<PAGE> 1
1933 Act File No. 2-36429
1940 Act File No. 811-2033
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
<TABLE>
<S> <C>
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
----
Pre-Effective Amendment No.
----- ----
Post-Effective Amendment No. 58 X
----- ----
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
----
Amendment No. 28 X
-------- ----
</TABLE>
(Check appropriate box or boxes.)
THE RESERVE FUND
- --------------------------------------------------------------------------------
(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) 977-9982
------------------------------
Michelle Neufeld, Esq. The Reserve Fund, 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 October 17, 1997 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
---
---------------
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, 1997 was filed with the Commission on
July 25, 1997.
This filing contains __ pages.
<PAGE> 2
THE RESERVE FUND
CROSS REFERENCE SHEET PURSUANT TO RULE 404aA
<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;
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;
Holders of Securities Shares of Beneficial Interest
16. Investment Advisory and Other Services Investment Management, Distribution,
Service 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
of Securities Being Offered Shares;
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
This filing contains a combined prospectus which includes Funds not part of
this Registraion Statement.
</TABLE>
<PAGE> 3
General Information, Purchases and
Redemptions
[LOGO] ---------------------------------------
24 Hour Yield and Balance Information
---------------------------------------
Nationwide 800-637-1700 M
www.reservefunds.com
The Reserve Fund, "America's First Money Fund," is a no-load money market
fund with eleven investment portfolios: PRIMARY, U.S. GOVERNMENT, U.S. TREASURY,
INTERSTATE TAX-EXEMPT, CALIFORNIA TAX-EXEMPT, CONNECTICUT TAX-EXEMPT, FLORIDA
TAX-EXEMPT, MASSACHUSETTS TAX-EXEMPT, NEW JERSEY TAX-EXEMPT, NEW YORK
TAX-EXEMPT, AND PENNSYLVANIA TAX-EXEMPT FUNDS (the "Fund(s)").
The primary objective of each Fund is to seek as high a level of current
income for the taxable Funds and short-term interest income exempt from federal
and/or state and local taxes for the tax-exempt Funds as is consistent with the
preservation of capital and liquidity. However, achievement of this objective
cannot be assured.
The Funds are designed for institutions and individuals as a convenient
alternative to the direct investment of temporary cash balances in short-term
money market accounts or instruments. The Funds seek to employ idle cash at
yields competitive with yields of other comparable short-term investments, and
are designed to reduce or eliminate for the investor the mechanical problems of
direct investment in money market instruments such as scheduling maturities,
evaluating the credit of issuers, investing in round lots, safeguarding receipt
and delivery of securities and reinvesting.
- PRIMARY FUND invests in (i) obligations backed by the full faith and
credit of the United States government and its agencies or
instrumentalities; (ii) deposit-type obligations, acceptances and letters
of credit of FDIC insured institutions and foreign banks with assets in
excess of $25 billion; (iii) short-term corporate obligations rated A-1 or
the equivalent thereof; (iv) other similar high quality short-term
instruments; and (v) instruments fully collateralized by the foregoing
instruments.
- U.S. GOVERNMENT FUND invests in obligations backed by the full faith and
credit of the United States government or obligations collateralized
thereby.
- U.S. TREASURY FUND invests exclusively in obligations backed by the full
faith and credit of the United States government that provide interest
income exempt from state and local income taxes.
- THE INTERSTATE TAX-EXEMPT FUND invests principally in short-term
obligations issued by the states, territories, and possessions of the
United States and their political subdivisions, duly constituted
authorities and corporations.
- THE NEW YORK TAX-EXEMPT FUND of Reserve New York Tax-Exempt Trust and the
CALIFORNIA, CONNECTICUT, FLORIDA, MASSACHUSETTS, NEW JERSEY, AND
PENNSYLVANIA TAX-EXEMPT FUNDS of Reserve Tax-Exempt Trust seek a high level
of short-term interest income exempt from federal, state, and local income
and/or property taxes, if any, for resident holders of the particular state
fund as is consistent with the preservation of capital and liquidity. Each
of the Funds invests principally in high quality tax-exempt obligations
issued by the specific state and its counties, municipalities, authorities
or other political subdivisions.
SHARES OF THE FUNDS ARE NEITHER GUARANTEED NOR INSURED BY THE U.S.
GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE FUNDS WILL BE ABLE TO MAINTAIN
A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
This Prospectus sets forth the information about each Fund which a
prospective investor should know before investing. A Statement of Additional
Information ("SAI") dated July 31, 1997, as amended on October 17, 1997,
providing further details about the Funds, has been filed with the Securities
and Exchange Commission ("SEC"). It may be obtained without charge by writing or
calling the Funds at 800-637-1700. The SAI is hereby incorporated by reference
into this Prospectus.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR 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 HAVE THEY PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------
Prospectus dated October 17, 1997.
