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Registration Statement Nos. 2-82592
811-3696
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
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Post-Effective Amendment No. 38 [X]
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 40
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(Check appropriate box or boxes.)
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(Exact Name of Registrant as Specified in Charter)
RESERVE TAX-EXEMPT TRUST
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1250 Broadway, New York, NY 10001-3701
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (212) 401-5500
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(Name and Address of Agent for Service)
MaryKathleen F. Gaza, Esq.
The Reserve Funds
1250 Broadway
New York, NY 10001-3701
Approximate Date of Proposed Public Offering
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It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on March 1, 2000 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485.
if appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
The Commission is requested to send copies of all communications to:
MaryKathleen F. Gaza, Esq.
The Reserve Funds
1250 Broadway
New York, NY 10001-3701
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[LOGO]
VIRGINIA TAX-EXEMPT FUND:
"A TAX-EXEMPT MONEY-MARKET FUND
FOR RESIDENTS OF VIRGINIA"
PROSPECTUS
MARCH 1, 2000
The VIRGINIA TAX-EXEMPT FUND (a "Fund") of Reserve Tax-Exempt Trust is a
money-market fund 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 Virginia
as is consistent with preservation of capital and liquidity.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
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PAGE
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Investment Objectives & Principal Strategies............................. 2
Performance History...................................................... 5
Fees & Expenses of the Fund.............................................. 5
Management............................................................... 6
How to Buy Shares........................................................ 6
Selling Fund Shares...................................................... 8
Tax Consequences......................................................... 9
General Information...................................................... 10
Financial Highlights..................................................... 10
</TABLE>
INVESTMENT OBJECTIVES & PRINCIPAL STRATEGIES
The investment objective of the Fund 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 Virginia
as is consistent with preservation of capital and liquidity. The Fund seeks to
attain its objective by investing principally in tax-exempt obligations issued
by the Commonwealth of Virginia and its counties, municipalities, authorities or
other political subdivisions. However, achievement of this objective cannot be
assured.
The Fund is designed for institutions and individuals as a convenient
alternative to the direct investment of temporary cash balances in short-term
money-market accounts or instruments. The Fund seeks to employ idle cash at
yields competitive with yields of other comparable short-term investments, and
is designed to reduce or eliminate for the investor the mechanical problems of
direct investment in other instruments such as scheduling maturities and
reinvestment, as well as evaluating the credit of issuers, investing in round
lots, safeguarding receipt and delivery of securities.
The Fund seeks to maintain a stable $1.00 share price. The portfolio
managers monitor a range of economic and financial factors. Based on their
analysis, the Fund is principally invested in high quality, tax-exempt
obligations issued by Virginia and its counties, municipalities, authorities or
other political subdivisions that are intended to provide as high a yield as
possible without violating the Fund's credit quality policies or jeopardizing
the stability of its share price.
The Fund's principal investment strategies include:
o Investing primarily in municipal money-market securities. The Fund
invests principally in high-quality, tax-exempt obligations issued by
Virginia and its counties, municipalities, authorities or other political
subdivisions. These securities are generally referred to as "municipal
obligations".
o Investing at least 80% of the value of the Fund's net assets in municipal
obligations which are exempt from federal income and state and local
personal income taxes, including federal Alternative Minimum Tax ("AMT"),
unless it has adopted a temporary defensive position. Interest received
on certain otherwise tax-exempt securities ("private activity bonds") is
subject to federal AMT. It is the position of the SEC that in order for a
fund to call itself "tax-free", not more than 20% of its net assets may
be invested in municipal securities subject to the AMT or at least 80% of
its income will be tax-exempt. Income received on such securities is
classified as a "tax preference item," which could subject certain
shareholders of the Fund to
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AMT. However, as of the date of this Prospectus, the Fund does not intend
to purchase such securities. The Fund may take temporary defensive
positions that are inconsistent with the Fund's principal investment
strategies in attempting to respond to adverse market, economic,
political or other conditions and may invest more than 20% of the value
of its net assets in municipal obligations exempt only from federal
income taxes.
o Investing in compliance with federal regulations of money-market funds,
which are designed to help maintain liquidity and the strict standards
for credit quality, diversification and maturity.
The interest on securities generally known as municipal obligations is
exempt from federal income tax in the opinion of either bond counsel for the
issuer or, in some instances, the issuer itself. These obligations may be issued
to raise money for various public purposes such as constructing public
facilities, while others 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. Municipal obligations bear fixed,
variable or floating rates of interest.
The Fund will purchase tax-exempt securities which are rated MIG1 or MIG2
by Moody's Investor Services, Inc. ("Moody's"), SP-1 or SP-2 by Standard &
Poor's Corporation ("S&P") or the equivalent. Municipal obligations which are
not rated may also be purchased provided Reserve Management Co., Inc ("RMCI"),
the Adviser, determines them to be of comparable quality pursuant to guidelines
established by their Boards of Trustees ("Trustees").
Although not a principal strategy, the Fund is allowed to invest all or
substantially all of its investable assets, except to the extent required to
remain uninvested to satisfy cash requirements, in another open-end management
company having the same investment objective and substantially similar policies
and restrictions.
RMCI uses its reasonable business judgment in selecting investments in
addition to considering the ratings of Moody's, S&P and other rating services,
when available.
The investment objective and principal strategies are summarized here. For
more information on the investment objective and strategies, please read the
Statement of Additional Information ("SAI").
PRINCIPAL RISKS OF INVESTING IN THE FUND. The Fund is a money-market fund,
which is a specific type of fund that seeks to maintain a $1.00 price per share.
An investment in the Fund is not insured or guaranteed by the U.S. government,
Federal Deposit Insurance Corporation or any other government agency. Although
the Fund seeks to preserve the value of your investment at $1.00 per share, it
is possible to lose money by investing in the Fund. Additionally, the Fund's
yield will vary as the short-term securities in its portfolio mature and the
proceeds are reinvested in securities with different interest rates.
While the Fund will strive to maintain a constant share price, the
following factors and principal investment risks could reduce the Fund's income
level and/or share price:
o Interest rates could rise sharply causing the value of the Fund's
securities and share price to drop. When interest rates fall, the Fund's
yields will typically fall as well.
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o 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.
o The value of municipal securities may be affected by uncertainties and
changes in municipal market-related legislation or litigation.
o Overall, a decline in the credit quality of an issuer or the provider of
credit support or a maturity-shortening structure for a security can
cause the price of a money-market security to decrease.
o The Fund concentrates its investments in securities of issuers located in
the Commonwealth of Virginia and is non-diversified under the Investment
Company Act. This raises special concerns because performance is more
dependent upon the performance of a smaller number of securities and
issuers than in a diversified portfolio. The change in value of any one
security may affect the overall value of the Fund more than it would in a
diversified portfolio. In particular, changes in the economic conditions
and governmental policies of Virginia and its political subdivisions can
significantly affect the financial condition and credit quality of
issuers of municipal securities located in that state. Further, the
municipal market is volatile. As to the Virginia Tax-Exempt Fund,
investors should realize that the Commonwealth's low unemployment level
is due in large part to Federal Government jobs available to it's
residents in neighboring Washington D.C. Virginia's continued financial
strength rests in its ability to maintain low debt levels and to
diversify its economy.
o The Reserve Funds' emphasis on the high credit quality of its investments
may mean that its yields are lower than those available from certain
other money-market funds, which may invest in commercial paper. Because
of the low level of risk, over time, a money-market fund may produce
lower returns than bond or stock investments which entail higher levels
of risk.
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 Trust depend
on the smooth functioning of computer systems. The Trust could be adversely
affected if the computer systems and service providers that interface with it
are unable to process data from January 1, 2000 and after including leap day;
however, steps are being taken to reasonably address this issue and to obtain
assurance that comparable efforts are being made by service providers. There can
be no assurance that these steps will be sufficient to avoid any adverse impact
to the Trust. In addition, because the Year 2000 issue affects virtually all
organizations, the extent of its impact cannot be predicted.
PERFORMANCE HISTORY
The Reserve Tax-Exempt Trust did not begin offering shares of the Virginia
Tax-Exempt Fund until March 1, 2000. Therefore, the performance information
(including annual total returns and average annual total returns) for a full
calendar year is not available.
For the Fund's current yield, call toll-free 800 637-1700 or visit our web
site at www.reservefunds.com
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FEES & EXPENSES OF THE FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
SHAREHOLDER FEES FOR THE FUND
(Fees paid directly from your investment)
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Sales Load Imposed on Purchases......................................... None
Sales Load Imposed on Reinvested Dividends.............................. None
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ANNUAL FUND OPERATING EXPENSES FOR THE FUND
(Expenses that are deducted from Fund assets)
<TABLE>
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Comprehensive Management Fee ......................................... 80%
Distribution (12b)-1 Fees (*) ........................................ .20
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Total Annual Fund Operating Expenses.................................. 1.00%
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(*) The Fund has adopted a Rule 12b-1 plan which allows the Fund to pay
distribution fees for the sale and distribution of its shares. The maximum
level of distribution expenses is 0.20% per year of the Fund's average net
assets. As these fees are paid out of the Fund's assets on an on-going
basis, over time these fees will increase the cost of your investment and
may cost you more than paying other types of sales charges.
EXAMPLE: This example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example should
not be considered indicative of future investment returns and operating expenses
which may be more or less than those shown. This example is based on the annual
fund operating expenses described in the table.
This example uses the same assumptions other funds use in their
prospectuses. It assumes that you invest $10,000 in the fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. The costs would be the
same whether you stayed in the Fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
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ONE YEAR THREE YEARS
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$102 $ 318
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MANAGEMENT
INVESTMENT ADVISER. Since November 15, 1971, Reserve Management Company, Inc.
("RMCI") 1250 Broadway, New York, NY 10001 and its affiliates have provided
investment advice to The Reserve Funds. RMCI serves as the investment adviser to
the Fund under an Investment Management Agreement (the "Agreement") with the
Reserve Tax-Exempt Trust. The Agreement provides that RMCI will furnish
continuous investment advisory and management services to the Fund. In addition
to the Fund, RMCI provides investment management services to other mutual funds
within the Reserve family of funds and, as of February 1, 2000, had
approximately $6.5 billion under management.
RMCI manages the investment portfolio of the Fund, subject to policies
adopted by the Trustees. For its services, RMCI receives a fee of 0.80% per year
of the average daily net assets of the Fund. RMCI pays all employee and
customary operating expenses of the Fund. Excluded from the definition of
customary operating expenses are interest, taxes, brokerage fees, extraordinary
legal and accounting fees and expenses, and the fees of the disinterested
Trustees, for which the Fund pays its direct or allocated share.
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HOW TO BUY SHARES
SHARE PRICE: NET ASSET VALUE. Investors pay no sales charges to invest in the
Fund. The price you pay for a share of the Fund, and the price you receive upon
selling or redeeming a share of the Fund, is called the Fund's net asset value
("NAV") per share. The NAV is calculated by taking the total value of the Fund's
assets, subtracting its liabilities, and then dividing by the number of shares
that have already been issued. The Fund uses the amortized cost method of
valuing its securities under Rule 2a-7 of the 1940 Act. This is a standard
calculation, and forms the basis for all transactions involving buying, selling,
exchanging or reinvesting shares. The NAV is generally calculated as of the
close of trading on the New York Stock Exchange (usually 4:00 PM Eastern time)
every day the Exchange is open. NAV is not calculated on days the Exchange is
closed and regional bank holidays. The Exchange is closed on most national
holidays, and Good Friday. Your order will be priced at the next NAV calculated
after your order is accepted (i.e., converted to federal funds) by the Fund.
PURCHASE OF SHARES. The minimum initial investment is $1,000 (IRA minimum $250)
with no minimum subsequent investment. All investments must be in U.S. dollars.
