<PAGE> 1
1933 Act File No. 2-85406
1940 Act File No. 811-3814
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
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Pre-Effective Amendment No.
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Post-Effective Amendment No. 17 X
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REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
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Amendment No. 18 X
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(Check appropriate box or boxes.)
RESERVE NEW YORK TAX-EXEMPT TRUST
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
810 Seventh Avenue, New York, NY 10019
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (212) 977-9882
----------------------
Marc C. Cozzolino, Esq. , Reserve New York Tax-Exempt Trust, 810 Seventh
Avenue, 17th Floor,
- --------------------------------------------------------------------------------
New York, NY 10019
- --------------------------------------------------------------------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
immediately upon filing pursuant to paragraph (b) of Rule 485
--
X on September 29, 1995 pursuant to paragraph (b) of Rule 485
--
60 days after filing pursuant to paragraph (a) of Rule 485
--
on (date) pursuant to paragraph (a) of Rule 485
--
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The Commission is requested to send copies of all communications to:
Paul F. Roye, Esq.
Dechert Price & Rhoads
1500 K Street, NW
Washington, DC 20005
Registrant has filed a declaration pursuant to Rule 24f-2 under the Investment
Company Act of 1940 electing to register an indefinite number of shares of
beneficial interest. The notice required by Rule 24f-2 with respect to
Registrant's fiscal year ending May 31, 1995 was filed with the Commission on
July 17, 1995
This filing contains 70 pages.
<PAGE> 2
RESERVE NEW YORK TAX-EXEMPT TRUST
CROSS REFERENCE SHEET PURSUANT TO RULE 495
<TABLE>
<CAPTION>
FORM PROSPECTUS AND STATEMENT
N-1A OF ADDITIONAL INFORMATION
ITEM FORM CAPTION CAPTION
- ---- ------------------------- ---------------------------
<S> <C> <C>
1 Cover Page Cover Page
2 Synopsis (omitted)
3 Condensed Financial Information Financial Highlights
4 General Description of Registrant Investment Objective and Policies;
Shares of Beneficial Interest
5 Management of the Fund Management; How to Buy Shares
6 Capital Stock and Other Securities Shares of Beneficial Interest
7 Purchase of Securities Being Offered How to Buy Shares
8 Redemption or Repurchase Redemptions
9 Legal Proceedings (omitted)
10 Cover Page Statement of Additional Information
11 Table of Contents Table of Contents
12 General Information and History (omitted)
13 Investment Objective and Policies Investment Objective and Policies
14 Management of the Registrant Trustees and Executive Officers
15 Control Persons and Principal Trustees and Executive Officers; Shares of
Holders of Securities Beneficial Interest
16 Investment Advisory and Other Investment Management, Distribution, Service
Services and Custodian Agreements
17 Brokerage Allocation Portfolio Turnover, Transaction Charges and
Allocation
18 Capital Stock and Other Securities Shares of Beneficial Interest
19 Purchase, Redemption, and Pricing Purchase, Redemption and Pricing of Shares;
of Securities Being Offered
20 Tax Status Distributions and Taxes
21 Underwriters Investment Management, Distribution, Service and
Custodian Agreements
22 Calculation of Yield Quotations Fund Yield
Of Money Market Funds
23 Financial Statements Financial Statements
</TABLE>
<PAGE> 3
THE GENERAL INFORMATION, PURCHASES AND REDEMPTIONS
RESERVE 24 HOUR YIELD AND BALANCE INFORMATION
FUNDS NATIONWIDE 800-637-1700
TAX-EXEMPT MONEY MARKET FUNDS
FOR RESIDENTS OF
NEW YORK, CALIFORNIA, CONNECTICUT,
MASSACHUSETTS and NEW JERSEY
The NEW YORK TAX-EXEMPT FUND of Reserve New York Tax-Exempt Trust and
the CALIFORNIA TAX-EXEMPT, CONNECTICUT TAX-EXEMPT, MASSACHUSETTS TAX-EXEMPT
AND NEW JERSEY TAX-EXEMPT FUNDS of Reserve Tax-Exempt Trust (the "Fund(s)") are
money market funds whose investment objective is to seek as high a level of
short term interest income exempt from federal, state and local income taxes,
if any, as is consistent with preservation of capital and liquidity.
-- NEW YORK TAX-EXEMPT FUND invests principally in high-quality
tax-exempt obligations issued by the State of New York and its
counties, municipalities, authorities or other political
subdivisions.
-- CALIFORNIA TAX-EXEMPT FUND invests principally in high-quality
tax-exempt obligations issued by the State of California and its
counties, municipalities, authorities or other political
subdivisions.
-- CONNECTICUT TAX-EXEMPT FUND invests principally in high-quality
tax-exempt obligations issued by the State of Connecticut and its
counties, municipalities, authorities or other political
subdivisions.
-- MASSACHUSETTS TAX-EXEMPT FUND invests principally in high-quality
tax-exempt obligations issued by the Commonwealth of Massachusetts
and its counties, municipalities, authorities or other political
subdivisions.
-- NEW JERSEY TAX-EXEMPT FUND invests principally in high-quality
tax-exempt obligations issued by the State of New Jersey and its
counties, municipalities, authorities or other political
subdivisions.
SHARES OF THE FUNDS ARE NEITHER GUARANTEED NOR INSURED BY THE U.S.
GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE FUNDS WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
This Prospectus sets forth the information about the Funds which a
prospective investor should know before investing. A Statement of Additional
Information dated September 29, 1995, providing further details about the
Funds, has been filed with the Securities and Exchange Commission. It may be
obtained and without charge by writing or calling the Funds at (800) 637-1700.
The Statement of Additional Information is incorporated by reference into this
Prospectus.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR OBLIGATIONS
GUARANTEED OR ENDORSED BY ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
Prospectus dated September 29, 1995.
Investors are advised to read and retain this Prospectus for future reference.
<PAGE> 4
SHAREHOLDER EXPENSES
The following table illustrates all expenses and fees that a
shareholder of each Fund will incur. The expenses and fees set forth in the
table are for the fiscal year ended May 31, 1995.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
NEW YORK CALIFORNIA CONNECTICUT MASSACHUSETTS NEW JERSEY
TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT
FUND FUND FUND FUND FUND
---------- ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Sales Load Imposed on Purchases . . . . . . . . . . . None None None None None
Sales Load Imposed on Reinvested
Dividends . . . . . . . . . . . . . . . . . . None None None None None
Redemption Fees* . . . . . . . . . . . . . . . . . None None None None None
Exchange Fees . . . . . . . . . . . . . . . . . . . . None None None None None
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
NEW YORK CALIFORNIA CONNECTICUT MASSACHUSETTS NEW JERSEY
TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT
FUND FUND FUND FUND FUND
---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Management Fees (after waiver) . . . . . . . . .50% .50% .48% .39% .49%
12b-1 Fees . . . . . . . . . . . . . . . . . . . .18% .19% .15% .03% .18%
Other Operating Expenses
Administration and Operations Expenses . . . . .27% .30% .23% .24% .31%
Equipment . . . . . . . . . . . . . . . . . . .02% .02% .02% .02% .02%
Other . . . . . . . . . . . . . . . . . . . .01% .01% .01% .01% .01%
---- ----- ---- ---- -----
Total Operating Expenses . . . . . . . . . . . . .98% 1.02% .89% .69% 1.01%
==== ===== ==== ==== =====
</TABLE>
The purpose of this table is to assist the investor in understanding the
costs and expenses that a shareholder in a Fund will bear directly or
indirectly. These figures reflect a voluntary reduction of the management fee
for the Connecticut, Massachusetts and New Jersey Tax-Exempt Funds by the
investment adviser. If there was no voluntary reduction, the management fee
would be .50% for the Funds. * A $2.00 fee is charged on redemption checks
issued by the Funds of less than $100 and a $10 fee is charged for wire
redemptions of less than $10,000.
The following example illustrates the expenses that a shareholder would
pay on a $1,000 investment over various time periods assuming: (1) a 5% annual
rate of return and (2) redemption at the end of each time period. The example
reflects the voluntary reduction of the management fee for the Connecticut,
Massachusetts and New Jersey Tax-Exempt Funds by the investment adviser.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
New York Tax-Exempt Fund $10 $31 $54 $120
California Tax-Exempt Fund $10 $32 $56 $125
Connecticut Tax-Exempt Fund $ 9 $28 $49 $110
Massachusetts Tax-Exempt Fund $ 7 $22 $38 $ 86
New Jersey Tax-Exempt Fund $10 $32 $56 $124
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
<PAGE> 5
FINANCIAL HIGHLIGHTS
The following information applies to a share of the Reserve New York Tax-Exempt
Trust - New York Fund and Reserve Tax-Exempt Trust--California, Connecticut,
Massachusetts and New Jersey Funds outstanding throughout each period. It
should be read in conjunction with the financial statements and related notes
appearing in the Statement of Additional Information. Such information has
been audited by Coopers & Lybrand L.L.P. as indicated in their report appearing
in the Statement of Additional Information.
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
-------------------------------------------------------------------------
NEW YORK TAX-EXEMPT FUND 1995 1994 1993 1992 1991 1990
- ------------------------ ------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- ------- ------
Income from investment operations .0352 .0249 .0281 .0421 .0563 .0616
Expenses .0099 .0099 .0103 .0104 .0105 .0100
------- ------- ------- ------- ------- ------
Net investment income (1) .0253 .0150 .0178 .0317 .0458 .0516
Dividends from net investment income(1) (.0253) (.0150) (.0178) (.0317) (.0458) (.0516)
------- ------- ------- ------- ------- ------
Net asset value, end of year $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= ======= =======
Total Return 2.53% 1.50% 1 .78% 3.17% 4.58% 5.16%
Ratios/Supplemental Data
- ------------------------
Net assets in thousands,
end of year 152,906 148,387 149,785 156,567 148,079 120,142
Ratio of expenses to average
net assets .98% .98% 1 .02% 1.03% 1.01% .98%
Ratio of net investment income
to average net assets 2.48% 1.48% 1 .76% 3.09% 4.43% 5.02%
</TABLE>
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
-------------------------------------------------
NEW YORK TAX-EXEMPT FUND 1989 1988 1987 1986
- ------------------------ ------- ------- ------- -------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- -------
Income from investment operations .0600 .0476 .0454 .0531
Expenses .0103 .0102 .0100 .0102
------- ------- ------- -------
Net investment income (1) .0497 .0374 .0354 .0429
Dividends from net investment income(1) (.0497) (.0374) (.0354) (.0429)
------- ------- ------- -------
Net asset value, end of year $1.0000 $1.0000 $1.0000 $1.0000
======== ======= ======= =======
Total Return 4.97% 3.74% 3.54% 4.29%
Ratios/Supplemental Data
- ------------------------
Net assets in thousands,
end of year 90,378 86,749 84,730 80,501
Ratio of expenses to average
net assets 1.00% 1.00% .98% 1.00%
Ratio of net investment income
to average net assets 4.86% 3.66% 3.46% 4.19%
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
------------------------------------------------------------------------------
CONNECTICUT TAX-EXEMPT FUND 1995 (3) 1994 (3) 1993 (3) 1992 (3) 1991 (3)
- --------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- -------
Income from investment operations .0352 .0250 .0269 .0400 .0534
Expenses (3) .0098 .0086 .0087 .0091 .0086
------- ------- ------- ------- -------
Net investment income (1) .0254 .0164 .0182 .0309 .0448
Dividends from net investment income (1) (.0254) (.0164) (.0182) (.0309) (.0448)
------- ------- ------- ------- -------
Net asset value, end of year $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= =======
Total Return 2.54% 1.64% 1.82% 3.09% 4.48%
Ratios/Supplemental Data
- ------------------------
Net assets in thousands, end of year 26,626 128,693 157,115 191,101 241,790
Ratio of expenses to average
net assets (3) .89% .85% .86% .90% .85%
Ratio of net investment income
to average net assets 2.33% 1.62% 1.81% 3.05% 4.41%
</TABLE>
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
-------------------------------------------------------------------
CONNECTICUT TAX-EXEMPT FUND 1990 1989 1988 1987 1986
- --------------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- -------
Income from investment operations .0615 .0604 .0481 .0449 .0533
Expenses .0083 .0086 .0092 .0076 .0064
------- ------- ------- ------- -------
Net investment income (1) .0532 .0518 .0389 .0373 .0469
Dividends from net investment income (1) (.0532) (.0518) (.0389) (.0373) (.0469)
------- ------- ------- ------- -------
Net asset value, end of year $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= =======
Total Return 5.32% 5.18% 3.89% 3.73% 4.69%
Ratios/Supplemental Data
- ------------------------
Net assets in thousands, end of year 314,489 247,929 245,588 234,728 202,504
Ratio of expenses to average
net assets (3) .81% .84% .90% .74% .62%
Ratio of net investment income
to average net assets 5.17% 5.05% 3.81% 3.63% 4.57%
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
-----------------------------------------------------------------
MASSACHUSETTS TAX-EXEMPT FUND 1995 (3) 1994 (3) 1993 (3) 1992 (3)
- ----------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- -------
Income from investment operations .0335 .0227 .0257 .0386
Expenses (3) .0070 .0052 .0048 .0045
------- ------- ------- -------
Net investment income (1) .0265 .0175 .0209 .0341
Dividends from net investment income (1) (.0265) (.0175) (.0209) (.0341)
------- ------- ------- -------
Net asset value, end of year $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= =======
Total Return 2.65% 1.75% 2.09% 3.41%
Ratios/Supplemental Data
- ------------------------
Net assets in thousands, end of year 10,169 14,824 13,305 7,186
Ratio of expenses to average net assets (3) .69% .51% .46% .44%
Ratio of net investment income to
average net assets 2.60% 1.73% 2.04% 3.28%
</TABLE>
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31, (COMMENCEMENT OF
------------------------------- OPERATIONS) THROUGH
MASSACHUSETTS TAX-EXEMPT FUND 1991 (3) MAY 31, 1990
- ----------------------------- -------- -------------------
<S> <C> <C>
Net asset value, beginning of year $1.0000 $1.0000
------- -------
Income from investment operations .0551 .0209
Expenses (3) .0032 .0010
------- -------
Net investment income (1) .0519 .0199
Dividends from net investment income (1) (.0519) (.0199)(4)
------- -------
Net asset value, end of year $1.0000 $1.0000
======= =======
Total Return 5.19% 5.59%(2)
Ratios/Supplemental Data
- ------------------------
Net assets in thousands, end of year 4,652 2,140
Ratio of expenses to average net assets .30% .29%(2)
Ratio of net investment income to
average net assets 4.79% 5.53%(2)
</TABLE>
<PAGE> 8
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
OCTOBER 17, 1994
(COMMENCEMENT OF
OPERATIONS) THROUGH
CALIFORNIA TAX-EXEMPT FUND MAY 31, 1995
- -------------------------- -------------------
<S> <C>
Net asset value, beginning of period $1.0000
-------
Income from investment operations .0243
Expenses (2) .0062
-------
Net investment income (1) .0181
Dividends from net investment income (1) (.0181)
-------
Net asset value, end of period $1.0000
=======
Total Return 1.81%
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net assets in thousands, end of period 11,088
Ratio of expenses to average
net assets (2) 1.02%
Ratio of net investment income
to average net assets (2) 2.95%
</TABLE>
<TABLE>
<CAPTION>
JUNE 21, 1994
(COMMENCEMENT OF
OPERATIONS) THROUGH
NEW JERSEY TAX-EXEMPT FUND May 31, 1995 (3)
- -------------------------- -------------------
<S> <C>
Net asset value, beginning of period $1.0000
-------
Income from investment operations .0330
Expenses (2)(3) .0087
-------
Net investment income (1) .0243
Dividends from net investment income (1) (.0243)
-------
Net asset value, end of period $1.0000
=======
Total Return 2.43%
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net assets in thousands, end of period 21,607
Ratio of expenses to average
net assets (2) 1.01%
Ratio of net investment income
to average net assets (2) 2.82%
</TABLE>
(1) Based on compounding of daily dividends. Not indicative of future
results.
(2) Annualized.
(3) During these periods the Manager waived all or a portion of fees and
expenses. If there were no reductions in expenses, the actual expenses
would have been .91%, .95%, .96%, 1.00% and .95% for the Connecticut
Tax-Exempt Fund, .80%, 1.01%, .96%, .94% and .80% for the Massachusetts
Tax-Exept Fund and 1.01% for the New Jersey Tax-Exempt Fund.
(4) .01 cents per share represents distributions of taxable income.
<PAGE> 9
YIELD
For the seven calendar days ended May 31, 1995, the current yield and the
effective yield for the Funds were as follows:
<TABLE>
<CAPTION>
CURRENT YIELD EFFECTIVE YIELD
------------- ---------------
<S> <C> <C>
New York Tax-Exempt Fund 3.09% 3.14%
California Tax-Exempt Fund 3.23% 3.28%
Connecticut Tax-Exempt Fund 2.99% 3.04%
Massachusetts Tax-Exempt Fund 3.09% 3.13%
New Jersey Tax-Exempt Fund 2.92% 2.96%
</TABLE>
Current yield refers to the income generated by an investment in a Fund
over a seven-day period. This income is then annualized. That is, the amount
of income generated by the investment during that week is assumed to be
generated each week over a 52-week period and is shown as a percentage of the
investment. The effective yield is calculated similarly but, when annualized,
the income earned is assumed to be reinvested. The effective yield will be
higher than the current yield because of this compounding effect.
The Funds may also quote tax equivalent yields, which show the taxable
yields an investor would have to earn before taxes to equal a Fund's tax-free
yield. A tax equivalent yield is calculated by dividing a Fund's current or
effective yield by the result of one minus a stated federal and/or state and
local tax rate.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of each of the Funds is to seek as high a level
of short term interest income exempt from federal, state and local income
taxes, if any, as is consistent with preservation of capital and liquidity.
However, achievement of this objective cannot be assured. This investment
objective may not be changed without the vote of a majority of the outstanding
shares of a Fund as defined in the Investment Company Act of 1940.
Each Fund seeks to attain its objective by investing principally in
tax-exempt obligations issued by the state for which it is named and the
state's counties, municipalities, authorities or other political subdivisions.
There can be no assurance that any of the Funds will achieve its investment
objective.
These securities are generally known as "municipal bonds" or "municipal
notes" and the interest on them is exempt from federal income tax in the
opinion of either bond counsel for the issuers or, in some instances, the
issuer itself ("Municipal Obligations"). They may be issued to raise money for
various public purposes such as constructing public facilities. Certain types
of Municipal Obligations are issued to obtain funding for privately operated
facilities. General obligation bonds and notes are backed by the taxing power
of the issuer. Revenue bonds and notes are backed by the revenues of a project
or facility such as tolls from a toll road or, in some cases, from the proceeds
of a special excise tax, but not by the general taxing power. Industrial
development revenue bonds and notes are a specific type of revenue bond or note
backed by the credit of a private issuer. Each Fund may invest any portion of
its assets in industrial revenue bonds and notes. Municipal Obligations bear
fixed, variable or floating rates of interest. At least 80% of each Fund's
assets will be invested in Municipal Obligations which are exempt from federal,
state and, with respect to the New York Tax-Exempt Fund, local income taxes
unless it has adopted a temporary defensive position. In addition, during
periods when the Funds' investment adviser believes that Municipal Obligations
meeting each respective Fund's quality standards are not available, a Fund may
invest up to 20% of its assets, or a greater percentage on a temporary basis,
in Municipal Obligations exempt only from federal income taxes.
A Fund may purchase floating and variable rate demand notes, which are
Municipal Obligations normally having stated maturities in excess of one year,
but which permit the holder to demand payment of principal and accrued interest
at any time, or at specified intervals not exceeding one year, in each case
usually upon not more than seven days' notice. The interest rates on these
floating and variable rate demand notes fluctuate from time to time.
Frequently, such Municipal Obligations are secured by letters of credit or
other credit support arrangements provided by banks. The Funds may invest any
portion of their assets in floating and variable rate demand notes secured by
bank letters of credit or other credit support arrangements. Use of letters of
credit support arrangements will not adversely affect the tax-exempt status of
these Municipal Obligations. A Fund will not invest more than 10% of the value
of its assets in floating or variable rate demand notes for which there is no
secondary market if the demand feature on such Municipal Obligations is
exercisable on more than seven days notice.
<PAGE> 10
In view of the investment of each of the Funds in industrial revenue
development bonds and notes secured by letters of credit or guarantees of
banks, an investment in a Fund's shares should be made with an understanding of
the characteristics of the banking industry and the risks such an investment
may entail. Banks are subject to extensive government regulations which may
limit both the amounts and types of loans and other financial commitments which
may be made and interest rates and fees which may be charged. The
profitability of the banking industry is largely dependent upon the
availability and cost of capital funds for the purpose of financing lending
operations under prevailing money market conditions. In addition, general
economic conditions play an important part in the operations of this industry,
and exposure to credit losses arising from possible financial difficulties
might affect a bank's ability to meet its obligations under a letter of credit.
Each Fund will purchase tax-exempt securities which are rated MIG-1 or
MIG-2 by Moody's Investor Services, Inc. ("Moody's"), SP-1 or SP-2 by Standard
& Poor's Corporation ("S&P") or the equivalent thereof. Municipal Obligations
which are not rated may also be purchased provided such securities are
determined to be of comparable quality by the Fund's investment adviser to
those rated securities in which the Funds may invest pursuant to guidelines
established by their Boards of Trustees.
OTHER POLICIES. Certain banks and other municipal securities dealers have
indicated a willingness to sell Municipal Obligations to the Funds accompanied
by a commitment to repurchase the securities, at a Fund's option or at a
specified date, at an agreed upon price or yield within a specified period
prior to the maturity date of such securities at the amortized cost thereof.
If a bank or other municipal securities dealer were to default under such
standby commitment and fail to pay the exercise price, a Fund could suffer a
potential loss to the extent that the amount paid by the Fund, if any, for the
Municipal Obligation with a standby commitment exceeded the current value of
the underlying Municipal Obligation. If a bank or other municipal securities
dealer defaults under its standby commitment, the liquidity of the security
subject to such commitment may be adversely affected.
Municipal Obligations are sometimes offered on a "when-issued" or delayed
delivery basis. There is no limit on a Fund's ability to purchase municipal
securities on a when-issued basis. The price of when-issued securities, which
is generally expressed in yield terms, is fixed at the time the commitment to
purchase is made but delivery and payment for the when-issued securities takes
place at a later date. Normally, the settlement date occurs within one month
of the purchase of such Municipal Obligations. During the period between the
purchase and settlement dates, no payment is made by a Fund to the issuer and
no interest accrues to a Fund on such securities. To the extent that assets of
a Fund purchasing such securities are not invested prior to the settlement of a
purchase of securities, a Fund will earn no income; however, it is each of the
Fund's intent to be as fully invested as is practicable. While when-issued
securities may be sold prior to settlement date, the Funds intend to purchase
such securities with the purpose of actually acquiring them unless a sale
appears desirable for investment reasons. At the time a Fund makes the
commitment to purchase a Municipal Obligation on a when-issued basis, it will
record the transaction and reflect the value of the security in determining its
net asset value. Each Fund will also maintain readily marketable assets at
least equal in value to commitments for when-issued securities specifically for
the settlement of such commitments. The investment adviser does not believe
that a Fund's net asset value or income will be adversely affected by the
purchase of Municipal Obligations on a when-issued basis.
The Funds may purchase from financial institutions participation interests
in Municipal Obligations. A participation interest gives a Fund an undivided
interest in the Municipal Obligation in the proportion that the Fund's
participation interest bears to the total principal amount of the Municipal
Obligation. These instruments may have fixed, floating or variable rates of
interest. Frequently, such instruments are secured by letters of credit or
other credit support arrangements provided by banks.
The Tax Reform Act of 1986 ("the Act") subjects interest received on
certain otherwise tax-exempt securities ("private activity bonds") to a federal
alternative minimum tax. It is the position of the Securities and Exchange
Commission 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 federal
alternative minimum tax 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 investors in such securities, including
shareholders of each of the Funds, to an increased alternative minimum tax.
However as of the date of this Prospectus, each Fund does not purchase such
securities, but reserves the right to do so depending on market conditions in
the future.
Yields on municipal securities depend on a variety of factors, including
general economic and monetary conditions, money market factors, conditions in
the tax-exempt securities market, size of a particular offering, maturity of
the obligation and rating of the issue. The ability of each of the Funds 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.
<PAGE> 11
From time to time a Fund may invest in taxable short term investments
("Taxable Investments") consisting of obligations backed by the full faith and
credit of the United States Government, its agencies or instrumentalities
("U.S. Governments"); deposit-type obligations, acceptances, and letters of
credit of Federal Deposit Insurance Corporation member banks; and instruments
fully collateralized by such obligations. Unless a Fund has adopted a
temporary defensive position, no more than 20% of the net assets of each of the
Funds will be invested in Taxable Investments at any time. A Fund may enter
into repurchase agreements with regard to the taxable obligations listed above.
Although a Fund is permitted to make taxable temporary investments, there is no
current intention of generating income subject to federal income tax.
The Fund's investment adviser uses its reasonable business judgment in
selecting investments in addition to considering the ratings of Moody's and
S&P. This analysis considers, among other things, the financial condition of
the issuer by taking into account present and future liquidity, cash flow, and
capacity to meet debt service requirements. Since the market value of debt
obligations fluctuates as an inverse function of changing interest rates, each
Fund seeks to minimize the effect of such fluctuations by investing in
instruments with remaining maturities of 397 days or less and limiting its
average maturity to 90 days or less.