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
the Funds will incur. The expenses and fees set forth in the table are for the
fiscal year ended May 31, 1997.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Load Imposed on Purchases..................................... None
Sales Load Imposed on Reinvested Dividends.......................... None
Redemption Fees*.................................................... None
Exchange Fees....................................................... None
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
U.S. CALIFORNIA
PRIMARY GOVERNMENT U.S. TREASURY INTERSTATE TAX-EXEMPT
FUND FUND FUND FUND FUND
------- -------------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Management Fee............................. .46% .50% .60%(1) .50% .50%
12b-1 Fees................................. .18% .18% .17% .19% .20%
Other Operating Expenses
Administration and Operations Expenses... .30% .27% None .28% .27%
Equipment................................ .03% .03% None .04% .04%
Other.................................... .01% .01% None .03% .02%
------- ------ ------ ---------- ----------
Total Operating Expenses................... .98% .99% .77% 1.04% 1.03%
======= ============= =========== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
CONNECTICUT FLORIDA MASSACHUSETTS NEW JERSEY NEW YORK PENNSYLVANIA
TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT
FUND FUND FUND FUND FUND FUND (3)
---------- ---------- ------------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Management Fees.............. .50% .50% .46%(2) .50% .50% .50%
12b-1 Fees................... .16% .15% .03% .19% .18% .20%
Other Operating Expenses
Administration and
Operations Expenses...... .27% .34% .25% .32% .32% None
Equipment.................. .03% .04% .03% .04% .03% None
Other...................... .01% .01% .02% .01% .01% .30%
---------- ---------- ------ ---------- ---------- ------
Total Operating Expenses..... .97% 1.04% .79% 1.06% 1.04% 1.00%
========== ========== ============ ========== ========== ===========
</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. *A $2.00 fee will be charged on redemption checks issued by the
Funds of less than $100 and a $10 fee will be charged for wire redemptions of
less than $10,000. (1) The U.S. Treasury Fund is charged a comprehensive
management fee of 0.80% per annum of its average net assets for both advisory
and ordinary operating expenses during the year. The U.S. Treasury Fund
voluntarily waived a portion of its comprehensive fee. However, the U.S.
Treasury Fund may be charged for certain non-recurring extraordinary expenses
and its allocated or direct share of certain other expenses. (2) The figures
reflect a voluntary reduction of the management fee for the Massachusetts Fund
by the Adviser. If there was no voluntary reduction, the management fee would be
..50%. (3) The Pennsylvania Fund commenced operations on September 13, 1997. See
"Investment Management Agreements" on page 13.
2
<PAGE> 5
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 comprehensive and management fee for the
U.S. Treasury Fund and the Massachusetts Fund by the adviser.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Primary Fund........................................ $ 10 $31 $54 $120
U.S. Government Fund................................ $ 10 $32 $55 $121
U.S. Treasury Fund.................................. $ 8 $25 $43 $ 95
Interstate Tax-Exempt Fund.......................... $ 11 $33 $57 $127
California Tax-Exempt Fund.......................... $ 11 $33 $57 $126
Connecticut Tax-Exempt Fund......................... $ 10 $31 $54 $119
Florida Tax-Exempt Fund............................. $ 11 $33 $57 $127
Massachusetts Tax-Exempt Fund....................... $ 8 $25 $44 $ 98
New Jersey Tax-Exempt Fund.......................... $ 11 $34 $58 $129
New York Tax-Exempt Fund............................ $ 11 $33 $57 $127
Pennsylvania Tax-Exempt Fund........................ $ 10 $32 $55 $122
</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.
3
<PAGE> 6
FINANCIAL HIGHLIGHTS
The following information applies to a share of the Primary, U.S.