Third-party, foreign and travellers checks, as well as cash investments will not
be accepted. For clients of certain broker-dealers and financial institutions
("Firms"), shares may be purchased directly through such Firms. However,
purchases may be subject to the Firms' own minimums and purchase requirements.
Purchase orders are not accepted on days the Exchange is closed for trading and
regional bank holidays.
o By check--(drawn on U.S. bank) payable to The Reserve Funds, 1250
Broadway, 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 Reserve Funds at
800-637-1700 for specific instructions or the Firm from which you
received this Prospectus.
Checks and wires which do not correctly identify the account to be credited
may be returned or delay the purchase of shares. Only federal funds wires and
checks drawn on the Fund's bank are eligible for entry as of the business day
received. For federal funds wires to be eligible for same-day order entry, the
Fund must be notified before 11:00 AM (Eastern 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 is 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 (Eastern time), will be
considered received the next business day. Investors will be charged a fee $15
for any check that does not clear and will be responsible for any losses
suffered by the Fund as a result.
RESERVE AUTOMATIC ASSET-BUILDER PLAN. If you have an account, you may purchase
shares of the Fund ($25 suggested minimum) from a checking, NOW, or bank
money-market deposit account or from a U.S. government distribution ($25
suggested minimum) such as social security, federal salary, or certain veterans'
benefits, or other payment from the federal government. You may also purchase
shares automatically by arranging to have your payroll deposited directly into
your Reserve account. Please call the Fund at 800-637-1700 for an application.
INDIVIDUAL RETIREMENT ACCOUNTS. Investors may use the Fund as an investment for
Individual Retirement Accounts ("IRAs"). A master IRA plan with information
regarding administration fees and other details is available from the Fund.
THIRD-PARTY INVESTMENTS. Investments made through a third party (rather than
directly with Reserve) such as a financial services agent may be subject to
policies and fees different than those described here. Banks, brokers, 401(k)
plans, financial advisers and financial supermarkets may charge transaction fees
and may set different
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minimum investments or limitations on buying or selling shares. Investors should
consult a representative of the plan or financial institution if in doubt.
DISTRIBUTORS. The Fund's distributor is Resrv Partners, Inc. ("RESRV"), 1250
Broadway, New York, NY 10001-3701.
RESTRICTIONS. Certain other restrictions and conditions for buying shares apply
to the Fund. Please see the SAI for more information.
SELLING FUND SHARES
Investors may sell shares at any time. Shares will be sold at the NAV next
determined after the redemption request is received by the Fund. The Fund
usually transmits payments the same day when requests are received before 11:00
AM (Eastern time) and the next business day for requests received after the time
specified to enable shareholders to receive additional dividends. Shares do not
earn dividends on the day a redemption is effected, regardless of the time the
order is received. Orders will be processed promptly and investors will
generally receive the proceeds within a week after receiving your properly
completed request, which complies with requirements set forth in "Written and
telephone requests" below. The Fund strongly suggests (but does not require)
that each telephone redemption be at least $1,000, except for redemptions which
are intended to liquidate an account. A shareholder will be charged $2 for
redemption checks issued for less than $100. Upon request, redemptions will be
made by bank wire; however, wire redemptions of less than $10,000 will be
charged a fee (currently $10). The Fund assumes no responsibility for delays in
the receipt of wired or mailed funds.
WRITTEN AND TELEPHONE REQUESTS. Redemption instructions and options should be
specified 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. One
way to redeem shares is to write a letter of instruction which states: the
name(s) and signature(s) of all accountholders (signature(s) guaranteed, if
necessary), account number, Fund name, the dollar amount you want to sell, and
how and where to send the proceeds. If you are redeeming your IRA, please note
the applicable withholding requirements.
To reduce the risk of loss, certain situations require written instructions
along with signature guarantees. These include:
(1) redemptions for more than $5,000; or
(2) redemptions on accounts whose address has been changed within the past
30 days; or
(3) redemption requests to be sent to someone other than the account owner
or the address of record for the past 30 days.
You may redeem by calling the Fund at 800-637-1700. Unless you decline
telephone privileges on your application and the Fund fails to take reasonable
measures to verify the request, the Fund will not be liable for any unauthorized
telephone redemption, or for any loss, cost or expense for acting upon an
investor's telephone instructions. Telephone redemptions may be sent to the bank
or brokerage account designated by the shareholder on the application or in a
letter with signature guarantee. To change the designated brokerage or bank
account it is necessary to contact the Firm through which shares of the Fund
were purchased or, if purchased directly from the Fund, it is necessary to send
a written request to the Fund with signature(s) guaranteed. The Fund reserves
the right to refuse a telephone redemption if it believes it is advisable to do
so.
Signature guarantees are designed to protect both you and the Fund from
fraud. Signature guarantees can be obtained from most banks, credit unions or
savings associations, or from broker/dealers, national securities exchanges or
clearing agencies. Notaries public cannot provide signature guarantees. For more
information about redemption procedures, please read the SAI.
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CHECKING, VISA AND ATM ACCESS. You may redeem shares of the Fund by using your
Reserve checks and VISA check card. By completing the application or a signature
card (for existing accounts) and certain other documentation, you can write
checks in any amount against your account. A check will be returned (bounced)
and a fee charged if you request a stop payment; the check is postdated;
contains an irregularity in the signature, amount or otherwise; or, is written
against accounts with insufficient or uncollected funds. Please do not postdate
your checks or use them to close your account. 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 some Firms may
establish their own minimum check amount. Shareholders may use their VISA check
card at ATM's to receive cash and may be charged a surcharge by the ATM owner.
Please see the SAI for information including charges, fees, etcetera.
EXCHANGE PRIVILEGE. Investors can exchange all or some of their shares offered
for shares in other Reserve money-market and equity funds. Investors can request
an exchange in writing or by telephone. The shares of the other Funds are not
offered by this Prospectus. Be sure to read the current prospectus for any fund
into which you are exchanging. Any new account established through an exchange
will have the same privileges as an original account (as long as they are
available). Please see the SAI for more information.
OTHER AUTOMATIC SERVICES. Certain other services and restrictions for selling
shares automatically are offered by the Fund. Please see the SAI for more
information about these services and restrictions.
REDEMPTIONS THROUGH BROKERS AND FINANCIAL INSTITUTIONS. Redemptions through
brokers and financial institutions may involve such Firms' own redemption
minimums, services fees, and other redemption requirements.
OTHER. The Fund also reserves the right to make a "redemption in kind",
(payment in portfolio securities rather than cash), without notice, if the
amount the investor is redeeming is large enough to affect fund operations (for
example, if it represents more than 1% of the Fund's assets). Further, the Fund
reserves the right to:
o refuse any purchase or exchange request,
o change or discontinue its exchange privilege,
o change its minimum investment amounts, and
o delay sending out redemption proceeds for up to seven days
(generally applies only in cases of very large redemptions,
excessive trading or during unusual market conditions).
TAX CONSEQUENCES
The following discussion is intended as general information only. Because
everyone's tax situation is unique, you should consult your own tax
advisor(s) with regard to the applicability of state and local tax laws on Fund
distributions. For more information, please see the SAI.
DIVIDENDS, DISTRIBUTIONS AND TAXES. The Fund declares dividends daily and
automatically reinvests them in additional shares monthly except for
shareholders who elect in writing to receive cash dividends, in which case
monthly or quarterly dividend checks are sent to the shareholder. There are no
fees or sales charges on reinvestments.
To maintain its regulated investment company status for federal income tax
purposes, the Fund intends to satisfy certain requirements imposed by the
Internal Revenue Code, so as to avoid any federal income or excise tax
liability. Dividends derived from the interest earned on municipal obligations
and designated by the Fund as "exempt interest dividends" are not subject to
federal income taxes. To the extent the Fund invests in municipal
8
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obligations issued by the Commonwealth of Virginia or political subdivision
thereof, exempt-interest dividends derived from the interest thereon generally
is not subject to state income taxes.
The tax status of dividends and distributions will be detailed in annual
tax statements from the Fund. An exchange of the Fund's shares for the shares of
another fund will be treated as a sale of the Fund's shares and any gain may be
subject to federal income tax.
BACKUP WITHHOLDING. The Fund may be required to withhold U.S. federal income
tax at the rate of 31% of all taxable distributions payable to certain
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.
However, special rules apply for certain accounts. For example, for an account
established under the Uniform Gift to Minors Act, the TIN of the minor should be
furnished. Shareholders should be aware that, under regulations promulgated by
the IRS the Fund may be fined $50 annually for each account for which a
certified TIN is not provided or is incorrect. In the event that such a fine is
imposed with respect to an account in any year, a corresponding charge will be
made against the account. The Fund will not accept purchase orders for accounts
for which a correct and certified TIN is not provided or which is otherwise
subject to backup withholding, except in the case of certain non-resident alien
account holders.
GENERAL INFORMATION
SMALL BALANCES. Because of the expense of maintaining accounts with small
balances (less than $1,000), the Fund may choose without notice to either levy a
monthly charge (currently $5) or redeem the account and remit the proceeds. Some
Firms may establish variations of minimum balances and monthly charges if
approved by the Fund.
RESERVE EASY ACCESS. Easy Access is The Reserve Funds' 24-hour toll-free
telephone service that lets customers use a touch-tone phone for a variety of
options, which include yields, account balances, check reorders and other
options. 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 SHAREHOLDER SERVICES. The Fund reserves the right to charge shareholder
accounts for specific costs incurred in processing unusual transactions. Such
transactions include, but are not limited to, stop payment requests, copies of
Fund redemption or shareholder checks, copies of statements and special research
services.
ACCOUNT STATEMENTS. Shareholders are advised to retain all account statements.
FINANCIAL HIGHLIGHTS
The Trust did not offer shares of Virginia Tax-Exempt Fund until March 1, 2000.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN
THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST
NOT BE RELIED UPON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
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This Prospectus contains the information about the Fund, which a prospective
investor should know before investing.
The Statement of Additional Information ("SAI") contains additional and more
detailed information about the Fund, and is considered part of this Prospectus.
Our Annual and Semi-Annual Reports list the holdings in the Fund, describe Fund
performance, include financial statements for the Fund, and discuss market
conditions and strategies that significantly affected the Fund's performance.
These documents may be obtained without charge by writing to the address below
or calling The Reserve Funds at 800-637-1700. You can download the documents
from the EDGAR database of the SEC's web site (http://www.sec.gov) or, you can
obtain copies by visiting the SEC's Public Reference Room in Washington, DC
(1-202-942-8090) or, by electronic mail request sent to [email protected] or,
by sending your request and duplicating fee to the SEC's Public Reference
Section, Washington, DC 20549-6009.
Investors are advised to read and retain this prospectus for future reference.
[THE RESERVE FUNDS LOGO]
1250 Broadway, New York, NY 10001-3701
(212) 401-5500
GENERAL INFORMATION AND 24-HOUR YIELD AND BALANCE INFORMATION
800-637-1700--WWW.RESERVEFUNDS.COM
Distributor -- Resrv Partners, Inc.