The principal risk factors associated with investment in each Fund are the
risk of fluctuations in short term interest rates, the risk of default among
one or more issuers of securities which comprise a Fund's assets and the risk
of non-diversification. As a non-diversified investment company, the Fund is
permitted to have all its assets invested in a limited number of issuers.
Accordingly, since a relatively high percentage of a Fund's assets may be
invested in the securities of a limited number of issuers, a Fund's investment
securities may be more susceptible to any single economic, political or
regulatory occurrence than the investment securities of a diversified
investment company. However, each Fund intends to qualify as a "regulated
investment company" for purposes of the Internal Revenue Code. This limits the
aggregate value of all investments (except United States Government securities,
securities of other regulated investment companies, cash and cash items) so
that, with respect to at least 50% of its total assets, not more than 5% of
such assets are invested in the securities of a single issuer.
RISK FACTORS IN CONCENTRATING IN CALIFORNIA. You should consider carefully the
special risks inherent in the Fund's investment in California Municipal
Obligations. These risks result from certain amendments to the California
Constitution and other statutes that limit the taxing and spending authority of
California governmental entities, as well as from the general financial
condition of the State of California. Since the start of the State's 1990-91
fiscal year, the State has experienced the worst economic, fiscal and budget
conditions since the 1930's. As a result, the State has experienced recurring
budget deficits for four of the last five completed fiscal years. By June 30,
1992, according to California's Department of Finance, the State's General Fund
has an accumulated deficit, on a budget basis, of approximately $2.2 billion.
Moreover, the Governor's Budget for 1993-94, released January 8, 1993,
projected a $2.5 billion budget deficit for the fiscal year ending June 30,
1993. By June 30, 1994, according to California's Department of Finance, the
State's Reserve for Economic Uncertainties had an accumulated deficit, on a
budget basis, of approximately $2.0 billion. A further consequence of the
large budget imbalances has been that the State depleted its available cash
resources and has had to use a series of external borrowings to meet its cash
needs. To meet its cash flow needs in the 1994-95 fiscal year, the State
issued, in July and August 1994, $4.0 billion of revenue anticipation warrants
and $3.0 billion of revenue anticipation notes. As a result of the
deterioration in the State's budget and cash situation, between October 1991
and July 1994 the rating on the State's general obligation bonds was reduced by
S&P from AAA, to A, by Moody's from Aaa to A1 and by Fitch from AAA to A.
These and other factors may have the effect of impairing the ability of the
issuers of California Municipal Obligations to pay interest on, or repay
principal of, such California Municipal Obligations. You should obtain and
review a copy of the Statement of Additional Information which more fully sets
forth these and other risk factors.
RISK FACTORS IN CONCENTRATING IN CONNECTICUT. The Connecticut Tax-Exempt
Fund's concentration in securities issued by the State of Connecticut and its
political subdivisions involves greater risks than a fund broadly invested
across many states and municipalities. Specifically, the credit quality of the
Connecticut Tax-Exempt Fund will depend on the continued financial strength of
the State of Connecticut and its political subdivisions. From 1970 to 1992,
the number of persons employed in non-manufacturing industries has increased
60.8% while manufacturing employment has declined 30.8%. It is expected that
these trends will continue in the future. Defense-related business plays an
important role in the Connecticut economy. Due to reduced defense-related
spending, several employers have announced substantial planned labor force
reductions scheduled to occur over the next several years. For 1992, the rate
of unemployment in Connecticut was 7.5% on a seasonably adjusted basis, and the
rate in the United States was 7.3% on a seasonably adjusted basis. The State
Comptroller's annual reports for the fiscal year ended June 30, 1992, 1993 and
1994 reflected General Fund operating surpluses of $110 million, $113.5 million
and $19.7 million, respectively. The Computer's monthly report for the period
ended August 31, 1994 stated that the cumulative deficit under GAAP for 1994-95
is approximately $531 million. As a result of the recent recurring budgetary
problems, S&P downgraded the State's general obligation bonds from AA+ to in
April 1990 and to AA+ in September 1991.
<PAGE> 12
Moody's and Fitch currently rate Connecticut's bonds Aa and AA+, respectively.
The Statement of Additional Information further discusses risk factors in
concentrating in securities issued by the State of Connecticut and its
subdivisions.
RISK FACTORS IN CONCENTRATING IN MASSACHUSETTS. The Massachusetts Tax-Exempt
Fund's concentration in securities issued by the Commonwealth of Massachusetts
and its political subdivisions involves greater risks than a fund broadly
invested across many states and municipalities. Specifically, the credit
quality of the Massachusetts Tax-Exempt Fund will depend on the continued
financial strength of the Commonwealth of Massachusetts and its political
subdivisions. The Commonwealth's unemployment rate peaked in 1991 at 9.0% and
dropped to 6.9% in 1993. Between 1990 and 1991 manufacturing employment
declined 7.1%. Between 1991 and 1992 manufacturing employment declined 4.7%.
In November 1992 33.5% of all jobs were in the service sector. Due to the
adverse financial condition of the Commonwealth, Moody's downgraded the
Commonwealth's general obligation bonds from Baa-1 to Baa on March 19, 1990.
S&P downgraded its rating of Commonwealth general obligation bonds from A to
BBB on December 13, 1989. Both Moody's and S&P subsequently raised their
ratings of Commonwealth general obligation bonds to A on September 9, 1992. O
n October 13, 1993 S&P raised its rating of commonwealth general obligation
bonds to A+. There can be no assurance that these difficulties will not
adversely affect the ability of the Commonwealth of Massachusetts and its
political subdivisions to make debt payments on the Municipal Obligations they
issue. The Statement of Additional Information further discusses risk factors
in concentrating in securities issued by the Commonwealth of Massachusetts and
its subdivisions.
RISK FACTORS IN CONCENTRATING IN NEW JERSEY. The Fund's concentration in
securities issued by the State of New Jersey and its political subdivisions
involves greater risks than a fund broadly invested across many states and
municipalities. The state's economy performed strongly for much of the 1980s.
Like much of the Northeast in the 1980s, the state's economy outpaced national
trends. However, since 1989 the state's economic performance has been weak and
it has under performed the rest of the national. Unemployment currently
exceeds the national average, and weakness in the economy appears in many
employment sectors. The downward trend was apparent in New Jersey 18 months
before national indicators. Economic recovery will be slower due to the
weakness in the real estate and construction sectors, the lack of consumer
confidence, and the loss of manufacturing and high level corporate service
jobs. Reflecting the economic downturn, the State's unemployment rate rose
from 3.6% in the first quarter of 1989 to 9.1% in April 1993. As a result of
New Jersey's recent fiscal weakness, in July 1991, S&P lowered its rating of
the State's general obligation debt from AAA to AA+. The Statement of
Additional Information further discusses risk factors in concentrating in
securities issued by the State of New Jersey and its political subdivisions.
Nevertheless, New Jersey's economic base continues to be strong, fortified
by one of the most diversified structures in the nation. The leading
employment sectors are services, wholesale and retail trade, government and
manufacturing.
RISK FACTORS IN CONCENTRATING IN NEW YORK. The New York Tax-Exempt Fund's
concentration in securities issued by the State of New York and its political
subdivisions involves greater risks than a fund broadly invested across many
states and municipalities. Specifically, the credit quality of the New York
Tax-Exempt Fund will depend upon the continued financial strength of the State
of New York, which in turn is directly affected by the financial condition of
numerous public bodies and municipalities, including New York City. New York
State and City continue to face challenges to their fiscal well being,
including shrinking federal assistance, large pension and infrastructure needs,
declining industrial base, and the continuing dependence of several municipal
issuers, such as the Metropolitan Transit Authority and the Housing Finance
Agency, for large operating subsidies. The State's 1993 and 1994 fiscal years,
however, were characterized by national and regional economies that performed
better than projected. After reflecting a 1993 year-end deposit to the State's
refund reserve account of $671 million, reported 1993 General Fund receipts
were $45 million higher than originally projected in April 1992. The State
completed the 1994 fiscal year with an operating surplus in the General Fund of
$914 million. In September 1994, however, the State projected a General Fund
operating deficit of $690 million for the 1995 fiscal year. There can be no
assurance that New York will not face substantial potential budget gaps in
future years. New York State's tax and revenue tax and revenue anticipation
notes issued in April 1992 were rated MIG-2 by Moody's, SP-1 by Standard &
Poor's and F-1 by Fitch Investors, Service, Inc. New York State's 1993 tax and
revenue anticipation notes were rated MIG-1 by Moody's, SP-1+ by S&P, and F-1+
by Fitch. There is no assurance that any ratings will continue for any period
of time or will not be revised downward or withdrawn entirely by a ratings
agency. The Statement of Additional Information further discusses risk factors
in concentrating in securities issued by the State of New York and its
subdivisions.
<PAGE> 13
MANAGEMENT
INVESTMENT MANAGEMENT AGREEMENTS. The Boards of Trustees manages each Fund's
business and affairs. Reserve Management Company, Inc. ("Adviser"), 14 Locust
Place, Manhasset, New York 11030, provides each Fund with investment advice
pursuant to an Investment Management Agreement. Since November 15, 1971, the
Adviser and its affiliates have been advising the Reserve Funds, which
currently have assets in excess of $3 billion. Under the Investment Management
Agreements, the Adviser manages each Fund's investments, including effecting
purchases and sales thereof, in furtherance of the Fund's investment objective
and policies, subject to overall control and direction by each Board of
Trustees.
As compensation for these services, the Adviser receives a management fee,
which is a percentage of the average daily assets of each Fund, calculated as
follows: (i) .50% per annum of the first $500 million of average daily net
assets, (ii) .475% per annum of the next $500 million of such assets; (iii)
.45% per annum of the next $500 million of such assets; (iv) .425% per annum of
the next $500 million of such assets; and (v) .40% per annum of such assets in
excess of $2 billion. For the fiscal year ended May 31, 1995, the Adviser
received a management fee of .50% of the average net assets of the California
Tax-Exempt Fund, .48% of the average net assets of the Connecticut Tax-Exempt
Fund, .39% of the average net assets of the Massachusetts Tax-Exempt Fund, .49%
of the average net assets of the New Jersey Tax-Exempt Fund, and .50% of the
New York Tax-Exempt Fund. During the year, the Adviser voluntarily agreed to
a reduction of the management fee for the Connecticut Tax-Exempt Fund,
Massachusetts Tax-Exempt Fund and for the New Jersey Tax-Exempt Fund.
The Adviser may make such advertising and promotional expenditures, using
its own resources, as it from time to time deems appropriate.
The Investment Management Agreement provides that the Adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Fund in connection with the matters as to which the agreement relates,
except a loss resulting from the willful misfeasance, bad faith or gross
negligence on the part of the Adviser in the performance of its duties or from
reckless disregard by it of its duties and obligations thereunder.
SERVICE AGREEMENTS. The Adviser furnishes to each Fund, at cost, all personnel
required for the operations of each Fund such as executive, administrative,
clerical, recordkeeping, bookkeeping, and shareholder accounting and servicing,
as well as suitable office space and necessary equipment and supplies used by
such personnel in performing these functions. Operating costs for which each
Fund reimburses the Adviser include salaries and other personnel expense, rent,
depreciation of equipment and facilities, interest and amortization on loans
financing equipment used by the Fund, and all other expenses for the conduct of
each Fund's affairs. Affiliates of the Adviser may provide some of these
services. Each Fund also reimburses the Adviser for: brokerage fees and
commissions; interest charges and taxes; the cost of registering for sale,
issuing and redeeming the Fund's shares and of printing and mailing all
prospectuses, proxy statements and shareholder reports furnished to current
shareholders; and the fees and expenses of the Fund custodians, auditors,
lawyers and Trustees who are not "interested persons" of the Fund.
The Adviser has agreed to repay each Fund promptly any amount which a
majority of disinterested Trustees reasonably determines in its discretion is
in excess of or not properly attributable to the cost of operations or expenses
of a Fund. The Service Agreements are nonassignable and continue until
terminated by either party on 120 days notice.
During the fiscal year ended May 31, 1995, the ratio of expenses to the
average net assets of each Fund was 1.02% for the California Tax-Exempt Fund;
.89% for the Connecticut Tax-Exempt Fund; .69% for the Massachusetts Tax-Exempt
Fund; 1.01% for the New Jersey Tax-Exempt Fund; and .98% for the New York
Tax-Exempt Fund.
TRUSTEES. The Trustees serve indefinite terms (subject to certain removal
procedures) and they appoint their own successors, provided that at least a
majority of the Trustees have been elected by shareholders. A Trustee may be
removed at any meeting of shareholders by a vote of a majority of the
shareholders of Reserve Tax-Exempt Trust or Reserve New York Tax-Exempt Trust.
TRANSFER AGENT AND DIVIDEND PAYING AGENT. Reserve Tax-Exempt Trust and Reserve
New York Tax-Exempt Trust act as their own transfer agent and dividend paying
agent.
<PAGE> 14
HOW TO BUY SHARES
METHOD OF PAYMENT. The minimum initial investment is $1,000 and $250 for
subsequent investments ($50 if shares are purchased by Reserve Automatic Asset
Builder, Reserve Automatic Asset Builder for U.S. Government Distributions and
$25 if purchased by Reserve Automatic Asset Builder for Payroll or Pension).
An initial purchase must be accompanied by an investment application or
equivalent information. For clients of certain broker-dealers and financial
institutions, shares may be purchased directly through such firm. You can buy
shares of the Funds each business day at the net asset value next determined
after receipt by the Funds of a properly completed order and payment in Federal
Funds (member bank deposits with a Federal Reserve bank). Payments
(denominated in U.S. dollars) must be made:
-- By check (drawn on a U.S. bank) payable to The Reserve Fund, 810
Seventh Avenue, New York, N.Y. 10019-5868. You must include your
account number (or Taxpayer Identification number) on the "pay to
the order of" line for each check made payable to The Reserve Fund
or within the endorsement for each check endorsed to The Reserve
Fund.
-- By wire - Prior to calling your bank, call the Funds for specific
instructions at 800-637-1700 or the broker-dealer or financial
institution ("firm") from which you received this Prospectus.
Checks and wires which do not correctly identify the Fund and account to
be credited may be returned or delay the purchase of shares. Because each Fund
must pay for its securities purchases on the same day in Federal funds, only
Federal funds wires and checks drawn on the Fund's bank are eligible for entry
as of the business day received. For Federal funds wires to be eligible for
same-day order entry, a Fund must be notified before 11:00 A.M. (New York time)
of the amount to be transmitted and the account to be credited. Payment by
check not immediately convertible into Federal funds will be entered as of the
business day when covering Federal funds are received or bank checks are
converted into Federal funds. This usually occurs within two business days,
but may take longer. Checks delivered to the Fund's offices after 11:00 A.M.
(New York time) will be considered received the next business day. A fee will
be charged if any check used for investment in your account does not clear.
Any monies which cannot be credited to an account by the end of the
business day following that on which Federal funds become available will be
returned as promptly as possible to the sender or, if this cannot be readily
determined, to the bank from which they came or were drawn. The Funds reserve
the right, with respect to any person or class of persons, under certain
circumstances to waive investment minimums and redemption requirements. The
Funds also reserve the right to suspend the offering of shares from time to
time and to reject any purchase order for any reason. The Funds will only
accept purchase checks in excess of $100 which are payable to The Reserve Fund
or payable to the shareholder/payee of the check and endorsed to The Reserve
Fund. The Funds do not accept travelers checks.
RESERVE AUTOMATIC ASSET BUILDER. You may purchase shares of a Fund ($50
minimum) at regular intervals selected by you. Shares are purchased monthly,
quarterly or annually by transferring monies from the checking, NOW or bank
money market deposit account (as permitted) designated by you. The account
designated by you will be debited in the specified amount, and shares will be
purchased on either the fifth or twentieth day of a month, or twice a month, on
both days. Only an account maintained in a domestic financial institution
which is an Automatic Clearing House member may be so designated. To establish
a Reserve Automatic Asset Builder account, you must file an authorization form
with the Funds which is available from them. You may cancel this privilege or
change the amount of purchase at any time by mailing written notification to
the Funds, and the notification will be effective fifteen business days
following receipt. The Funds may impose a charge or modify or terminate this
privilege at any time. Shares purchased by this privilege may not be redeemed
until the Fund has assured itself that good payment has been collected which
will generally be up to ten business days. This privilege may not be available
to clients of certain firms or may be available subject to conditions or
limitations.
RESERVE AUTOMATIC ASSET BUILDER FOR PAYROLL OR PENSION. You may purchase
shares of a Fund ($25 minimum) automatically on a regular basis. Depending
upon your employer's direct deposit program, you may have all or a part of your
paycheck transferred to your existing Fund account at each period through the
Automatic Clearing House. To establish such an account, you must file an
authorization form, which is available from the Funds, with your employer's
payroll department. Your employer must complete the form and return it to the
Funds. You may change the amount of the purchase or cancel the authorization
only by written notice to your employer. It is the sole responsibility of your
employer, not the Funds or any other person, to arrange for transactions under
the Reserve Automatic Asset Builder for Payroll or Pension plan. The Funds may
impose a charge or modify or terminate this privilege at any time. This
privilege may not be available to clients of certain firms or may be available
subject to conditions or limitations.
<PAGE> 15
RESERVE AUTOMATIC ASSET BUILDER FOR U.S. GOVERNMENT DISTRIBUTIONS. You may
purchase shares of a Fund ($50 minimum) by having federal salary, Social
Security, or certain veteran's benefits or other payments from the federal
government automatically deposited into your Fund account. To enroll in
Reserve Automatic Asset Builder for U.S. Government Distributions, you must
file with the Funds a completed Reserve Automatic Asset Builder Sign-Up Form
for each type of payment to be deposited. The appropriate form may be obtained
from the Funds. Death or legal incapacity will terminate your participation in
this privilege and you may elect at any time to terminate your participation by
notifying in writing the appropriate federal agency. In addition, the Funds
may terminate your participation upon 30 day's notice to you. This privilege
may not be available to clients of certain firms or may be available subject to
conditions or limitations.
NET ASSET VALUE. Shares are sold to the public at net asset value ("NAV").
The NAV of each Fund is calculated at the close of each business day (normally
4:00 P.M. New York time) by taking the sum of the value of the Fund's
investments (amortized cost value is used for this purpose) and any cash or
other assets, subtracting liabilities, and dividing by the total number of
shares outstanding. A "business day" is Monday through Friday exclusive of
days the New York Stock Exchange is closed for trading and bank holidays in New
York State which include Martin Luther King's Birthday and Columbus Day. It is
the policy of each Fund to seek to maintain a stable NAV per share of $1.00
although this share price is not guaranteed.
DISTRIBUTOR. The distributor of the California, Connecticut, Massachusetts and
New Jersey Tax-Exempt Funds of Reserve Tax-Exempt Trust and Reserve New York
Tax-Exempt Trust is Resrv Partners, Inc., 810 Seventh Avenue, New York, N.Y.
10019-5868. The distributor is a wholly-owned subsidiary of the Adviser.
EXCHANGE PRIVILEGE. The shares offered by this Prospectus may be exchanged for
shares in other Reserve money market funds at net asset value. Shares to be
acquired in an exchange must be registered for sale in the investor's state.
The exchange privilege described under this heading may not be available to
clients of certain firms and some firms may impose conditions on their clients
which are different from those described in this Prospectus. In addition, this
exchange privilege may be modified or terminated at any time, or from time to
time, upon 60 days' notice to shareholders.
DISTRIBUTION AND SERVICE PLAN. Purchases may also be made through brokers,
financial intermediaries and financial institutions. Some of these firms
participate in each Fund's Plan of Distribution ("Plan"). Reserve Tax-Exempt
Trust and Reserve New York Tax-Exempt Trust maintain the Plans and related
agreements, as amended, under Rule 12b-1 of the Investment Company Act of 1940
("1940 Act"). Under the Plans, each Fund makes assistance payments at an
annual rate of .20% of the net asset value of broker, financial institution and
financial intermediary shareholder accounts ("qualified accounts").
Substantially all such monies are paid to brokers, financial institutions and
financial intermediaries for distribution assistance or administrative services
provided the Funds. The investment adviser is required by the Plans to pay an
equivalent amount and may, at its discretion, pay from its own resources or
from other sources available to it, additional amounts and incentives,
including lump-sum payments, based upon the amount of assets committed to the
Funds by such brokers, financial institutions, financial intermediaries and
underwriters. The Plan does not permit the carrying over of payments from year
to year. The investment adviser also reimburses firms, from its own resources
or from sources available to it, for a portion of their costs of advertising
and marketing shares of a Fund. All such arrangements are designed to
facilitate the sale of a Fund's shares. Financial institutions providing
distribution assistance or administrative services for a Fund may be required
to register as securities dealers in certain states.
During the fiscal year ended May 31, 1995, the ratio of expenditures under
the Plans were .19% of the average net assets of the California Tax-Exempt
Fund, .15% of the average net assets of the Connecticut Tax-Exempt Fund, .03%
of the average net assets of the Massachusetts Tax-Exempt Fund, .18% of the
average net assets of the New Jersey Tax-Exempt Fund, and .18% of the average
net assets of the New York Tax-Exempt Fund.
CLIENTS OF FIRMS. Firms provide varying arrangements for their clients with
respect to the purchase and redemption of a Fund's shares and may arrange with
their clients for other investment or administrative services. Firms are
responsible for the prompt transmission of purchase and redemption orders.
Some firms may independently establish and charge additional amounts such as
redemption fees to their clients for their services, which charges would reduce
their clients' yield or return. Firms may also hold a Fund's shares in nominee
or street name as agent for and on behalf of their clients. In such instances,
the Fund's transfer agent will have no information with respect to or control
over the accounts of specific shareholders. Such shareholders may obtain
access to their accounts and information about their accounts only from their
firm. Certain firms may receive compensation for recordkeeping and other
services relating to these nominee accounts. In addition, certain privileges
with respect to the purchase and redemption of shares (such as check writing
redemptions) or the reinvestment of dividends may not be available through such
firm or may only be available subject to certain conditions and limitations.
Some firms may participate in a program allowing them access to their client's
accounts for servicing including, without limitation, transfers of registration
and dividend payee changes; and may perform functions such as generation of
confirmation statements and
<PAGE> 16
disbursement of cash dividends. The Prospectus should be read in
connection with such firm's material regarding its fees and services.
SHARES OF BENEFICIAL INTEREST
Reserve Tax-Exempt Trust and Reserve New York Tax-Exempt Trust were
organized as Massachusetts business trusts on January 25, 1983, and July 12,
1983, respectively, and are open-end management investment companies common
known as mutual funds. At the date of this Prospectus, there were five
separate series of Reserve Tax-Exempt Trust authorized and outstanding and one
separate series of Reserve New York Tax-Exempt Trust ("Trust(s)") authorized
and outstanding. Additional series may be added in the future by each Trust's
Board of Trustees. Each Trust is authorized to issue an unlimited number of
shares of beneficial interest which may be issued in any number of series.
Shares issued will be fully paid and non-assessable and will have no
preemptive, conversion or sinking rights. The shareholders of each Trust are
entitled to a full vote for each full share held (and fractional votes for
fractional shares) and have equal rights with respect to earnings, dividends,
redemption and in the net assets of their respective series on liquidation.
The Trustees of each Trust do not intend to hold annual meetings of
shareholders. The Trustees will call such special meetings of shareholders as
may be required under the 1940 Act (e.g. to approve a new investment advisory
agreement or changing the fundamental investment policies of a Fund) or by a
Declaration of Trust.
Under Massachusetts law, the shareholders and trustees of a business trust
may, in certain circumstances, be personally liable for the trust's obligations
to third parties. However, the Declaration of Trust of Reserve Tax-Exempt
Trust and Reserve New York Tax-Exempt Trust provides, in substance, that no
shareholder or a Trustee shall be personally liable for a Trust's, and each
separate investment portfolio's, obligations to third parties, and that every
written contract made by the Trust or a Fund shall contain a provision to that
effect. Each Declaration of Trust also requires a Trust to indemnify
shareholders and Trustees against such liabilities and any related claims or
expenses.
DAILY DIVIDENDS
Each Fund declares dividends each business day. Dividends are distributed
daily as additional shares to shareholder accounts except for shareholders who
elect in writing to receive cash dividends, in which case monthly dividend
checks are sent to the shareholder. Although none are anticipated, any net
realized long term capital gains will be distributed at least annually.
TAXES
Each Fund intends to maintain its regulated investment company status for
federal income tax purposes. Accordingly, each Fund intends to satisfy certain
requirements imposed by the Internal Revenue Code, so as to avoid any federal
income or excise tax to it. Dividends derived from the interest earned on
Municipal Obligations constitute "tax-exempt interest dividends" and are not
subject to federal income taxes. To the extent a Fund invests in Municipal
Obligations issued by its respective state or political subdivision thereof,
dividends derived from the interest thereon is not subject to state and, with
respect to the New York Tax-Exempt Fund, local income taxes. Any distributions
of net realized long term capital gains earned by a Fund are taxable to
shareholders as such regardless of the length of time a Fund's shares have been
owned by the shareholder.
Shareholders are advised to retain all statements received from a Fund to
maintain accurate records of their investments. If any dividends are not
exempt from federal or state and local income taxes, shareholders will be
advised of such percentage by January 31, of the following year. Shareholders
should consult their tax advisers regarding specific questions as to federal,
state or local taxes.
REDEMPTIONS
TIME AND METHOD OF REDEMPTION. A Fund's shares are redeemed at their net asset
value next determined after receipt by the Fund of a request in proper form.