Government, U.S. Treasury, Interstate, California, Connecticut, Florida,
Massachusetts, New Jersey and New York 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,
----------------------------------------------------------------------------------------------------
PRIMARY FUND 1997 1996 1995 1994 1993 1992 1991 1990
- ---------------------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year.... $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
--------- --------- --------- --------- --------- --------- --------- ---------
Income from investment
operations........... .0557 .0591 .0549 .0345 .0361 .0541 .0794 .0915
Expenses.............. .0100 .0101 .0099 .0099 .0100 .0100 .0100 .0096
--------- --------- --------- --------- --------- --------- --------- ---------
Net investment
income(1)............ .0457 .0490 .0450 .0246 .0261 .0441 .0694 .0819
Dividends from net
investment
income(1)............ (.0457) (.0490) (.0450) (.0246) (.0261) (.0441) (.0694) (.0819)
--------- --------- --------- --------- --------- --------- --------- ---------
Net asset value, end
of year.............. $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
========= ========= ========= ========= ========= ========= ========= =========
Total Return.......... 4.57% 4.90% 4.50% 2.46% 2.61% 4.41% 6.94% 8.19%
RATIOS/SUPPLEMENTAL
DATA
- ----------------------
Net assets in
thousands, end of
year................. 2,104,109 1,664,114 1,602,464 1,415,378 1,389,136 1,553,828 1,803,132 1,777,372
Ratio of expenses to
average net assets... .98% .98% .97% .97% .99% .99% .97% .92%
Ratio of net
investment income to
average net assets... 4.47% 4.79% 4.42% 2.44% 2.58% 4.34% 6.72% 7.85%
<CAPTION>
PRIMARY FUND 1989 1988
- ---------------------- --------- ---------
<S> <C> <C>
Net asset value,
beginning of year.... $ 1.0000 $ 1.0000
--------- ---------
Income from investment
operations........... .0913 .0735
Expenses.............. .0098 .0101
--------- ---------
Net investment
income(1)............ .0815 .0634
Dividends from net
investment
income(1)............ (.0815) (.0634)
--------- ---------
Net asset value, end
of year.............. $ 1.0000 $ 1.0000
========= =========
Total Return.......... 8.15% 6.34%
RATIOS/SUPPLEMENTAL
DATA
- ----------------------
Net assets in
thousands, end of
year................. 1,698,934 1,656,050
Ratio of expenses to
average net assets... .94% .98%
Ratio of net
investment income to
average net assets... 7.84% 6.14%
</TABLE>
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
-------------------------------------------------------------------------------------------------
U.S. GOVERNMENT FUND 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ------------------------------ ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
year........................ $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income from investment
operations.................. .0550 .0586 .0542 .0337 .0353 .0533 .0772 .0908 .0921 .0721
Expenses...................... .0101 .0102 .0101 .0100 .0100 .0101 .0102 .0098 .0100 .0103
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net investment income(1)...... .0449 .0484 .0441 .0237 .0253 .0432 .0670 .0810 .0821 .0618
Dividends from net investment
income(1)................... (.0449) (.0484) (.0441) (.0237) (.0253) (.0432) (.0670) (.0810) (.0821) (.0618)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of
year........................ $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total Return.................. 4.49% 4.84% 4.41% 2.37% 2.53% 4.32% 6.70% 8.10% 8.21% 6.18%
RATIOS/SUPPLEMENTAL DATA
- ------------------------------
Net assets in thousands, end
of year..................... 611,844 568,497 721,785 740,698 728,138 853,823 817,604 585,023 654,571 407,214
Ratio of expenses to average
net assets.................. .99% 1.00% .99% .99% .99% .99% .98% .94% .98% 1.00%
Ratio of net investment income
to average net assets....... 4.40% 4.75% 4.31% 2.35% 2.50% 4.21% 6.38% 7.78% 8.01% 5.99%
</TABLE>
4
<PAGE> 7
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31, FEBRUARY 3, 1992
------------------------------------------------------- (COMMENCEMENT OF OPERATIONS)
U.S. TREASURY FUND 1997 1996 1995 1994 1993 THROUGH MAY 31, 1992
- ----------------------------------------- ------- ------- ------- ------- ------- ----------------------------
<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........ .0521 .0547 .0523 .0313 .0330 .0121
Expenses................................. .0078 .0081 .0067 .0073 .0092 .0031
------- ------- ------- ------- ------- -------
Net investment income(1)................. .0443 .0466 .0456 .0240 .0238 .0090
Dividends from net investment
income(1).............................. (.0443) (.0466) (.0456) (.0240) (.0238) (.0090)
------- ------- ------- ------- ------- -------
Net asset value, end of year............. $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $ 1.0000
======= ======= ======= ======= ======= =======
Total Return............................. 4.43% 4.66% 4.56% 2.40% 2.38% 2.75%(2)
RATIOS/SUPPLEMENTAL DATA
- -----------------------------------------
Net assets in thousands, end of year..... 169,178 142,766 95,227 7,350 32,325 512