RTET/VA-03/2000
SEC File Number
Reserve Tax-Exempt Trust
811-3696
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[THE RESERVE FUNDS LOGO]
- -------------------------------------------------
- -------------------------------------------------
VIRGINIA TAX-EXEMPT FUND
PROSPECTUS
MARCH 1, 2000
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<PAGE>
RESERVE TAX-EXEMPT TRUST
1250 BROADWAY, NEW YORK, NY 10001-3701
212-401-5500 o 800-637-1700
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24-HOUR YIELD AND BALANCE INFORMATION
Nationwide 800-637-1700 o www.reservefunds.com
Virginia Tax-Exempt Fund:
"A Tax-Exempt Money-Market Fund
for Residents of Virginia"
Statement Of Additional Information
This Statement of Additional Information ("SAI") describes the Virginia
Tax-Exempt Fund (the "Fund") of Reserve Tax-Exempt Trust (the "Trust")
which is a state-specific municipal money fund. At the date of this SAI,
there were ten (10) separate series of Reserve Tax-Exempt Trust authorized
and outstanding (Interstate, California II, Connecticut, Florida,
Massachusetts, Michigan, New Jersey, Ohio, Pennsylvania and Virginia
Tax-Exempt Funds) authorized and outstanding. Additional series (funds) may
be added in the future by the Board of Trustees. The Reserve Tax-Exempt
Trust was organized as a Massachusetts business trust on January 25, 1983
and is an open-end investment management company commonly known as
money-market mutual fund. This Statement is not a Prospectus, but provides
detailed information to supplement the Prospectus dated March 1, 2000 and
should be read in conjunction with it. A copy of the Prospectus may be
obtained without charge by writing or calling the Fund at the above address
or telephone number. The Securities and Exchange Commission ("SEC")
maintains a web site (http://www.sec.gov) where you can download the SAI,
the Prospectus, material incorporated by reference & other information
regarding the Fund. This Statement is dated March 1, 2000.
TABLE OF CONTENTS PAGE
Description of the Fund 2
Investment Strategies & Risks 2
Management of the Trust 11
Investment Management, Distribution and Custodian Agreements 14
Information About the Trust 16
How to Buy and Sell Shares 17
Dividends, Distributions and Taxes 23
Yield Information 25
General Information 26
Shares of the Fund are neither guaranteed nor insured by the U.S. Government and
there can be no assurance that the Fund will be able to maintain a stable net
asset value of $1.00 per share.
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DESCRIPTION OF THE FUND
The investment objective of the Fund 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
Virginia Fund as is consistent with preservation of capital and liquidity. The
Fund seeks to attain its objective by investing principally in tax-exempt
obligations issued by the Commonwealth of Virginia and its counties,
municipalities, authorities or political subdivisions. Achievement of the Fund's
objective cannot be assured. This investment objective may not be changed
without the vote of a majority of the outstanding shares of the Fund as defined
in the Investment Company Act of 1940 ("1940 Act").
Investment in the Fund is not insured or guaranteed by the U.S.
government, Federal Deposit Insurance Corporation or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money investing in the Fund.
The Fund is designed for institutions and individuals as a convenient
alternative to the direct investment of temporary cash balances in short-term
money-market accounts or instruments. The Fund seeks to employ idle cash at
yields competitive with yields of other comparable short-term investments, and
is designed to reduce or eliminate for the investor the mechanical problems of
direct investment in other instruments such as scheduling maturities and
reinvesting, as well as evaluating the credit of issuers, investing in round
lots, safeguarding receipt and delivery of securities.
Money-market funds are subject to federal regulations designed to help
maintain liquidity. The regulations set strict standards for credit quality,
diversification and maturity (397 days or less for individual securities, 90
days or less for the average portfolio life.)
Investment management companies can be divided into "diversified" and
"non-diversified" under the 1940 Act. Under Section 5(b) of the 1940 Act, a
diversified company must have 75% of the value of its total assets in cash and
cash items (including receivables), U.S. government securities, securities of
other investment companies, and other securities. Any investment management
company other than a diversified company is defined as a "non-diversified"
company pursuant to Section 5(b)(2). The Trust has elected to be a
non-diversified mutual fund under Section 5(b).
In addition, the Fund operates with the intention to comply with the
requirements of Rule 2a-7 under the 1940 Act which places certain limits on the
Fund's investments in any one issuer's securities in order to limit investment
risk. With few exceptions, under Rule 2a-7, the Fund may invest no more than 5%
of its assets in securities of any one issuer, except U.S. government
securities. A "single state" tax-exempt fund, such as this Fund, is also subject
to this 5% limitation, but only as to 75% of its total assets. With respect to
the remaining 25% of the Fund's assets, more than 5% may be invested in
securities of a single issuer as long as the securities are "first-tier"
securities (i.e., securities rated in the highest short-term category for debt
by at least two nationally recognized statistical rating organizations, shares
of another money-market fund, or U.S. government securities).
Reserve Management Co., Inc. ("RMCI") serves as the Fund's Investment
Adviser. Resrv Partners, Inc. ("RESRV"), which is a wholly owned subsidiary of
RMCI, is the distributor of the Fund's shares. RESRV is located at 1250
Broadway, New York, NY 10001-3701.
The following information supplements and should be read in conjunction
with the Prospectus.
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INVESTMENT STRATEGIES & RISKS
Fund Strategies. The Fund may purchase floating and variable rate
demand bonds, 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, usually upon not more than seven (7) days' notice. The Fund
will not invest more than 10% of the value of its assets in floating or variable
rate demand bonds for which there is no secondary market if the demand feature
on such municipal obligations requires more than seven (7) days' notice.
Municipal obligations are sometimes offered on a "when-issued" or delayed
delivery basis. There is no limit on the 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.
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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 the Fund to the issuer and no interest accrues to
the Fund on such securities. To the extent that assets of the Fund purchasing
such securities are not invested prior to the settlement of a purchase of
securities, the Fund will earn no income, however, it is the Fund's intent to be
as fully invested as is practicable. While when-issued securities may be sold
prior to settlement date, the Fund intends to purchase such securities with the
purpose of actually acquiring them unless a sale appears desirable for
investment reasons. At the time the 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").
The 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. RMCI does not believe that the Fund's NAV or income will be
adversely affected by the purchase of municipal obligations on a when-issued
basis.
The Fund may purchase participation interests in municipal obligations
from financial institutions. 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. These instruments may have fixed, floating or variable rates of
interest. Frequently, such instruments are secured by letters of credit or other
credit support arrangements provided by banks.
These securities may be subject to greater credit risks than other
municipal money market securities because of their structure. Municipal
securities generally are classified as "general obligation" or "revenue" and may
be purchased directly or through participation interests. General obligation
securities typically are secured by the issuer's pledge of its full faith and
credit and taxing power for the payment of principal and interest. Revenue
securities typically are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special tax or other specific revenue source. Private activity bonds and
industrial development bonds are, in most cases, revenue bonds and generally do
not constitute the pledge of the credit of the issuer of such bonds. The credit
quality of private activity bonds is frequently related to the credit standing
of private corporations or other entities.
Credit and Liquidity Supports or enhancements may be employed by issuers to
reduce the credit risk of their securities. Credit supports include letters of
credit, insurance and guarantees provided by foreign and domestic entities.
Liquidity supports include puts, demand features, and lines of credit. Most of
these
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arrangements move the credit risk of an investment from the issuer of the
security to the support provider. Changes in the credit quality of a support
provider could cause losses to a fund.
RMCI uses its reasonable business judgment in selecting investments in
addition to considering the ratings of Moody's, S&P and other rating services,
when available. This analysis considers, among other things, the financial
condition of the issuer by taking into account present and future liquidity,
cash flow and capacity to meet debt service requirements. Since the market value
of debt obligations fluctuates as an inverse function of changing interest
rates, the Fund seeks to minimize the effect of such fluctuations by investing
in instruments with remaining maturities of 397 days or less and limiting its
average maturity to 90 days or less.
Types of Securities. Money-market securities are high-quality, short-term
securities that pay a fixed, variable or floating interest rate. Securities are
often specifically structured so that they are eligible investments for a
money-market fund having demand or put features which have the effect of
shortening the security's maturity. Municipal money-market securities include
variable rate demand bonds, commercial paper, municipal notes and shares of
municipal money-market funds.
Debt securities are used by issuers to borrow money. The issuer usually
pays a fixed, variable or floating rate of interest, and must repay the amount
borrowed at the maturity of the security. Some debt securities, such as zero
coupon bonds, do not pay current interest, but are sold at a discount from their
face values. Municipal debt securities include general obligation bonds of
municipalities, local or state governments, project or revenue-specific bonds,
or pre-refunded or escrowed bonds.
Municipal securities are issued to raise money for a variety of public
and private purposes, including general financing for state and local
governments, or financing for a specific project or public facility. Municipal
securities may be fully or partially backed by the local government, by the
credit of a private issuer, by the current or anticipated revenues from a
specific project or specific assets, or by domestic or foreign entities
providing credit support such as letters of credit, guarantees or insurance.
Repurchase Agreements. A repurchase agreement ("repo") transaction occurs when
the Fund purchases and simultaneously contracts to resell securities at fixed
prices determined by the negotiated yields. The Fund will limit repo
transactions to those financial institutions and securities dealers who are
deemed creditworthy pursuant to guidelines established by the Fund's Board of
Trustees. Repos are considered by the SEC staff to be loans by the Fund that
enters into them. Repos could involve risks in the event of a default or
insolvency of the repo counter-party to the agreement, including possible delays
or restrictions upon the Fund's ability to dispose of the underlying securities.
In an attempt to reduce the risk of incurring a loss on a repo, RMCI will follow
procedures intended to provide that all repos are at least 100% collateralized
as to principal and interest. The Fund will make payment for such instruments
only upon their physical delivery to, or evidence of their book-entry transfer
to, the account of the Fund's Custodian. If the seller defaults on the
repurchase obligation, the Fund could incur a loss and may incur costs in
disposing of the underlying security. The Fund will not hold more than 10% of
its net assets in illiquid securities, including repos with a term greater than
seven (7) days.
Risks of Investing in the Fund. The investment risks of the Fund is specific to
the particular type of municipal obligation, as well as general investment risks
that may affect the municipal money-market as a whole.
There are two types of education-related bonds: (i) those issued to
finance projects for public and private colleges and universities, and (ii)
those representing pooled interests in student loans. Bonds issued to supply
educational institutions with funds are subject to the risk of unanticipated
revenue decline, primarily the result of decreasing student enrollment or
decreasing state and federal funding.
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Student loan revenue bonds are generally offered by state authorities or
commissions and are backed by pools of student loans. Underlying student loans
may be guaranteed by state guarantee agencies and may be subject to
reimbursement by the U.S. Department of Education through its guaranteed student
loan program. Others may be private, uninsured loans made to parents or students
which are supported by reserves or other forms of credit enhancement. Recoveries
of principal due to loan defaults may be applied to redemption of bonds or may
be used to re-lend, depending on program latitude and demand for loans. Cash
flows supporting student loan revenue bonds are impacted by numerous factors,
including the rate of student loan defaults, seasoning of the loan portfolio,
and student repayment deferral periods of forbearance. Other risks associated
with student loan revenue bonds include potential changes in federal legislation
regarding student loan revenue bonds, state guarantee agency reimbursement and
continued federal interest and other program subsidies currently in effect.
The risks associated with electric utilities include the availability
and cost of fuel and capital, the effects of conservation on energy demand, the
effects of rapidly changing environmental safety, and licensing requirements,
and other federal, state, and local regulations, timely and sufficient rate
increases, increasing competition, opposition to nuclear power and legislative
changes.
A major revenue source for the health care industry is payments from
the Medicare and Medicaid programs and, consequently, the industry is sensitive
to legislative changes and reductions in spending for such programs. Many other
factors may affect health care-related obligations, such as general and local
economic conditions; demand for services; expenses (including malpractice
insurance premiums); legislative and regulatory changes by private and
governmental agencies, as well as competition among health care providers.
Housing revenue bonds are generally issued by a state, county, city,
local housing authority, or other public agency. Generally they are secured by
the revenues derived from mortgages purchased with the proceeds of the bond
issue. It is extremely difficult to predict the supply of available mortgages to
be purchased with the proceeds of an issue or the future cash flow from the
underlying mortgages. Therefore, there are risks that proceeds will exceed
supply, resulting in early retirement of bonds, or that homeowner repayments
will create an irregular cash flow. Many factors may affect the financing of
housing projects, including but not limited to: acceptable completion of
construction, proper management, occupancy and rent levels, economic conditions,
and changes to current laws and regulations.