Although a Fund has seven days to transmit payment for share redemptions, it
usually transmits payment the same day when redemption requests are received
before 11:00 A.M. (New York time) and the next day for requests received after
11:00 A.M. (New York time). This is not always possible, however, and
transmission of redemption proceeds may be delayed. Unless otherwise
specified, orders received after 11:00 A.M. (New York time) are not entered
until
<PAGE> 17
the next business day to enable shareholders to receive additional dividends.
Payment will normally be made by check or bank transfer. Shares do not earn
dividends on the day a redemption is effected regardless of whether the
redemption order is received before or after 11:00 A.M.
WRITTEN AND TELEPHONE REDEMPTION REQUESTS. The Funds strongly suggest (but do
not require) that each written redemption be at least $1,000 and require that
each telephone redemption be at least $1,000, except for redemptions which are
intended to liquidate your account. A shareholder will be charged $2 for
redemption checks issued by a Fund of less than $100. Payments of $10,000 or
more will be wired upon request without charge. A shareholder will be charged
$10 for wires of less than $10,000. The Funds assume no responsibility for
delays in the receipt of wired or mailed funds. The use of a predesignated
financial institution, such as a savings bank, credit union or savings and loan
association, which is not a member of the Federal Reserve wire system to
receive your wire could cause such a delay. If a Fund has previously been
advised in writing of your brokerage or bank account, telephone requests by any
person are accepted for payment to such account by calling 800-637-1700. A
Fund may be liable for any losses caused by its failure to employ reasonable
procedures. To reduce the risk of loss, proceeds of a telephone redemption may
be sent only to (1) the bank or brokerage account designated by the
shareholder, in writing, on the investment application or in a letter with the
signature(s) guaranteed; or (2) to the address of record if all the conditions
listed below are met. To change the designated brokerage or bank account it is
necessary to contact the firm through which shares of a Fund were purchased or,
if purchased directly from a Fund it is necessary to send a written request to
the Fund with signature(s) guaranteed as described below. Other redemption
orders must be in writing with the necessary signature(s) guaranteed by a
domestic commercial bank; a domestic trust company; a domestic savings bank,
credit union or savings association or a member firm of a national securities
exchange. Guarantees from notaries public, are unacceptable. The Funds will
waive the signature guarantee requirement on a redemption request once every
thirty (30) days if ALL of the following conditions apply: (1) the redemption
is for $5,000 or less; (2) the redemption check is payable to the
shareholder(s) of record; and (3) the redemption check is mailed to the
shareholder(s) at the address of record. The requirement of a guaranteed
signature protects against an unauthorized person redeeming shares and
obtaining the redemption proceeds. Redemption instructions and election of the
plans described below may be made when your account is opened. Subsequent
elections and changes in instructions must be in writing with the signature(s)
guaranteed. Changes in registration or authorized signatories may require
additional documentation.
The Fund reserves the right to refuse a telephone redemption if it
believes it is advisable to do so. Procedures for telephone redemptions may be
modified or terminated by the Fund at any time. During times of drastic
economic or market conditions shareholders may experience difficulty in
contacting the Funds by telephone to request a redemption or exchange of a
Fund's shares. In such cases shareholders should consider using another method
of redemption, such as a written request or a redemption by check.
REDEMPTION BY CHECK. By completing signature cards (and certain other
documentation if the record owner is a fiduciary, corporation, partnership,
trust or other organization) which is available from the Funds or the firm
through which shares of the Funds were purchased, you can draw checks against
your account. This privilege may not be available to clients of certain firms.
There is no minimum amount for check redemptions, however, the Fund, upon
proper notice to the shareholder may choose to impose a fee if it deems a
shareholder s actions to be burdensome to the Funds. A firm may establish
variations of minimum check amounts for their customers if such variations are
approved by the Funds. This procedure lengthens the time your money earns
dividends, since redemptions are not made until the check is processed by the
Funds. Because of this, a check cannot completely liquidate your account, nor
may a check be presented for certification or be presented for immediate
payment. Otherwise, you may deposit a check in your bank account or use it to
pay any third party obligation not requiring certification. Shareholder checks
written against accounts with insufficient funds, postdated checks and checks
which contain an irregularity in the signature, amount or otherwise will be
returned by the Fund and a fee charged against the account. Because check
redemptions are reported on account statements, they will not be confirmed
separately. A fee is charged for providing check copies.
STOP PAYMENTS. The Funds will honor stop payment requests on unpaid
shareholder checks provided the Funds are advised of the correct check number,
payee, check amount, and date. Stop payment requests received by the Funds by
2:00 P.M. (New York time) in proper form will be effective the next business
day. Oral stop payment requests are effective for 14 calendar days, at which
time they will be cancelled unless confirmed in writing. Written stop payment
orders are effective for one year. A fee is charged for this service.
AUTOMATIC WITHDRAWAL PLANS. If you have an account with a balance of at least
$5,000, you may make a written election 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 from your account to
<PAGE> 18
make a specified monthly, quarterly or annual payment of a fixed amount. In
order for such payments to continue under either Plan, there must be a minimum
of $25 available from reinvested dividends or distributions. Payments can be
made to you or your designee. An application for the Automatic Withdrawal
Plans can be obtained from the Funds. The amount, frequency and recipient of
the payments may be changed by giving proper written notice to the Fund. The
Funds may impose a charge or modify or terminate any Automatic Withdrawal Plan
at any time after the participant has been duly notified. This privilege may
not be available to clients of certain firms or may be available subject to
conditions or limitations.
RESERVE AUTOMATIC TRANSFER. You may redeem shares of a 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
(as permitted) designated in the application. Only such an account maintained
in a domestic financial institution which is an Automated Clearing House member
may be so designated. Redemption proceeds will be on deposit in your account
at the Automated Clearing House member bank ordinarily two business days after
receipt of the redemption request. The Funds may impose a charge or modify or
terminate this privilege at any time after the participant has been duly
notified. This privilege may not be available to clients of certain firms or
may be available subject to conditions or limitations.
RESTRICTIONS. The right of redemption may be suspended or the date of payment
postponed for more than seven days only (a) when the New York Stock Exchange is
closed (other than for customary closings), (b) when, as determined by the
Securities and Exchange Commission ("SEC"), trading on the Exchange is
restricted or an emergency exists making it not reasonably practicable to
dispose of securities owned by a Fund or for it to determine fairly the value
of its net assets, or (c) for such periods as the SEC may by order permit. If
shares of a Fund are purchased by check or Reserve Automatic Transfer, the Fund
may delay transmittal of redemption proceeds until such time as it has assured
itself that good payment has been collected for the purchase of such shares,
which will generally be up to ten (10) business days. Shareholder checks
written against funds which are not yet considered collected will be returned
and a fee charged against the account. When a purchase is made by wire and
subsequently redeemed, the proceeds from such redemption normally will not be
transmitted until two business days after the purchase by wire. Bank
acknowledgment of payment initiated by you may shorten delays.
GENERAL INFORMATION
JOINT OWNERSHIP. When an account is registered in the name of one person or
another, for example husband or wife, either person is entitled to redeem
shares in the account. The Funds assumes no responsibility to either person
for actions taken by the other person with respect to an account so registered.
The Funds' application provides that persons so registering their account
indemnify and hold the Funds harmless for actions taken by either party.
BACKUP WITHHOLDING. The Funds are required by federal law to withhold 31% of
dividends and other distributions that are subject to federal income tax if (i)
a correct and certified Taxpayer Identification Number (TIN) is not provided
for your account, (ii) you fail to certify that you have not been notified by
the IRS that you underreported taxable interest or dividend payments or (iii)
the Funds are notified by the IRS (or a broker) that the TIN provided is
incorrect or you are otherwise subject to backup withholding. Amounts withheld
and forwarded to the IRS can be credited as a payment of tax when completing
your federal income tax return. For individual shareholders, the TIN is the
social security number. 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 Funds 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.
USE OF JOINT PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION. Although each
Fund is offering only its own shares, it is possible that a Fund might become
liable for any misstatement in the Prospectus and Statement of Additional
Information about the other Funds. However, each Fund has acknowledged that
it, and not any of the other Funds, is liable for any material misstatement or
omission about it in the Prospectus or Statement of Additional Information.
REPORTS AND STATEMENTS. Shareholders receive an annual report containing
audited financial statements and an unaudited semi-annual report. A statement
is sent to each shareholder at least quarterly. Shareholders who are clients
of certain firms will receive a statement combining transactions in Fund shares
with statements covering other brokerage or mutual fund accounts.
<PAGE> 19
SMALL BALANCES. Because of the expense of maintaining accounts with small
balances (less than $1,000), the Funds will either levy a monthly charge
(currently $5) or redeem the account and remit the proceeds. A firm may
establish variations of minimum balances and fee amounts if such variations are
approved by the Funds.
RESERVE EASY ACCESS. Easy Access is The Reserve Funds' 24 hour toll-free
telephone service that lets customers use a touch-tone phone to obtain yields
and account balances. To use it, call 800-637-1700 and follow the instructions
you will receive.
INQUIRIES. Shareholders should direct their inquiries to the firm from which
they received this Prospectus or the Funds.
SPECIAL SERVICES. The Funds reserve the right to charge shareholder accounts
for specific costs incurred in processing unusual transactions for
shareholders. Such transactions include, but are not limited to, stop payment
requests on or copies of Fund redemption checks or shareholder checks and
special research services.
PERFORMANCE. The Funds may compare their performance to other income producing
alternatives such as (i) money market funds (based on yields cited by
Donoghue's Money Fund Report and other industry publications); and (ii) various
bank products (based on average rates of bank and thrift institution
certificates of deposit, money market deposit accounts and N.O.W. accounts as
reported by the Bank Rate Monitor and other industry publications). An
investment in shares of a Fund is not insured by the Federal Deposit Insurance
Corporation.
Yield information is useful in reviewing the Funds' 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.
RESERVE CASH PERFORMANCE PLUS ACCOUNT
The Funds offer a comprehensive package of services which enhances the
value of and access to an investment in them. The Reserve Cash Performance
Plus Account (CPA) services include: (i) any amount checking; and (ii) a
comprehensive monthly and annual statement which summarizes your CPA activity
by payee and expense category and simplifies budget and tax recordkeeping.
These CPA services are provided for a fee and transaction charges may apply.
Participating firms may also charge their own service fees.
In addition, CPA investors may, for no additional fee, apply for a Visa
Gold debit card which may be used to access your CPA investment balances. A
Visa Gold cardholder will be provided a comprehensive package of free travel
and emergency assistance services, including; (i) $150,000 in travel accident
insurance when the travel tickets are paid with the Visa Gold card; (ii) auto
rental collision/loss damage insurance when the rental is paid using your Visa
Gold card; (iii) expedited card replacement and emergency cash; (iv) medical,
legal and lost baggage assistance; and (v) extend retail product guarantees
when the purchase is paid with the Visa Gold card.
--------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
--------------
<PAGE> 20
RESERVE TAX-EXEMPT TRUST
CALIFORNIA TAX-EXEMPT FUND
CONNECTICUT TAX-EXEMPT FUND
MASSACHUSETTS TAX-EXEMPT FUND
NEW JERSEY TAX-EXEMPT FUND
RESERVE NEW YORK TAX-EXEMPT TRUST
NEW YORK TAX-EXEMPT FUND
810 SEVENTH AVENUE, NEW YORK, N.Y. 10019
(800) 637-1700
--------------
YIELD AND BALANCE INFORMATION
TOLL FREE (800) 637-1700 -- TOUCH TONE PHONE
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information describes the
California Tax-Exempt, Connecticut Tax-Exempt, Massachusetts Tax-Exempt
and New Jersey Tax-Exempt Funds of Reserve Tax-Exempt Trust and the New
York Tax-Exempt Fund of Reserve New York Tax-Exempt Trust (the
"Fund(s)"). This Statement is not a Prospectus, but provides detailed
information to supplement the Prospectus and should be read in
conjunction with the Prospectus. A copy of the Prospectus may be
obtained from the Funds at the above address. This Statement is dated
September 29, 1995.
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
----------------- ----
<S> <C>
Investment Objective and Policies 2
Trustees and Executive Officers 3
Investment Management, Distribution,
Service and Custodian Agreements 4
Portfolio Turnover, Transaction
Charges and Allocation 7
Shares of Beneficial Interest 7
Purchase, Redemption and Pricing
of Shares 8
Distributions and Taxes 10
Fund Yield 11
Reserve Cash Performance Plus Account 12
Municipal Obligations 13
Ratings 14
Risk Factors of Concentrating in California 15
Risk Factors of Concentrating in Connecticut 17
Risk Factors of Concentrating in Massachusetts 19
Risk Factors of Concentrating in New Jersey 20
Risk Factors of Concentrating in New York 20
Report of Independent Accountants 25
Financial Statements 26
</TABLE>
SHARES OF THE FUNDS ARE NEITHER GUARANTEED NOR INSURED BY THE
U.S. GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE FUNDS WILL BE
ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
<PAGE> 21
INVESTMENT OBJECTIVE AND POLICIES
The following information provides additional details about the
Funds' investment objectives and policies.
Each Fund's investment objective is to seek as high a level of short
term interest income exempt from federal, state, and, with respect to the New
York Portfolio, local income taxes as is consistent with preservation of
capital and liquidity, by investing principally in municipal securities.
These securities are generally known as "municipal bonds" or
"municipal notes" and the interest on them is exempt from federal income tax in
the opinion of bond counsel for the issuers ("Municipal Obligations").
Municipal Obligations generally include debt obligations issued to obtain funds
for various public purposes, including the construction of a wide range of
public facilities such as airports, bridges, highways, housing, hospitals, mass
transportation, schools, street, water and sewer works. Other public purposes
for which Municipal Obligations may be issued include refunding outstanding
obligations, obtaining funds for general operating expenses and lending such
funds to other public institutions and facilities. In addition, certain types
of industrial development bonds are issued by or on behalf of public
authorities to obtain funds to provide for the construction, equipment, repair
or improvement of privately operated housing facilities, sports facilities,
convention or trade show facilities, airport, mass transit, industrial, port or
parking facilities, air or water pollution control facilities and certain local
facilities for water supply, gas, electricity or sewage or solid waste
disposal; the interest paid on such obligations may be exempt from federal
income tax. At least 80% of each Fund's assets will be invested in municipal
bonds and notes exempt from federal, state, and with respect to the New York
Tax-Exempt Fund, local income taxes unless the Fund has adopted a defensive
position. During periods when a state's Municipal Obligations meeting a Fund's
quality standards are not available, a Fund may invest up to 20% of its assets,
or a greater percentage on a temporary basis, in Municipal Obligations exempt
only from federal income taxes.
The Funds will purchase tax exempt securities which are rated MIG-1
or MIG-2 by Moody's Investor Services, Inc. ("Moody's"); SP-1 or SP-2 by
Standard & Poor's Corporation ("S&P") or the equivalent thereof. Municipal
Obligations which are not rated may be purchased provided such securities are
determined to be of comparable quality by the Fund's investment adviser
pursuant to guidelines adopted by the Board of Trustees to those rated
securities in which a Fund may invest.
Subsequent to its purchase by a Fund, an issue of rated Municipal
Obligations may cease to be rated or its rating may be reduced below the
minimum required for purchase by the Fund. In the event a Municipal
Obligation's rating falls below the second highest rating category of any
nationally recognized statistical rating agency, the Municipal Obligation will
be disposed of within five business days of the date the investment adviser
becomes aware of the new rating. Should a rated Municipal Obligation cease to
be rated, the investment adviser will promptly reassess the quality and credit
risk of the Municipal Obligation. The ratings of Moody's and S&P represent
their opinions as to the quality of the Municipal Obligations which they rate.
It should be emphasized, however, that ratings are relative and subjective and
are not absolute standards of quality.
From time to time, on a temporary basis other than for temporary
defensive purposes, the Funds may invest in taxable short term investments
("Taxable Investments") consisting of obligations backed by the full faith and
credit of the United States Government, its agencies and instrumentalities
("U.S. Governments"); deposit-type obligations, acceptances, and letters of
credit of Federal Deposit Insurance Corporation member banks; or instruments
fully secured or collateralized by such obligations. The Funds will not invest
in foreign securities or in taxable commercial paper. Interest earned on
Taxable Investments will be taxable income to investors. Unless a Fund has
adopted a temporary defensive position, no more than 20% of the net assets of a
Fund will be invested in Taxable Investments at any time.
SUPPLEMENTAL INVESTMENT POLICIES. The Funds' investment objective, and the
following supplemental policies may not be changed without the affirmative vote
of a majority of the outstanding shares of a Fund. A majority of the
outstanding shares of a Fund means the vote of the lesser of (i) 67% or more of
the shares of the Fund present at a meeting, if the holders of more than 50% of
the outstanding shares of the Fund are present or represented by proxy, or (ii)
more than 50% of the outstanding shares of a Fund. A Fund cannot: (1) invest
in any security other than those discussed herein or in the Prospectus; (2)
borrow money except as a temporary or emergency measure (but not for the
purpose of purchasing investment securities), and not in an amount to exceed 5%
of the value of its total assets; (3) issue securities senior to its capital
stock; (4) act as an underwriter with respect to the securities of others; (5)
concentrate investments in any particular industry except to the extent that
its investments are concentrated exclusively in Municipal Obligations, U.S.
Governments or instruments secured by such obligations; (6) purchase, sell or
otherwise invest in real estate or commodities or commodity contracts; however,
a Fund may purchase Municipal Obligations secured by interests in real estate;
(7) lend more than 33 1/3% of the value of its total assets
<PAGE> 22
to the extent its investments are considered loans; (8) sell any security short
or write, sell or purchase any futures contract or put or call option;
provided, however, a Fund shall have the authority to purchase Municipal
Obligations subject to a stand-by commitment, at the Fund's option; (9) invest
in voting securities or in companies for the purpose of exercising control;
(10) invest in the securities of other investment companies except in
compliance with the Investment Company Act of 1940; (11) make investments on a
margin basis; and (12) purchase or sell any securities (other than securities
of the Fund) from or to any officer or Trustee of a Fund, the investment
adviser or affiliated person except in compliance with the Investment Company
Act of 1940.
OTHER POLICIES. Certain banks and other municipal securities dealers have
indicated a willingness to sell Municipal Obligations to the Funds accompanied
by a stand-by commitment to repurchase the securities, at a Fund's option or on
a specified date, at an agreed-upon price or yield within a specified period
prior to the maturity date of such securities.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS. A repurchase agreement
transaction occurs when a Fund purchases and simultaneously contracts to resell
in advance securities at fixed prices determined by the yields negotiated.
Each Fund will limit repurchase agreement transactions to those financial
institutions and securities dealers who are deemed credit worthy pursuant to
guidelines established by each Fund's Board of Trustees. The investment
adviser will follow procedures intended to provide that all acquired repurchase
agreements are at least 100% collateralized as to principal and interest. A
Fund will make payment for such instruments only upon their physical delivery
to, or evidence of their book-entry transfer to, the account of a Fund's
custodian. If the seller defaults on the repurchase obligation, a Fund could
incur a loss, and may incur costs in disposing of the underlying security. The
Funds will not hold more than 10% of their net assets in illiquid securities,
including repurchase agreements with a term greater than seven days.
The Funds may sell securities in a reverse repurchase agreement when
it is considered advantageous, such as to cover net redemptions or to avoid a
premature outright sale of its portfolio securities. In a typical reverse
repurchase agreement transaction, the seller (Fund) retains the right to
receive interest and principal payments on the security, but transfers title to
and possession of the security to a second party in return for a percentage of
its value. By paying back to this party the value received plus interest, the
seller repurchases the transferred security. It is the Funds' policy that
entering into a reverse repurchase agreement will be for temporary purposes
only and, when aggregated with other borrowing, may not exceed 5% of the value
of the total assets of a Fund at the time of the transaction.
TRUSTEES AND EXECUTIVE OFFICERS
*BRUCE R. BENT, President, Treasurer and Trustee, 810 Seventh Avenue, New
York, New York 10019.
Mr. Bent is President, Treasurer, and Trustee of The Reserve Fund ("RF"),
Reserve Institutional Trust ("RIT"), Reserve Tax-Exempt Trust ("RTET") and
Reserve New York Tax-Exempt Trust ("RNYTET"), Director, Vice President and
Secretary of Reserve Management Company, Inc. ("RMCI") and Reserve Management
Corporation, and Chairman and Director of Resrv Partners, Inc. Before 1968, he
was associated with Stone & Webster Securities Corp., and previously, Teachers
Insurance and Annuity Association.
EDWIN EHLERT, JR., Trustee, 125 Elm Street, Westfield, New Jersey 07091.
Mr. Ehlert is President and Director of Ehlert Travel Associates, Inc.
(travel agency formerly called Travelong of Westfield, Inc.) and Ehlert Travel
Associates of Florida, Inc. (travel agency), and Trustee of RF, RIT, RNYTET and
RTET.
HENRI W. EMMET, Trustee, 176 East 71st Street, New York, New York 10021.
Mr. Emmet is the Managing Director of Servus Associates, Inc, and U.S.A.
Representative of the First National Bank of Southern Africa and Trustee of RF,
RET, RNYTET and RTET. Until 1989, he was Senior Vice President of the New York
branch of Banque Nationale de Paris.
*DONALD J. HARRINGTON, C.M, Trustee, St. John's University, Jamaica, New
York 11439.
<PAGE> 23
The Reverend Harrington is President of St. John's University (NY) and a
Trustee of RF, RIT, RNYTET and RTET. The Reverend Harrington served as
President of Niagara University from 1984 to 1989 and was Executive Vice
President of Niagara University from 1981 to 1984.
NIELS W. JOHNSEN, Trustee, 1 Whitehall Street, New York, New York 10004.
Mr. Johnsen is Chairman of the Board of International Shipholding Corp.
and Central Gulf Lines, Inc. (ship cargo carrier), Director of Centennial
Insurance Co. and Trustee of The Atlantic companies (insurance), RF, RIT,
RNYTET and RTET.
MARC C. COZZOLINO, Counsel and Secretary, 810 Seventh Avenue, New York, NY
10019.
Mr. Cozzolino is Counsel and Secretary of RF, RIT, RTET, and RNYTET.
Before joining The Reserve Funds in 1994, Mr. Cozzolino was a staff attorney
at the New Jersey Bureau of Securities.
PAT A. COLLETTI, Controller, 810 Seventh Avenue, New York, New York 10019.
Mr. Colletti is Controller of RF, RIT, RTET and RNYTET. Prior to joining
The Reserve Funds in 1985, Mr. Colletti was Supervisor of Accounting of Money
Market Funds for the Dreyfus Corporation.
- -----------------
*Interested Trustee within the meaning of the Investment Company Act of 1940.
Messrs. Ehlert, Emmet, Harrington, and Johnsen are members of a Review
Committee which performs the functions of an Audit Committee and reviews
compliance procedures and practices.
During the fiscal year ended May 31, 1995, the Trustees received the
following fees from the Funds: $83 from the California Tax-Exempt Fund, $1,021
from the Connecticut Tax-Exempt Fund, $282 from the Massachusetts Tax-Exempt
Fund, $204 from the New Jersey Tax-Exempt Fund and $3,306 from the New York
Tax-Exempt Fund. As of June 30, 1995, Trustees and officers as a group owned
less than 1% of the outstanding shares of the California Tax-Exempt,
Connecticut Tax-Exempt, New Jersey Tax-Exempt and New York Tax-Exempt Funds
and shares of the Massachusetts Tax-Exempt Fund. During the year ended May 31,
1995, each Fund held four Board meetings and one Review Committee meeting.
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM FUND AND FUND COMPLEX
NAME OF TRUSTEE FROM FUND* (4 ADDITIONAL TRUSTS) PAID TO TRUSTEE*
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Edwin Ehlert, Jr. $1,444 $16,500
Henri W. Emmet $1,444 $16,500
Rev. Donald J. Harrington $1,444 $16,500
Niels W. Johnsen $1,444 $16,500
</TABLE>
<PAGE> 24
INVESTMENT MANAGEMENT, DISTRIBUTION, SERVICE
AND CUSTODIAN AGREEMENTS
INVESTMENT MANAGEMENT AGREEMENT. Reserve Management Company, Inc. ("RMCI"), 14
Locust Place, Manhasset, N.Y. 11030, of which Messrs. Henry B.R. Brown and
Bruce R. Bent are the Directors, manages each Fund and provides it with
investment advice pursuant to an Investment Management Agreement. Messrs.
Brown and Bent together with their children own RMCI. Under each agreement,
RMCI manages each Fund's investments, including effecting purchases and sales
thereof, in furtherance of its investment objective and policies, subject to
overall control and direction of the Trustees. RMCI also pays the promotional
expenses related to the sale of each Fund's shares (paying for prospectuses
distributed to potential investors and for other sales literature, but not
paying for prospectuses distributed to current shareholders, distribution
assistance payments paid by a Fund, or registration fees and expenses).
Each of the Funds periodically pays RMCI a management fee at the annual
rate of .50% of the first $500 million of average daily net assets, .475% of
the next $500 million of such assets, .45% of the next $500 million of such
assets, .425% per annum of the next $500 million of such assets, and .40% of
such assets in excess of $2 billion. For the fiscal years ended May 31, 1992,
1993, 1994 and 1995, RMCI received management fees of $830,684, $886,468,
$591,908 and $200,783 respectively from the Connecticut Tax-Exempt Fund; 0, 0,
$8,253 and $52,248 from the Massachusetts Tax-Exempt Fund; and $751,572,
$770,031, $803,061 and $763,741 from the New York Tax-Exempt Fund. For the
period October 17, 1994 to May 31, 1995 RMCI received $24,072 in management
fees from the California Tax-Exempt Fund. For the period of June 21, 1994 to
May 31, 1995 RMCI received $51,948 in management fees from the New Jersey
Tax-Exempt Fund.
