<PAGE> 1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Trustees of The Reserve Fund:
We have audited the accompanying statements of net assets of The Reserve
Fund, (comprising the Primary, U.S. Government and U.S. Treasury Funds) as of
May 31, 1996, 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 Fund'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, 1996, by correspondence with the custodian and brokers. 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 the
Primary, U.S. Government and U.S. Treasury Funds of The Reserve Fund as of May
31, 1996, 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 28, 1996
THE RESERVE FUND--PRIMARY FUND
STATEMENT OF NET ASSETS--MAY 31, 1996
<TABLE>
<CAPTION>
% DAYS TO VALUE
RATE MATURITY (NOTE 1)
------------- ------- --------------
<S> <C> <C> <C>
NEGOTIABLE BANK CERTIFICATES OF DEPOSIT--51.67%
First Alabama Bank............................................................ 5.36 48 $ 25,167,500
Union Bank of California N.A.................................................. 5.40 68 50,202,500
Harris Trust and Savings Bank................................................. 5.31 17 70,182,900
State Street Bank & Trust Co.................................................. 5.30 7 50,125,139
U.S. National Bank of Oregon.................................................. 5.30 17 40,105,903
Banque Nationale de Paris(b).................................................. 5.30-5.35 17-66 80,568,392
Bayerische Vereinsbank AG(a).................................................. 5.33-5.35 24-28 44,450,215
Bayerische Hypothekenund Wechsel Bank(b)...................................... 5.35-5.40 19-45 80,569,984
Canadian Imperial Bank of Commerce(b)......................................... 5.19-5.37 3-95 80,781,190
Creditanstalt-Bankverein(b)................................................... 5.31-5.32 5-18 55,596,244
Creditanstalt-Bankverein(a)................................................... 5.35 38 25,226,872
National Westminster Bank PLC(b).............................................. 5.33 20-28 65,716,839
Sanwa Bank Ltd.(b)............................................................ 5.51 18 50,589,640
Societe Generale(b)........................................................... 5.3125-5.35 13-46 75,474,542
Svenska Handelsbanken(b)...................................................... 5.30 24 25,036,806
U.S. Bank of Washington NA.................................................... 5.32 32 40,023,644
--------------
Total Negotiable Bank Certificates of Deposit................................. $ 859,818,310
--------------
PROMISSORY NOTES--17.47%
ABN Bank Canada(c)............................................................ 5.285-5.31 18-81 $ 78,402,380
Kredietbank North American Finance Corp.(c)................................... 5.29 28 29,889,792
Internationale Nederlanden (U.S.) Funding Corp.(c)............................ 5.25 25 49,839,583
Svenska Handelsbanken Inc.(c)................................................. 5.135-5.25 6-12 54,952,581
Toronto Dominion Holdings (U.S.A.) Inc.(c).................................... 5.26 32-38 77,644,950
--------------
Total Promissory Notes........................................................ $ 290,729,286
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE> 2
THE RESERVE FUND--PRIMARY FUND
STATEMENT OF NET ASSETS--MAY 31, 1996--(CONTINUED)
<TABLE>
<CAPTION>
% DAYS TO VALUE
RATE MATURITY (NOTE 1)
------------- ------- --------------
<S> <C> <C> <C>
REPURCHASE AGREEMENTS--24.65%
FGRA 5.8875%-6.75% due from 9/15/98 to 11/15/23, FGRM 5.25%-8% due from
12/15/98 to 01/15/24, FNAR 6.243% due 7/1/20, FNMS 7.50%-8% due from 3/1/26
to 5/1/26, FNRM 5%-9% due from 7/25/08 to 10/25/23, FNRA 5.49%-6.6875% due
from 6/25/99 to 2/25/24, FRRA 6.7875% due 5/25/23 (Repo with Bear, Stearns &
Co. Inc. dated May 31, 1996 resale amount $231,103,758)..................... 5.39 3 $ 231,103,758
FGPC 7.50% due 6/1/15 to 6/1/26, FMAR 7.309%-7.718% due 9/1/19 to 6/1/25, FHLB
6.85% due 2/25/97, FHOB 5.825%-7.151% due from 3/12/99 to 9/13/05, FGRM
5.85% due 11/15/17, MCDB 7.125% due 7/21/99, FMRA 5.824% due 10/25/23, FNRM