Transportation-related municipal securities may be issued to finance
the construction of toll roads, highways, airports, or other transit facilities.
Airport bonds are dependent on the stability of the airline industry and a
specific carrier who uses the airport as a hub. Air traffic generally follows
broader economic trends as well as the price and availability of fuel. The cost
and availability of fuel affects toll road bonds as do toll levels, the presence
of competing roads and the general economic health of an area. Fuel costs and
availability generally affect all transportation-related securities, as do the
presence of alternate forms of transportation, such as public transportation.
Water and sewer revenue bonds are often considered to have relatively
secure credit due to their issuer's importance, monopoly status, and generally
unimpeded ability to raise rates. Despite this, lack of water supply due to
insufficient rain, run-off, or snow pack is a concern that has led to past
defaults and could in the future. Further, public resistance to rate increases,
costly environmental litigation, and federal environmental mandates are
challenges faced by issuers.
In view of the Fund's investment in industrial development revenue
bonds and notes secured by letters of credit or guarantees of banks, an
investment in the 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
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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.
Many factors affect the Fund's performance. Because the Fund invests in
a specific state, the Fund's performance is expected to be closely tied to
economic and political conditions within that state and to be more volatile than
the performance of a more geographically diversified fund. The Fund's yields
will change daily based on changes in interest rates and market conditions.
Although the Fund has managed to maintain a stable $1.00 share price since
inception, there is no guarantee that the Fund will be able to continue to do
so.
The principal risk factors associated with investment in the Fund are
the risk of fluctuations in short-term interest rates and the risk of default
among one or more issuers of securities which comprise the Fund's assets;
consequently when you sell (redeem) your shares of the Fund, they could be worth
more or less than what you paid for them.
Municipal securities can be significantly affected by economic and
political changes, as well as uncertainties in the municipal market related to
taxation, legislative changes, or the rights of municipal security holders.
Because many municipal securities are issued to finance similar projects,
especially those relating to education, health care, transportation and various
utilities, conditions in those sectors and the financial condition of an
individual municipal issuer can affect the overall municipal market.
The value of municipal securities may be affected by uncertainties in
the municipal market-related to legislation or litigation involving the taxation
of municipal securities or the rights of municipal securities holders in the
event of a bankruptcy. Proposals to restrict or eliminate the federal income tax
exemption for interest on municipal securities are introduced from time to time.
Proposals also may be introduced before the individual state legislatures that
would affect the state tax treatment of a municipal fund's distributions. This
could have a significant impact on the prices of some or all of the municipal
securities held by the Fund, making it more difficult for a money-market fund to
maintain a stable net asset value ("NAV") per share.
Debt and money-market securities have varying levels of sensitivity to
changes in interest rates. In general, the price of a debt or money-market
security can fall when interest rates rise and can rise when interest rates
fall. Securities with longer maturities can be more sensitive to interest rate
changes. The longer the maturity of a security, the greater the impact a change
in interest rates could have on the security's price. In addition, short-term
and long-term interest rates do not necessarily move in the same amount or the
same direction. Short-term securities tend to react to changes in short-term
interest rates, and long-term securities tend to react to changes in long-term
interest rates. For example, a major increase in interest rates or a decrease in
the credit quality of the issuer of one of the Fund's investments could cause
the Fund's share price to decrease.
Changes in the financial condition of an issuer, changes in specific
economic or political conditions that affect a particular type of security or
issuer, and changes in general economic or political conditions can affect the
credit quality or value of an issuer's securities. Lower-quality debt securities
(those of less than investment-grade quality) tend to be more sensitive to these
changes than higher-quality debt securities. Entities providing credit support
or a maturity-shortening structure also can be affected by these types of
changes. Municipal securities backed by current or anticipated revenues from a
specific project or specific assets can be negatively affected by the
discontinuance of the taxation supporting the
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project or assets or the inability to collect revenues for the project or from
the assets. If the Internal Revenue Service determines an issuer of a municipal
security has not complied with applicable tax requirements, interest from the
security could become taxable and the security could decline significantly in
value. In addition, if the structure of a security fails to function as
intended, interest from the security could become taxable or the security could
decline in value.
In response to market, economic, political or other conditions, RMCI
may temporarily use a different investment strategy for defensive purposes. If
RMCI does so, different factors could affect the Fund's performance, and the
Fund may distribute income subject to federal or local or state personal income
tax. The Fund may enter into repurchase and reverse repurchase agreements for
temporary defensive purposes. A repurchase agreement transaction occurs when the
Fund purchases and simultaneously contracts to resell securities at fixed prices
determined by the yields negotiated. The Fund will limit repurchase agreement
transactions to those financial institutions and securities dealers who are
deemed credit-worthy pursuant to guidelines established by 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. The Fund will make payment for such instruments only
upon their physical delivery to, or evidence of their book-entry transfer to,
the account of the Fund's custodian. If the seller defaults on the repurchase
obligation, the Fund could incur a loss, and may incur costs in disposing of the
underlying security. The Fund will not hold more than 10% of its net assets in
illiquid securities, including repurchase agreements with a term greater than
seven (7) days.
The Fund may sell securities in a reverse repurchase agreement when it
is considered advantageous, such as to cover net redemptions or to avoid a
premature outright sale of its portfolio securities. In a typical reverse
repurchase agreement transaction, the seller (Fund) retains the right to receive
interest and principal payments on the security, but transfers title to and
possession of the security to a second party in return for a percentage of its
value. By paying back to this party the value received plus interest, the Fund
repurchases the transferred security. It is the Fund's policy that entering into
a reverse repurchase agreement will be for temporary purposes only, and, when
aggregated with other borrowing, may not exceed 5% of the value of the total
assets of the Fund at the time of the transaction.
Certain banks and other municipal securities dealers have indicated a
willingness to sell municipal obligations to the Fund accompanied by a
commitment to repurchase the securities at the Fund's option or at a specified
date, at an agreed upon price or yield within a specified period prior to the
maturity date of such securities at amortized cost. If a bank or other municipal
securities dealer were to default under such standby commitment and fail to pay
the exercise price, the 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.
Yields on municipal securities depend on a variety of factors,
including general economic and monetary conditions, money-market factors,
conditions in the tax-exempt securities market, size of a particular offering,
maturity of the obligation and rating of the issue. The ability of the Fund to
achieve its investment objective is also dependent on the continuing ability of
issuers of municipal securities to meet their obligations for the payment of
interest and principal when due.
Another risk factor associated with investment in the Fund is
"non-diversification". As a non-diversified investment company, the Fund is
permitted to have all of its assets invested in a limited number of issuers.
Further, the Fund's investment in securities issued by the Commonwealth of
Virginia and its political subdivisions provides a greater level of risk than a
fund which is invested across numerous states and municipal entities because the
Fund's investment securities may be more susceptible
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to any single economic, political or regulatory occurrence. The ability of a
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; as well as the underlying condition of the state,
and its municipalities, etceteras. However, the Fund intends to qualify as a
"regulated investment company" for purposes of the "Subchapter M" 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.
Risk Factors of Concentrating in Virginia. State-specific municipal money funds
invest primarily and generally predominately in municipal money market
securities issued by or on behalf of one state or it's counties, municipalities,
authorities or other subdivisions. These funds' securities are subject to the
same general risks associated with other municipal money market funds'
securities. In addition, their values will be particularly affected by economic,
political, geographic and demographic conditions and developments within the
appropriate state. A fund that invests primarily in securities issued by a
single state and its political subdivisions provides a greater level of risk
than a fund that 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 fiscal condition of
the state and its municipalities.
Specifically, the credit quality of the Virginia Tax-Exempt Fund will depend on
the continued financial strength of the Commonwealth of Virginia and its
political subdivisions. Historically, the Commonwealth has maintained low debt
levels allowing the State to carry a AAA rating since 1938. The Commonwealth's
economy has benefited from its proximity to Washington D.C. and the resulting
high number of federal government jobs. The Commonwealth has experienced an
explosion in population in recent years increasing the need for infrastructure
spending. This spending will add to Virginia's moderate debt load. Moreover,
Virginia will have to contend with the revenue loss caused by the elimination of
its vehicle tax. While these issues present challenges to the Commonwealth of
Virginia, continued conservative management and their successful economic
diversification in the last decade should enable the Commonwealth to remain
stable. Currently, Virginia's general obligation bonds are rated AAA by both
Moody's and S&P.
Fund Policies. The Fund's investment objective and the following investment
policies may not be changed without the affirmative vote of a majority of the
outstanding shares of the Fund. A majority of the outstanding shares of the Fund
means the vote of the lesser of (i) 67% or more of the shares of the Fund
present at a meeting, if the holders of more than 50% of the outstanding shares
of the Fund are present or represented by proxy, or (ii) more than 50% of the
outstanding shares of the Fund. The Fund cannot:
(1) invest in any security other than those discussed herein or in the
Prospectus;
(2) borrow money except as a temporary or emergency measure (but not for
the purpose of purchasing investment securities), and not in an amount
to exceed 5% of the value of its total assets;
(3) issue senior securities except in compliance with the Investment
Company Act of 1940 ("1940 Act");
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(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;
(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. With respect to not concentrating the Fund's investment in
any particular industry, the Fund may not invest more than 25% of its
total assets in securities paying interest from revenues of similar
type projects or industrial development bonds;
(6) purchase, sell or otherwise invest in real estate or commodities or
commodity contracts; however, the Fund may purchase municipal
obligations secured by interests in real estate;
(7) lend more than 33 1/3% of the value of its total assets 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, the Fund shall have the
authority to purchase municipal obligations subject to a stand-by
commitment, at the Fund's option; and
(9) make investments on a margin basis.
Notwithstanding the foregoing investment restrictions, the Fund may
invest substantially all of its assets in another open-end investment company
with substantially the same investment objective as the Fund.
Although not currently using a "master/feeder" structure, based upon
shareholder approval, the Trust may use a "master/feeder" structure. Rather than
investing directly in securities, the Fund would be a "feeder fund," meaning
that it invests in a corresponding "master fund". The master fund, in turn
invests in securities using the strategies described in the Prospectus. One
potential benefit of this structure is lower costs, because the expenses of the
master fund can be shared with any other feeder funds.
Borrowing may subject a fund to interest costs, which may exceed the interest
received on the securities purchased with the borrowed funds. A fund normally
may borrow at times to meet redemption requests rather than sell portfolio
securities to raise the necessary cash. Borrowing can involve leveraging when
securities are purchased with the borrowed money. To avoid this, each fund will
not purchase securities while borrowings are outstanding.
Illiquid Securities generally are any securities that cannot be disposed of
promptly and in the ordinary course of business at approximately the amount at
which the fund has valued the instruments. The liquidity of a fund's investments
is monitored under the supervision and direction of the board of trustees.
Investments currently not considered liquid include repurchase agreements not
maturing within seven days and certain restricted securities.
Temporary Defensive Position. Although it is not the current intention, from
time to time the Fund may invest in taxable short-term investments ("taxable
investments") consisting of obligations backed by the full faith and credit of
the U.S. government, its agencies or instrumentalities ("U.S. Government
Securities"), deposit-type obligations, acceptances, letters of credit of
Federal Deposit Insurance Corporation member banks and instruments fully
collateralized by such obligations, including repurchase agreements. Unless the
Fund has adopted a temporary defensive position, no more than 20% of the net
assets of the Fund will be invested in taxable investments at any time.
Transaction Charges and Allocation. As investment securities transactions made
by the Fund are normally principal transactions at net prices, the Fund does not
normally incur brokerage commissions. Purchases of securities from underwriters
involve a commission or concession paid by the issuer to the
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underwriter and after market transactions with dealers involve a spread between
the bid and asked prices. The Fund has not paid any brokerage commissions during
the past three fiscal years.