From time to time, RMCI may waive receipt of its fees and or voluntarily
assume certain expenses of a Fund which would have the effect of lowering the
Fund's expense ratio and increasing yield to investors at the time such amounts
are assumed or waived, as the case may be. RMCI may also make such advertising
and promotional expenditures, using its own resources as it from time to time
deems appropriate.
The Investment Management Agreements for the Connecticut Tax-Exempt and
New York Tax-Exempt Funds were duly approved by shareholders in 1986 and the
Investment Management Agreement for the Massachusetts Tax-Exempt Fund was duly
approved by shareholders in 1990, and the California Tax-Exempt and New Jersey
Tax-Exempt Fund was duly approved by shareholders in 1994. Each may be renewed
annually if specifically approved by the Board of Trustees and by the vote of a
majority of the Trustees who are not "interested persons" ("disinterested
Trustees") cast in person at a meeting called for the purpose of voting on such
renewal. The agreements terminate automatically upon their assignment and may
be terminated without penalty upon 60 days' written notice by a vote of the
Board of Trustees of each Fund or by vote of a majority of outstanding voting
shares of a Fund or by RMCI.
SERVICE AGREEMENT. Under a Service Agreement, RMCI furnishes to each Fund all
personnel required for administrative, clerical, recordkeeping, bookkeeping,
shareholder accounting, and shareholder servicing functions. In addition, RMCI
provides at cost, office space, office equipment (including computers), office
supplies, and direct expenditures which include brokerage fees and commissions,
interest, taxes, issuing and redemption costs, registration fees, disinterested
Trustees' fees, custodial fees, extraordinary legal expenses, costs of
preparing and printing prospectuses and statements of additional information
for regulatory purposes and for distribution to existing shareholders, costs of
shareholder reports and meetings, and independent accountants' fees. For all
of these items, each Fund reimburses RMCI for its costs. However, RMCI has
agreed to repay promptly any amount reimbursed which a majority of the
disinterested Trustees reasonably determines is in excess of, or not properly
attributable to, the cost of operations or expenses of each Fund. The Service
Agreement is nonassignable and continues until terminated by either party on
120 days' written notice. Reserve Management Corporation, an affiliate of
RMCI, may provide some of these services.
Pursuant to the Service Agreement, during the fiscal year end May 31,
1995, the California Tax-Exempt, Connecticut Tax-Exempt Fund, Massachusetts
Tax-Exempt Fund, New Jersey Tax-Exempt and New York Tax-Exempt Fund reimbursed
RMCI $15,416, $109,072, $37,309, $34,840 and $459,889, respectively, for
expenses. For the fiscal years ended May 31, 1993 and 1994, RMCI was
reimbursed $0 and $0 by the California Tax-Exempt Fund; and $556,710 and
$384,106 for expenses by the Connecticut Tax-Exempt Fund; $0 and $0 by the
New Jersey Tax-Exempt Fund; $47,184 and $49,916 by the Massachusetts
Tax-Exempt Fund; and $560,543 and $505,084 by the New York Tax-Exempt Fund,
respectively.
DISTRIBUTION AGREEMENT. The Funds' Distributor is Resrv Partners, Inc.
("RESRV"), 810 Seventh Avenue, New York, N.Y. 10019. The Funds have authorized
the Distributor, in connection with its sale of their 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. A
Distributor may offer and sell shares of the Funds pursuant to a separate
Prospectus applicable to such
<PAGE> 25
Distributor. The Distributor is a "principal underwriter" for the Funds within
the meaning of the Investment Company Act of 1940, and as such acts as agent in
arranging for the continuous offering of their shares. The Distributor has the
right to enter into selected dealer agreements with brokers or other persons of
its choice for the sale of the Funds' shares. Parties to selected dealer
agreements may receive assistance payments, if they qualify for such payments,
under the Plan of Distribution described below. RESRV's principal business is
the distribution of mutual fund shares. RESRV has retained no underwriting
commissions during the last three fiscal years. During the fiscal year ended
May 31, 1995, the Distributor received no distribution assistance payments from
any of the Funds.
The Distribution Agreements 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 renewal or by the vote of a majority of the outstanding voting
securities of the Fund.
PLAN OF DISTRIBUTION. Each 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, each Fund
makes assistance payments to brokers, financial institutions and other
financial intermediaries ("payee(s)") for shareholder accounts ("qualified
accounts") as to which the payee has rendered distribution assistance services
at an annual rate of .20% of the average net asset value of qualified accounts.
Such distribution assistance may include, but may not be limited to,
establishment of shareholder accounts, delivering prospectuses to prospective
investors and processing automatic investment in Fund shares of client account
balances. Substantially all such monies (together with significant amounts
from RMCI's own resources) are paid by RMCI to payees for their distribution
assistance or administrative services with any remaining amounts being used by
RMCI to partially defray other expenses incurred by RMCI in distributing Fund
shares. In addition to the amounts required by the Plan, RMCI may, in its
discretion, pay additional amounts from its resources. The rate of any
additional amounts that may be paid will be based upon RESRV's and RMCI's
analysis of the contribution that the payee makes to the Fund by increasing
assets under management and reducing expense ratios and the cost to the Fund if
such services were provided directly by the Fund or other authorized persons.
RMCI and RESRV will also consider the need to respond to competitive offers of
others, which could result in assets being withdrawn from the Fund and an
increase in the expense ratio for the Fund. RMCI may elect to retain a portion
of the distribution assistance payments to pay for sales materials or other
promotional activities. The Trustees have determined that there is a
reasonable likelihood the Plan will benefit each Fund and its shareholders.
The Glass-Steagall Act prohibits all entities which receive deposits from
engaging to any extent in the business of issuing, underwriting, selling, or
distributing securities, although national and state chartered banks are
permitted to purchase and sell securities upon the order and for the account of
their customers. Those persons who wish to provide assistance in the form of
activities not primarily intended to result in the sale of Fund shares (such as
administrative and account maintenance services) may include banks, upon advice
of counsel that they are permitted to do so under applicable laws and
regulations, including the Glass-Steagall Act. In such event, no preference
will be given to securities issued by such banks as investments and the
assistance payments received by such banks under the Plan may or may not
compensate the banks for their administrative and account maintenance services
for which the banks may also receive compensation from the bank accounts they
service. It is Fund management's position that payments to banks pursuant to
the Plan for activities not primarily intended to result in the sale of a
Fund's shares, such as administrative and account maintenance services, do not
violate the Glass-Steagall Act. However, this is an unsettled area of the law
and if a determination contrary to management's position is made by a bank
regulatory agency or court concerning payments to banks contemplated by the
Plan, any such payments will be terminated and any shares registered in the
bank's name, for its underlying customer, will be re-registered in the name of
that customer. Financial institutions providing distribution assistance or
administrative services for a Fund may be required to register as securities
dealers in certain states.
Under each Plan, the Trustees are provided quarterly reports of 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, 1995, the California Tax-Exempt
Fund, the Connecticut Tax-Exempt Fund, the New Jersey Tax-Exempt fund, the
Massachusetts Tax-Exempt Fund and the New York Tax-Exempt Fund made payments
under each Plan of $9,469, $63,147, $19,207, $3,467 and $269,772, respectively.
Any such payments are intended to benefit a Fund by maintaining or increasing
net assets to permit economies of scale in providing services to shareholders
and to contribute to the stability of such shareholder services. During the
fiscal year ended May 31, 1995, substantially all payments made by a Fund were
to brokers or other financial institutions and financial intermediaries for
share balances in a Fund.
<PAGE> 26
The Plans and related agreements were duly approved by shareholders and
may be terminated at any time by a vote of a majority of the outstanding voting
securities of a Fund or by vote of the disinterested Trustees. The Plans and
related agreements may be renewed from year to year if specifically approved by
the Boards of Trustees, and by the vote of a majority of the disinterested
Trustees cast in person at a meeting called for the purpose of voting on such
renewal. The Plans may not be amended to increase materially the amount to be
spent for distribution without shareholder approval. All material amendments
to the Plans 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.
The Securities and Exchange Commission had proposed to amend Rule 12b-1
under the Investment Company Act of 1940 in a manner which, among other things,
would effectively prohibit the implementation of compensation plans or any
other plans that do not tie payments by a fund to specific distribution
activities. If such a proposal were implemented, the Board of Trustees would
determine, at such time and in light of the existing circumstances, the
appropriateness of continuing the Plan, recommending its modification or
discontinuance, or taking any other action.
CUSTODIAL SERVICES AND INDEPENDENT ACCOUNTANT. Chemical Bank, 4 New York
Plaza, New York, N.Y. 10004 and Bankers Trust Company, One Bankers Trust
Plaza, New York, N.Y. 10015 are Custodians of the Funds securities and cash
pursuant to Custodian Agreements. Coopers & Lybrand L.L.P, 1301 Avenue of the
Americas, New York, N.Y. 10019 is the Funds' independent accountant.
PORTFOLIO TURNOVER, TRANSACTION CHARGES AND ALLOCATION
As investment securities transactions made by each Fund are normally
principal transactions at net prices, the Fund's do not normally incur
brokerage commissions. Purchases of securities from underwriters involve a
commission or concession paid by the issuer to the underwriter and aftermarket
transactions with dealers involve a spread between the bid and asked prices.
During the past three fiscal years the Funds have not paid any brokerage
commissions.
The Funds' policy of investing in debt securities maturing within one
year results in high portfolio turnover. However, because the cost of these
transactions is minimal, high turnover does not have a material adverse effect
upon the net asset value or yield of a Fund.
Subject to the overall supervision of each Fund's officers and the Boards
of Trustees, RMCI places all orders for the purchase and sale of a Fund's
investment securities. In general, in the purchase and sale of investment
securities RMCI will seek to obtain prompt and reliable execution of orders at
the most favorable prices or yields. In determining best price and execution,
RMCI may take into account a dealer's operational and financial capabilities,
the type of transaction involved, the dealer's general relationship with RMCI,
and any statistical, research, or other services provided by the dealer to
RMCI. To the extent such non-price factors are taken into account the
execution price paid may be increased, but only in reasonable relation to the
benefit of such non-price factors to the Funds as determined in good faith by
RMCI. Brokers or dealers who execute investment securities transactions may
also sell shares of a Fund; however, any such sales will not be either a
qualifying or disqualifying factor in the selection of brokers or dealers.
When orders to purchase or sell the same security on identical terms are
simultaneously placed for the Funds and other portfolios managed by RMCI, the
transactions are allocated as to amount in accordance with each order placed
for each portfolio. However, RMCI may not always be able to purchase or sell
the same security on identical terms for all portfolios affected.
SHARES OF BENEFICIAL INTEREST
The Declaration of Trusts permit the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest, and to divide or
combine the shares into a greater or lesser number of shares without thereby
changing the proportionate beneficial interests in a Fund. If they deem it
advisable and in the best interests of shareholders, the Trustees may classify
or reclassify any unissued shares of each Fund by setting or changing the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms and conditions of
redemption of the stock. Any changes would be required to comply with any
applicable state and federal securities laws. These currently require that
each class be preferred over all other classes in respect of assets
specifically allocated to such class. It is anticipated that under most
circumstances, the rights of any additional class would be comparable unless
otherwise required to respond to the particular situation. Upon liquidation of
a Fund, shareholders are entitled to share pro rata in its net assets. It is
possible, although considered highly unlikely in view of the method of
operation of mutual funds, that should assets of one class of
<PAGE> 27
shares be insufficient to satisfy its liabilities, the assets of another class
could be subjected to claims arising from the operations of the first class of
shares. No changes can be made to a Fund's issued shares without shareholder
approval.
Each Fund share, when issued, is fully paid, nonassessable (except as set
forth below), and fully transferable or redeemable at the shareholder's option.
Each Fund share has an equal interest in the net assets of its portfolio, equal
rights to all dividends and other distributions from its portfolio, and one
vote for all purposes. Shares of all classes vote together for the election of
Trustees and have noncumulative voting rights, meaning that the holders of more
than 50% of the shares voting for the election of Trustee could elect all
Trustees if they so choose, and in such event the holders of the remaining
shares could not elect any person to the Board of Trustees.
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable for the obligations of a
business trust. The Declaration of Trusts contain an express disclaimer of
shareholder liability for acts or obligations of a Fund and requires that
notices of such disclaimer be given in each agreement, obligation, or
instrument entered into or executed by the Fund or the Trustees. The
Declaration of Trusts provide for the indemnification out of the Fund property
of any shareholder held personally liable for the obligations of a Fund. The
Declaration of Trusts also provide that each Fund shall, upon request, assume
the defense of any claim made against any shareholder for any act or obligation
of a Fund and satisfy any judgment thereon. Thus, the risk of a shareholder
incurring financial loss on account of status as a shareholder is limited to
circumstances in which a Fund itself would be unable to meet its obligations.
The Declaration of Trusts further provides that the Trustees will not be
liable for errors of judgement or mistakes of fact or law; but nothing in the
Declarations protect 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.
Regulations of the Securities and Exchange Commission provide that if a
class is separately affected by a matter requiring shareholder vote (election
of Trustees, ratification of independent auditor selection and approval of an
underwriting agreement are not considered to have such separate effect and may
be voted upon by the Fund as a whole), each class will vote separately. Each
class votes separately on such matters as approval of the Investment Management
Agreement, material amendments to the Plan of Distribution, and changes in the
fundamental policies of the Fund. These items require approval by a majority
of the affected shareholders. For this purpose a "majority" is constituted by
either 50 percent of all shares voting as a group or 67 percent of the shares
voted at an annual meeting of shareholders at which at least 50 percent of the
shares of each group are represented.
As of September 6, 1995, the following persons owned beneficially or of
record 5 percent of the California Tax-Exempt Fund: J. Robert King & Adele
King, 4751 Westchester Drive, Woodland Hills, CA 91364-3455 (10.6%), J. Stephen
Lauch and Kathryn Lauch, P.O. Box 222, Ross, CA 94957 (9.3%), The Zimbert
Family Trust, 3510 Terrace View Drive, Encino, CA 91436-4018 (11.0%) and
Leonard Williams, 1121 Somera Road, Bel Air, CA 90077 (11.0%).
As of September 6, 1995, the following persons owned beneficially or of
record 5 percent of the Connecticut Tax-Exempt Fund: Fiduciary Trust Co.,
Federal Reserve Bank, New York, New York 10036 (15%), Chase Manhattan Bank,
1211 6th Avenue, New York, New York 10036 (6.8%), Klans Schleehauf, 33 Maple
Avenue, Bloomfield, CT 06002 (6.3%) As of September 6, 1995, the following
persons owned beneficially of record 5 percent of the Tax-Exempt Fund:
PURCHASE, REDEMPTION AND PRICING OF SHARES
Redemption payments will normally be made by check or wire transfer but
each Fund is authorized to make payment of redemptions partly or wholly in kind
(that is, by delivery of investment securities valued at the same time as the
redemption net asset value is determined). The Funds have elected to permit
any shareholder of record to make redemptions wholly in cash to the extent the
shareholder's redemptions in any 90-day period do not exceed the lesser of
$250,000 or 1% of the net assets of the Fund. The election is irrevocable
pursuant to rules and regulations under the Investment Company Act of 1940
unless withdrawal is permitted by order of the Securities and Exchange
Commission. Redemptions in kind are further limited by the Funds' intention to
redeem in kind only when necessary to reduce a disparity between amortized cost
and market value. In disposing of such securities, an investor might incur
transaction costs and on the date of disposition might receive an amount less
than the net asset value of the redemption.
IF SHARES OF A FUND ARE PURCHASED BY CHECK OR RESERVE AUTOMATIC TRANSFER,
THE FUND MAY DELAY TRANSMITTAL OF REDEMPTION PROCEEDS UNTIL SUCH TIME AS IT HAS
ASSURED ITSELF THAT GOOD
<PAGE> 28
PAYMENT HAS BEEN COLLECTED FOR THE PURCHASE OF SUCH SHARES, WHICH WILL
GENERALLY BE UP TO 10 BUSINESS DAYS.
PURCHASES AND REDEMPTIONS THROUGH OTHERS. Share purchases and redemptions may
also be made through brokers and financial institutions ("firms"). Firms may
provide varying arrangements for their clients with respect to the purchase and
redemption of Fund shares and may arrange with their clients for other
investment or administrative services. Some of these firms participate in the
Funds' Plans of Distribution ("Plan"). Under the Plans, payments are made to
persons who provide assistance in distributing Fund shares or other assistance
to a Fund.
NET ASSET VALUE. Shares are offered at net asset value. The net asset value
of the Funds are calculated at the close of each business day as defined in the
Prospectus. The net asset value is not calculated on New Year's Day,
Presidents' Day, Good Friday, Memorial Day observed, Independence Day, Labor
Day, Thanksgiving Day, Christmas Day on other days the New York Stock Exchange
is closed for trading, and on regional banking holidays which may include
Martin Luther King's Birthday and Columbus Day. The net asset value of each
Fund is normally maintained at $1.00 per share. The Funds cannot guarantee
that their net asset value will always remain at $1.00 per share.
The net asset value per share of a Fund is determined by adding the value
of all of its securities, cash and other assets, subtracting its liabilities,
and dividing the results by the number of its shares outstanding. The Boards
of Trustees has determined the most practical method currently available for
valuing investment securities is the amortized cost method. This procedure
values a purchased security at cost at the time of purchase and thereafter
assumes a constant amortization to maturity of any discount or premium and
accrual of interest income, irrespective of intervening changes in interest
rates or security market values.
In order to maintain a $1.00 share price the Funds will utilize the
following practices: maintain a dollar-weighted average portfolio maturity of
90 days or less; purchase only instruments having remaining maturities of 397
days or less; and invest only in securities determined by the Boards of
Trustees to be of high quality with minimal credit risk. To assess whether
repurchase agreement transactions present more than minimal credit risk, the
Trustees have established guidelines and monitor the creditworthiness of all
entities, including banks and broker-dealers, with which a Fund proposes to
enter into repurchase agreements. In addition, the Funds' have adopted
procedures, taking into account current market conditions and the investment
objective, to attempt to maintain its net asset value as computed for the
purpose of sales and redemptions at $1.00 per share. Such procedures will
include review by the Trustees at such intervals as they may determine
reasonable, to ascertain the extent of any difference in the net asset value of
a Fund from $1.00 a share determined by valuing its assets at amortized cost as
opposed to valuing them based on market factors. If the deviation exceeds 1/2
of one percent, the Trustees will promptly consider what action if any should
be initiated. If they believe that the deviation may result in material
dilution or other unfair results to shareholders, the Trustees have undertaken
to apply appropriate corrective remedies which may include the sale of a Fund's
assets prior to maturity to realize capital gains or losses or to shorten the
average maturity of a Fund, withholding dividends, redemption of shares of a
Fund in kind, or reverting to valuation based upon market prices and estimates.
SHAREHOLDER SERVICE POLICIES. The Funds' policies concerning shareholder
services are subject to change from time to time. The Funds reserve the right
to change the $1,000 minimum account size subject to the $5 monthly service
charge or involuntary redemption. The Funds further reserve the right to
impose special service charges for services provided to individual shareholders
generally including, but not limited to, fees for returned checks, stop payment
orders on official checks and shareholder checks, and special research
services. The Funds' standard service charges as described in the Prospectus
are also subject to adjustment from time to time. In addition, the Funds
reserve the right to increase their minimum initial investment amount at any
time.
CREDITING OF INVESTMENTS. The Funds will only give credit for investments in
them on the day they become available in federal funds which is normally within
one or two days of receipt. 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 A.M. (New York time) of the amount to be
transmitted and the account to be credited. Checks and other items submitted
to the Funds for investment are only accepted when submitted in proper form,
denominated in United States dollars, and are credited to shareholder accounts
only upon their conversion into federal funds, which normally takes one or two
business days following receipt. Checks delivered to the Funds after 11:00 AM
(New York time) are considered received on the following business day.
Checks drawn on foreign banks are normally not accepted by the Funds. In
addition, the Funds do not accept cash investments.
<PAGE> 29
The Funds reserve the right to reject any investment in them for any
reason and may at any time suspend all new investment.
IF SHARES PURCHASED ARE TO BE PAID FOR BY WIRE AND THE WIRE IS NOT
RECEIVED BY A FUND OR IF SHARES ARE PURCHASED BY A CHECK WHICH, AFTER DEPOSIT,
IS RETURNED UNPAID OR PROVES UNCOLLECTABLE, THE SHARE PURCHASE MAY BE CANCELLED
OR REDEEMED IMMEDIATELY. THE INVESTOR THAT GAVE NOTICE OF THE INTENDED WIRE OR
SUBMITTED THE CHECK WILL BE HELD FULLY RESPONSIBLE FOR ANY LOSSES INCURRED BY
THE FUND, THE INVESTMENT ADVISER OR THE DISTRIBUTOR. THE FUND MAY REDEEM
SHARES FROM ANY ACCOUNT REGISTERED IN THAT PURCHASER'S NAME AND MAY APPLY THE
PROCEEDS THEREFROM TO THE PAYMENT OF ANY AMOUNTS OWED THE FUND.
SHARE CERTIFICATES. Share certificates are not issued by the Funds.
DISTRIBUTIONS AND TAXES
Each of the Funds intend to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986 ("Code") so long as
such qualification is in the best interests of their shareholders. The status
of the Funds as regulated investment companies does not involve government
supervision of management or of investment practices or policies. If they so
qualify, in any fiscal year in which each distributes at least 90 percent of
its net income, a Fund will not be subjected to federal income tax on such
distributed amounts. Although interest derived from Municipal Obligations is
not subject to federal income taxation, any net capital gains realized by a
Fund and distributed to shareholders as regular or capital gains dividends,
whether distributed in cash or in the form of additional shares, will be
taxable to shareholders.
In order to qualify as a regulated investment company under the Code, a
Fund must, among other things, in each fiscal year distribute at least 90
percent of its investment company taxable income to shareholders; derive at
least 90 percent of its gross income from dividends, interest and gains from
the sale or disposition of securities; meet certain diversification
requirements; and derive less than 30 percent of the gross income from the sale
or disposition of securities held for less than three months.
Exempt interest dividends distributed to shareholders are not included in
the shareholder's gross income for federal income tax purposes. The percentage
of income that is tax exempt will be determined for each year and will be
applied uniformly to all dividends declared during that year. This percentage
may differ from the actual tax exempt percentage for any particular day.
Distributions of net investment income received by a Fund from investments in
debt securities other than Municipal Obligations and any net realized capital
gains distributed by a Fund will be taxable as ordinary income. Shareholders
will be advised annually as to the federal income tax consequences of
distributions made during the year.
If any dividends are not exempt from federal or state and local income
taxes shareholders will be advised of such percentage by January 31 of the
following year. Distributions will be reported under more than one tax
identification number only if a separate account is established for each
number. If a Fund has both tax exempt and taxable interest income, it will use
the "actual earned method" for determining the percentage that is taxable
income. Under this method, the ratio of taxable income earned during the
period, for which a distribution was made, to total income earned during the
period determines the percentage of the distribution designated taxable and, as
a result, the percentage of the distribution that is tax-exempt may vary from
distribution to distribution.
The identification of the issuer of Municipal Obligations depends on the
terms and conditions of the security. When the assets and revenues of an
agency, authority, instrumentality, or other political subdivision are separate
from those of the government creating the subdivision, such subdivision would
be deemed to be the sole issuer. Similarly, in the case of an industrial
development bond, if that bond is backed only by the assets and revenues of the
nongovernmental users, then such nongovernmental user would be deemed to be the
sole issuer. However, in either case, if the creating government or some other
entity guarantees a security, such a guarantee would be considered a separate
security and is to be treated as an issue of such government or other agency.
The Tax Reform Act of 1986 ( the "Act") provides that in the event a Fund
should hold certain private activity bonds issued after August 7, 1986,
shareholders must include, as an item of tax preference, the portion of
dividends paid by the Fund that is attributable to interest on such bonds in
their federal alternative minimum taxable income for purposes of determining
any liability for the alternative minimum tax applicable to individuals and the
alternative minimum tax and the
<PAGE> 30
environmental tax applicable to corporations. In the case of corporations,
federal alternative minimum taxable income will also include one-half the
excess of the corporation's pre-tax book income (including all exempt-interest
dividends) over the corporation's other federal alternative minimum taxable
income. Shareholders receiving Social Security benefits should note that all
exempt-interest dividends will be taken into account in determining the
taxability of such benefits.
The Act also provides that, for taxable years beginning after December
31, 1986, every person required to file a tax return must report solely for
information purposes on such return the amount of exempt interest dividends
received from a Fund during the taxable year. In addition, with respect to a
shareholder who receives exempt interest dividends on shares held for less than
six months, any loss on the sale or exchange of such shares will, to the extent
of the amount of such exempt interest dividends, be disallowed.
The exemption from federal income tax of dividends derived from interest
on Municipal Obligations does not necessary result in exemption under the tax
laws of any state or local taxing authority.
Shareholders are advised to consult with their tax advisers regarding the
applicability of state and local taxes to an investment or income therefrom in
a Fund which may differ from the federal income tax consequences described
above.
FUND YIELD
The current yield of a Fund may differ from the Fund's effective yield and
annualized dividends.