Ratio of expenses to average net
assets................................. .77%(3) .79%(3) .68%(3) .73%(3) .80% .97%(2)
Ratio of net investment income to average
net assets............................. 4.33% 4.53% 4.64% 2.38% 2.07% 2.74%(2)
</TABLE>
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
INTERSTATE -----------------------------------------------------------------------------------------------------------
TAX-EXEMPT FUND 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- -------------------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
year.............. $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income from
investment
operations........ .0361 .0390 .0368 .0268 .0312 .0455 .0599 .0663 .0650 .0528
Expenses............ .0105 .0105 .0103 .0103 .0104 .0106 .0105 .0104 .0104 .0102
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net investment
income(1)......... .0256 .0285 .0265 .0165 .0208 .0349 .0494 .0559 .0546 .0426
Dividends from net
investment
income(1)......... (.0256) (.0285) (.0265) (.0165) (.0208) (.0349) (.0494) (.0559) (.0546) (.0426)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end
of year........... $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total return........ 2.56% 2.85% 2.65% 1.65% 2.08% 3.49% 4.94% 5.59% 5.46% 4.26%
RATIOS/SUPPLEMENTAL
DATA
- --------------------
Net assets in
thousands, end of
year.............. 306,152 292,067 315,232 352,594 366,383 358,101 333,321 306,153 312,239 371,227
Ratio of expenses to
average net
assets............ 1.04% 1.04% 1.00% 1.02% 1.03% 1.03% 1.03% 1.01% 1.01% 1.00%
Ratio of net
investment income
to average net
assets............ 2.52% 2.80% 2.59% 1.63% 2.06% 3.41% 4.81% 5.43% 5.29% 4.17%
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 17, 1994
YEAR ENDED YEAR ENDED (COMMENCEMENT OF OPERATIONS)
CALIFORNIA TAX-EXEMPT FUND MAY 31, 1997 MAY 31, 1996 THROUGH MAY 31, 1995
- --------------------------------------------------------------------- ------------ ------------ ----------------------------
<S> <C> <C> <C>
Net asset value, beginning of period................................. $ 1.0000 $ 1.0000 $ 1.0000
------- ------- -------
Income from investment operations.................................... .0341 .0379 .0243
Expenses............................................................. .0102 .0106 .0062
------- ------- -------
Net investment income(1)............................................. .0239 .0273 .0181
Dividends from net investment income(1).............................. (.0239) (.0273) (.0181)
------- ------- -------
Net asset value, end of year......................................... $ 1.0000 $ 1.0000 $ 1.0000
======= ======= =======
Total Return......................................................... 2.39% 2.73% 1.81%(2)
RATIOS/SUPPLEMENTAL DATA
- ---------------------------------------------------------------------
Net assets in thousands, end of year................................. 30,952 12,612 11,088
Ratio of expenses to average net assets.............................. 1.03% 1.04% 1.02%(2)
Ratio of net investment income to average net assets................. 2.40% 2.67% 2.95%(2)
</TABLE>
5
<PAGE> 8
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
CONNECTICUT TAX-EXEMPT --------------------------------------------------------------------------------------------------------
FUND 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ----------------------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year.... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income from investment
operations........... .0341 .0368 .0352 .0250 .0269 .0400 .0534 .0615 .0604 .0481
Expenses............... .0098 .0102 .0098(3) .0086(3) .0087(3) .0091(3) .0086(3) .0083(3) .0086(3) .0092(3)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net investment
income(1)............ .0243 .0266 .0254 .0164 .0182 .0309 .0448 .0532 .0518 .0389
Dividends from net
investment
income(1)............ (.0243) (.0266) (.0254) (.0164) (.0182) (.0309) (.0448) (.0532) (.0518) (.0389)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of
year................. $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total Return........... 2.43% 2.66% 2.54% 1.64% 1.82% 3.09% 4.48% 5.32% 5.18% 3.89%
RATIOS/SUPPLEMENTAL
DATA
- -----------------------
Net assets in
thousands, end of
year................. 33,497 34,801 26,626 128,693 157,115 191,101 241,790 314,489 247,929 245,588
Ratio of expenses to
average net assets... .97% 1.01% .89%(3) .85%(3) .86%(3) .90%(3) .85%(3) .81%(3) .84%(3) .90%(3)
Ratio of net investment
income to average net
assets............... 2.39% 2.61% 2.33% 1.62% 1.81% 3.05% 4.41% 5.17% 5.05% 3.81%
</TABLE>
<TABLE>
<CAPTION>
JUNE 24, 1996
(COMMENCEMENT OF OPERATIONS)
FLORIDA TAX-EXEMPT FUND THROUGH MAY 31, 1997
- ---------------------------------------------------- ----------------------------
<S> <C>
Net asset value, beginning of period................ $ 1.0000
-------
Income from investment operations................... .0321
Expenses............................................ .0093
-------
Net investment income(1)............................ .0228
Dividends from net investment income(1)............. (.0228)