Subject to the overall supervision of the officers of the Fund and the
Trustees, RMCI places all orders for the purchase and sale of the Fund's
investment securities. In the purchase and sale of investment securities, RMCI
will seek to obtain prompt and reliable execution of orders at the most
favorable prices and yields. In determining best price and execution, RMCI may
take into account a dealer's operational and financial capabilities, the type of
transaction involved, the dealer's general relationship with RMCI, and any
statistical, research, or other services provided by the dealer to RMCI. To the
extent such non-price factors are taken into account the execution price paid
may be increased, but only in reasonable relation to the benefit of such
non-price factors to the Fund as determined by RMCI. Brokers or dealers who
execute investment securities transactions may also sell shares of the Fund;
however, any such sales will be neither a qualifying nor disqualifying factor in
the selection of brokers or dealers.
When orders to purchase or sell the same security on identical terms
are simultaneously placed for the Fund and other investment companies managed by
RMCI, the transactions are allocated as to amount in accordance with each order
placed for the Fund. However, RMCI may not always be able to purchase or sell
the same security on identical terms for all investment companies affected.
MANAGEMENT OF THE TRUST
The Fund's Trustees are responsible for the management and supervision
of the Trust. The Trustees approve all significant agreements between the Fund
and those companies that furnish services to the Funds.
Trustees and executive officers of the Fund, together with information
as to their principal business occupations during at least the last five years,
are shown below:
*++BRUCE R. BENT, 62, President, Treasurer and Trustee, 1250 Broadway, New York,
NY 10001-3701. 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 and President of Reserve Management Company, Inc. ("RMCI")
and Reserve Management Corporation ("RMC"); and Chairman and Director of Resrv
Partners, Inc. ("RESRV").
Mr. Bent co-founded The Reserve Funds in 1970 and has been an executive
officer since then.
*++BRUCE R. BENT II, 33, Trustee, Senior Vice President and Assistant Secretary,
1250 Broadway, 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, RTET, RNYTET and RPES. Mr. Bent II is also Vice
President and Secretary of Reserve Management Company, Inc. ("RMCI") and Reserve
Management Corporation ("RMC"); and Secretary and Director of Resrv Partners,
Inc. ("RESRV").
+EDWIN EHLERT, JR., 69, Trustee, 125 Elm Street, Westfield, NJ 07091.
Mr. Ehlert is President and Director of Ehlert Travel Associates, Inc.
(travel agency) and Ehlert Travel Associates of Florida, Inc. (travel agency),
and Trustee of RF, RIT, RTET, RNYTET and RPES.
11
<PAGE>
+HENRI W. EMMET, 73, 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. Since 1995, Mr. Emmet has served as a Principal of Global Interaction,
which provides consulting services to international banking interests. He is
currently Trustee of RF, RIT, RTET, RNYTET and RPES.
+DONALD J. HARRINGTON, C.M., 54, Trustee, St. John's University, Grand Central &
Utopia Parkways, Jamaica, NY 11439.
The Reverend Harrington is currently President of St. John's
University, NY, and a Director of the Bear Stearns Companies, Inc. since 1993.
He is currently a Trustee RF, RIT, RTET, RNYTET and RPES.
+DIANA P. HERRMANN, 42, Trustee, 380 Madison Avenue, Suite 2300, New York, NY
10017.
Ms. Herrmann has been President and COO of Aquila Management
Corporation ("Aquila"), sponsors of 14 mutual funds with over $3.1 billion in
assets as of February 1, 2000. Ms. Herrmann has been employed with Aquila since
1986. She is currently Trustee of RF, RIT, RTET, RNYTET and RPES.
+WILLIAM J. MONTGORIS, 52, Trustee, 286 Gregory Road, Franklin Lakes, NJ 07417.
Mr. Montgoris is formerly Chief Operating Officer of the Bear Stearns
Companies, Inc. (1979-1999). He is currently Trustee of RF, RIT, RTET, RNYTET
and RPES.
+WILLIAM E. VIKLUND, 59, Trustee, 110 Grist Mill Lane, Plandome Manor, NY
11030-1110.
Mr. Viklund is formerly President and COO of Long Island Bankcorp and
President and CEO of Long Island Savings Bank (1980-1996). He is currently
Trustee of RF, RIT, RTET, RNYTET and RPES.
*ARTHUR T. BENT III, 31, Vice President and Assistant Secretary, 1250 Broadway,
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. Mr. Bent III is also Vice
President and Treasurer of Reserve Management Company, Inc. ("RMCI") and Reserve
Management Corporation ("RMC"); and Treasurer and Director of Resrv Partners,
Inc. ("RESRV"). Before joining Reserve, he was a private investor.
MARYKATHLEEN F. GAZA, 30, Director of Compliance and Legal Affairs and
Secretary, 1250 Broadway, New York, NY 10001-3701.
Ms. Gaza is Director of Compliance and Legal Affairs and Secretary of
RF, RIT, RNYTET, RTET and RPES. Before joining The Reserve Funds in 1998, Ms.
Gaza was a staff attorney at PaineWebber, Inc. (1997-1998). Prior to that, Ms.
Gaza worked for the U.S. House of Representatives as a District Manager for a
Member of Congress (1995-1997).
JAMES M. FREISEN, 42, Controller, 1250 Broadway, New York, NY 10001-3701.
Mr. Freisen is Controller. Before joining The Reserve Funds in 1999,
Mr. Freisen was an Assistant Vice President at Paine Webber, Inc. (1998-1999).
Prior to that, he was Assistant Vice President, Bank of
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<PAGE>
New York (1997-1998); Assistant Vice President, Fifth Third Bank (1995-1997);
and Vice President, Smith Barney (1991-1995).
- --------
+ Messrs. Ehlert, Emmet, Harrington, Montgoris, Viklund and Ms. Herrmann are
members of a Review Committee which performs the functions of an Audit Committee
and reviews compliance procedures and practices.
++ 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.
* Mr. Bent is the father of Mr. Bent II and Mr. Bent III.
Under the Declaration of Trust, the Trustees and officers are entitled
to be indemnified by the Trust to the fullest extent permitted by law against
all liabilities and expenses reasonably incurred by them in connection with any
claim, suit or judgment or other liability of obligation of any kind in which
they become involved by virtue of their service as a Trustee or officer of the
Trust, except liabilities incurred by reason of their willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of their office.
The Trust does not pay any pension or retirement benefits to its
Trustees.
COMPENSATION TABLE
FOR FISCAL YEAR ENDED MAY 31, 1999
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM TRUST AND TRUST COMPLEX
NAME OF TRUSTEE, POSITION FROM THE TRUST (4 ADDITIONAL TRUSTS) PAID TO TRUSTEE
------------------------- -------------- ------------------------------------
<S> <C> <C>
Bruce R. Bent, President and Trustee $ 0 $ 0
Bruce R. Bent II, Vice President and Trustee 0 0
Edwin Ehlert, Jr., Trustee 1,973 30,500
Henri W. Emmet, Trustee 1,973 30,500
Rev. Donald J. Harrington, Trustee 1,973 30,500
Diana P. Herrmann, Trustee 226 3,500
William J. Montgoris, Trustee 0 0
William E. Viklund, Trustee 1,488 23,000
</TABLE>
None of the executive officers of the Trust had allocated cash
remuneration in excess of $60,000 during the last fiscal year ending May 31,
1999 for services rendered to the Fund.
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 Fund's
shareholders.
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<PAGE>
No persons will have owned of record or beneficially any of the
outstanding shares of the Fund prior to the effective date of this Statement.
INVESTMENT MANAGEMENT, DISTRIBUTION
AND CUSTODIAN AGREEMENT
Investment Management Agreement. Reserve Management Company, Inc. ("RMCI" or
"Adviser"), 1250 Broadway, New York, NY 10001-3701, a registered investment
adviser, manages the Fund and provides them with investment advice. Under the
Investment Management Agreement, RMCI manages the Fund's investment in
accordance with the Fund's investment objective and policies, subject to overall
approval by the Trustees.
Presently, under the terms of the Investment Management Agreement with
the Fund, the Fund pays RMCI a comprehensive management fee at an annual rate of
0.80% of average daily net assets. RMCI pays all employee and customary
operating expenses of the Fund. Excluded from the definition of customary
operating expenses are interest, taxes, brokerage fees, extraordinary legal and
accounting fees and expenses, and fees of the disinterested Trustees, for which
the Fund pays its direct or allocated share.
From time to time, RMCI may waive receipt of its fees and/or
voluntarily assume certain expenses of the Fund that would have the effect of
lowering the Fund expense ratio and increasing yield to investors at the time
such amounts are assumed or waived, as the case may be. RMCI may also make such
advertising and promotional expenditures, using its own resources, as it from
time to time deems appropriate.
The Investment Management Agreement for the Fund was duly approved by
shareholders in 1999, and may be renewed annually if specifically approved by
the 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 its assignment and may be terminated
without penalty upon sixty (60) days' written notice by a vote of the Trustees
or by vote of a majority of outstanding voting shares of the Fund or by RMCI.
Distribution Agreement. The Fund's Distributor is RESRV. The Fund has authorized
the Distributor, in connection with their sale of Fund shares, to give only such
information and to make only such statements and representations as are
contained in the Prospectus. Sales may be made only by the Prospectus. The
Distributor is the "principal underwriter" for the Fund within the meaning of
the Investment Company Act of 1940 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 their choice
for the sale of Fund shares. Parties to selected dealer agreements may receive
assistance payments if they qualify for such payments under the Plan of
Distribution described below. RESRV's principal business is the distribution of
mutual fund shares.
The Distribution Agreement may be renewed annually if specifically
approved by the Board of Trustees, and by the vote of a majority of the
disinterested Trustees cast in person at a meeting called for the purpose of
voting on such approval or by the vote of a majority of the outstanding voting
securities of the Fund.
Plan of Distribution. The Fund maintains a Plan of Distribution ("Plan") and
related agreements, as amended, under Rule 12b-1 of the Investment Company Act
of 1940, which provides that investment companies may pay distribution expenses,
directly or indirectly, pursuant to a Plan adopted by the investment company's
Board and approved by its shareholders. Under the Plan, the Fund makes
14
<PAGE>
assistance payments to brokers, financial institutions and other financial
intermediaries ("Firms") for shareholder accounts ("qualified accounts") at an
annual rate of 0.20% of the average daily NAV of all Firms' 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 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 from its resources. The rate of any additional amounts that may be paid
will be based upon RESRV and RMCI's analysis of the contribution that a Firm
makes to the Fund by increasing assets under management, and reducing expense
ratios and the cost to the Fund if such services were provided directly by the
Fund or other authorized persons and RESRV and RMCI will also consider the need
to respond to competitive offers of others, which could result in assets being
withdrawn from the Fund. RMCI may elect to retain a portion of the distribution
assistance payments to pay for sales materials or other promotional activities.
The Trustees have determined that there is a reasonable likelihood the Plan will
benefit the Fund and its shareholders.
Under the Plan, the Fund's Controller or Treasurer reports quarterly
the amounts and purposes of assistance payments. During the continuance of the
Plan, the selection and nomination of the disinterested Trustees are at the
discretion of the disinterested Trustees currently in office.
During the fiscal year ended May 31, 1999, $576,256 was paid under the
Plan by the Reserve Tax-Exempt Trust. Any such payments are intended to benefit
the Fund by maintaining or increasing net assets to permit economies of scale in
providing services to shareholders and to contribute to the stability of such
shareholder services. During the fiscal year ended May 31, 1999, substantially
all payments made by the Trust were to brokers or other financial institutions
and intermediaries for share balances in the Trust.
The Plan and related agreements were duly approved by shareholders and
may be terminated at any time by a vote of the majority of the outstanding
voting securities of the Fund, or by vote of the disinterested Trustees. The
Plan and related agreements may be renewed from year to year, if approved by 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 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
Board of Trustees and of the disinterested Trustees, cast in person at a meeting
called for the purpose of such vote.