Current yield is calculated by determining the net change (exclusive of
capital changes) in the value of a hypothetical preexisting account having a
balance of one share at the beginning of the period, dividing the net change in
account value by the value of the account at the beginning of the base period
to obtain the base period return, and multiplying the base period return by a
fraction having 365 in the numerator and the number of days in the base period
in the denominator. The current yield stated in the prospectus utilizes a
seven day base period. Net change in account value must reflect (i) the value
of additional shares purchased with dividends from the original share and
dividends declared on by the original share and any such additional shares; and
(ii) any recurring fees charged to all shareholder accounts, in proportion to
the length of the base period and the Fund's average or median account size.
Net change in account value must exclude realized gains or losses and
unrealized appreciation or depreciation.
Effective yield is computed by adding one to current yield, raising the
sum to a power equal to 365 divided by the number of days in the base period
(seven days), and subtracting one from the result according to the following
formula: Effective Yield = [(Base Period Return + 1) /7]365-1. Effective
annual yields are a representative of the effective annual rate of return
produced by the monthly compounding of Fund dividends.
Taxable equivalent yield is computed by dividing either current yield or
effective yield by a denominator equal to one minus a stated income tax rate
according to the following formula: Taxable Equivalent Yield = Current or
Effective Yield - (1 - Income Tax Rate)
Yield information may be useful in reviewing the performance of a Fund,
but because of fluctuations, it may or may not provide a basis for comparison
with bank deposits, other money investments which pay a fixed yield for a
stated period of time, such as Treasury bills, bank certificates of deposit,
savings certificates and NOW accounts. When making comparisons, the investor
should also consider the quality and maturity of the portfolio securities of
the various money market funds. An investor's principal is not guaranteed by
the Fund, nor is it insured by a governmental agency.
RESERVE CASH PERFORMANCE PLUS ACCOUNT
The Reserve Cash Performance Plus Account ("CPA") is a comprehensive
package of additional services offered to investors in the Funds for an
additional fee.
CHECK PLAN. A Check Plan is an arrangement with Bank One, Columbus, NA ("Bank
One") whereby checks are issued to the participant which may be used to redeem
shares in any amount in a participant's Fund account. If Bank One accepts a
check for final payment, it will be paid by redemption of shares from your
account. Bank One will process new debits to a CHECK PLAN in order of receipt
against Bank One's determination of the CHECK PLAN "open-to-buy value" (the sum
of the value of the participant's shares transmitted before noon to Bank One
excluding (i) dividends which are accrued daily but including
<PAGE> 31
dividends paid monthly and (ii) checks and wires for the purchase of shares
which have not been verified as described under "Restrictions" below,
hereinafter referred to as the participant's account "liquidity value," minus
previous CHECK PLAN net debits which have not been applied against the
account's value). These debits include outstanding unpaid checks authorized
against the CHECK PLAN open-to-buy value and redemptions from the participant's
account determined and reported to Bank One. Any check in an amount exceeding
the participant's CHECK PLAN open-to-buy value for that business day will not
be paid but will be returned by Bank One to the payee in such manner as Bank
One may select. Checks may be used in the same manner as other bank checks and
may be written in any amount. Checks will be received by Bank One through the
Federal Reserve System or other clearing channels which Bank One may establish
from time to time. Checks will not be returned to the participant but complete
information on such checks, including the payee, will be supplied to the
participant on a monthly basis. Bank One will supply checks to each
participant which will be subject to the terms of your Reserve CPA Account
Agreement in the application for a CHECK PLAN.
A Fund will charge a non-refundable annual CPA service fee (currently $75
which may be charged to the account monthly) and a transaction fee of $0.50 for
each additional check in excess of five presented for payment within the
statement period. Participants will also be charged for specific costs
incurred in placing stop payment orders, obtaining check copies in processing
returned checks. The annual service fee and other charges may be changed at
any time upon 30 days notice to participants. In addition, broker/dealers or
other financial institutions in the CPA Program may charge their own service
fees in addition to the annual fee.
CUSTOM PLAN. A CUSTOM PLAN is a CHECK PLAN plus a VISA Gold card issued to the
participant. The VISA Gold card is a debit card, not a credit card. The
Custom Plan and VISA Gold card are available only to customers of participating
broker/dealers or other financial institutions. Use of the debit card will
provide automatic common carrier travel insurance, auto rental/loss damage
insurance and extended product guarantees. In addition, VISA Gold cardholders
will be provided a comprehensive package of free travel and emergency
assistance services, including: emergency cash; emergency card replacement;
medical, legal and lost baggage assistance; and emergency ticket replacement.
Bank One will process new debits to a CUSTOM PLAN in the order of receipt
against Bank One's determination of the CUSTOM PLAN "open-to-buy value" (the
sum of the participant's account value minus previous CUSTOM PLAN net debits
which have not been applied against net asset value). These debits include
outstanding VISA Gold card charges, unpaid check charges, cash advances
authorized by Bank One against the CUSTOM PLAN open-to-buy value and
redemptions from the participant's account determined and reported to Bank One.
A Fund will redeem shares on behalf of the participant on the business day it
receives notice of these debits from Bank One and send the proceeds to Bank One
to cover such debits.
The conditions for establishing a CPA account may be altered or waived by
the Funds, either with respect to services generally or with respect to special
groups or limited categories of individuals. The checks and VISA Gold card
features of the CPA Program are intended to provide participants with easy
access to their account assets. The Funds may reject any application to open a
CPA account and may terminate a CPA account for any reason. Bank One may
reject any application for checks or cards.
TRAVEL INSURANCE. Use of cards to pay the full travel fares for you, your
spouse, and your dependent children under the age of 25 years on any air or
land or water conveyance operated by a common carrier licensed to carry
passengers for hire will insure each automatically against accidental bodily
injuries which are the sole cause of death or dismemberment while riding in,
boarding, or getting out of such aircraft or conveyance. Your name must appear
in an account registration or you must be an associate cardholder for this
travel insurance to cover you, your spouse, and your dependent children.
VISA GOLD CARD. Upon approval of an application for participation in the
CUSTOM PLAN, Bank One will issue one or more VISA Gold Cards to the
participant. Bank One will not give authorizations for cash advances exceeding
on any business day the CUSTOM PLAN open-to-buy value.
Participants subscribing to the CUSTOM PLAN service may be liable for the
unauthorized use of their card up to the amount set by the governing Federal
regulations which is currently $500 if the Funds or Bank One is not notified of
the theft or loss within 2 business days. Participants should refer to the
VISA Account Shareholder Agreement for complete information regarding
responsibilities and liabilities with respect to the VISA Gold card. If a card
is lost or stolen, the CUSTOM PLAN participant should report the loss
immediately by telephoning Bank One at (614) 248-4242 which can be reached 24
hours a day, seven days a week or the Funds at (800) 631-7784 or (212) 977-9880
during normal business hours (9:00 A.M. to 5:00 P.M., New York time).
<PAGE> 32
The use of checks, and cards by participants will be subject to the terms
of your Reserve CPA Account Application and VISA Account Shareholder
Agreements.
MUNICIPAL OBLIGATIONS
Municipal bonds and municipal notes are the two major classifications of
Municipal Obligations. Such obligations are generally issued to obtain funds
for various public purposes, including the construction of public facilities
such as airports, bridges, highways, houses, hospitals, mass transportation,
schools, streets, and water and sewer works. In addition, Municipal
Obligations may be issued to refund outstanding debt and obtain funds for
general operating expenses.
Municipal bonds, which are long term instruments and generally have
maturities longer than one year when issued, may be either "general obligation"
or "revenue" issues. General obligation bonds are secured by the issuer's
pledge of its full faith, credit, and taxing power for the payment of principal
and interest. Revenue bonds are payable only from the revenues derived from a
particular facility or class of facilities, as in some cases, from the proceeds
of a special excise tax or other specific revenue source but not from the
general taxing power.
Certain kinds of industrial development bonds ("IDBs") are issued by or
on behalf of public authorities to provide funding for various privately
operated industrial facilities such as warehouse, office, plant, and store
facilities. IDBs are, in most cases, revenue bonds and do not generally
constitute the pledge of the credit of the issuer of such bonds. The payment
of the principal and interest on IDBs usually depends solely on the ability of
the user of the facilities financed by the bonds or other guarantor to meet its
financial obligations and, in certain instances, the pledge of real and
personal property as security for payment. If there is no established
secondary market for the IDBs, the IDBs or the participation interests
purchased by a Fund will be supported by repurchase commitments and bank
letters of credit or guarantees of banks that meet the quality criteria of the
Fund and which may be exercised by the Fund to provide liquidity.
Municipal notes are usually issued to obtain funds in anticipation of
receipt of taxes, receipt of proceeds of issuances of municipal bonds, or other
revenue which will provide funds to repay the notes, and generally have
maturities of one year or less.
On April 20, 1988, the United States Supreme Court in South Carolina v.
Baker, overruled an 1895 case, Pollock v. Farmers' Loan & Trust Company which
held that interest on Municipal Obligations was immune from Federal taxation.
As a result, proposals may be introduced before the Congress to eliminate or
restrict the Federal income tax exemption for interest on certain Municipal
Obligations.
The Funds may purchase securities affected by these proposals. If such
proposals are enacted, the availability of Municipal Obligations by the Funds
would be adversely affected. In such event, the Funds would reevaluate their
investment objective and policies and submit possible changes in the structure
of the Funds for the consideration of shareholders. Investors should be aware
that the quantity of Municipal Obligations available for purchase by the Funds
may be limited, and that factor may affect the amount of tax-exempt income
which can be obtained from an investment in them. Substantial reductions in
the availability of tax-exempt securities might also cause a reevaluation of a
Fund's investment objective and policies.
VARIABLE RATE DEMAND INSTRUMENTS. Variable rate demand instruments that the
Funds may purchase are tax-exempt Municipal Obligations or participation
interests therein that provide for periodic adjustments in the interest rate
paid on the instrument and permit the holder to demand payment of the unpaid
principal balance plus accrued interest upon a specified number of days notice
either from the issuer or by drawing on a bank letter of credit or guarantee
issued with respect to such instrument. The issuer of the Municipal Obligation
may have a corresponding right to prepay in its discretion the outstanding
principal of the instrument plus accrued interest upon notice comparable to the
required for the holder to demand payment.
The variable rate demand instruments in which the Funds may invest will
comply with Rule 2a-7 under the Investment Company Act of 1940. The Funds will
determine the variable rate demand instruments it will purchase in accordance
with procedures prescribed by its Board to minimize credit risks. The Fund's
investment adviser may determine that an unrated variable rate demand
instrument meets the Fund's investment high quality criteria if it is backed by
a suitable bank letter of credit or guarantee.
The variable rate demand instruments that the Funds may invest in include
participation interests purchased from banks in variable rate tax exempt
Municipal Obligations owned by banks or affiliated organizations. A
participation interest
<PAGE> 33
gives the Fund an undivided interest in the Municipal Obligation in the
proportion that the Fund's participation interest bears to the total principal
amount of the Municipal Obligation and provides the repurchase feature
described above. Each participation is backed by an irrevocable letter of
credit or guarantee of an appropriately rated bank. The Fund has the right to
sell the instrument back to the bank and draw on the letter of credit on
demand, after seven days notice, for all or any part of the full principal
amount of the Fund's participation interest in the bond plus accrued interest.
Banks usually retain a service fee, a letter of credit fee and a fee for
issuing repurchase commitments in an amount equal to the excess of the interest
paid on the Municipal Obligations over the negotiated yield at which the
instrument was purchased by the Fund.
RATINGS
TAX-EXEMPT BOND RATINGS. The highest ratings for municipal bonds are Aaa or Aa
if rated by Moody's Investor Services, Inc. ("Moody's") and AAA or AA if rated
by Standard & Poor's Corporation ("S&P"). Such bonds are judged to be a high
quality and are not considered speculative. Bonds rated A by Moody's are
considered to possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Such bonds have factors giving
security to principal and interest that are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future. Debt rated A by S&P is considered to have a strong capacity to pay
interest and repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt
in higher-rated categories.
TAX-EXEMPT PAPER RATINGS. Moody's tax-exempt paper rating are opinions of the
ability of issuers to repay punctually promissory obligations not having an
original maturity in excess of nine months. Moody's employs the following two
designations all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers: MIG-1/VMIG-1, Best Quality and
MIG-2/VMIG-2, High Quality. The designation of MIG-1/VMIG-1 indicates there is
strong protection by established cash flows, superior liquidity support of
demonstrated broad based access to the market for refinancing. The designation
of MIG-2/VMIG-2 indicates margins of protection ample although not so large as
in MIG-1/VMIG-1.
S&P's tax-exempt paper rating is a current assessment of the likelihood
of timely payment of debt having an original maturity of no more that 365 days.
The highest quality obligations are rated "A". Issues assigned A rating for
regarded as having the greatest capacity for timely payment. Issues in this
category are further refined with designations to indicate the relative degree
of safety. The two top such designations are 1 and 2. The "A-1" designation
indicates that the degree of safety regarding timely payment is strong. The
"A-2" designation indicates that capacity for timely payment is satisfactory.
Municipal note ratings by Standard & Poor's are preceded by the designation SP.
Those issues determined to possess overwhelming safety characteristics are
designated SP-1+. Municipal notes designated SP-1 are considered to have a
very strong or strong capacity to pay principal and interest. Municipal notes
designated SP-2 are considered to have a satisfactory capacity to pay principal
and interest.
RISK FACTOR OF CONCENTRATING IN CALIFORNIA
The following discusses the risks of concentrating investments in
obligations of the State of California ("State") and its political
subdivisions, duly constituted authorities and corporations.
Since the start of State's 1990-91 fiscal year, the State has faced the
worst economic, fiscal, and budget conditions since the 1930's. Construction,
manufacturing (especially aerospace), exports and financial services, among
other, have all been severely affected. Overall, the State has lost over
800,000 jobs since May 1990. Additional job losses are expected in 1993 before
net employment starts to increase, and pre-recession job levels will not be
reached for several more years. Unemployment reached 10% in November 1992 and
is expected to remain near that level through 1993. Recovery from the
recession in California is not expected in meaningful terms until late 1993 or
1994, notwithstanding signs of recovery elsewhere in the nation.
The recession seriously affected State tax revenues, which basically
mirror economic conditions. It also caused increased expenditures for health
and welfare programs. The State has also been facing a structural imbalance in
its budget with the largest programs supported by the General Fund - K-12
schools and community colleges, health, welfare and corrections - growing at
rates significantly higher than the growth rates for the principal revenue
sources of the General Fund. As a result, the State has experienced recurring
budget deficits; the State Controller reports that expenditures exceeded
revenues for four of the last five completed fiscal years. By June 30, 1992,
according to the Department of Finance, the State's General Fund had an
accumulated deficit on a budget basis, of approximately $2.2 billion.
<PAGE> 34
A further consequence of the large budget imbalance over two fiscal years
was that the State used up all of its available cash resources. In late June,
1992 the State was required to issue $475 million of short-term revenue
anticipation warrants to cover obligations coming due on June 30. Because the
1992-93 Budget Act was not adopted until September 2, 1992, the State was
delayed in carrying out its usual cash flow borrowing for the fiscal year. The
shortfall of cash forced the State Controller, after July 1, 1992, to issue
approximately $3.8 billion of interest-bearing "registered warrants" in lieu of
regular warrants which are redeemable for cash to many State vendors, suppliers
and employees and to local government agencies to pay valid obligations from
the prior fiscal year, and to pay continuing obligations after July 1 based on
special appropriations or court orders. Certain constitutionally mandated
obligations, such as debt service on bonds and revenue anticipation warrants,
were paid with available cash. Registered warrants had not been issued by the
State in the 1930s.
The 1992-93 Budget Act closed a "gap" of about $7.9 billion, but budgeted
a reserve at June 30, 1993 of only $28 million. However, the Governor's Budget
for 1993-94, released January 8, 1993 (the "1993-94 Governor's Budget"),
predicted revenues in the 1992-93 fiscal year will be $2.5 billion below
1992-93 Budget Act projections, and projected the State will have a $2.1
billion budget deficit at June 30, 1993. This however, assumed favorable
legislative action by March 1993 on certain proposals to reduce health and
welfare payments and eliminate a renters' tax credit, which combined would have
saved $475 million by June 30, 1993. The Legislature has failed to enact these
proposals. This, combined with the impact of the State Franchise Tax Board's
February 4, 1993 order to release the renters' tax credit refunds, will require
at least another $475 million in budget reductions in addition to those
proposed in the 1993-94 Government's Budget. The 1993-94 Governor's Budget
also projects that cash resources will be depleted during May 1993,
necessitating additional cash flow borrowing. Actual performance for the
balance of the 1992-93 Fiscal year will depend on many factors, including
economic conditions in the State and the nation. As result of the
deterioration in the State's budget and cash situation in fiscal years 1991-92,
and 1992-93, rating agencies reduced the State's credit ratings. Between
November 1991 and October 1992 the rating on the State's general obligation
bonds was reduced by S&P from AAA to Aa+, by Moody's from Aaa to Aa, and by
Fitch from AAA to AA.
The California personal income tax, which in 1990-91 contributed about
45% of General Fund revenues, is closely modeled after the federal income tax
law. It is imposed on net taxable income (gross income less exclusions and
deductions). The tax is progressive with rates ranging from 1% to 11%.
Personal, dependent, and other credits are allowed against the gross tax
liability. In addition, taxpayers may be subject to an alternative minimum tax
(AMT) which is much like the Federal AMT. This is designed to ensure that
excessive use of tax preferences does not reduce taxpayers' liabilities below
some minimum level. Legislation enacted in July 1991 added two new marginal
tax rates, at 10% and 11% effective for tax years 1991 through 1995. After
1995, the maximum personal income tax rate is scheduled to return to 9.3%, and
the AMT rate is scheduled to drop from 8.5% to 7%.
The personal income tax is adjusted annually by the change in the
consumer price index to prevent taxpayers from being pushed into higher tax
brackets without a real increase in income.
The sales tax is imposed upon retailers for the privilege of selling
tangible personal property in California. Most retail sales and leases are
subject to the tax. However, exemptions have been provided for certain
essentials such as food for home consumption, prescription drugs, gas,
electricity and water. Sales tax accounted for about 39% of General Fund
revenue in 1991-92. Bank and corporation tax revenues comprised about 11% of
General Fund revenue in 1991-92. In 1989, Proposition 99 added a 25 cents per
pack excise tax on cigarettes, and a new equivalent excise tax on other tobacco
products.
The Governor's Budget proposal for 1994-95 released January 7, 1994,
projected General Fund revenues and transfers in the fiscal year of $39.7
billion (a reduction of $900 million from the original 1993-94 Budget Act) and
expenditures of $39.7 billion (an increase of $800 million over the original
1993-94 Budget Act). The Governor's Budget proposed General Fund revenues and
transfers of $41.3 billion (including $2.0 billion from the Federal government)
and expenditures of $38.8 billion in the 1994-95 fiscal year, which would leave
a balance of approximately $260 million in the budget reserve, the Special Fund
for Economic Uncertainties (the "SFEU"), at June 30, 1995 after repayment of
the accumulated 1992-93 budget deficit of $2.8 billion.
On January 17, 1994, an earthquake of the magnitude of an estimated 6.8
on the Richter Scale struck Los Angeles causing significant damage to public
and private structures and facilities. The full impact of the earthquake on
Los Angeles and surrounding areas and on the State's finances has not been
determined.
<PAGE> 35
California is experiencing its deepest recession since the 1930's. The
State's tax revenue experience clearly reflects sharp declines in employment
income and retail sales on a scale not seen in over 50 years. California's
economy has clearly not joined in the national recovery. Employment continued
to decline through the latter months of 1992, retail sales remain below year
ago levels, what growth there is in personal incomes is mainly attributable to
government transfer payments and construction activity deteriorated further in
late 1992.
The State's economy faces several formidable barriers which will likely
prolong the recession through much of 1993 and will inhibit the pace of
recovery when it does finally arrive late in 1993 or early in 1994:
Defense budget cuts will continue to reduce employment in the aerospace
industry while the major impacts of previously announced military base closings
will be felt mainly in the 1993-95 period.
The construction and real estate sectors face a variety of obstacles,
including huge oversupplies of commercial office, retail and hotel space,
constraints on traditional financial institutions relative to real estate
lending and a painful adjustment in the upper half of the housing market.
California based industries, such as high technology manufacturing are
looking increasingly to lower cost areas of the nation and the world when
considering expansion sites. The factor may already be impeding the State's
recovery.
Export markets are unlikely to provide much support to the State's
economy in 1993. Japan, Western Europe, Canada and Mexico are all affected by
the global slowdown and California has a disproportionate share of export
oriented jobs in manufacturing and other industries as well.
Cost containment efforts are "downsizing" are continuing in a variety of
service producing industries, including finance, transportation, utilities and
wholesale and retail trade.
The construction industry is projected to see only modest improvement in
homebuilding to perhaps 115,000 units from 1992's estimated 95,000 unit volume.
Even 1944's 144,000 figure is a far cry from the quarter million unit years of
the lats 1980s.
With continued weakness in aerospace construction and export California
recovery will depend on national economic growth and the gradual completion of
the restructuring of the state's services economy. Eventually - by late 1993
or early 1994 - underlying national growth trends should be sufficient to
offset the diminishing negative effects of defense cuts, real estate imbalances
and sluggish export markets. Specifically, the Governor's Budget projects
further, albeit modest declines in employment over the first half of 1993,
stabilization in the second half of the year with an upturn finally underway by
the end of 1993 or early 1994. On a year average basis, however, wage and
salary employment is expected to decline by about 1% in 1993 compared to 1992's
drop of slightly more than 2% and 1991's 3% fall. In 1994, the number of jobs
is expected to increase by over 1%.
The State's unemployment rate which first broke into double digits in
November 1992, is expected to remain near 10% throughout 1993, reflecting
continued labor force growth against stagnant employment. In 1994, the rate is
expected to fall slow to 9.5% on an annual average basis.
RISK FACTORS OF CONCENTRATING IN CONNECTICUT
The following concerns the risks of concentrating investments in
obligations of the State of Connecticut ("State") and its political
subdivisions, duly constituted authorities and corporations.
Connecticut's economy is diverse, with manufacturing, services and trade
accounting for approximately 70% of total nonagricultural employment.
Manufacturing employment has been on a downward trend since 1984 while
nonmanufacturing employment has risen significantly. From 1970 to 1992,
manufacturing employment has declined 30.8% while the number of persons
employed in service-related industries, such as trade, government, health,
education, recreation, utilities, finance, insurance, transportation, and real
estate increased 60.8%. Although agriculture remains significant to
Connecticut, the amount of land devoted to farming has declined over time.
These trends are expected to continue in the future. Tourism and summer
residency are also economic factors.
<PAGE> 36
Manufacturing has traditionally been of prime economic importance to
Connecticut and remains the State's single most important economic activity.
The manufacturing industry is diversified, with transportation equipment
(primarily commercial and defense related) the dominant industry, followed by
fabricated metal products, non-electrical machinery and electrical machinery.
Defense-related business plays an important role in the Connecticut economy.
Economic activity has been affected by the volume of defense contracts awarded
to Connecticut firms. In the past ten years Connecticut has generally ranked
from 6th to 11th among all states in total defense contracts awards, receiving
2.8% of all such contracts in 1992. On a per capita basis, defense awards to
Connecticut have been among the highest in the nation. In recent years, the
federal government has reduced defense-related spending and this trend is
expected to continue. Both United Technologies Corporation and General
Dynamics Corporation's Electric Boat Division have announced substantial labor
force reduction. Any further decline in the federal defense budget could have
a detrimental affect on the Connecticut economy.
The industrial activity of the State is concentrated in two regions. The
first, the Naugatuck Valley extends from Bridgeport north through Ansonia and
Waterbury to Torrington, and has a high proportion of heavy industry. The
second, a belt extending from Hartford southwest through New Britain, Middleton
and Meriden to New Haven, is typified by highly skilled precision metal
products manufacturing. In addition, certain large submarine building activity
and chemical production exist in the Groton area.
Hartford, the capital of Connecticut, is a center of the insurance
industry and a major service center for business and commerce. The
southwestern portion of the State benefits from its proximity to New York City,
with a substantial amount of suburban commutation to New York. An important
factor in Connecticut's overall economic and employment picture is the influx
of major business organizations that are relocating corporate headquarters or
executive offices in Connecticut. Major employers in Connecticut include
United Technologies Corporation, General Dynamics Corporation, Aetna Life and
Casualty Company, The Travelers Insurance Company and Yale University.
The budget adopted by the General Assembly for fiscal 1993-94 projects
General Fund operations of $7,690.1 million and estimated General Fund revenues
of $7,695.3 million. The State Comptroller's monthly report for November 1993,
which is required by Section 3-115 of the Connecticut General Statutes,
reflects a surplus of $62.9 million. No assurance can be given that the
financial assumptions utilized in the 1993-94 budget will be accurate and that
there will not be subsequent changes to the budget.
On November 3, 1992, Connecticut voters approved a constitutional
amendment which requires a balanced budget for each year and imposes a cap on
the growth of expenditures. The General Assembly is required by the
constitutional amendment to adopt by three-fifths vote certain spending cap
definitions, which has not yet occurred. Accordingly, the adopted budget
complies with the current statutory spending cap definitions enacted in 1991.
Expenditures for the payment of bonds, notes and other evidences of
indebtedness are excluded from the constitutional statutory definitions of
general budget expenditures.
In order to promote economic stability and provide a positive business
climate, several tax changes were adopted during the 1993 legislative session.
