK> 2,238,921
<SHARES-COMMON-PRIOR> 2,506,605
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 2,238,921
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 37,353
<OTHER-INCOME> 0
<EXPENSES-NET> 11,185
<NET-INVESTMENT-INCOME> 26,168
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 26,168
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (26,168)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,850,308
<NUMBER-OF-SHARES-REDEEMED> 2,144,160
<SHARES-REINVESTED> 26,168
<NET-CHANGE-IN-ASSETS> (267,684)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,608
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 11,185
<AVERAGE-NET-ASSETS> 2,237,304
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .012
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.012)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
Exhibit 19
POWER OF ATTORNEY
RESERVE TAX- EXEMPT TRUST, a Massachusetts business trust, does hereby
constitute and appoint MaryKathleen Foynes, Bruce R. Bent, Bruce R. Bent II and
Arthur T. Bent III, and each of them, his true and lawful attorney and agent to
do any and all acts and things and to execute any and all instruments which said
attorney and agent may deem necessary or advisable; (i) to enable the said Trust
to comply with the Securities Act of 1933, as amended, and any rules,
regulations and requirements of the Securities and Exchange Commission in
respect thereof, in connection with the registration under said Securities Act
of the shares of beneficial interest of said Trust (the "Securities"), including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign for and on behalf of the undersigned the name of the
undersigned as trustee of said Trust to a Registration Statement or to any
amendment thereto filed with the Securities and Exchange Commission in respect
of said Securities and to any instrument or document filed as part of, as an
exhibit to or in connection with said Registration Statement or amendment; (ii)
to enable said Trust to comply with the Investment Company act of 1940, as
amended, and any rules, regulations and requirements of the Securities and
Exchange Commission in respect thereof, in connection with the registration
under said Investment Company Act of the Trust, including specifically, but
without limiting the generality of the foregoing, the power and authority to
sign for and on behalf of the undersigned the name of the undersigned as trustee
of said Trust to a Registration Statement or to any amendment thereto filed with
the Securities and Exchange Commission in respect of said Trust and to any
instrument or document filed as part of, as an exhibit to or in connection with
said Registration Statement or amendment; and (iii) to register or qualify said
Securities for sale and to register or license said Trust as a broker or dealer
in said Securities under the securities or Blue Sky laws of all such states as
may be necessary or appropriate to permit therein the offering and sale of said
Securities as contemplated by said Registration Statement, including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign for and on behalf of the undersigned the name of the
undersigned as trustee of said Trust to any application, statement, petition,
prospectus, notice or other instrument or document, or to any amendment thereto,
or to any exhibit filed as a part thereof or in connection therewith, which is
required to be signed by the undersigned and to be filed with the public
authority or authorities administering said securities or Blue Sky laws for the
purpose of so registering or qualifying said Securities or registering or
licensing said Trust, and the undersigned does hereby ratify and confirm as his
own act and deed all that said attorney and agent shall do or cause to be done
by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this 3rd
day of March, 1999.
/s/ Bruce R. Bent /s/ Edwin Ehlert, Jr.
------------------------- -----------------------------
Bruce R. Bent Edwin Ehlert, Jr.
/s/ Bruce R. Bent II /s/ William E. Viklund
------------------------- -----------------------------
Bruce R. Bent II William E. Viklund
/s/ Henri W. Emmet /s/ Richard Bassuk
------------------------- -----------------------------
Henri W. Emmet Richard Bassuk
/s/ Donald J. Harrington /s/ Diana P. Herrmann
------------------------- -----------------------------
Donald J. Harrington Diana P. Herrmann