Transfer Agent and Dividend-Paying Agent. The Reserve Tax-Exempt Trust acts as
its own transfer agent and dividend-paying agent.
Custodian and Independent Accountant. The Chase Manhattan Bank, 4 New York
Plaza, New York, NY 10004 is Custodian of the Fund's securities and cash
pursuant to a Custodian Agreement. The Bank of New York, 1 Wall Street, New
York, NY 10286 and Custodial Trust Company, 101 Carnegie Center, Princeton, NJ
08540 are Custodians for the Fund for limited purposes in connection with
certain repurchase agreements. The Custodian has no part in determining the
investment policies of the Fund or which securities are to be purchased or sold
by the Fund. PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York,
NY 10036 is the Fund's independent accountant.
15
<PAGE>
INFORMATION ABOUT THE TRUST
The Reserve Tax-Exempt Trust's Declaration of Trust permits the Trust
to issue an unlimited number of full and fractional shares of beneficial
interest that may be issued in any number of series (funds) and/or classes.
Shares issued will be fully paid and non-assessable and will have no preemptive
rights. The shareholders of the Fund are entitled to a full vote for each full
share held (and fractional votes for fractional shares) and have equal rights to
earnings, dividends, redemptions and in the net assets of their Fund 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 change the fundamental
investment policies) or by the Declaration of Trust.
Further, the Trust is allowed to divide or combine the shares into a
greater or lesser number of shares without thereby changing the proportionate
beneficial interests in the Fund. If they deem it advisable and in the best
interests of shareholders, the Trustees may classify or reclassify any unissued
shares of the 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 all applicable state and federal securities
laws. These currently require that each class be preferred over all other
classes in respect to assets specifically allocated to such class. It is
anticipated that, under most circumstances, the rights of any additional classes
would be comparable, unless otherwise required, to respond to the particular
situation. Upon liquidation of any Fund, shareholders are entitled to share, pro
rata, in the 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 the assets of one class
of shares be insufficient to satisfy its liabilities, the assets of another
class could be subject to claims arising from the operations of the first class
of shares. No changes can be made to the Fund's issued shares without
shareholder approval.
A Fund share, when issued, is fully paid, non-assessable and fully
transferable or redeemable at the shareholder's option. Each share has an equal
interest in the net assets of the Fund, equal rights to all dividends and other
distributions, and one vote for all purposes. Shares of all classes vote
together for the election of Trustees and have non-cumulative voting rights,
meaning that the holders of more than 50% of the shares voting for the election
of Trustees could elect all Trustees if they so choose, and in such event the
holders of the remaining shares could not elect any person to the Board of
Trustees. The Fund intends to conduct their operations in such a way as to
avoid, as far as possible, ultimate liability of the shareholders for
liabilities of the Fund.
As stated previously, to date, the Board of Trustees has authorized the
creation of ten (10) series (funds) of the Reserve Tax-Exempt Trust (Interstate,
California II, Connecticut, Florida, Massachusetts, Michigan, New Jersey, Ohio,
Pennsylvania and Virginia Tax-Exempt Funds). All consideration received by the
Trust for shares of a Fund and all assets in which such consideration is
invested will belong to that Fund (subject only to rights of creditors of the
Fund) and will be subject to the liabilities related thereto. The income
attributable to, and the expenses of, one fund are treated separately from those
of the other fund. The Trust has the ability to create, from time to time, a new
fund without shareholder approval.
Under Massachusetts law, the shareholders and trustees of a business
trust can be personally liable for the Fund's obligations unless, as in this
instance, the Declaration of Trust provides, in substance, that no shareholder
or trustee shall be personally liable for the Fund, and each investment
portfolio's, obligations to third parties, and requires that every written
contract made by the Fund contain a provision to that effect. The Declaration of
Trust also requires the Fund to indemnify its shareholders and Trustees against
such liabilities and any related claims or expenses.
16
<PAGE>
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration protects a Trustee against any liability to which he would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his office.
SEC regulations 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
shareholders of the Fund as a whole), each class will vote separately on such
matters as approval of the Investment Management Agreement, material amendments
to the Plan of Distribution, and changes in the fundamental policies of the
Fund. These items require approval by a majority of the affected shareholders.
For this purpose a "majority" is constituted by either 50 percent of all shares
voting as a group or 67 percent of the shares voted as a group at an annual
meeting of shareholders at which at least 50 percent of the shares of each group
are represented.
HOW TO BUY AND SELL SHARES
Purchases -- General. Shares of the Fund are sold without a sales charge. You
may be charged a fee if you effect transactions in shares of the Fund through a
securities dealer, bank or other financial institution. The Fund reserves the
right to reject any purchase order.
The minimum initial investment in the Fund is $1,000, unless you are a
client of a securities dealer, bank or other financial institution, which
maintains an omnibus account in the Fund, or if you are an IRA customer. There
is no minimum subsequent investment. The initial investment must be accompanied
by an Account Application or equivalent information. Checks drawn on foreign
banks are normally not accepted by the Fund. In addition, the Fund does not
accept cash investments or travellers or third party checks. The Fund reserves
the right to reject any investment in the Fund for any reason and may, at any
time, suspend all new investment in the Fund. Shares also may be purchased
through Reserve Automatic Asset Builder (see below). In addition, the Fund
reserves the right to change the minimum investment amount at any time.
The Fund's shares are sold on a continuous basis at the NAV per share.
Checks and wires which do not correctly identify the account to be credited may
be returned or delay the purchase of shares. Only federal funds wires and checks
drawn on the Fund's bank are eligible for entry as of the business day received.
For federal funds wires to be eligible for same-day order entry, the Fund must
be notified before 11:00 AM (Eastern 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 (Eastern time), will be considered received
the next business day. Investors will be charged a fee for any check that does
not clear. The Fund will only give credit for investments in the Fund 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 (Eastern time) of the amount to be
transmitted and the account to be credited. Checks and other items submitted to
the Fund for investment are only accepted when submitted in proper form (i.e.,
receipt of all necessary information, signatures and documentation), 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 Fund after 11:00 AM (Eastern time)
are considered received on the following business day.
17
<PAGE>
If shares of the Fund are purchased by check or Reserve Automatic
Transfer, the Fund may delay transmittal of redemption proceeds until such time
as it has assured itself that good payment has been collected for the purchase
of such shares, which may be up to ten (10) calendar days from date of purchase.
Share Price: NAV. The valuation of the Fund's portfolio securities is based upon
their amortized cost, which does not take into account unrealized gains or
losses. This involves valuing an instrument at its cost and thereafter assuming
a constant amortization to maturity of any discount or premium, regardless of
the impact of fluctuating interest rates on the market value of the instrument.
While this method provides certainty in valuation, there may be some periods
during which value, as determined by amortized cost, is higher or lower than the
price the Fund would receive if it sold the instrument.
The Fund's Board has established, as a particular responsibility within
the overall duty of care owed to the Fund's investors, procedures reasonably
designed to stabilize the Fund's price per share as computed for the purpose of
purchases and redemptions at $1.00. Such procedures include review of the Fund's
portfolio holdings by the Board, at such intervals as it may deem appropriate,
to determine whether the Fund's NAV calculated by using available market
quotations or market equivalents deviates from $1.00 per share based on
amortized cost. In such review, investments for which market quotations are
readily available will be valued at the most recent comparable maturity, quality
and type, as obtained from one or more of the major market makers for the
securities to be valued. Other investments and assets will be valued at fair
value as determined in good faith by the Board.
The extent of any deviation between the Fund's NAV based upon available
market quotations or market equivalents and $1.00 per share based on amortized
cost will be examined by the Fund's Board. If such deviation exceeds 1/4 of 1%,
the Board will consider promptly what action, if any, will be initiated (The
Trusts are required by the SEC to contact the Board if the deviation is 1/2 of
1%). In the event the Board determines that a deviation exists which may result
in material dilution or other unfair results to investors or existing
shareholders, it has agreed to take such corrective action as it regards as
necessary and appropriate, including: selling Fund instruments prior to maturity
to realize capital gains or losses or to shorten average Fund maturity;
withholding dividends or paying distributions from capital gains; redeeming
shares in kind; or establishing a NAV per share by using available market
quotations. Shares are offered at their NAV, which is calculated at the close of
each business day as defined in the Prospectus. The NAV is not calculated on
days the Exchange is closed for trading and on certain regional banking
holidays: New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas;
in addition, regional bank holidays are: Columbus Day and Veterans Day. The NAV
of the Fund is normally maintained at $1.00 per share. No Fund can guarantee
that its NAV will always remain at $1.00 per share although the Fund has managed
to do so since inception.
The NAV per share of the Fund is computed by dividing the value of the
net assets of the Fund (i.e., the value of its assets less liabilities) by the
total number of shares of the Fund outstanding. The Board of Trustees have
determined the most practical method currently available for valuing investment
securities is the amortized cost method. This procedure values a money-market
fund's portfolio securities, which does not take into account unrealized gains
and losses. As a result, portfolio securities are valued at their acquisition
cost, adjusted over time based on the discounts or premiums reflected in their
purchase price. This method of valuation is designed to permit a fund to be able
to maintain a stable NAV.
In order to maintain a $1.00 share price, the Fund will utilize the
following practices: maintain a dollar-weighted average portfolio maturity of 90
days or less; purchase only instruments having remaining maturities of 397 days
or less; and invest only in securities determined by the Board of Trustees to be
of high quality with minimal credit risk. To assess whether repurchase agreement
18
<PAGE>
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 whom the Fund proposes to enter into
repurchase agreements. In addition, such procedures are reasonably designed,
taking into account current market conditions and the investment objective of
the Fund, to attempt to maintain the Fund's NAV as computed for the purpose of
sales and redemptions at $1.00 per share.
Share Certificates. Share certificates are not issued by the Fund.
Reserve Automatic Asset-Builder Plan. If you have an account, you may purchase
shares of the Fund ($25 suggested minimum) from a checking, NOW, or bank
money-market deposit account; from a U.S. government distribution ($25 suggested
minimum) such as a social security, federal salary, or certain veterans'
benefits, or other payment from the federal government. You may also make
arrangements for the direct deposit of your payroll into your Fund account.
Please call The Reserve Funds at 800-637-1700 for an application.
Redemptions -- General. Redemption payments will normally be made by check or
wire transfer but the Fund is authorized to make payment of redemptions partly
or wholly in kind (that is, by delivery of investment securities valued at the
same time as the redemption NAV is determined). The Fund has elected to permit
any shareholder of record to make redemptions wholly in cash to the extent the
shareholder's redemptions in any 90-day period do not exceed the lesser of
$250,000 or 1% of the net assets of the respective 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 Fund's practice of holding instruments typically with a minimum
value of $1,000,000 and its 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 NAV of the redemption.
Written and telephone requests. Redemption instructions and options should be
specified 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. One
way to redeem shares is to write a letter of instruction which states: the
name(s) and signature(s) of all accountholders (signature(s) guaranteed, if
necessary), account number, Fund name, the dollar amount you want to sell, and
how and where to send the proceeds. If you are redeeming your IRA, please note
the applicable withholding requirements.
To reduce the risk of loss, certain situations require written
instructions along with signature guarantees. These include:
(1) redemptions for more than $5,000; or
(2) redemptions on accounts whose address has been changed within
the past 30 days; or
(3) redemption requests to be sent to someone other than the
account owner or the address of record for the past 30 days.
You may redeem by calling the Funds at 800-637-1700. Unless you decline
telephone privileges on your application and the Fund fails to take reasonable
measures to verify the request, the Fund will not be liable for any unauthorized
telephone redemption, or for any loss, cost or expense for acting upon an
investor's telephone instructions. Telephone redemptions may be sent to the bank
or brokerage account designated by the shareholder on the application or in a
letter with signature guarantee. To change the designated brokerage or bank
account it is necessary to contact the Firm through which shares of the Fund
were purchased or, if purchased directly from the Funds, it is necessary to send
a written request to the
19
<PAGE>
Fund with signature(s) guaranteed. The Fund reserves the right to refuse a
telephone redemption if it believes it is advisable to do so.