Among the most significant changes was a four year gradual rate reduction to
the Corporation Business Tax based on income. Additionally, the interest rate
for late payment of the Corporation Business Tax was reduced and additional tax
credits, including a research and development tax credit, were created. In
addition, several Sales Tax exemptions were added which include, among others,
amusements and recreation, certain tax preparation services and car washes.
Although the State recorded General Fund surpluses in its fiscal years
1985 through 1987, Connecticut reported deficits from its General Fund
operations for the fiscal years 1988 through 1991. Together with the deficit
carried forward from the State's 1990 fiscal year, the total General Fund
deficit for the 1991 fiscal year was $965.7 million. The total deficit was
funded by the issuance of General Obligation Economic Recovery Notes. The
Comptroller's annual reports for the fiscal years ended June 30, 1992, 1993 and
1994 reflected General Fund operating surpluses of $110 million, $113.5
million, and $19.7 million, respectively. The Comptroller's monthly report for
the period ended August 31, 1994 stated that on a GAAP basis the cumulative
deficit is $531 million for fiscal 1994-95. S&P, Moody's and Fitch currently
rate Connecticut's bonds AA-Aa and AA+, respectively.
There can be no assurance that general economic difficulties or the
financial circumstances of Connecticut or its towns and cities will not
adversely affect the ability of Connecticut issuers or obligors of State,
municipal and public authority debt obligations to meet their obligations
thereunder.
<PAGE> 37
RISK FACTORS OF CONCENTRATING IN MASSACHUSETTS
The following concerns the risks of concentrating investments in
obligations of the Commonwealth of Massachusetts and its political
subdivisions, duly constituted authorities and corporations.
There has been a significant improvement in the Massachusetts
unemployment rate since 1975 when it was 12 percent. The state has recovered
well from the decline of the apparel, textile and leather industries. Its
employment mix is now particularly strong in high technology, military
contractors, financial services, and education. In 1992, 33% of the work force
was in the service sector.
Boston is the transportation and commercial center for New England. It
has an improving seaport and extensive railroad and trucking facilities, and
its Logan International Airport is the tenth busiest airport in the United
States. Boston is also a substantial world financial center, the home of major
banking, insurance, mutual fund and investment institutions. The concentration
of educational institutions in Boston, and Massachusetts generally, has
contributed greatly to the growing strength of the Massachusetts economy.
Between 1991 and 1992, the state has lost 22,900 manufacturing jobs, from
485,000 to 462,100 (4.7%), and the unemployment rate in January 1994 was 7.2%
while the United States unemployment rate was 6.7%. Increasing unemployment
claims have also caused a deficit in the unemployment compensation trust fund
of $120 million as of December 31, 1993. Between January 1993 and November
1993, 2,547 businesses failed; a slight decrease of 273 (9.68%) from the same
period in 1992. Further, it is estimated by the Defense Budget Project that
civilian defense related employment will decline to 90,000 in 1993 from 107,000
in 1990. In addition, per capita personal income is currently growing at a
rate lower than the national average.
On January 21, 1994, the Governor submitted a fiscal 1995 budget
recommendation of approximately $16,139 billion. The recommended spending
level is approximately $423.8 million, or 2.7% over fiscal 1994's estimated
state spending level of $15.716 billion, exclusive of certain interfund
transfers. Proposed revenues for fiscal 1995 would exceed proposed
expenditures by approximately $1.5 million. The Governor's budget
recommendation is based on a tax revenue estimate of $11.226 billion, an
increase of approximately $532 million, or 5.0%, from estimated fiscal 1994 tax
revenues of $10,694 billion. The Governor's fiscal 1995 budget submission also
proposes tax reductions aggregating $105 million, which includes a reduction in
the income tax rate from 5.95% to 5.85%, an increase in certain income tax
exemptions and an increase in the no-tax threshold for low-income taxpayers.
The Governor's recommendation projects a fiscal 1995 ending balance of
approximately $383.4 million, of which approximately $325.0 million will be in
the Stabilization Fund. The Governor's budget recommendation is based on a tax
revenue estimate of $11.226 billion, an increase of approximately $532 million,
or approximately 5.0%, as compared to estimated fiscal 1994 tax revenues of
$10.694 billion. The Governor's fiscal 1995 budget submission also proposes
tax reductions aggregating $105 million in fiscal 1995, which include a
reduction in the income tax rate from 5.95% to 5.85%, an increase in certain
income tax exemptions and an increase in the no-tax status threshold for
low-income taxpayers. The fiscal 1995 revenue estimate of $11.226 billion is
net of the $105 million tax reduction proposal. The annualized impact of these
reductions is estimated to be approximately $270 million.
Under the Governor's budge recommendation, non-tax revenues and estimated
to increase to approximately $4.915 billion in fiscal 1995, an increase of
approximately $73.19 million, or 1.5%, over estimated non-tax revenues for
fiscal 1994. Such non-tax revenues would include $125 million from a new video
poker game and water-based gambling to be run by the State Lottery Commission,
which are proposed in the Governor's budget recommendation.
There can be no assurance that general economic difficulties or the
financial circumstances of Massachusetts or its political subdivisions will not
adversely affect the ability of Massachusetts issuers or obligors of State,
municipal and public authority obligations to meet those obligations.
RISK FACTOR OF CONCENTRATING IN NEW JERSEY
The following discusses the risks of concentrating investments in
obligations of the State of New Jersey ("State") and its political
subdivisions, duly constituted authorities and corporations.
<PAGE> 38
New Jersey is the ninth largest state in population and fifth smallest in
land area. With an average of 1,050 persons per square mile, it is the most
densely populated of all the states. The State's economy is diversified
consisting of a variety of manufacturing, construction and service industries,
supplemented by rural areas with selective commercial agriculture.
After enjoying an extraordinary boom during the mid-1980s, New Jersey as
well as the rest of the Northeast slipped into an economic slowdown well before
the onset of the national recession which officially began in 1990 (according
to the National Bureau of Economic Research). Initially, this slowdown was an
expected response to the State's tight labor market and the fewer number of
young persons from the "baby bust" generation born in the late 1960s and early
1970s, entering the labor force.
By the beginning of the national recession, construction activity had
already been declining in New Jersey for nearly two years. As the rapid
acceleration of real estate prices forced many would-be homeowners out of the
market and high non-residential vacancy rates reduced new commitments for
offices and commercial facilities, construction employment began to decline;
also growth had tapered off markedly in the services sectors and the long-term
downtrend of factory employment had accelerated, partly because of a leveling
off of industrial demand nationally. The onset of recession caused an
acceleration of New Jersey's job losses in construction and manufacturing, as
well as an employment downturn in such previously growing sectors as wholesale
trade, retail trade, finance, utilities and trucking. Reflecting the downturn,
the rate of unemployment in the State rose from a peace time low of 3.6% during
the first quarter of 1989 to an estimated 6.6% in 1991. In 1992 the State's
unemployment rate moved ahead of the nation's for the first time in a decade to
an annual average of 8.4% versus 7.4% in the United States.
Unemployment in the State has been declining since July 1992, when it
peaked at 9.6% according to U.S. Bureau of Labor Statistics estimates based on
the federal government's monthly household survey. The same survey shows
joblessness dropping to an average of 8.4% during the fourth quarter of 1992,
to an average of 7.8% in the first quarter of 1993 before declining to 6.9% in
June 1993. Although June's drop is probably a statistical aberration, the
trend in these numbers shows that conditions in the labor market have been
slowly improving.
Prospects for New Jersey are favorable, although a return to pace of the
1980s is highly unlikely. Although growth is expected to be slower than in the
nation, the local advantages that have served the State well for many years
will remain. Structural changes that have been going on for years can be
expected to continue, with job creation primarily in the services sector.
RISK FACTORS OF CONCENTRATING IN NEW YORK
The following concerns the risks of concentrating investments in
obligations of New York and its political subdivisions, duly constituted
authorities and corporations.
The financial condition of New York State ("State") may be affected by
various financial, social economic and political factors. Those factors can be
complex, may vary from fiscal year, and are frequently the result of actions
taken not only by the State and its agencies and instrumentalities but also by
entities that are not under the control of the State. The information set
forth below concerns the financing activities of the State, the activities of
the State's authorities and public benefit corporations (the "Authorities"),
the financial condition and projections of the Metropolitan Transit Authority
("MTA"), the financial condition of The City of New York (the "City"), and
certain information relating to the State's other localities. Adverse
developments affecting the State's financing activities, the Authorities, the
MTA, the City or other localities could adversely affect the State's financial
condition.
STATE FINANCING ACTIVITIES
There are a number of methods by which the State may incur debt. In
addition to tax and revenue anticipation notes, the State may issue general
obligation bonds and notes in anticipation of such bonds. Except for certain
general obligation bonds that may be issued for specifically enumerated
emergency purposes, all general obligation bonds must be authorized by the
voters. The State may also, pursuant to specific constitutional authorization,
directly guarantee certain Authority obligations. Payments of debt service on
State general obligation and State-guaranteed bonds and notes are legally
enforceable obligations of the State.
The State also employs two other types of long-term financing mechanisms
which are State-supported but are not general obligations of the State: moral
obligation and lease-purchase or contractual-obligation financing. Moral
obligation
<PAGE> 39
financing generally involves the issuance of debt by an Authority to finance a
revenue-producing project or other activity. The Authority's debt is secured
by project revenues and statutory provisions for the State, subject to
appropriation by the Legislature, to make up any deficiencies which may occur
in the issuer's debt service reserve fund. Under lease-purchase or
contractual-obligation financial arrangements, Authorities and certain
municipalities have issued obligations to finance the construction and
rehabilitation of facilities or the acquisition and rehabilitation of equipment
and expect to cover debt service and amortization of the obligations through
the receipt of rental or other contract payments made by the State. State
lease-purchase or contractual-obligation financing arrangements involve a
contractual undertaking to make payments to an authority, municipality, or
other entity, but the State's obligation to make such payments is generally
expressly made subject to appropriation by the Legislature and the actual
availability of money to the State for making the payments.
The State also participates in the issuance of certificates of
participation in a pool of leases entered into by the State's Office of General
Service on behalf of several State departments and agencies and in the issuance
of certificates of participation which represent proportionate interests in
lease payments to be paid by the State, acting by and through the Commissioner
of the Commissioner of the Office of Mental Health of the State of New York.
Payments for principal and interest due on general obligation bonds,
interest due on tax and revenue anticipation notes, and contractual-obligation
and lease-purchase payments are estimated to be $2.167 billion in the aggregate
for the State's 1993-94 fiscal year and are projected to be $2.459 billion in
the aggregate for the 1994-95 fiscal year. These figures do not include
interest payable on State General Obligation Refunding Bonds issued in July
1992, to the extent that such interest is to be paid from an escrow fund
established with proceeds of such Refunding Bonds, or the State's installment
payments relating to the issuance of certificates of participation.
The State has never defaulted on any of its general obligation
indebtedness or its obligations under lease-purchase or contractual-obligation
financing arrangements and has never been called upon to make any direct
payments pursuant to its guarantees. There has never been a default on any
moral obligation debt of any Authority.
In addition to the arrangements described above, State law provides for
State municipal assistance corporations, which are Authorities authorized to
aid financially troubled localities. The Municipal Assistance Corporation For
The City of New York, ("MAC"), created to provide financing assistance to New
York City, is the only municipal assistance corporation created to date. To
enable MAC to pay debt service on its obligations, MAC receives, subject to
annual appropriation by the Legislature, receipts from the 4% New York Sales
Tax for the Benefits of New York City, the State-imposed Stock Transfer Tax
and, subject to certain prior liens, local assistance payments otherwise
payable to the City.
The State's budget for the 1994-95 fiscal year was enacted by the
Legislature on June 7, 1994, more than two months after the start of the fiscal
year. Prior to adoption of the budget, the Legislature enacted appropriations
for disbursements considered to be necessary for State operations and other
purposes, including all necessary appropriations for debt service. The State
Financial Plan for 1994-95 fiscal year was formulated on June 16, 1994 and is
based on the State's budget as enacted by the Legislature and signed into law
by the Governor.
The State Financial Plan is based upon forecasts for national and State
economic activity. Economic forecasts have frequently failed to predict
accurately the timing and magnitude of changes in the national and the State
economies. many uncertainties exist in forecasts of both the national and
State economies, including consumer attitudes toward spending, Federal
financial and monetary policies, the availability of credit and the condition
of the world economy, which could have an adverse effect on the State. There
can be no assurance that the State economy will not experience
worse-than-predicted results in the 1994-95 fiscal year, with corresponding
material and adverse effects on the State's projections of receipts and
disbursements.
AUTHORITIES
The fiscal stability of the State is related to the fiscal stability of
its Authorities, which generally have responsibility for financing,
constructing and operating revenue-producing public benefit facilities.
Authorities are not subject to the constitutional restrictions on the
incurrence of debt which apply to the State itself, and issue bonds and notes
within the amounts of, and as otherwise restricted by, their legislative
authorization. As of September 30, 1993, the latest data available, there were
18 Authorities that had outstanding debt of $100 million or more. The
aggregate outstanding debt, including refunding bonds, of these 18 Authorities
was $63.5 billion as of September 30, 1993, of which approximately $7.7 billion
was moral obligation debt and approximately $19.3 billion was financed under
lease-purchased or contractual-obligation financing arrangements.
<PAGE> 40
Authorities are generally supported by revenues generated by the projects
financed or operated, such as fares, user fees on bridges, highway tolls and
rentals for dormitory room and housing. In recent years, however the State has
provided financial assistance through appropriations, in some cases of a
recurring nature, to certain of the 18 Authorities for operating and other
expenses and, in fulfillment of its commitments on moral obligation
indebtedness or otherwise, for debt service. The operating assistance is
expected to continue to be required in future years.
The State's experience has been that if an Authority suffers serious
financial difficulties, both the ability of the State and the Authorities to
obtain financing in the public credit markets and the market price of the
State's outstanding bonds and notes may be adversely affected. The Housing
Finance Agency ("HFA") and the Urban Development Corporation ("UDC") have in
the past required substantial amounts of assistance from the State of meet debt
service costs or to pay operating expenses. Further assistance, possibly in
increasing amounts, may be required for these, or other, Authorities in the
future. In addition, certain statutory arrangements provide for State local
assistance payments otherwise payable to localities to be made under certain
circumstance to certain Authorities. The State has no obligation to provide
additional assistance to localities whose local assistance payments have been
paid to Authorities under these arrangements. However, in the event that such
local assistance payments are so diverted, the affected localities could seek
additional State funds.
METROPOLITAN TRANSPORTATION AUTHORITY ("MTA")
The MTA oversees the operation of New York City's subway and bus lines by
the New York City Transit Authority and the Manhattan and Bronx Surface Transit
Operating Authority (collectively, the "Transit Authority" or the "TA").
Through its subsidiaries, the Long Island Rail Road Company, the Metro-North
Commuter Railroad Company and the Metropolitan Suburban Bus Authority, the MTA
operates certain commuter rail and bus lines in the New York metropolitan area.
In addition, the Staten Island Rapid Transit Operating Authority, an MTA
subsidiary, operates a rapid transit line on Staten Island. Through its
affiliated agency, the Triborough Bridge and Tunnel Authority (the "TBTA"), the
MTA operates certain intrastate toll bridges and tunnels. Because fare
revenues are not sufficient to finance the mass transit portion of these
operations, the MTA has depended, and will continue to depend, for operating
support upon a system of State, local government and TBTA support, and, to the
extent available, federal operating assistance, including loans, grants and
subsidies.
OTHER LOCALITIES
Certain localities in addition to New York City could also have financial
problems leading to requests for additional State assistance during the State's
1993-94 and 1994-95 fiscal years and thereafter. The potential impact on the
State of such request by localities is not included in the projections of the
State receipts and disbursements in the State's 1994-95 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the creation of the Financial Control Board for the City of Yonkers
(the "Yonkers Board") by the State in 1984. The Yonkers Board is charged with
oversight of the fiscal affairs of Yonkers. Future actions taken by the
Governor or the State Legislature to assist Yonkers could result in allocation
of State resources in amounts that cannot yet be determined.
CERTAIN MUNICIPAL INDEBTEDNESS
Municipalities and school districts have engaged in substantial
short-term and long-term borrowing. In 1992 the total indebtedness of all
localities in the State was approximately $35.2 billion, of which $19.5 billion
was debt of New York City (excluding $5.9 billion in MAC debt); a small portion
(approximately $71.6 million) of the $35.2 billion of indebtedness represented
borrowing to finance budgetary deficits and was issued pursuant to enabling
State legislation. State law requires the Comptroller to review and make
recommendations concerning the budgets of those local government units other
than New York City authorized by State law to issue debt to finance deficits
during the period that such deficit financing is outstanding. Seventeen
localities had outstanding indebtedness for deficit financing at the close of
their fiscal year ending in 1992.
In 1992, an unusually large number of local government units requested
authorization for deficit financing. According to the Comptroller, nine local
government units were authorized to issue deficit financing in the aggregate
amount of $131.1 million, including Nassau County for $65 million in six-year
deficit bonds and Suffolk County for $36 million in six-year deficit bonds.
The current session of the Legislature may receive as many or more requests for
deficit-financing authorizations as a result of deficits previously incurred by
local governments. The Comptroller has indicated that the level of deficit
financing
<PAGE> 41
requests in 1992 was unprecedented, since in 1993 only five localities were
authorized to issue only $5.5 million in deficit financing indebtedness.
Certain proposed federal expenditure reductions would reduce, or in some
cases eliminate, federal funding of some local programs and accordingly might
impose substantial increased expenditure requirements on affected local
programs and accordingly might impose substantial increased expenditure
requirements on affected localities. If the State, New York City or any of the
Authorities were to suffer serious financial difficulties jeopardizing their
respective access to the public credit markets, the marketability of notes and
bonds issued by localities within the State should be adversely affected.
Localities also face anticipated and potential problems resulting from certain
pending litigation, judicial decisions, and long-range economic trends. The
longer-range problems of declining urban population, increasing expenditures,
and other economic trends could adversely affect localities and require
increasing State assistance in the future.
THE CITY OF NEW YORK
The fiscal health of the State is closely related to the fiscal health of
its localities, particularly the City, which has required and continues to
require significant financial assistance form the State. The City's
independently audited operating results for each of its 1981 through 1993
fiscal years, which end on June 30, show a General Fund surplus reported in
accordance with GAAP. In addition, the City's financial statements for the
1993 fiscal year received an unqualified opinion from the City's independent
auditors, the eleventh consecutive year the City has received such an opinion.
However, there can be no assurance that the City will not have a sizable
deficit in the future.
In response to the City's fiscal crisis in 1975, the State took a number
of steps to assist the City in returning to fiscal stability. Among these
actions, the State created MAC to provide financing assistance to the City.
The State also enacted the New York State Financial Emergency Act for The City
of New York (the "Financial Emergency Act") which, among other things,
established the New York State Financial Control Board (the "Control Board") to
oversee the City's financial affairs. The State also established the Office of
the State Deputy Comptroller of the City of New York ("OSDC") to assist the
Control Board in exercising its powers and responsibilities.
The City operates under a four-year financial plan which is prepared
annually and is periodically updated. On June 30, 1986, the Control Board's
powers of approval over the City's financial plan were suspended pursuant to
the Financial Emergency Act. However, the Control Board, MAC and OSDC continue
to exercise various monitoring functions relating to the City's financial
position. The City submits its financial plans as well as the periodic updates
to the Control Board for its review.
Estimates of the City's revenues and expenditures are based on numerous
assumptions and are subject to various uncertainties. If expected federal or
State aid is not forthcoming, if unforeseen developments in the economy
significantly reduce revenues derived from economically sensitive taxes or
necessitate increased expenditures for public assistance, if the City should
negotiate wage increases for its employees greater than the amounts provided
for the City's financial plan or if other uncertainties materialized that
reduce expected revenues or increase projected expenditures, then, to avoid
operating deficits, the City may be required to implement additional actions,
including increases in taxes and reductions in essential City services. The
City might also seek additional assistance from the State.
On December 1, 1993, a three-member panel appointed by the Mayor to
address City structural budget imbalance released a report setting forth its
findings and recommendations. In its report, they noted that budget imbalance
is likely to be greater than the City projected on November 23, 1993 by $255
million in fiscal year 1995, rising to nearly $1.5 billion in fiscal year 1997.
The report provided a number of options that the City should consider in
addressing the structural balance issues such as severe cuts in City-funded
personnel levels, increases in residential property taxes and the sales tax,
and the imposition of bridge tolls and solid waste collection fees. The report
also noted that additional State actions will be required in many instances to
allow the City to cut its budget without grave damage to basic services.