7.60% due 11/25/19, GNMA 6.50%-8.50% due from 8/15/08 to 4/15/26, RFIN due
from 4/15/02 to 1/15/18 and TVBD 8.25%-8.625% due 11/15/96 to 11/15/29, USTN
6% due 5/31/98 (Repo with Smith Barney Inc. dated May 30, 1996 resale amount
$179,106,406)............................................................... 5.35 3 179,106,406
--------------
Total Repurchase Agreements................................................... $ 410,210,164
--------------
TAXABLE MUNICIPAL BONDS--6.92%
Florida Housing Finance Agency Housing Revenue Bonds 1993 Series A(d)......... 5.39 7 $ 41,303,626
Illinois Student Assistance(d)................................................ 5.33-5.36 7 25,223,461
Maricopa County Industrial Development Authority Revenue Bonds for Phoenix
Multi-Purpose Arena Project Series 1990(d).................................. 5.80 7 43,630,743
New Hampshire Business Finance Authority Revenue Bonds 1992 Series B(d)....... 5.60 7 5,024,889
--------------
Total Taxable Municipal Bonds................................................. $ 115,182,719
--------------
Total Primary Fund Investments--(100.71%) (Cost $1,666,699,948)................. 1,675,940,479
Other liabilities, less assets--(-.71%)......................................... (11,826,389)
--------------
NET ASSETS (100%) equivalent to $1.00 net asset value, offering and redemption
price per share based on 1,664,114,090 shares of beneficial interest $.001 par
value outstanding............................................................. $1,664,114,090
=============
</TABLE>
THE RESERVE FUND--U.S. GOVERNMENT FUND
STATEMENT OF NET ASSETS--MAY 31, 1996
<TABLE>
<S> <C> <C> <C>
REPURCHASE AGREEMENTS--99.80%
GNMA 6%-8.50% due from 12/15/10 to 1/15/26 (Repos with Bear, Stearns & Co.
Inc. dated May 16, 1996, resale amount $125,348,993)........................ 5.29 4 $ 125,330,625
GNMA 7%-7.50% due from 10/15/07 to 12/15/25 (Repo with CS First Boston Corp.
dated May 13, 1996, resale amount $115,372,472)............................. 5.30 4 115,355,541
GNMA 6%-10% due from 11/15/04 to 9/20/25 (Repo with Lehman Brothers Inc. dated
May 16, 1996, resale amount $115,321,681)................................... 5.30 4 115,304,750
GNMA 5.5%-17% due from 5/15/98 to 4/15/26 (Repos with Merrill Lynch GSI dated
May 31, 1996 resale amount $87,038,788)..................................... 5.35 3 87,038,788
GNMA 6%-10% due from 5/15/01 to 5/20/26 (Repo with Smith Barney Inc. dated May
16, 1996, resale amount $124,346,856)....................................... 5.30 4 124,328,600
--------------
Total U.S. Government Fund Investments--(99.80%) (Cost $566,000,000).......... 567,358,304
Other assets, less liabilities--(.20%).......................................... 1,138,869
--------------
NET ASSETS (100%) equivalent to $1.00 net asset value, offering and redemption
prices per share based on 568,497,173 shares of beneficial interest $.001 par
value outstanding............................................................. $ 568,497,173
=============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE> 3
THE RESERVE FUND--U.S. TREASURY FUND
STATEMENT OF NET ASSETS--MAY 31, 1996
<TABLE>
<CAPTION>
DAYS
% TO VALUE
RATE MATURITY (NOTE 1)
----------- ------ ------------
<S> <C> <C> <C>
U.S. TREASURY BILLS--98.88%
U.S. Treasury Bills (Cost $140,290,035)............................................ 4.745-5.115 6-167 $141,173,666
Other assets, less liabilities--(1.12%).............................................. 1,592,500
------------
NET ASSETS (100%) equivalent to $1.00 net asset value, offering and redemption prices
per share based on 142,766,166 shares of beneficial interest $.001 par value
outstanding........................................................................ $142,766,166
===========
</TABLE>
- ---------------
(a) Eurodollar Certificates of Deposit--London Branch, United Kingdom.
(b) Yankee Certificates of Deposit.
(c) Collateralized by Bank Letter of Credit.
(d) The interest rate is subject to change periodically. The rates shown were in
effect at May 31, 1996. Securities payable on demand are collateralized by
bank letter of credit, other bank credit agreements or financial guaranty
assurance agencies.