-------
Net asset value, end of year........................ $ 1.0000
=======
Total Return(2)..................................... 2.42%
RATIOS/SUPPLEMENTAL DATA
- ----------------------------------------------------
Net assets in thousands, end of year................ 4,109
Ratio of expenses to average net assets(2).......... 1.04%
Ratio of net investment income to average net
assets(2)......................................... 2.39%
</TABLE>
<TABLE>
<CAPTION>
JANUARY 22, 1990
FOR FISCAL YEARS ENDED MAY 31, (COMMENCEMENT OF
------------------------------------------------------------------- OPERATIONS) THROUGH
MASSACHUSETTS TAX-EXEMPT FUND 1997 1996 1995 1994 1993 1992 1991 MAY 31, 1990
- -------------------------------------- ------- ------- ------- ------- ------- ------- ------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period.............................. $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- ------- ------- ------- -------
Income from investment operations..... .0338 .0362 .0335 .0227 .0257 .0386 .0551 .0209
Expenses(3)........................... .0079 .0086 .0070 .0052 .0048 .0045 .0032 .0010
------- ------- ------- ------- ------- ------- ------- -------
Net investment income(1).............. .0259 .0276 .0265 .0175 .0209 .0341 .0519 .0199
Dividends from net investment
income(1)........................... (.0259) (.0276) (.0265) (.0175) (.0209) (.0341) (.0519) (.0199)(4)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of year.......... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= ======= ======= ======= =======
Total Return.......................... 2.59% 2.76% 2.65% 1.75% 2.09% 3.41% 5.19% 5.59%(2)
RATIOS/SUPPLEMENTAL DATA
- --------------------------------------
Net assets in thousands, end of
year................................ 13,035 8,955 10,169 14,824 13,305 7,186 4,652 2,140
Ratio of expenses to average net
assets(3)........................... .79% .84% .69% .51% .46% .44% .30% .29%(2)
Ratio of net investment income to
average net assets.................. 2.58% 2.71% 2.60% 1.73% 2.04% 3.28% 4.79% 5.53%(2)
</TABLE>
6
<PAGE> 9
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
OCTOBER 17, 1994
YEAR ENDED YEAR ENDED (COMMENCEMENT OF OPERATIONS)
NEW JERSEY TAX-EXEMPT FUND MAY 31, 1997 MAY 31, 1996 THROUGH MAY 31, 1995
- ------------------------------------------------------------------- ------------- ------------- ----------------------------
<S> <C> <C> <C>
Net asset value, beginning of period............................... $1.0000 $1.0000 $ 1.0000
------- ------- -------
Income from investment operations.................................. .0343 .0369 .0330
Expenses........................................................... .0107 .0106 .0087(3)
------- ------- -------
Net investment income(1)........................................... .0236 .0263 .0243
Dividends from net investment income(1)............................ (.0236) (.0263) (.0243)
------- ------- -------
Net asset value, end of year....................................... $1.0000 $1.0000 $ 1.0000
======= ======= =======
Total Return....................................................... 2.36% 2.63% 2.43%(2)
RATIOS/SUPPLEMENTAL DATA
- -------------------------------------------------------------------
Net assets in thousands, end of year............................... 39,452 41,026 21,607
Ratio of expenses to average net assets............................ 1.06% 1.04% 1.01%(2)(3)
Ratio of net investment income to average net assets............... 2.33% 2.59% 2.82%(2)
</TABLE>
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
-------------------------------------------------------------------------------------------------
NEW YORK TAX-EXEMPT FUND 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ------------------------------ ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
year........................ $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income from investment
operations.................. .0352 .0381 .0352 .0249 .0281 .0421 .0563 .0616 .0600 .0476
Expenses...................... .0105 .0105 .0099 .0099 .0103 .0104 .0105 .0100 .0103 .0102
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net investment income(1)...... .0247 .0276 .0253 .0150 .0178 .0317 .0458 .0516 .0497 .0374
Dividends from net investment
income(1)................... (.0247) (.0276) (.0253) (.0150) (.0178) (.0317) (.0458) (.0516) (.0497) (.0374)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of
year........................ $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total Return.................. 2.47% 2.76% 2.53% 1.50% 1.78% 3.17% 4.58% 5.16% 4.97% 3.74%
RATIOS/SUPPLEMENTAL DATA
- ------------------------------
Net assets in thousands, end
of year..................... 153,180 125,454 152,906 148,387 149,785 156,567 148,079 120,142 90,378 86,749
Ratio of expenses to average
net assets.................. 1.04% 1.04% .98% .98% 1.02% 1.03% 1.01% .98% 1.00% 1.00%
Ratio of net investment income
to average net assets....... 2.43% 2.72% 2.48% 1.48% 1.76% 3.09% 4.43% 5.02% 4.86% 3.66%
</TABLE>
- ---------------
(1) Based on compounding of daily dividends. Not indicative of future results.