<PAGE> 42
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Trustees of Reserve New York Tax-Exempt
Trust-New York Fund and Reserve Tax-Exempt Trust - Connecticut, Massachusetts,
California and New Jersey Funds:
We have audited the accompanying statements of net assets of Reserve New
York Tax-Exempt Trust-New York Fund and the Connecticut, Massachusetts,
California and New Jersey Funds (four of the series constituting Reserve
Tax-Exempt Trust) and the statements of assets and liabilities of the
Connecticut and California Funds, as of May 31, 1995, and the related
statements of operations, the statements of changes in net assets and the
financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the respective
Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of May 31, 1995 by correspondence with the custodian. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Reserve New York Tax-Exempt Trust-New York Fund and the Connecticut,
Massachusetts, California and New Jersey Funds of Reserve Tax-Exempt Trust as
of May 31, 1995, the results of their operations, the changes in their net
assets and their financial highlights for the periods referred to above, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
New York, New York
June 23, 1995
<PAGE> 43
RESERVE NEW YORK TAX-EXEMPT TRUST--NEW YORK FUND
STATEMENT OF NET ASSETS--MAY 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ----------------------- ---- -------------- --------
<S> <C> <C> <C>
Akron Central School District BAN, 5% 9/13/1995 $2,000 $2,072,815
Babylon IDA for General Microwave Corporation, 3.40% (a) 10/1/1999 1,800 1,806,305
Bleecker HDC Terrace Apt Project S85, 4.40% (a) 7/1/2015 2,590 2,610,907
Buffalo RAN, 5% 7/12/1995 3,000 3,075,714
Cattaragus County IDR for Park Centre Development Project, 4.90% (a) 1/1/2000 665 670,931
Chautauqua County IDR for Greater Buffalo Press Project, 4.15 % (a) 1/1/2000 1,700 1,713,003
Commack Union Free School District TAN, 4.25% 6/30/1995 1,800 1,866,405
Deer Park Union Free School District TAN, 4.25% 6/28/1995 2,000 2,078,933
Dutchess County IDR for M&R Associates Series 1984, 3.80% (a) 12/1/2002 420 424,115
Eagle Tax-Exempt Trust Certificates of Participation Series 1994 C2,
4.20% (a) 6/15/2018 3,000 3,058,380
Guilderland IDA for North Eastern Industrial Park Series 1993 A,
3.40% (a) 12/1/2008 3,700 3,713,472
Hempstead BAN Series D, 4.50% 8/17/1995 3,000 3,109,685
Islip BAN, 4.50% 8/22/1995 2,000 2,071,506
Jefferson County IDA for Watertown Carthage, 4.22% (a) 12/1/2012 3,500 3,512,544
Liverpool Central School District BAN,3.65% 6/23/1995 900 930,147
Metropolitan Transportation Authority Commuter Facilities Revenue Bonds
Series 1991, 3.35% (a) 7/1/2021 5,500 5,519,386
Monroe County BAN Series B, 4.35% 6/9/1995 860 884,354
Montgomery County IDR for Service Merchandise Co., 4.15% (a) 12/31/2024 1,600 1,603,093
Nassau County BAN Series D, 4.75% 8/15/1995 1,000 1,036,085
Nassau County GOB, 5.625% 10/15/1995 1,380 1,396,550
New York City Custodial Receipts Series A31, 4.85% (a) 8/1/2001 4,000 4,062,208
New York City GOB Series A4, 4.20% (a) 8/1/2021 1,100 1,104,016
New York City GOB Series A7, 4.50% (a) 8/1/2020 1,900 1,907,158
New York City GOB Series A9, 4.10% (a) 8/1/2018 1,800 1,806,751
New York City GOB Series A10, 4.10% (a) 8/1/2016 2,000 2,007,501
New York City GOB Series B6, 4.45% (a) 8/15/2005 1,000 1,003,818
New York City GOB Series C, 4.20% (a) 8/1/1995 600 602,218
New York City GOB Series C, 4.20% (a) 8/1/1996 200 200,739
New York City GOB Series C4, 4.20% (a) 8/1/1996 2,300 2,308,504
New York City GOB Series C4, 4.20% (a) 8/1/1997 2,400 2,408,873
New York City GOB Series C5, 4.20% (a) 8/1/1998 200 200,739
New York City GOB Series C5, 4.20% (a) 8/1/2000 300 301,109
New York City GOB Series C-99, 4.20% (a) 8/1/1999 300 301,109
New York City GOB Series D, 4.10% (a) 8/1/1995 1,100 1,104,010
New York City GOB Series E2, 4.10% (a) 8/1/2020 2,300 2,308,494
New York City GOB Series E2, 4.10% (a) 8/1/2021 300 301,108
New York City GOB Series E3, 4.20% (a) 5/15/1997 300 301,109
</TABLE>
<PAGE> 44
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ----------------------- ---- -------------- --------
<S> <C> <C> <C>
New York City GOB Series E4, 4% (a) 8/1/2022 $ 600 $ 602,165
New York City GOB Series E5, 4.10% (a) 8/1/2009 300 301,108
New York City GOB Series E5, 4.10% (a) 8/1/2010 700 702,585
New York City GOB Series E5, 4.10% (a) 8/1/2016 200 200,739
New York City GOB Series E5, 4.10% (a) 8/1/2017 600 602,216
New York City GOB Series E5, 4.10% (a) 8/1/2018 1,300 1,304,801
New York City GOB Series E5, 4.10% (a) 8/1/2019 300 301,108
New York City GOB Series 95B, 4.45% (a) 8/15/2022 1,100 1,104,200
New York City HDC for Carnegie Park Project, 4.50% (a) 12/1/2016 1,410 1,426,507
New York City HDC for Columbus Green Project, 4.50% (a) 12/1/2009 900 910,536
New York City HDC for Parkgate Tower, 3.50% (a) 12/1/2007 3,365 3,376,985
New York City HDC for 96th Street Project 1990 Series A, 3.70% (a) 8/1/2015 4,800 4,817,560
New York City IDR for Calhoun School, Inc. Project, 3.70% (a) 5/1/2020 1,300 1,304,238
New York City RAN, 4.75% 6/30/1995 2,000 2,075,771
New York State BAN Series Q, 4.10% 7/11/1995 2,000 2,005,167
New York State ERD/PCR for New York State Electric and Gas Series
85B, 4.10% (a) 10/15/2015 2,000 2,010,082
New York State ERD/PCR for Orange Rockland Utilties, 3.35% (a) 10/1/2014 1,000 1,003,578
New York State ERD/PCR for Rochester Gas and Electric Corporation,
3.90% (a) 10/1/2014 3,000 3,009,937
New York State ERD/PCR for LILCO Series 85B, 4.70% (a) 3/1/2016 3,000 3,035,250
New York State HFR for Liberty View Apartments Project, 3.85% (a) 11/1/2005 3,350 3,362,698
New York State Job Development Authority Series F, 4.10% (a) 3/1/1999 670 672,333
New York State Local Government Assistance Revenue Bonds Series
1993 A, 3.30% (a) 4/1/2022 5,600 5,619,500
New York State Mortgage Agency Revenue Anticipation Warrants
12th Series, 4.50% (a) 10/1/2012 5,470 5,511,032
North Hempstead Solid Waste Management Authority
Series 93 A, 3.35% (a) 2/1/2012 2,000 2,007,159
Oneida School District BAN Series 1994, 4% 6/16/1995 2,070 2,149,668
Onondaga County IDR for Edge Comb Metals Project, 3.90% (a) 11/1/2009 1,100 1,104,139
Onondaga County IDR for McLane Co. Project, 4.40% (a) 11/1/2004 3,260 3,273,669
Onondaga County IDR for Pass and Seymour, Inc. Project, 4.20% (a) 6/15/1997 1,900 1,903,717
Puerto Rico Government Development Bank, 4% 6/13/1995 3,000 3,004,932
Puerto Rico Municipal Finance Loan Repayment Revenue Bonds for
Series A, 4.75% 7/1/1995 1,000 1,020,409
Rochester BAN Series 1, 5.25% 3/12/1996 2,000 2,033,366
Sachem Central School District TAN, 4.375% 6/29/1995 2,000 2,080,181
Sachem Central School District TAN, 4.50% 6/29/1995 2,000 2,082,586
Suffolk County TAN, 5.25% 8/15/1995 2,000 2,044,872
Suffolk County TAN, 4.50% 9/14/1995 2,000 2,064,435
Syracuse IDR for General Accident Insurance Co. Project, 4.25% (a) 12/1/2003 4,550 4,646,688
</TABLE>
<PAGE> 45
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ----------------------- ---- -------------- --------
<S> <C> <C> <C>
Triboro Bridge and Tunnel Authority Special Obligation Revenue Bonds
Series 1994, 3.30% (a) 1/1/2024 $2,200 $ 2,207,781
Westchester County IDR for M and F Associates Project, 4.90% (a) 7/1/2000 2,000 2,017,839
Westchester County TAN, 5% 12/14/1995 2,000 2,034,072
William Floyd Union Free School District TAN, 4.75% 6/30/1995 4,000 4,108,450
Wyoming County IDR for KN Aronson Inc. Project, 4.58% 8/1/1995 1,000 1,004,111
Yonkers IDR for Consumers Union facility, 3.25% (a) 7/1/2024 1,000 1,003,263
------------
Total New York Fund Investments (99.69%) (Cost $150,713,697) 152,435,227
Other assets, less liabilities (.31%) 470,741
NET ASSETS (100%) equivalent to $1.00 net asset value, offering ------------
and redemption prices per share on 152,905,968 shares of
beneficial interest of $.001 par value outstanding $152,905,968
============
</TABLE>
(a) The interest rate is subject to change periodically. The rates shown
were in effect at May 31, 1995. Securities payable on demand are
collateralized by bank letters of credit or other bank credit agreements.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE> 46
RESERVE TAX-EXEMPT TRUST--CONNECTICUT FUND
STATEMENT OF NET ASSETS--MAY 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ----------------------- ---- -------------- --------
<S> <C> <C> <C>
Connecticut DAI for Allen Group Inc., 4.15% (a) 2/1/2013 $ 800 $ 802,820
Connecticut DAI for Conco Medical Co. Project Series 85, 3.90% (a) 11/1/2005 400 401,319
Connecticut DAI for General Accident Insurance Co., 4.25% (a) 12/1/2013 1,700 1,736,125
Connecticut DAI for Jewish Community Center of Greater New Haven,
3.70% (a) 9/1/2017 300 300,882
Connecticut DAI for Martin Brower Corp. Series 1985, 3.20% (a) 5/1/2005 370 371,284
Connecticut DAI for Rafferty Brown Steel Co. Project Series 85,
4.41% (a) 7/1/1995 700 702,622
Connecticut DAI for Regional YMCA Project, 4.40% (a) 6/1/2008 462 463,726
Connecticut DAI for Trudy Corporation Project, 4.10% (a) 9/1/2009 600 602,089
Connecticut DAI for Zotos International Project, 4.35% (a) 12/1/2004 1,190 1,194,396
Connecticut Development Authority Airport Facilities Industrial
Revenue Bonds for RK Bradley Hotel Association, 4.05% (a) 12/1/2020 1,200 1,204,772
Connecticut Development Authority Health Care Revenue Bonds for
Independent Living Project 1990 Series, 3.45% (a) 7/1/2015 1,145 1,149,210
Connecticut Development Authority PCR for Central Vermont Public
Service, 3.85% (a) 12/1/2015 1,200 1,203,924
Connecticut Development Authority PCR for Connecticut Light and
Power Project Series 1993a, 3.40% (a) 9/1/2028 1,300 1,304,840
Connecticut Development Authority PCR for Western Massachusetts
Electric Co., 3.75% (a) 9/1/2028 1,200 1,204,396
Connecticut GOE Series B, 3.55% (a) 6/1/1996 1,300 1,304,828
Connecticut HEF for Bridgeport Hospital Series B, 3.45% (a) 7/1/2025 1,000 1,003,249
Connecticut HEF for Charlotte Hospital Series B, 4.10% (a) 7/1/2010 300 301,145
Connecticut HEF for Kingswood Oxford School Issue Series A, 4.40% (a) 2/1/2009 700 702,616
Connecticut HEF for Pomfret School Issue Series A, 3.55% (a) 7/1/2024 1,385 1,389,756
Connecticut HEF for Yale New Haven Hospital Series E, 8.60% (a) 7/1/1999 200 211,914
Connecticut State Special Assessment Unemployment Compensation
RAW, Series C, 3.85% (a) 11/15/2001 2,000 2,032,119
Connecticut State Special Assessment Unemployment Compensation
Revenue Bonds Series 1993B, 3.65% (a) 11/1/2001 1,000 1,003,771
Connecticut State Special Tax Transportation Infrastructure
Revenue Bonds, 3.40% (a) 12/1/2010 900 903,565
</TABLE>
<PAGE> 47
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ----------------------- ---- -------------- --------
<S> <C> <C> <C>
Glastonbury BAN, 4.25% 6/15/1995 $1,000 $ 1,020,535
Hartford Redevelopment Agency MHR for Underwood Towers Project,
4.10% (a) 6/1/2020 1,300 1,304,960
Norwich BAN, 4.65% 10/5/1995 210 216,680
Puerto Rico Industrial, Medical, Higher Education and Environmental
RAW for Reynolds Metals, 4% (a) 9/1/2013 700 707,171
Redding BAN, 4.32% 10/25/1995 500 513,225
Shelton BAN, 4.50% 8/15/1995 1,000 1,013,887
-----------
Total Connecticut Fund Investments (98.67%) (Cost $26,073,542) 26,271,826
Other assets, less liabilities, (1.33%) 354,132
-----------
NET ASSETS (100%) equivalent to $1.00 net asset value, offering $26,625,958
and redemption prices per share on 26,625,958 shares of ===========
beneficial interest of $.001 par value outstanding
</TABLE>
- ------------------------
(a) The interest rate is subject to change periodically. The rates shown
were in effect at May 31, 1995. Securities payable on demand are
collateralized by bank letters of credit or other bank credit agreements.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE> 48
RESERVE TAX-EXEMPT TRUST--MASSACHUSETTS FUND
STATEMENT OF NET ASSETS--MAY 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ----------------------- ---- -------------- --------
<S> <C> <C> <C>
Billerica Federal Aid RAN, 4.48% 7/24/1995 $ 324 $ 329,317
Framingham IDA for Perini Corp., 3.60% (a) 9/30/2005 300 301,141
Lincoln BAN, 4% 7/6/1995 400 414,577
Massachusetts Bay Transit Authority 1995 Series A GOB, 5.50% 3/1/1996 700 714,429
Massachusetts Bay Transportation Authority General Transit System
84-A RAW, 4.40% (a) 3/1/2014 500 505,500
Massachusetts Dedicated Income Tax Bonds Series B, 4.15% (a) 12/1/1997 200 200,726
Massachusetts Dedicated Income Tax Bonds Series D, 4.15% 6/1/1995 100 100,363
Massachusetts Dedicated Income Tax Bonds Series E, 4.15% (a) 12/1/1997 300 301,090
Massachusetts GOB, 5% 6/15/1995 700 718,645
Massachusetts HEF for Capital Asset Program Series G-1, 3.20% (a) 1/1/2019 300 300,961
Massachusetts HEF for Boston University Series H, 4.10% (a) 12/1/2015 400 402,471
Massachusetts HEF for Capital Asset Program Series E, 3.60% (a) 1/1/2035 400 401,437
Massachusetts HEF for Harvard University, 3.50% (a) 8/1/2017 200 200,696
Massachusetts HEF for Harvard University, 3.50% (a) 2/1/2016 187 187,651
Massachusetts HEF for Mount IDA College Series A, 3.75% (a) 7/1/2018 500 501,611
Massachusetts HEF for Wellesley College Series E, 3.10% (a) 7/1/2022 400 401,388
Massachusetts HEF for Williams College Series E, 3.40% (a) 8/1/2014 800 802,907
Massachusetts IDA for KRH Rolls Inc. Project Series 1988, 4.15% (a) 5/1/2006 400 402,937
Massachusetts Municipal Wholesale Electric Series 1994 C, 3.45% (a) 7/1/2019 400 401,439
Puerto Rico Municipal Finance Agency Series A RAW, 4.75% 7/1/1995 750 765,307
Saugus BAN, 4.50% 8/24/1995 535 548,030
Winchester GOB, 5.75% 7/1/1995 400 410,380
Yarmouth RAN, 4.24% 9/5/1995 700 707,343
-----------
Total Massachusetts Fund Investments-(98.54%) (Cost $9,919,550) 10,020,346
Other assets, less liabilities - (1.46%) 148,639
-----------
NET ASSETS (100%) equivalent to $1.00 net asset value, offering $10,168,985
and redemption price per share on 10,168,985 shares of beneficial ===========
interest of $.001 par value outstanding.
</TABLE>
- ------------------------
(a) The interest rate is subject to change periodically. The rates shown
were in effect at May 31, 1995. Securities payable on demand are
collateralized by bank letters of credit or other bank credit agreements.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE> 49
RESERVE TAX-EXEMPT TRUST--CALIFORNIA FUND
STATEMENT OF NET ASSETS--MAY 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ----------------------- ---- -------------- --------
<S> <C> <C> <C>
Anaheim Certificate of Participation, 3.50% (a) 8/1/2019 $ 350 $ 354,507
California HFA for Sutter Health Series 1990 B, 4.20% (a) 3/1/2020 600 602,181
California PCR for Pacific G&E, 4.05% (a) 11/1/2008 400 401,331
California RAN Series A, 5% 6/28/1995 1,000 1,041,513
California State RAW Series C, 5.75% 4/25/1996 600 635,750
Irvine Ranch Water District Waterworks Bonds Elections 1988,
4.25% (a) 11/15/2013 200 200,754
Lancaster MHR for Westwood Park Apartments 1985, 4% (a) 12/1/2007 500 501,915
Los Angeles Community Redevelopment Agency for Baldwin Hills,
3.60% (a) 12/1/2014 400 401,382
Los Angeles for Promenade Towers Series 1989, 4.30% (a) 4/1/2009 400 403,106
Los Angeles Metropolitan Transporation Authority IDA for General
Revenue Union Station Gateway Series 1995A, 4.30% (a) 7/1/2025 700 702,647
Los Angeles TRAN, 4.50% 6/30/1995 400 416,635
Orange County Apartment Development Revenue Bonds Issue A of
1991, the Lakes Project 3.85%, Letter of Credit with Citibank (a) 12/1/2006 500 501,877
Orange County Sanitation District Capital Improvement Program
1990-92, 4.50% Letter of Credit with National Westminster (a) 8/1/2015 200 200,805
Pico Rivera Community Redevelopment Agency for Rainer Fund Crossroads
Plaza Project, 3.55% (a) 12/1/2010 500 501,737
Puerto Rico Development Bank, 4% 6/13/1995 1,000 1,001,644
San Diego MHR for Series 88A, 5.85% (a) 12/1/2007 790 801,649
Santa Ana HDC for Mercury S&L, 4.275% (a) 11/1/2005 500 503,930
Santa Clara Power Electric Revenue Bonds Series 85C, 3.40% (a) 7/1/2010 300 301,081
Upland MHR Community Redevelopment Bonds, 4.40% (a) 3/1/2014 200 202,277
Upland MHR Community Redevelopment Bonds Series B, 4.40% (a) 3/1/2014 100 101,139
West Covina TRAN, 4.50% 8/31/1995 500 518,685
-----------
Total California Fund Investments (92.87%) (Cost $10,149,136) 10,296,545
Other assets, less liabilities (7.13%) 791,067
-----------
NET ASSETS (100%) equivalent to $1.00 net asset value, offering $11,087,612
and redemption prices per share on 11,087,612 shares of ===========
beneficial interest of $.001 par value outstanding
</TABLE>
(a) The interest rate is subject to change periodically. The rates shown
were in effect at May 31, 1995. Securities payable on demand are
collateralized by bank letters of credit or other bank credit agreements.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE> 50
RESERVE TAX-EXEMPT TRUST--NEW JERSEY FUND
STATEMENT OF NET ASSETS--MAY 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ----------------------- ---- -------------- --------
<S> <C> <C> <C>
Bayonne Temporary Notes, 4.35% 9/15/1995 $ 900 $ 926,196
Bloomingdale GOB, 5.50% 3/22/1995 110 112,115
Brick Township General Improvement Bonds, 5.35% 3/1/1996 330 336,410
Clifton BAN, 3.68% 6/30/1995 500 516,752
Dover General Improvement Bonds Series A, 5.40% 3/15/1996 400 407,288
Engelwood RAN, 3.87% 7/19/1995 300 309,723
Ewing Township BAN, 5.04% 10/27/1995 695 707,404
Jersey City School Promissory Notes, 5.125% 3/8/1996 500 507,551
Montvale TAN, 4.40% 1/9/1996 500 503,350
New Jersey EDA for Economic Growth Bond Series F, 4% (a) 8/1/2014 840 843,090
New Jersey EDA for IMTT Dock, 4.10% (a) 12/1/2027 1,700 1,706,160
New Jersey EDA for IMTT Dock, 4.15% (a) 12/1/2027 700 702,566
New Jersey EDA for St. Peters School Series 1995, 4.10% (a) 1/1/2010 1,375 1,380,159
New Jersey EDA for Volvo of American Corp, 4.708% (a) 12/1/2004 1,700 1,719,981
New Jersey Economic Recovery Notes, 4.45% (a) 8/1/2008 1,000 1,004,044
New Jersey GOB Series D, 4.20% 2/15/1996 170 172,102
New Jersey TRAN Series A, 5% 6/15/1995 1,600 1,639,088
New Jersey TRAN, 4.35% 6/14/1995 1,000 1,001,788
New Jersey Turnpike Authority Series 91D, 3.25% (a) 1/1/2018 700 710,459
Newark State Aid School Bonds, 8.50% 10/1/1995 435 447,558
North Brunswick BAN, 4.50% 8/16/1995 500 503,742
Puerto Rico Building Authority Public Education and Health Facilities
Series E & F, 8.60% (a) 7/1/1997 250 264,856
Puerto Rico Industrial, Medical, Higher Education and Environmental
PCR Facilities Finance Authority, 3.50% (a) 12/1/2015 800 802,915
Puerto Rico Pre-Refunded Electrical Power Authority Series J, 9% (a) 7/1/2005 205 219,580
Saddle Brook BAN, 4.30% 6/16/1995 500 504,538
Union County BAN, 4.71% 6/30/1995 500 511,801
Voorhees BAN Series D, 4.30% 6/1/1995 300 307,920
------------
Total New Jersey Fund Investments (86.86%) (Cost $18,541,798) 18,769,136
Other assets, less liabilities, (13.14%) 2,838,114
------------
NET ASSETS (100%) equivalent to $1.00 net asset value, offering
and redemption prices per share on 21,607,250 shares of
beneficial interest of $.001 par value outstanding $21,607,250
===========
</TABLE>
- ------------------------
(a) The interest rate is subject to change periodically. The rates shown
were in effect at May 31, 1995. Securities payable on demand are
collateralized by bank letters of credit or other bank credit agreements.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE> 51
SECURITY TYPE ABBREVIATIONS:
BAN - Bond Anticipation Notes
DAI - Development Authority Industrial Development Refunding Bonds
EDA - Economic Development Authority Revenue Bonds
ERD - Energy Research and Development Authority
GOB - General Obligation Bonds
GOE - General Obligation Economic Recovery Notes
HDC - Housing Development Corporation Bonds
HEF - Health and Educational Facilities Revenue Bonds
HFA - Health Facilities Authority Revenue Bonds
HFH - Housing Finance Authority Housing Mortgage Finance Program Bonds
HFR - Housing Finance Agency Revenue Bonds
IDA - Industrial Development Authority Revenue Bonds
IDR - Industrial Development Agency Revenue Bonds
MHR - Multifamily Housing Revenue Bonds
PCR - Pollution Control Revenue Bonds
RAN - Revenue Anticipation Notes
RAW - Revenue Anticipation Warrants
TAN - Tax Anticipation Notes
TRAN- Tax & Revenue Anticipation Notes
<PAGE> 52
RESERVE TAX-EXEMPT TRUST ("TRUST")
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1995
<TABLE>
<CAPTION>
CALIFORNIA FUND
- ---------------
<S> <C>
ASSETS:
Investments, at value (identified cost - $10,149,136) $10,296,545
Cash 791,380
-----------
Total Assets 11,087,925
-----------
LIABILITIES:
Accrued expenses 313
-----------
Total Liabilities 313
-----------
NET ASSETS $11,087,612
===========
NET ASSETS CONSIST OF:
Shares of beneficial interest, $.001 par value,
unlimited number of shares authorized $ 11,088
Paid-in capital in excess of par 11,076,524
-----------
NET ASSETS - Equivalent to $1.00 per share based on 11,087,612
shares of beneficial interest outstanding $11,087,612
===========
</TABLE>
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1995
<TABLE>
<CAPTION>
NEW JERSEY FUND
- ---------------
<S> <C>
ASSETS:
Investments, at value (identified cost - $18,541,798) $18,769,136
Cash 2,838,724
-----------
Total Assets 21,607,860
-----------
LIABILITIES:
Accrued expenses 610
-----------
Total Liabilities 610
-----------
NET ASSETS $21,607,250
===========
NET ASSETS CONSIST OF:
Shares of beneficial interest, $.001 par value,
unlimited number of shares authorized $ 21,607
Paid-in capital in excess of par 21,585,643
-----------
NET ASSETS - Equivalent to $1.00 per share based on 21,607,250
shares of beneficial interest outstanding $21,607,250
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE> 53
RESERVE NEW YORK TAX-EXEMPT TRUST ("NY TRUST")
RESERVE TAX-EXEMPT TRUST (CONNECTICUT, MASSACHUSETTS,
CALIFORNIA AND NEW JERSEY FUND) ("TRUST")
(THE NY TRUST AND TRUST ARE COLLECTIVELY REFERRED TO AS "TRUSTS")
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
The Trusts are registered under the Investment Company Act of 1940 as
nondiversified, open-end management investment companies. The policies
summarized below are consistently followed in the preparation of their
financial statements in conformity with generally accepted accounting
principles.
A. The Trust and NY Trust shares of beneficial interest authorized are
unlimited. The Trust's shares are divided into five series, Connecticut
Fund, Interstate Fund, Massachusetts Fund, California Fund and New Jersey
Fund. These financial statements and notes apply only to the
Connecticut, Massachusetts, California and New Jersey Funds of Reserve
Tax-Exempt Trust and to the New York Fund of Reserve New York Tax-Exempt
Trust.
B. Securities are stated at value which represents amortized cost plus
interest accrued to date. Under Securities and Exchange Commission Rule
2a-7, the Trusts use amortized cost to value each fund, by which
investments are valued at cost and the difference between the cost of
each instrument and its value at maturity is accrued into income on a
straight line basis over the number of days to maturity, irrespective of
intervening changes in interest rates or market values of investments.
The maturity of floating or variable rate instruments in which the Trusts
may invest will be deemed to be, for floating rate instruments (1)
following, and for variable rate instruments the longer of (1) or (2)
following: (1) the notice period required before the fund is entitled to
receive payment of the principal amount of the instrument; (2) the period
remaining until the instrument's next rate adjustment, for purposes of
Rule 2a-7 and for computing each fund's weighted average life.
C. It is the Trusts' policy to comply with the requirements of
Subchapter M of the Internal Revenue Code and to distribute all income to
its shareholders. Accordingly, no Federal income tax provision is
required.
D. Investments are recorded as of the date of their purchase and sale.
Interest income is determined on the basis of interest accrued, premium
amortized, and discount accreted.
E. Net investment income on investments is distributed to shareholders
daily and automatically reinvested in additional shares.
F. Each Fund is charged only for its direct or allocated (in proportion
to net assets or number of shareholder accounts) share of expenses.
<PAGE> 54
RESERVE NEW YORK TAX-EXEMPT TRUST ("NY TRUST")
RESERVE TAX-EXEMPT TRUST (CONNECTICUT, MASSACHUSETTS,
CALIFORNIA AND NEW JERSEY FUNDS) ("TRUST")
(THE NY TRUST AND TRUST ARE COLLECTIVELY REFERRED TO AS "TRUSTS")
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
2. MANAGEMENT FEE, SHAREHOLDER SERVICING COSTS AND TRANSACTIONS WITH
AFFILIATES:
Reserve Management Company, Inc. ("RMCI") manages the Trusts'
investments, effects purchases and sales thereof, and absorbs certain
promotional expenses. For such services RMCI receives management fees
from each fund at an annual rate of .50% of the first $500 million, .475%
of the next $500 million, .45% of the next $500 million, .425% of the
next $500 million and .40% of any excess over $2 billion of the average
daily closing net assets.
Also, under the current Service Agreement, RMCI was reimbursed $459,889
(New York Fund), $109,072 (Connecticut Fund), $37,309 (Massachusetts
Fund), $15,416 (California Fund) and $34,840 (New Jersey Fund) during the
year ended May 31, 1995 for expenditures made on behalf of the Trusts'
for personnel, office space and equipment and shareholder accounting and
administrative services, to conduct the Trusts' business. The manager
waived management fees and expenses of $7,311, $14,913 and $494 on the
Connecticut, Massachusetts and New Jersey Funds, respectively. At May
31, 1995 the New York, Connecticut, Massachusetts, California and New
Jersey Funds, had accrued expenses of $4,315, $729, $237, $313 and $610,
respectively, due to RMCI.
3. DISTRIBUTION ASSISTANCE:
Pursuant to a Distribution Plan, each Trust will make payments of up to
.20% per annum of the average net asset value of the Trust qualified
shareholder accounts as to which the payee or RMCI has rendered
assistance in distributing its shares.
4. INVESTMENT CONCENTRATION
The New York, Connecticut, Massachusetts, California and New Jersey Funds
invest substantially all of their assets in portfolios of tax-exempt
debt obligations primarily consisting of issuers of each of the
respective states. The issuers' abilities to meet their obligations may
be affected by economic, regional or political developments. In order to
reduce the credit risk associated with such factors, 72.88%, 86.95%,
41.17%, 65.36% and 49.34% of the New York, Connecticut, Massachusetts,
California and New Jersey Funds' investments, respectively, were backed
by letters of credit, bond insurance of financial institutions and
financial guaranty assurance agencies.