GLOSSARY
<TABLE>
<S> <C>
FGPC FHLMC Gold Mortgage-Backed Pass-Through Participation Certificates
FGRA FHLMC Gold REMIC Mortgage-Backed Pass-Through Participation Certificates--Adjustable Rate
FGRM FHLMC Gold REMIC Mortgage-Backed Pass-Through Participation Certificates
FHLB Federal Home Loan Bank Consolidated Bond
FHLMC Federal Home Loan Mortgage Corporation
FHOB Farmers Home Administrative Certificate of Beneficial Ownership Floating Rate
FMAR FHLMC Adjustable Rate Mortgage-Backed Pass-Through Participation Certificates
FMRA FHLMC Remic Adjustable
FNAR FNMA Adjustable Rate Mortgage-Backed Pass-Through Securities
FNMA Federal National Mortgage Association ("FNMA")
FNMS FNMA Mortgage-Backed Pass-Through Securities
FNRA FNMA REMIC Adjustable Rate Mortgage-Backed Pass-Through Securities
FNRM FNMA REMIC Mortgage-Backed Pass-Through Securities
FRRA FHLMC REMIC Adjustable Rate
GNMA Government National Mortgage Association Mortgage-Backed Pass-Through Securities
MCDB FHLMC Debenture Bond
REMIC Real Estate Mortgage Investment Conduit
RFIN Resolution Funding Corp, STRIPS
STRIP Separate Trading of Registered Interest and Principal
TVBD Tennessee Valley Authority Bond
USTN U.S. Treasury Notes
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE> 4
THE RESERVE FUND
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, 1996
-----------------------------------------------
PRIMARY U.S. GOVERNMENT U.S. TREASURY
FUND FUND FUND
----------- --------------- -------------
<S> <C> <C> <C>
INTEREST INCOME (Note 1)........................................... $99,495,368 $40,250,194 $ 6,344,664
---------- ---------- ---------
EXPENSES (Note 2)
Management fee................................................... 8,120,156 3,471,243 --
Comprehensive fee................................................ -- -- 958,253
Shareholder servicing, administration and general office
expenses....................................................... 3,783,931 1,414,076 --
Distribution assistance (Note 3)................................. 3,045,195 1,312,209 224,672
Equipment expense................................................ 619,234 238,307 --
Professional fees................................................ 473,026 184,443 --
Occupancy costs.................................................. 366,519 142,988 --
Stationery, printing and supplies................................ 311,899 125,928 --
Trustee Fees..................................................... 48,093 18,808 --
Other expenses................................................... 191,358 85,693 --
---------- ---------- ---------
Total Expenses................................................. 16,959,411 6,993,695 1,182,925
Less: voluntary waiver........................................... -- -- (238,966)
---------- ---------- ---------
Net Expenses................................................... 16,959,411 6,993,695 943,959
---------- ---------- ---------
NET INVESTMENT INCOME.............................................. $82,535,957 $33,256,499 $ 5,400,705
========== ========== =========
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
PRIMARY FUND U.S. GOVERNMENT FUND U.S. TREASURY FUND
----------------------------------- ----------------------------------- -------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, 1996 MAY 31, 1995 MAY 31, 1996 MAY 31, 1995 MAY 31, 1996 MAY 31, 1995
--------------- --------------- --------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE
(DECREASE) IN
NET ASSETS
FROM
INVESTMENT
OPERATIONS:
Net
investment
income
paid to
shareholder
as
dividends
(Note
1)....... $ (82,535,957) $ (63,849,095) $ (33,256,499) $ (31,622,436) $ (5,400,705 ) $ (2,101,013 )
------------- ------------- ------------- ------------- ------------ ------------
FROM CAPITAL
SHARE
TRANSACTIONS
(at net
asset value
of $1 per
share):
Net
proceeds
from the
sale of
shares... 7,548,966,022 5,517,915,950 3,341,970,451 3,357,034,315 595,400,649 275,724,588
Net asset
value of
shares
issued on
reinvestment
of
dividends... 82,535,957 63,849,095 33,256,499 31,622,436 5,400,705 2,101,013
------------- ------------- ------------- ------------- ------------ ------------
Subtotal... 7,631,501,979 5,581,765,045 3,375,226,950 3,388,656,751 600,801,354 277,825,601
Cost of
shares
redeemed... (7,569,851,461) (5,394,679,426) (3,528,514,569) (3,407,569,981) (553,261,868 ) (189,949,285 )
------------- ------------- ------------- ------------- ------------ ------------
Net increase
(decrease)
from capital
share
transactions... 61,650,518 187,085,619 (153,287,619) (18,913,230) 47,539,486 87,876,316
NET ASSETS:
Beginning of
year....... 1,602,463,572 1,415,377,953 721,784,792 740,698,022 95,226,680 7,350,364
------------- ------------- ------------- ------------- ------------ ------------
End of
year....... $ 1,664,114,090 $ 1,602,463,572 $ 568,497,173 $ 721,784,792 $142,766,166 $ 95,226,680
============= ============= ============= ============= ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE> 5
THE RESERVE FUND (THE "FUND")
PRIMARY, U.S. GOVERNMENT AND U.S. TREASURY FUNDS (THE "FUNDS")
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
------------------------------
The Fund is registered under the Investment Company Act of 1940 as a
non-diversified, open end investment company. The policies summarized below
are consistently followed in the preparation of its financial statements in
conformity with generally accepted accounting principles.