(2) Annualized.
(3) During these periods the manager waived a portion of fees and expenses. If
there were no reductions in expenses, the actual expenses would have been
approximately .20%, .20%, .25% and .12% higher, respectively for the U.S.
Treasury Fund, .10% higher for the Connecticut Fund, .04%, .05%, .11%, .43%,
.50%, .50%, .50% and .50% higher for the Massachusetts Fund and .01% higher
for the New Jersey Fund.
(4) .01c per share represents distributions of taxable income.
7
<PAGE> 10
YIELD
For the seven calendar days ended May 31, 1997, the current and effective
yields of each Fund were as follows:
<TABLE>
<CAPTION>
CURRENT YIELD EFFECTIVE YIELD
------------- ---------------
<S> <C> <C>
Primary Fund.............................................................. 4.66% 4.77%
U.S. Government Fund...................................................... 4.61% 4.72%
U.S. Treasury Fund........................................................ 4.42%* 4.52%*
Interstate Tax-Exempt Fund................................................ 2.93% 2.97%
California Tax-Exempt Fund................................................ 2.76% 2.80%
Connecticut Tax-Exempt Fund............................................... 2.71% 2.75%
Florida Tax-Exempt Fund................................................... 2.79% 2.82%
Massachusetts Tax-Exempt Fund............................................. 3.02%* 3.07%*
New Jersey Tax-Exempt Fund................................................ 2.81% 2.85%
New York Tax-Exempt Fund.................................................. 2.80% 2.84%
</TABLE>
--------------------
* After voluntary waiver of its comprehensive fee.
Current yield refers to the income generated by an investment in a Fund over
a seven-day period. This income is then annualized, that is, the amount of
income generated by the investment during that week is assumed to be generated
each week over a 52-week period and is shown as a percentage of the investment.
The effective yield is calculated similarly but, when annualized, the income
earned is assumed to be reinvested. The effective yield will be higher than the
current yield because of this compounding effect.
The Funds may also quote tax equivalent yields, which show the taxable
yields an investor would have to earn before taxes to equal a Fund's tax-free
yield. The tax equivalent yield is calculated by dividing a Fund's current or
effective yield by the result of one minus a stated federal and/or state and
local tax rate.
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Fund is to seek as high a level of current
income 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 that
Fund as defined in the Investment Company Act of 1940 ("1940 Act").
INVESTMENT OBJECTIVES AND POLICIES OF THE PRIMARY, U.S. GOVERNMENT AND U.S.
TREASURY FUNDS
The Primary Fund seeks to attain its objective by investing in U.S.
government securities; deposit-type obligations, such as negotiable certificates
of deposit and time deposits, bankers' acceptances and letters of credit of
domestic and foreign banks; savings and loan associations and savings banks;
high quality domestic and foreign commercial paper as determined by any
nationally recognized statistical rating organization or, in the case of any
instrument that is not rated, of comparable quality as determined by the Board
of Trustees; other short-term instruments of similar quality; and instruments
fully collateralized by such obligations.
The U.S. Government Fund seeks to attain its objective by investing only in
securities backed by the full faith and credit of the United States government
or obligations collateralized thereby.
The U.S. Treasury Fund seeks to attain its objective by investing in
securities of the United States government that provide interest income exempt
from state and local income taxes.
United States government securities include a variety of securities which
are issued or guaranteed by the U.S. Treasury, various agencies of the federal
government and various instrumentalities which have been established or
sponsored by the U.S. government, and certain interests in the foregoing types
of securities such as U.S. Treasury STRIPS. United States government securities
include direct obligations of the U.S. Treasury (such as Treasury bills,
Treasury notes, and Treasury bonds). Obligations such as securities issued by
the Government National Mortgage Association ("GNMA"), the Federal Home Loan
Mortgage Corporation ("FHLMC"), the Federal National Mortgage Association
("FNMA"), the Student Loan Marketing Association ("SLMA") and the Federal Home
Loan Bank ("FHLB") are also considered U.S. government securities. Some
obligations of agencies and instrumentalities of the U.S. government, such as
the GNMA, are supported by the full faith and credit of the United States. Other
securities, such as obligations issued by the FNMA and SLMA, are supported by
the right of the issuer to borrow from the U.S. Treasury; and others, such as
obligations issued by the FHLB and FHLMC, are supported only by the credit of
the agency or instrumentality issuing the obligation. In
8
<PAGE> 11
the case of securities not backed by the full faith and credit of the United
States the investor must look principally to the agency issuing or guaranteeing
the obligation for ultimate repayment.
U.S. Treasury STRIPS permit the separate ownership and trading of the
interest and principal components of direct obligations of the U.S. Treasury.