<PAGE> 55
STATEMENTS OF OPERATIONS
YEAR ENDED MAY 31, 1995
<TABLE>
<CAPTION>
RESERVE NEW YORK TAX-EXEMPT TRUST RESERVE TAX-EXEMPT TRUST
--------------------------------- ----------------------------------------------
NEW YORK FUND CONNECTICUT FUND MASSACHUSETTS FUND
--------------------- ---------------- ------------------
<S> <C> <C> <C>
INTEREST INCOME (Note 1) $5,286,200 $1,344,159 $445,351
---------- ---------- --------
EXPENSES (Note 2)
Management fee 763,741 208,094 67,161
Shareholder servicing,
administration and general
office expenses 320,023 72,705 22,763
Distribution assistance (Note 3) 269,772 63,147 3,476
Equipment expense 36,832 8,953 3,052
Professional fees 32,168 10,845 5,275
Occupancy costs 35,143 9,005 2,945
Stationery, printing and supplies 26,131 3,900 998
Trustee fees 3,306 1,021 282
Other expenses 6,286 2,643 1,994
---------- ---------- --------
Total Expenses 1,493,402 380,313 107,946
Less: Management fees and other
expenses voluntarily waived by
Investment Manager (7,311) (14,913)
---------- ---------- --------
Net Expenses 1,493,402 373,002 93,033
---------- ---------- --------
NET INVESTMENT INCOME $3,792,798 $ 971,157 $352,318
========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
RESERVE TAX-EXEMPT TRUST
-------------------------------------------
CALIFORNIA FUND* NEW JERSEY FUND*
--------------- ---------------
<S> <C> <C>
INTEREST INCOME (Note 1) $191,243 $402,202
-------- --------
EXPENSES (Note 2)
Management fee 24,072 52,442
Shareholder servicing,
administration and general
office expenses 9,618 22,497
Distribution assistance (Note 3) 9,469 19,207
Equipment expense 1,270 2,988
Professional fees 2,277 4,308
Occupancy costs 1,016 2,408
Stationery, printing and supplies 438 2,097
Trustee fees 83 204
Other expenses 714 338
-------- --------
Total Expenses 48,957 106,489
Less: Management fees and other
expenses voluntarily waived by
Investment Manager (494)
-------- --------
Net Expenses 48,957 105,995
-------- --------
NET INVESTMENT INCOME $142,286 $296,207
======== ========
</TABLE>
* The California Fund commenced operations on October 17, 1994 and the New
Jersey Fund commenced operations on June 21, 1994.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE> 56
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
RESERVE NEW YORK TAX-EXEMPT TRUST RESERVE TAX-EXEMPT TRUST
------------------------------------- ----------------------------------
NEW YORK FUND CONNECTICUT FUND
------------------------------------- ----------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, 1995 MAY 31, 1994 MAY 31, 1995 MAY 31, 1994
--------------- -------------- ------------- -----------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM INVESTMENT OPERATIONS:
Net investment income (Note 1) $ 3,792,798 $ 2,383,343 $ 971,157 $ 2,341,947
Dividends to shareholders (3,792,798) (2,383,343) (971,157) (2,341,947)
----------- ------------ ------------ ------------
FROM CAPITAL SHARE TRANSACTIONS
(at net asset value of $1 per share):
Net proceeds from sale of shares 592,052,007 620,779,329 114,340,212 263,061,550
Net asset value of shares issued
on reinvestment of dividends 3,792,798 2,383,343 971,157 2,341,947
------------ ------------ ------------ ------------
Subtotal 595,844,805 623,162,672 115,311,369 265,403,497
Cost of shares redeemed (591,325,629) (624,560,694) (217,378,001) (293,826,203)
------------ ------------ ------------ ------------
Increase (decrease) in net assets
derived from capital share
transactions and from investment
operations 4,519,176 (1,398,022) (102,066,632) (28,422,706)
NET ASSETS:
Beginning of year 148,386,792 149,784,814 128,692,590 157,115,296
------------ ------------ ------------ ------------
End of year $152,905,968 $148,386,792 $ 26,625,958 $128,692,590
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
RESERVE TAX-EXEMPT TRUST
----------------------------------------
MASSACHUSETTS FUND
----------------------------------------
YEAR ENDED YEAR ENDED
MAY 31, 1995 MAY 31, 1994
-------------- --------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM INVESTMENT OPERATIONS:
Net investment income (Note 1) $ 352,318 $ 207,245
Dividends to shareholders (352,318) (207,245)
----------- -----------
FROM CAPITAL SHARE TRANSACTIONS
(at net asset value of $1 per share):
Net proceeds from sale of shares 58,983,470 54,742,682
Net asset value of shares issued
on reinvestment of dividends 352,318 207,245
----------- -----------
Subtotal 59,335,788 54,949,927
Cost of shares redeemed (63,991,145) (53,430,161)
----------- -----------
Increase (decrease) in net assets
derived from capital share
transactions and from investment
operations (4,655,357) 1,519,766
NET ASSETS:
Beginning of year 14,824,342 13,304,576
----------- -----------
End of year $10,168,985 $14,824,342
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE> 57
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
RESERVE TAX-EXEMPT TRUST
----------------------------------------------------------------------------------
CALIFORNIA FUND NEW JERSEY FUND
----------------------------------------------------------------------------------
OCTOBER 17, 1994 JUNE 21, 1994
(COMMENCEMENT OF (COMMENCEMENT OF
OPERATIONS) THROUGH OPERATIONS) THROUGH
MAY 31, 1995 MAY 31, 1995
------------------- -------------------
<S> <C> <C>
INCREASE IN NET ASSETS
FROM INVESTMENT OPERATIONS:
Net investment income (Note 1) $ 142,286 $ 296,207
Dividends to shareholders (142,286) (296,207)
----------- -----------
FROM CAPITAL SHARE TRANSACTIONS
(at net asset value of $1 per share):
Net proceeds from sale of shares 29,447,705 74,669,862
Net asset value of shares issued
on reinvestment of dividends 142,286 296,207
----------- -----------
Subtotal 29,589,991 74,966,069
Cost of shares redeemed (18,502,379) (53,358,819)
----------- -----------
Increase in net assets derived
from capital share transactions and f
investment operations 11,087,612 21,607,250
NET ASSETS:
Beginning of period 0 0
----------- -----------
End of period $11,087,612 $21,607,250
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE> 58
RESERVE NEW YORK TAX-EXEMPT TRUST ("NY TRUST")
RESERVE TAX-EXEMPT TRUST (CONNECTICUT, MASSACHUSETTS,
CALIFORNIA AND NEW JERSEY FUNDS) ("TRUST)"
(THE NY TRUST AND TRUST ARE COLLECTIVELY REFERRED TO AS "TRUSTS")
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
5. FINANCIAL HIGHLIGHTS (FOR ONE SHARE OUTSTANDING THROUGHOUT EACH YEAR):
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
---------------------------------------------------------------------------
NEW YORK FUND 1995 1994 1993 1992 1991
------------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- -------
Income from investment operations .0352 .0249 .0281 .0421 .0563
Expenses .0099 .0099 .0103 .0104 .0105
------- ------- ------- ------- -------
Net investment income (1) .0253 .0150 .0178 .0317 .0458
Dividends from net investment income(1) (.0253) (.0150) (.0178) (.0317) (.0458)
------ ------- ------- ------- -------
Net asset value, end of year $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= =======
Total Return 2.53% 1.50% 1.78% 3.17% 4.58%
RATIOS/SUPPLEMENTAL DATA
------------------------
Net assets in thousands, end of year 152,906 148,387 149,785 156,567 148,079
Ratio of expenses to average
net assets .98% .98% 1.02% 1.03% 1.01%
Ratio of net investment income
to average net assets 2.48% 1.48% 1.76% 3.09% 4.43%
</TABLE>
<PAGE> 59
RESERVE NEW YORK TAX-EXEMPT TRUST ("NY TRUST")
RESERVE TAX-EXEMPT TRUST (CONNECTICUT, MASSACHUSETTS,
CALIFORNIA AND NEW JERSEY FUNDS) ("TRUST)"
(THE NY TRUST AND TRUST ARE COLLECTIVELY REFERRED TO AS "TRUSTS")
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FINANCIAL HIGHLIGHTS (FOR ONE SHARE OUTSTANDING THROUGHOUT EACH YEAR):
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
-----------------------------------------------------------------------------
CONNECTICUT FUND 1995 1994 1993 1992 1991
- ---------------- ------ -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- -------
Income from investment operations .0352 .0250 .0269 .0400 .0534
Expenses (3) .0098 .0086 .0087 .0091 .0086
------- ------- ------- ------- -------
Net investment income (1) .0254 .0164 .0182 .0309 .0448
Dividends from net investment income (1) (.0254) (.0164) (.0182) (.0309) (.0448)
------- ------- ------- ------- -------
Net asset value, end of year $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= =======
Total Return 2.54% 1.64% 1.82% 3.09% 4.48%
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net assets in thousands, end of year 26,626 128,693 157,115 191,101 241,790
Ratio of expenses to average
net assets (3) .89% .85% .86% .90% .85%
Ratio of net investment income
to average net assets 2.33% 1.62% 1.81% 3.05% 4.41%
</TABLE>
<PAGE> 60
RESERVE NEW YORK TAX-EXEMPT TRUST ("NY TRUST")
RESERVE TAX-EXEMPT TRUST (CONNECTICUT, MASSACHUSETTS,
CALIFORNIA AND NEW JERSEY FUNDS) ("TRUST)"
(THE NY TRUST AND TRUST ARE COLLECTIVELY REFERRED TO AS "TRUSTS")
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FINANCIAL HIGHLIGHTS (FOR ONE SHARE OUTSTANDING THROUGHOUT EACH YEAR):
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
-------------------------------------------------------------------------------
MASSACHUSETTS FUND 1995 1994 1993 1992 1991
- ------------------ -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- -------
Income from investment operations .0335 .0227 .0257 .0386 .0551
Expenses (3) .0070 .0052 .0048 .0045 .0032
------- ------- ------- ------- -------
Net investment income (1) .0265 .0175 .0209 .0341 .0519
Dividends from net investment income (1) (.0265) (.0175) (.0209) (.0341) (.0519)
------- ------- ------- ------- -------
Net asset value, end of year $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= =======
Total Return 2.65% 1.75% 2.09% 3.41% 5.19%
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net assets in thousands, end of year 10,169 14,824 13,305 7,186 4,652
Ratio of expenses to average net
assets (3) .69% .51% .46% .44% .30%
Ratio of net investment income to
average net assets 2.60% 1.73% 2.04% 3.28% 4.79%
</TABLE>
<PAGE> 61
RESERVE NEW YORK TAX-EXEMPT TRUST ("NY TRUST")
RESERVE TAX-EXEMPT TRUST (CONNECTICUT, MASSACHUSETTS,
CALIFORNIA AND NEW JERSEY FUNDS) ("TRUST)"
(THE NY TRUST AND TRUST ARE COLLECTIVELY REFERRED TO AS "TRUSTS")
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FINANCIAL HIGHLIGHTS (FOR ONE SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
<TABLE>
<CAPTION>
OCTOBER 17, 1994
(COMMENCEMENT OF
OPERATIONS) THROUGH
CALIFORNIA FUND MAY 31, 1995
- --------------- -------------------
<S> <C>
Net asset value, beginning of period $1.0000
-------
Income from investment operations .0243
Expenses (2) .0062
-------
Net investment income (1) .0181
Dividends from net investment income (1) (.0181)
-------
Net asset value, end of period $1.0000
=======
Total Return 1.81%
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net assets in thousands, end of period 11,088
Ratio of expenses to average
net assets (2) 1.02%
Ratio of net investment income
to average net assets (2) 2.95%
</TABLE>
<TABLE>
<CAPTION>
JUNE 21, 1994
(COMMENCEMENT OF
OPERATIONS) THROUGH
NEW JERSEY FUND MAY 31, 1995
- --------------- -------------------
<S> <C>
Net asset value, beginning of period $1.0000
-------
Income from investment operations .0330
Expenses (2)(3) .0087
-------
Net investment income (1) .0243
Dividends from net investment income (1) (.0243)
-------
Net asset value, end of period $1.0000
=======
Total Return 2.43%
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net assets in thousands, end of period 21,607
Ratio of expenses to average
net assets (2)(3) 1.01%
Ratio of net investment income
to average net assets (2) 2.82%
</TABLE>
- ------------------------------
<PAGE> 62
(1) Based on compounding of daily dividends. Not indicative of future
results.
(2) Annualized.
(3) During these periods the Manager waived all or a portion of fees and
expenses. If there were no reductions in expenses, the actual expenses
would have been .91%, .95%, .96%, 1.00% and .95% for the Connecticut
Fund, .80%, 1.01%, .96%, .94%, and .80% for the Massachusetts Fund and
1.01% for New Jersey Fund.
------------------------
FEDERAL TAX INFORMATION
The dividends distributed by each Fund are exempt interest dividends for
Federal tax purposes.
<PAGE> 63
RESERVE NEW YORK TAX-EXEMPT TRUST
PART C
Item 24.Financial Statements and Exhibits
(a) Financial Statements Included in Part A
(1) Financial Highlights
(b) Financial Statements Included in Part A and Part B
(1) Statements of Net Assets at May 31, 1995
(2) Statements of Operations for the year ended May 31, 1995
(3) Statements of Changes in Net Assets for the years ended May
31, 1994 and 1995
(4) Notes to Financial Statements
(5) Report of Independent Accountants.
(b) Exhibits
* (1) Declaration of Trust was filed as an exhibit to Registrant's
Initial Registration Statement dated July 22, 1983.
* (2) Bylaws were filed as an exhibit to Registrant's Initial
Registration Statement dated July 22, 1983. Amendment No.
2 filed as an exhibit to Post-Effective Amendment No. 10
dated July 31, 1990.
(3) Not Applicable.
(4) Not Applicable.
* (5) Form of Investment Management Agreement filed as an Exhibit
to Post-Effective Amendment No. 8.
* (6) Form of Distribution Agreement and Plan of
Distribution filed as an exhibit to Registrant's Initial
Registration Statement dated July 22, 1983. Amendment to
Plan of Distribution filed as exhibit to Post-Effective
Amendment No. 9 dated July 31, 1988. *
(7) Pension Plan of Reserve Management Corporation was filed as
an exhibit to Post-Effective Amendment No. 9 dated
September 30, 1986; Amendments to Pension Plan filed as an
exhibit to Post-Effective Amendment No. 45 of The Reserve
Fund (File No. 811-2033) dated July 31, 1989.
* (8) Custodian Agreement with Chemical Bank filed as an exhibit
to Registrant's Initial Registration Statement dated July 22,
1983.
* (9) Form of Service Agreement filed as an exhibit to
Post-Effective Amendment No. 3 dated May 31, 1985.
(10) Opinion of counsel filed herewith.
(11) Consent of auditors filed herewith.
(12) Not Applicable.
(14) Not Applicable.
* (15) See item No. 6.
(16) Schedule of computation of each performance quotation
provided in Registration Statement.
(17) Power of Attorney
(18) Not Applicable
- ---------------------------
* Incorporated by reference
<PAGE> 64
Item 25. Persons Controlled by or Under Common Control with Registrant
Not Applicable
Item 26. Number of Holders of Securities
Number of Record Holders
Title of Class at June 30, 1995
-------------- ------------------------
New York Tax-Exempt Fund 12,387
Item 27. Indemnification
Each Trustee, officer, employee or agent of the Registrant, and any
person who has served at its request as a Director, Trustee, officer
or employee of another business entity, shall be entitled to be
indemnified by the Registrant to the fullest extent permitted by the
laws of the Commonwealth of Massachusetts, subject to the provisions
of the Investment Company Act of 1940 and the rules and regulations
thereunder.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to Trustees, officers and
controlling persons of the Registrant pursuant to the Declaration of
Trust or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable In the event that a claim for
indemnification against such liabilities (other than the payment by
the Registrant of any expenses incurred or paid by a Trustee,
officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy
as expressed in the Act and will be governed the final adjudication
of such issue.
Item 28. Business and Other Connections of Investment Adviser
<TABLE>
<CAPTION>
Name Position with the Adviser Other Businesses
- ---- ------------------------- ----------------
<S> <C> <C>
Henry B.R. Brown President, Treasurer and President, Treasurer and Director of
Director Reserve Management Corporation of the same address
as the Trust; Director and Treasurer of Transfer Agent
Inc. 5 Cornwall St., N.W., Leesburg, Virginia 22075.
Bruce R. Bent Vice President, Secretary Vice President, Secretary and Director of
and Director Reserve Management Corporation and Director of Resrv
Partners, Inc. both of the same address as the Trust.
</TABLE>
Item 29. Principal Underwriters
(a) Resrv Partners, Inc., a principal underwriter of the Registrant,
also acts as principal underwriter to The Reserve Fund, Reserve Institutional
Trust, Reserve Tax-Exempt Trust and Reserve Private Equity Series.
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address with Resrv Partners, Inc. with Registrant
- ------------------ ------------------------- ---------------------
<S> <C> <C>
Bruce R. Bent Chairman and Director President, Treasurer
810 Seventh Avenue & Trustee
New York, NY 10019
</TABLE>
<PAGE> 65
Item 30. Location of Accounts and Records
All records required to be maintained by Section 31(a) of the 1940
Act and the Rules promulgated thereunder are maintained at 810
Seventh Avenue, New York, NY 10019 except those relating to receipts
and deliveries of securities, which are maintained by the
Registrant's Custodian.
Item 31. Management Services
See "Investment Management, Distribution, Service and Custodian
Agreements" in Part B.
Item 32. Undertakings
Not Applicable
<PAGE> 66
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. 18 to
its Registration Statement to be signed on its behalf by the undersigned
thereunto duly authorized, in the City of New York and State of New York, on
the 29th day of September 1995.
/s/ Bruce R. Bent
----------------------------
Bruce R. Bent, President
Attest:
/s/ Marc C. Cozzolino
- --------------------------------------
Marc C. Cozzolino, Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 17 to its Registration Statement has been below
signed by the following persons in the capacities and on the dates indicated.
/s/ Bruce R. Bent Date 9/29/95
- ---------------------------------------- ------------
Bruce R. Bent, President, Treasurer
and Board Member (principal executive,
operating and financial officer)
* Date
---------------
- ---------------------------------------------------
Edwin Ehlert Jr., Board Member
* Date
- -------------------------------------------------- ---------------
Henri W. Emmet, Board Member
* Date
- ------------------------------------------------- ---------------
Donald J. Harrington, Board Member
* Date
- ------------------------------------------------- ---------------
Niels W. Johnsen, Board Member
/s/ Marc C. Cozzolino Date 9/29/95
- ------------------------------------------------- ---------------
Marc C. Cozzolino, *Attorney-in-Fact
General Counsel
<PAGE> 67
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit No. Description Numbered
- ----------- ----------- ------------
<S> <C>
1. Declaration of Trust of Registrant**
2. By-Laws of Registrant**
3. Not Applicable
4. Not Applicable
5. (a) Form of Investment Management Agreement
between the Registrant and Reserve Management Company Inc.**
(b) Form of Sub-Investment Management Agreement
between Registrant, Reserve Management Company, Inc.
and Pinnacle Associates Ltd.
6. (a) Form of Distribution Agreement between the
Registrant and Resrv Parners, Inc.**
(b) Form of Selected Dealer Agreement.**
7. 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 all
are incorporated by reference
8. Form of Custodian Agreements between Registrant and Custodial
Trust Company**
9. Not Applicable
10. Opinion of Counsel
11. Consent of Auditors
12. Not Applicable
13. Form of Subscription Agreement between the Registrant and Reserve
Management Company, Inc.**
14. Not Applicable
15. Form of Service Plan**
16. Schedule of computation of each performance quotation provided in
Registration Statement
17. Powers of Attorney
18. Not Applicable
</TABLE>
* To be filed by amendment
**Previously filed
<PAGE> 1
EXHIBIT 10
[THE RESERVE FUNDS LETTERHEAD]
September 29, 1995
Board of Trustees
Reserve New York Tax-Exempt Trust
810 Seventh Avenue
New York, New York 10019
Gentlemen:
I have acted as counsel to Reserve New York Tax-Exempt Trust, a
Massachusetts business trust (the "Fund"), in connection with the registration
of shares of the New York Tax-Exempt Fund ("Portfolio") with the Securities and
Exchange Commission.
As counsel to the Fund, I have made such investigations and have examined
and relied upon the originals or copies, certified or otherwise identified to
my satisfaction, of such records, instruments, certificates, memoranda and
other documents as I have deemed necessary or advisable for the purposes of
this opinion.
1. The Fund has been duly incorporated and is validly existing under the
laws of Massachusetts.
2. To the best of my knowledge, no further approval, consent or other
order of the Board of Trustees is legally required in connection
with the organization of the Portfolio and the registration of its
shares.
3. To the best of my knowledge, the shares of the Portfolio, when
issued, will be legally issued, non-assessable and, when subscribed
to, fully paid.
I consent to the filing of this opinion as an exhibit to the Fund's
registration statement under the Securities Act of 1933.
Very truly yours,
/s/ Marc C. Cozzolino
Marc C. Cozzolino
Counsel
<PAGE> 1
[COOPERS & LYBRAND LETTERHEAD]
Exhibit 11
CONSENT OF INDEPENDENT ACCOUNTANTS
-------------
We consent to the inclusion of our reports dated June 23, 1995, appearing in
the Post-Effective Amendment to Registration Statement (Form N-1A) of Reserve
Tax-Exempt Trust, on the financial statements and financial highlights of the
Interstate Fund (one of the funds constituting Reserve Tax-Exempt Trust), and
Reserve New York Tax-Exempt Trust-New York Tax Exempt, California Tax-Exempt,
Connecticut Tax-Exempt, Massachusetts Tax-Exempt and New Jersey Tax-Exempt
Funds (four of the funds constituting Reserve Tax-Exempt Trust) to be filed
with the Securities and Exchange Commission under the provisions of the
Securities Act of 1933 and the Investment Company Act of 1940, as amended.
We also consent to the reference to our Firm under the caption Custodial
Services and Independent Accountants in the Statement of Additional
Information.
COOPERS & LYBRAND L.L.P.
New York, New York
September 25, 1995
<PAGE> 1
Exhibit 17
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of
RESERVE NEW YORK TAX-EXEMPT TRUST, a Massachusetts business trust, does hereby
constitute and appoint Marc C. Cozzolino and William Goodwin, and each of them,
his true and lawful attorney and agent to do any and all acts and things and to
execute any and all instruments which said attorney and agent may deem
necessary or advisable; (i) to enable the said Trust to comply with the
Securities Act of 1933, as amended, and any rules, regulations and requirements
of the Securities and Exchange Commission in respect thereof, in connection
with the registration under said Securities Act of the shares of beneficial
interest of said Trust (the "Securities"), including specifically, but without
limiting the generality of the foregoing, the power and authority to sign for
and on behalf of the undersigned the name of the undersigned as trustee of said
Trust to a Registration Statement or to any amendment thereto filed with the
Securities and Exchange Commission in respect of said Securities and to any
instrument or document filed as part of, as an exhibit to or in connection with
said Registration Statement or amendment; (ii) to enable said Trust to comply
with the Investment Company act of 1940, as amended, and any rules, regulations
and requirements of the Securities and Exchange Commission in respect thereof,
in connection with the registration under said Investment Company Act of the
Trust, including specifically, but without limiting the generality of the
foregoing, the power and authority to sign for and on behalf of the undersigned
the name of the undersigned as trustee of said Trust to a Registration
Statement or to any amendment thereto filed with the Securities and Exchange
Commission in respect of said Trust and to any instrument or document filed as
part of, as an exhibit to or in connection with said Registration Statement or
amendment; and (iii) to register or qualify said Securities for sale and to
register or license said Trust as a broker or dealer in said Securities under
the securities or Blue Sky laws of all such states as may be necessary or
appropriate to permit therein the offering and sale of said Securities as
contemplated by said Registration Statement, including specifically, but
without limiting the generality of the foregoing, the power and authority to
sign for and on behalf of the undersigned the name of the undersigned as
trustee of said Trust to any application, statement, petition, prospectus,
notice or other instrument or document, or to any amendment thereto, or to any
exhibit filed as a part thereof or in connection therewith, which is required
to be signed by the undersigned and to be filed with the public authority or
authorities administering said securities or Blue Sky laws for the purpose of
so registering or qualifying said Securities or registering or licensing said
Trust, and the undersigned does hereby ratify and confirm as his own act and
deed all that said attorney and agent shall do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this
21st day of September, 1994.
/s/ Edwin Ehlert Jr.
----------------------------------
Edwin Ehlert Jr., Board Member
/s/ Henri W. Emmet
----------------------------------
Henri W. Emmet, Board Member
/s/ Donald J. Harrington
----------------------------------
Donald J. Harrington, Board Member
/s/ Niels W. Johnsen
----------------------------------
Niels W. Johnsen, Board Member
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FISCAL YEAR ENDED 5/31/95 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH 485b POST-EFFECTIVE AMENDMENT
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-START> JUN-01-1994
<PERIOD-END> MAY-31-1995
<INVESTMENTS-AT-COST> 150,714
<INVESTMENTS-AT-VALUE> 150,602
<RECEIVABLES> 1,833
<ASSETS-OTHER> 475
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 152,910
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 4
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4,515
<SHARES-COMMON-STOCK> 4
<SHARES-COMMON-PRIOR> 148,387
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 152,906
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,286
<OTHER-INCOME> 0
<EXPENSES-NET> 1,493
<NET-INVESTMENT-INCOME> 3,793
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 4,519
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 592,052
<NUMBER-OF-SHARES-REDEEMED> 591,326
<SHARES-REINVESTED> 3,793
<NET-CHANGE-IN-ASSETS> 4,519
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 764
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,493
<AVERAGE-NET-ASSETS> 152,771
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .025
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> .025
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .98
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