Signature guarantees can be obtained from most banks, credit unions or
savings associations, or from broker/dealers, national securities exchanges or
clearing agencies deemed eligible by the SEC. Guarantees must be signed by an
authorized signatory of the guarantor and "Signature Guaranteed" must appear
with the signature. Notaries public cannot provide signature guarantees. The
Fund may request additional documentation from corporations, executors,
administrators, trustees or guardians, and may accept other suitable
verification arrangements from foreign investors, such as consular verification.
For more information with respect to signature guarantees, please call
800-637-1700.
Reserve Cash Performance Account. The Reserve Cash Performance Account ("CPA")
and the Reserve Cash Performance Account Plus ("CPA Plus") provide a
comprehensive package of additional services to investors. These packages
provide a check arrangement where checks are issued to Reserve shareholders. By
completing the application or a signature card (for existing accounts) and
certain other documentation, 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 Fund. Because
of this, you cannot write a check to completely liquidate your account, nor may
a check be presented for certification or immediate payment. 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 or uncollected funds. All transactions activity,
including check redemptions, will be reported on your account statement.
Checking may not be available to clients of some brokers and financial
institutions ("Firms").
A VISA Check Card (a debit card) is also available with these packages.
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. You may
also use your VISA card to get cash at ATMs. Investors receive a 1% cash rebate
on all VISA purchases which is credited to their Reserve account. As with the
checking facility, VISA charges are paid by liquidating shares in your Reserve
account, but any charges 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.
VISA cardholders may be liable for the unauthorized use of their card,
if the Fund or the bank is not notified of the theft or loss within two (2)
business days. If the Fund or bank is notified within the specified period, the
card holder is only liable up to the amount set by Federal regulations,
currently $50. Participants should refer to the VISA Account Shareholder
Agreement for complete information regarding responsibilities and liabilities
with respect to the VISA Check Card. If a card is lost or stolen, the cardholder
should report the loss immediately by telephoning the issuing bank, currently
BankOne at 800-VISA911 or 402-331-5152, which can be reached 24 hours a day,
seven (7) days a week or the Funds at 800-637-1700 or 212-401-5500 during normal
business hours (Monday through Friday, 9:00 AM to 5:00 PM, Eastern time).
For the different attributes associated with CPA and CPA Plus packages,
please call The Reserve Funds at 800-637-1700. The Funds will charge a
nonrefundable annual CPA Plus service fee (currently $60 which may be charged to
the account at the rate of $5 monthly). CPA and CPA Plus participants will be
charged for specific costs incurred in placing stop payment orders, obtaining
check copies and in processing returned checks. These charges may be changed at
any time upon 30 days' notice to participants. Upon proper notice, the Funds may
choose to impose a fee if it deems a shareholder's
20
<PAGE>
actions to be burdensome. In addition, Firms in this program may charge their
own additional service fees and may establish their own minimum check amount.
The use of checks and VISA cards by participants will be subject to the
terms of your Reserve CPA Application and VISA Account Shareholder Agreement.
Touch-Tone Bill Payment Service. In the near future, the Fund will offer its
shareholders this service which gives you the flexibility of paying bills over
the telephone on an automatic or variable basis. Terms, conditions and
restrictions will be outlined in the User Guide and Application.
Reserve On-Line Access. In the near future, the Fund will offer its shareholders
on-line check writing which gives you the ability of paying bills with the use
of your home computer on an automatic or variable basis. Terms, conditions and
restrictions will be outlined in the User Guide and Application.
Stop Payments. The Fund will honor stop payment requests on unpaid shareholder
checks provided they are advised of the correct check number, payee, check
amount and date. Stop payment requests received by the Fund by 2:00 PM (Eastern
time) will be effective the next business day. Oral stop payment requests are
effective for fourteen (14) calendar days, at which time they will be cancelled
unless confirmed in writing. Written stop payment requests will remain in effect
for one year. A fee will be charged for this service.
Automatic Withdrawal Plans. If you have an account with a balance of at least
$5,000, you may elect in writing to participate in either of the following: (i)
an Income Distribution Plan providing for monthly, quarterly or annual payments
by redemption of shares from reinvested dividends or distributions paid to your
account during the preceding period; or (ii) a Fixed Amount Withdrawal Plan
providing for the automatic redemption of a sufficient number of shares of your
account to make a specified monthly, quarterly or annual payment of a fixed
amount. Changes to instructions must be in writing with signature(s) guaranteed.
In order for such payments to continue under the Plan, there must be a minimum
of $25 available from reinvested dividends or distributions. Payments can be
made to you or your designee. An application for the Automatic Withdrawal Plans
can be obtained from the Fund. The amount, frequency and recipient of the
payments may be changed by giving proper written notice to the Fund. The Fund
may impose a charge, modify or terminate any Automatic Withdrawal Plan at any
time after the participant has been notified. This privilege may not be
available to clients of some Firms or may be available subject to conditions or
limitations.
Automatic Transfer Plans (ACH). You may redeem shares of the Fund (minimum $100)
without charge by telephone if you have filed a separate Reserve Automatic
Transfer application with the Fund. The proceeds will be transferred between
your Fund account and the checking, NOW or bank money-market deposit account
(must be an Automated Clearing House member bank) designated in your
application. 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 request. The Fund may impose a charge, modify or terminate this
privilege at any time after the participant has been duly notified. This
privilege may not be available to clients of some Firms or may be available
subject to conditions or limitations.
Exchange Privilege. A shareholder may exchange shares at NAV with all Reserve
money-market fund and the Reserve Private Equity Series. Shares to be acquired
in an exchange must be registered for sale in the investor's state. The Fund
reserves the right to record all exchange requests.
The exchange privilege is not available for shares which have been held
for less than fifteen (15) days. Exchanges by telephone are an automatic
privilege unless the shareholder notifies the Fund on the
21
<PAGE>
Account Application that this authorization has been withheld. Unless
authorization is withheld, the Fund will honor requests by any person by
telephone at 800-637-1700, that the Fund deems to be valid. The Fund and their
affiliates may be liable for any losses caused by their failure to employ
reasonable procedures to avoid unauthorized or fraudulent instructions. To
reduce such risk, the registration of the account into which shares are to be
exchanged must be identical to the registration of the originating account and
all telephone exchange requests will be recorded. The Fund may also require the
use of a password or other form of personal identification. In addition, the
Fund will provide written confirmation of exchange transactions. During periods
of volatile economic and market conditions, a shareholder may have difficulty
making an exchange request by telephone, in which case an exchange request would
have to be made in writing.
Exchanges of shares of one fund for another is a taxable event and may
result in a gain or loss for federal income tax purposes. The exchange privilege
described under this heading may not be available to clients of some Firms and
some Firms may impose conditions on their clients that are different from those
described in the Prospectus or SAI.
The exchange privilege may be modified or terminated at any time, or
from time to time, upon 60 days' notice to shareholders if such notice is
required by the 1940 Act. The notice period may be shorter if applicable law
permits. The Trust reserves the right to reject telephone or written requests
submitted in bulk on behalf of ten (10) or more accounts. A pattern of frequent
exchanges may be deemed by the Adviser to be abusive and contrary to the best
interests of the Fund's other shareholders and, at the Adviser's discretion, may
be limited by the Fund's refusal to accept additional purchases and/or exchanges
from the investor and/or the imposition of fees. The Fund does not have any
specific definition of what constitutes a pattern of frequent exchanges. Any
such restriction will be made on a prospective basis, upon notice to the
shareholder not later than ten (10) days following such shareholder's most
recent exchange. Telephone and written exchange requests must be received by the
Fund by 4:00 PM (Eastern time) on a regular business day to take effect that
day. Exchange requests received after 4:00 PM (Eastern time) will be effected at
the next calculated NAV.
Suspension of Redemptions. The right of redemption may be suspended or the date
of payment postponed for more than seven (7) days only (a) when the Exchange 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 the Fund or for it to
determine fairly the value of its net assets, or (c) for such periods as the SEC
may permit. If shares of the Fund are purchased by check or Reserve Automatic
Transfer, the Fund may delay transmittal of redemption proceeds until such time
as it has assured itself that good payment has been collected for the purchase
of such shares, which may generally take up to ten (10) business days.
Shareholder checks written against funds, which are not yet considered
collected, will be returned and a fee charged against the account. When a
purchase is made by wire and subsequently redeemed, the proceeds from such
redemptions normally will not be transmitted until two (2) business days after
the purchase.
Shareholder Service Policies. The Fund's policies concerning the shareholder
services are subject to change from time to time. The Fund reserves the right to
change the minimum account size subject to the $5 monthly service charge or
involuntary redemption. The Fund further reserves the right to impose special
service charges for services provided to individual shareholders generally
including, but not limited to, fees for returned checks, stop payment orders on
official checks and shareholder checks, and special research services. The
Fund's standard service charges as described in the Prospectus are also subject
to adjustment from time to time. In addition, the Fund reserves the right to
increase its minimum initial investment amount at any time.
22
<PAGE>
If shares purchased are to be paid for by wire and the wire is not
received by the Fund or if shares are purchased by check, which, after deposit,
is returned unpaid or proves uncollectible, the purchase may be canceled or
redeemed immediately. The investor who 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 apply the proceeds
therefrom to the payment of any amounts due the fund, the investment adviser or
the distributor.
Purchases and Redemptions through Others. Share purchases and redemptions may
also be made through Firms which may involve such Firms' own redemption
minimums, services fees, and other redemption requirements. 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. Firms are responsible for the prompt
transmission of purchase and redemption orders. Some Firms which utilize a
centralized purchase method for shares may have an earlier cut-off for purchase
orders than stated above and may establish higher minimum investment
requirements than set forth above. Some Firms may independently establish and
charge additional fees for their services, which would reduce their clients'
yield or return. Firms may also hold shares in nominee or street name on behalf
of their clients. In such instances, the Fund's transfer agents will have no
information about their accounts, which will be available only from their Firm.
Some of these firms participate in the Fund's Plan of Distribution ("Plan").
Under the Plan, Firms may receive compensation for recordkeeping and other
services and assistance in distributing Fund shares. In addition, certain
privileges with respect to the purchase and redemption of shares (such as check
writing redemptions) or the reinvestment of dividends may not be available
through such Firms or may only be available subject to certain conditions or
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.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended ("the Code"), so
long as such qualification is in the best interests of shareholders. Such
qualification relieves the Fund of any liability for federal income tax to the
extent its earnings are distributed in accordance with applicable provisions of
the Code. If the Fund did not qualify as a regulated investment company, it
would be treated for tax purposes as an ordinary corporation subject to federal
income tax.
The Fund ordinarily declares dividends from its net investment income
on each day the Exchange and The Reserve Fund is open for business. The Fund's
earnings for Saturdays, Sundays and holidays are declared as dividends on the
preceding business day. Dividends paid out of the Fund's investment company
taxable income will be taxable to a U.S. shareholder as ordinary income. Because
no portion of the Fund's income is expected to consist of dividends paid by U.S.
corporations, no portion of the dividends paid by the 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.
23
<PAGE>
If you elect to receive dividends and distributions in cash, and your
dividend or distribution check is returned to the Fund as undeliverable or
remains uncashed for six months, the Fund reserves the right to reinvest such
dividends or distributions and all future dividends and distributions payable to
you in additional Fund shares at NAV. No interest will accrue on amounts
represented by uncashed distribution or redemption checks.
As a regulated investment company, the 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. The 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, the 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 the 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.