These obligations may take the form of (i) obligations from which interest
coupons have been stripped; (ii) the interest coupons that are stripped; or
(iii) book-entries at a Federal Reserve member bank representing ownership of
obligation components.
Under federal law, the income derived from obligations issued by the U.S.
Treasury and certain of its agencies and instrumentalities is exempt from state
personal income taxes. A substantial majority of the states that tax personal
income permit mutual funds to pass-through this tax exemption to shareholders.
It is anticipated that a substantial portion of the dividends paid to
shareholders of the U.S. Treasury Fund residing in these states will qualify for
this exemption from state taxation. However, a state or local taxing authority
may seek, in the future, to tax a shareholder on all or a portion of the
interest income of a security held by the U.S. Treasury Fund.
The Primary Fund may invest in obligations of U.S. banking institutions that
are insured by the FDIC; commercial paper which is rated, at the time of
investment, P-1 by Moody's Investors Service, Inc. ("Moody's"), A-1 by Standard
& Poor's Corporation ("S&P") or the equivalent thereof; and obligations of
foreign banks which, at the time of investment, have more than $25 billion (or
the equivalent in other currencies) in total assets and which, in the opinion of
the Fund's Adviser, are of comparable quality to obligations of United States
banks which may be purchased by the Fund. Instruments which are not rated may
also be purchased by the Primary Fund provided such instruments are determined
to be of comparable quality by the Board of Trustees of the Fund to those rated
instruments in which the Primary Fund may invest.
The Primary Fund may invest in obligations of U.S. banks, foreign branches
of U.S. banks (Eurodollars), U.S. branches of foreign banks (Yankee dollars) and
foreign branches of foreign banks. Euro and Yankee dollar investments involve
certain risks that are different from investments in obligations of U.S. banks.
These risks may include unfavorable political and economic developments,
possible withholding taxes, seizure of foreign deposits, currency controls or
other governmental restrictions which might affect payment of principal or
interest. In addition, foreign branches of foreign banks are not regulated by
U.S. banking authorities and are generally not bound by financial reporting
standards comparable to U.S. banks. The Primary Fund will limit its investment
in foreign banks to those banks located in Australia, Canada, Western Europe and
Japan. The Primary Fund may also invest in Municipal Obligations secured by bank
letters of credit, the interest on which is not exempt from federal income
taxation.
OTHER POLICIES. Each Fund may engage in repurchase agreement transactions. A
repurchase agreement is a transaction by which a Fund purchases a security (U.S.
government or other) and simultaneously commits to resell that security to the
seller at an agreed upon price at a later date. The Fund will limit repurchase
agreements to those banks and securities dealers who are deemed creditworthy
pursuant to guidelines adopted by the Fund's Board of Trustees. The Adviser will
follow procedures to assure that all repurchase agreements are always fully
collateralized as to principal and interest. The instruments held as collateral
are valued daily, and if the value of the instruments declines, the Fund will
require additional collateral. If the other party to the repurchase agreement
defaults on its obligation to repurchase the underlying securities, a portfolio
may incur a loss upon disposition of them if the value of those securities has
declined. In the event of insolvency or bankruptcy of the other party to a
repurchase agreement, a Fund may encounter difficulties and might incur costs
upon the exercise of its rights under the repurchase agreement. The U.S.
Treasury Fund will limit its investment in repurchase agreements with respect to
securities backed only by the full faith and credit of the U.S. government to
not more than 5% of its total assets. Such investment will be for temporary
purposes pending the investment of uninvested cash in U.S. Treasury obligations.
The Primary Fund may engage in limited repurchase agreement transactions
collateralized by first mortgages conforming to the lending standards of the
GNMA, FHLMA or FNMA.
The Primary and U.S. Government Funds may from time to time lend securities
on a short-term basis to banks, brokers and dealers (but not individuals) and
receive as collateral cash or securities issued by the U.S. government or its
agencies or instrumentalities (or any combination thereof), which collateral
will be required to be maintained at all times in an amount equal to at least
100% of the current value of the loaned securities plus accrued interest. During
the time portfolio securities are on loan, the borrower will pay the Fund an
amount equivalent to any interest paid on such securities and the Fund may
invest the cash collateral and earn additional income, or it may receive an
agreed upon amount of interest from the borrower who has delivered equivalent
collateral or secured a letter of credit. The value of the securities loaned
cannot exceed 25% of the Fund's total assets. Loans of securities involve risks
of delay in receiving additional collateral or in recovering the securities lent
or even loss of rights to the collateral in the event of insolvency of the
borrower of the securities. The Statement of Additional Information further
explains the Funds' securities lending policies.