A. The Fund's authorized shares of beneficial interest are unlimited. The
Fund's shares are divided into four classes, Primary Fund, U.S. Government
Fund, U.S. Treasury Fund and the Strategist Money Market Fund. These
financial statements and notes apply only to the Primary, U.S. Government and
U.S. Treasury Funds.
B. Securities are stated at value which represents amortized cost plus
interest accrued to date. Under Securities and Exchange Commission Rule 2a-7,
the Fund uses amortized cost to value the portfolios, 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 days to maturity irrespective of intervening changes in interest rates or
market value of investments. The maturity of floating or variable rate
instruments in which the Fund 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 the portfolio's average weighted life
to maturity.
C. It is the Fund's policy to comply with Subchapter M of the Internal
Revenue Code and to distribute all of its taxable 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. The Fund's custodian holds the securities owned subject to repurchase
agreements. The Fund's investment adviser determines that the resale amount
of the repurchase agreement is fully collateralized.
F. Net investment income on investments is distributed to shareholders daily
and automatically reinvested in additional Fund shares.
G. The Primary and U.S. Government Funds are charged only for their direct or
allocated (in proportion to net assets or number of shareholder accounts)
share of expenses.
H. The Primary Fund had payables of $20,000,000 for securities purchased but
not received at May 31, 1996.
2. MANAGEMENT FEE, SHAREHOLDER SERVICING COST AND TRANSACTIONS WITH AFFILIATES:
---------------------------------------------------------------------------
Under the Management Agreement, Reserve Management Company, Inc. ("RMCI"),
manages the Fund's investments, effects purchases and sales thereof, and
absorbs certain promotional expenses. RMCI receives management fees from the
Primary and U.S. Government Funds 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 net assets of Primary and U.S. Government Funds, subject to
reimbursement of Fund expenses (excluding brokerage fees and commissions,
interest charges, taxes and extraordinary legal fees and expenses) exceeding
1% of average daily closing net assets. For the U.S. Treasury Fund, RMCI
receives a comprehensive fee at an annual rate of .80% of the average daily
net assets. At May 31, 1996, the advisor waived a portion of its
comprehensive fee. Also, under the current Service Agreement, RMCI was
reimbursed $5,794,060 (Primary Fund) and $2,210,243 (U.S. Government Fund)
during the year ended May 31, 1996 for expenditures made on behalf of the
Fund's respective Portfolios for personnel, office space and equipment and
shareholder accounting and administrative services, to carry out the Fund's
business. At May 31, 1996, the Primary, U.S. Government and U.S. Treasury
Funds had accrued expenses of $133,638, $45,510, and $8,540, respectively,
due to RMCI.
3. DISTRIBUTION ASSISTANCE:
-----------------------
Pursuant to a Plan of Distribution, subject to the Fund's expense
limitations, the Fund will make payments of up to .20% per annum of the
average net asset value of shareholder accounts as to which the payee has
rendered assistance in distributing shares of the portfolios. The Plan
requires RMCI to pay an equivalent amount from its own resources.
4. MANAGEMENT'S USE OF ESTIMATES:
--------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the dates of
the financial statements and the reported amounts of income and expenses
during the reporting periods. Actual results could differ from those
estimates.
16
<PAGE> 6
THE RESERVE FUND (THE "FUND")
PRIMARY, U.S. GOVERNMENT AND U.S. TREASURY FUNDS (THE "FUNDS")
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. COMPONENTS OF NET ASSETS:
---------------------------
At 5/31/96, the following funds had these components of net assets:
<TABLE>
<CAPTION>
U.S. U.S.
PRIMARY GOVERNMENT TREASURY
-------------- ------------ ------------
<S> <C> <C> <C>
Par Value........................................................ $ 1,664,114 $ 568,497 $ 142,766
Paid-in-Capital.................................................. 1,662,449,976 567,928,676 142,623,400
-------------- ------------ ------------
Net Assets....................................................... $1,664,114,090 $568,497,173 $142,766,166
============== ============= =============
</TABLE>
------------------------
FEDERAL TAX INFORMATION
The dividends distributed by the Primary, U.S. Government and U.S. Treasury
Funds in each of the periods are treated for Federal tax purposes as ordinary
income.
17