The Fund intends to qualify under the Code to pay "exempt-interest
dividends" to its shareholders. The 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 the 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. The Fund will inform shareholders annually as to
the portion of the distributions from the Fund which constituted
"exempt-interest dividends."
Upon the sale or other disposition of shares of the 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 the 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.
24
<PAGE>
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 Fund)
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 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 their own tax advisor(s) with
respect to the particular tax consequences to them of an investment in the 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 the 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. Further, shareholders are advised to consult with their tax
advisers regarding the applicability of state and local taxes to an investment
or income therefrom in the Fund which may differ from the federal income tax
consequences described above.
The tax consequences to a foreign shareholder of an investment in the
Fund may be different from those described herein.
YIELD INFORMATION
Yield is computed in accordance with a standardized method which
involves determining the net change in the value of a hypothetical pre-existing
Fund account having a balance of one share at the beginning of a seven calendar
day period for which the yield is to be quoted, dividing the net change by the
value of the account at the beginning of the period to obtain the base period
return, and annualizing the results (i.e., multiplying the base period return by
365/7). The net change in the value of the account reflects the value of
additional shares purchased with dividends declared on the original share and
any such additional shares and fees that may be charged to shareholder accounts,
in proportion to the length of the base period and the Fund's average account
size, but does not include realized gains and losses or unrealized appreciation
and depreciation. Effective yield is computed by adding 1 to the base period
return (calculated as described above), raising the sum to a power equal to 365
divided by 7, and subtracting 1 from the result.
Yields will fluctuate and are not necessarily representative of future
results. You should remember that yield is a function of the type and quality of
the instruments in the portfolio, portfolio maturity and operating expenses.
Your principal in the Fund is not guaranteed. See above "Share Price: NAV" for a
discussion of the manner in which the Fund's price per share is determined.
Yield information is useful in reviewing the Fund's performance
relative to other funds that hold investments of similar quality. Because yields
will fluctuate, yield information may not provide a basis for comparison with
bank and thrift certificates of deposit which normally pay a fixed rate for a
fixed term and are subject to a penalty for withdrawals prior to maturity which
will reduce their return.
25
<PAGE>
Comparative performance information may be used from time to time in
advertising or marketing the Fund's shares, including data from various industry
publications. From time to time, the Fund in its advertising and sales
literature may refer to the growth of assets managed or administered by RMCI
over certain time periods.
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 Fund assumes no responsibility to either owner for
actions taken by the other with respect to an account so registered. The
Application provides that persons who register their account indemnify and hold
the Fund harmless for actions taken by either party.
Use of Joint Prospectus and Statement of Additional Information. Although the
Fund is offering only its own shares, it is possible that the Fund might become
liable for any misstatement in the Prospectus and SAI about the other Funds.
However, the 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. An account statement
is sent to each shareholder at least quarterly. Shareholders who are clients of
some Firms will receive an account statement combining transactions in Fund
shares with account statements covering other brokerage or mutual fund accounts.
Shareholders have a duty to examine their account statement(s) and report any
discrepancies to The Reserve Funds immediately. Failure to do so could result in
the shareholder suffering a loss. Further, shareholders are advised to retain
account statements.
Reserve Easy Access. Easy Access is The Reserve Funds' 24-hour toll-free
telephone service that lets customers use a touch-tone phone for a variety of
options including yields, account balances, check reorders, and other options.
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 the Prospectus or SAI or to The Reserve Funds, 1250 Broadway, New
York, NY 10001-3701 or 800-637-1700.
RATINGS
The following are the rating designations of short-term instruments and
their respective meanings.
STANDARD & POOR'S CORPORATION. A-1: This designation is the highest category of
S&P and indicates that the degree of safety regarding timely payment is strong.
Those short-term obligations that are extremely strong characteristics will be
denoted with a plus (+).
MOODY'S INVESTORS SERVICE, INC. Prime-1 (P-1): Issuers rated P-1 (or supporting
institutions) have a superior ability for repayment of senior short-term debt
obligations. P-1 repayment will often be evidenced by many of the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternative liquidity.
26
<PAGE>
There are three categories for short-term obligations that define an
investment grade situation designated Moody's Investment Grade as MIG1 (best)
through MIG3. MIG1 denotes best quality, i.e., there is a strong protection by
established cash flows, superior liquidity support or demonstrated broad-based
market access for re-financing. MIG2 denotes high quality, the margins of
protection are ample but not as large as MIG1.
DUFF & PHELPS CREDIT RATING CO. Duff-1: Very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor. Those issues determined to have the highest
certainty of timely payment and whose safety is just below risk-free U.S.
Treasury short-term obligations will be denoted with a plus (+) sign
designation. Those issues determined to have a high certainty of timely payment
and whose risk factors are very small will be denoted with a minus (-) sign
designation.
FITCH IBCA. F1: This designation indicates the strongest credit quality. Issues
assigned this rating reflect an assurance of timely payment. Those obligations
with an exceptionally strong credit quality will be denoted with a plus (+)
sign. Issues assigned the rating of F1+ are regarded as having the strongest
degree assurance for timely payment.
27
<PAGE>
PART C
Item 23. Exhibits
(a) Declaration of Trust and Amendments filed as an exhibit to
registrants Post-Effective Amendment No. 36 dated July 31, 1999, and
incorporated by reference.
(b) Bylaws and Amendments filed as an exhibit to registrants
Post-Effective Amendment No. 36 dated July 31, 1999, and incorporated by
reference.
(c) Not Applicable
(d) Form of Investment Management Agreement for the Virginia Tax-Emempt
Fund
(e) 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. Amendment to Plan of Distribution filed as
exhibit to Post-Effective Amendment No. 11 dated August 1, 1988 and
incorporated by reference.
(f) Pension Plan of Reserve Management Corp. filed as an exhibit to
Post-Effective Amendment No. 32 of The Reserve Fund (File No. 2-36429);
amendments thereto filed as an exhibit to Post-Effective Amendment No. 45
and incorporated by reference.
(g) Custodian Agreement with Chase Manhattan Bank filed as exhibit to
registrants Post-Effective Amendment No. 36 dated July 31, 1999 and
incorporated by reference.
(h) Not applicable
(i) Opinion of Counsel
(j) Not applicable
(k) Not applicable
(l) Not applicable
(m) Form of Registered Dealer Agreement filed as exhibit to registrants
Post-Effective Amendment No. 36 dated July 31, 1999 and incorporated by
reference.
(n) Not applicable
(o) Not applicable
---------
Item 24. Persons Controlled by or Under Common Control with Registrant
Not Applicable
Item 25. 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 26. Business and Other Connections of Investment Adviser
Name Position with the Adviser Other Businesses
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
Bruce R. Bent President President and Director of Reserve
Management Corporation and Chairman
and Director and of Resrv Partners, Inc.
both of the same address as the Trust.
- ------------------------------------------------------------------------------------------------------------------
Bruce R. Bent II Vice President and Vice President, Secretary and
Secretary Director of Reserve Management
Corporation and Secretary and
Director of Resrv Partners, Inc.
both of the same address as the
Trust.
- ------------------------------------------------------------------------------------------------------------------
Arthur T. Bent III Vice President and Vice President, Treasurer and
Treasurer Director of Reserve Management
Corporation and Treasurer
and Director of Resrv Partners, Inc.
both of the same address as the
Trust.
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Item 27. 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.
Name and Principal Positions and Offices Positions and Offices Business Address
with Resrv Partners, Inc. with Registrant
<TABLE>
<S> <C>
- --------------------------------------------------------------------------
Bruce R. Bent Chairman and Director
1250 Broadway
New York, New York 10001-3701
- --------------------------------------------------------------------------
Mary A. Belmonte President
1250 Broadway
New York, New York 10001-3701
- --------------------------------------------------------------------------
Bruce R. Bent II Secretary and Director
1250 Broadway
New York, New York 10001-3701
- --------------------------------------------------------------------------
Arthur Bent III Treasurer and Director
1250 Broadway
New York, New York 10001-3701
- --------------------------------------------------------------------------
MaryKathleen F. Gaza Counsel & Assistant Secretary
1250 Broadway
New York, New York 10001-3701
- --------------------------------------------------------------------------
James Freisen Controller
1250 Broadway
New York, New York 10001-3701
- --------------------------------------------------------------------------
</TABLE>
Item 28. 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 1250 Broadway, New York, NY 10001-3701 except those relating to
receipts and deliveries of securities, which are maintained by the Registrant's
Custodian.
Item 29. Management Services
See "Investment Management, Distribution, Service and Custodian
Agreements" in Part B.
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 (b) under the Securities
Act of 1933 and Registrant has duly caused this Post-Effective Amendment No.
38 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 10th day of February, 2000.
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. 38 to Registrant's Registration Statement has been
signed below by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Bruce R. Bent President, Treasurer and Trustee (principal February 10, 2000
- --------------------------------- executive operating and financial officer)
Bruce R. Bent
* Trustee February 10, 2000
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Edwin Ehlert Jr.
* Trustee February 10, 2000
- ---------------------------------
Henri W. Emmet
* Trustee February 10, 2000
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Donald J. Harrington
/s/ Bruce R. Bent II Trustee February 10, 2000
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Bruce R. Bent II
* Trustee February 10, 2000
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William E. Viklund
* Trustee February 10, 2000
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Diana P Hermann
* Trustee February 10, 2000
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William Montgoris
/s/ MaryKathleen F. Gaza Counsel and Secretary February 10, 2000
- ---------------------------------
MaryKathleen F. Gaza
*Attorney-in-Fact
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<PAGE>
"COMPREHENSIVE FEE"
INVESTMENT MANAGEMENT AGREEMENT
THIS AGREEMENT ("Agreement'), dated the ____ day of ______, 2000, made
and entered into by and between Reserve Tax-Exempt Trust, a Massachusetts
business trust (the "Trust"), on behalf of the Virginia Tax-Exempt 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
<PAGE>
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
-2-
<PAGE>
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.
-3-
<PAGE>
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 Portfolio and the
property of the Portfolio. 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.
15. Enforcement Limited to Portfolio. The Manager understands and
agrees that any debts, liabilities, obligations, and expenses incurred,
contracted for or otherwise existing under this Agreement shall be enforceable
against the assets of the Portfolio only, and not against the assets of the
Trust, generally, or the assets of any other separate series 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
Virginia Tax-Exempt Fund
By
-------------------------------------
President
ATTEST:
- -------------------------
Secretary
RESERVE MANAGEMENT COMPANY, INC.
By
-------------------------------------
President
ATTEST
- -------------------------
Secretary
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<PAGE>
February 10, 2000
Reserve Tax-Exempt Trust
1250 Broadway
New York, NY 10001
Ladies and Gentlemen:
I have acted as counsel to Reserve Tax-Exempt Trust ("Trust"), a Massachusetts
business trust, in connection with the preparation and filing of its
Registration Statement on Form N-1A (the "Registration Statements") covering
shares of beneficial interest, no par value per share, of the Trust, on behalf
of the Virginia Tax-Exempt Fund.
I have examined copies of the Declaration of Trust and By-Laws of the Trust,
the Registration Statement, and such other records, proceedings and documents,
as I have deemed necessary for the purpose of this opinion. I have also
examined such other documents, papers, statutes and authorities as I deemed
necessary to form a basis for the opinion hereinafter expressed. In my
examination of such material, I have assumed the genuineness of all signatures
and the conformity to original documents of all copies.
Based upon the foregoing, I am of the opinion that the shares of beneficial
interest, no par value per share, of the Trust to be issued in accordance with
the terms of the offering, as set forth in the Registration Statement, when so
issued and paid for will constitute validly authorized and legally issued
shares of beneficial interest, fully paid and non-assessable by the Trust.
Very truly yours,
\s\ MaryKathleen F. Gaza
- ---------------------------
MaryKathleen F. Gaza
General Counsel
The Reserve Funds