Each Fund may invest, without limitation, in U.S. government securities and
in instruments secured or collateralized by U.S. government securities. A Fund
will not invest more than 10% of its net assets in illiquid securities,
including repurchase agreements providing for settlement in more than seven (7)
days after notice and will not concentrate more than 25% of its total assets in
the
9
<PAGE> 12
securities of issuers in a single industry, except that the Primary Fund will
invest more than 25% of its assets in the banking industry. In addition, a Fund
will not invest more than 5% of its assets in the securities of any single
issuer (except U.S. government securities). Each Fund has the authority to
borrow money (including reverse purchase agreements) for extraordinary or
emergency purposes but not in an amount exceeding 5% of its total assets.
Reverse repurchase agreements involve sales by a Fund of portfolio securities
concurrently with an agreement by the Fund to repurchase the same securities at
a later date at a fixed price.
INVESTMENT OBJECTIVES AND POLICIES OF THE INTERSTATE, CALIFORNIA, CONNECTICUT,
FLORIDA, MASSACHUSETTS, NEW JERSEY, NEW YORK AND PENNSYLVANIA TAX-EXEMPT FUNDS
The investment objective of each of the tax-exempt 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
("1940 Act").
Each of the Funds 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.
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 the value 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 and, with
respect to the Florida Tax-Exempt Fund, the Florida intangibles tax, and with
respect to the Pennsylvania Tax-Exempt Fund, the Pennsylvania county personal
property tax, unless it has adopted a temporary defensive position. In addition,
during periods when the Funds' Investment Adviser believes that Municipal
Obligations meeting each respective Fund's quality standards are not available,
a Fund may invest up to 20% of the value of its assets, or a greater percentage
on a temporary basis, in Municipal Obligations exempt only from federal income
taxes.
Each Fund may purchase floating and variable rate demand notes, which are
Municipal Obligations normally having stated maturities in excess of one year,
but which permit the holder to demand payment of principal and accrued interest
at any time, or at specified intervals not exceeding one year, in each case
usually upon not more than seven (7) days' notice. The interest rates on these
floating and variable rate demand notes fluctuate from time to time. Frequently,
such Municipal Obligations are secured by letters of credit or other credit
support arrangements provided by banks. The Funds may invest any portion of
their assets in floating and variable rate demand notes secured by bank letters
of credit or other credit support arrangements. Use of letters of credit or
other credit support arrangements will not adversely affect the tax-exempt
status of these Municipal Obligations. A Fund will not invest more than 10% of
the value of its assets in floating or variable rate demand notes for which
there is no secondary market if the demand feature on such Municipal Obligations
is exercisable on more than seven (7) days' notice.
In view of the investment of each of the Funds in industrial revenue
development bonds and notes secured by letters of credit or guarantees of banks,
an investment in a Fund's shares should be made with an understanding of the
characteristics of the banking industry and the risks such an investment may
entail. Banks are subject to extensive government regulations which may limit
both the amounts and types of loans and other financial commitments which may be
made and interest rates and fees which may be charged. The profitability of the
banking industry is largely dependent upon the availability and cost of capital
funds for the purpose of financing lending operations under prevailing money
market conditions. In addition, general economic conditions play an important
part in the operations of this industry, and exposure to credit losses arising
from possible financial difficulties of borrowers might affect a bank's ability
to meet its obligations under a letter of credit.
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.
10
<PAGE> 13
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 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 participation interests in Municipal Obligations from
financial institutions. A participation interest gives a Fund an undivided
interest in the Municipal Obligation in the proportion that the Fund's
participation interest bears to the total principal amount of the Municipal
Obligation. These instruments may have fixed, floating or variable rates of
interest. Frequently, such instruments are secured by 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 ("AMT"). It is the position of the SEC that in order for
a fund to call itself "tax-free", not more than 20% of its net assets may be
invested in municipal securities subject to the AMT or at least 80% of its
income will be tax-exempt. Income received on such securities is classified as a
"tax preference item," which could subject certain shareholders of each Fund to
the AMT. However, as of the date of this Prospectus, each Fund does not purchase
such securities, but reserves the right to do so depending on market conditions
in the future.
Yields on municipal securities depend on a variety of factors, including
general economic and monetary conditions, money market factors, conditions in
the tax-exempt securities market, size of a particular offering, maturity of the
obligation and rating of the issue. The ability of each Fund to achieve its
investment objective is also dependent on the continuing ability of issuers of
municipal securities to meet their obligations for the payment of interest and
principal when due.
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, letters of credit of
Federal Deposit Insurance Corporation member banks and instruments fully
collateralized by such obligations. Unless a Fund has adopted a temporary
defensive position, no more than 20% of the net assets of each Fund will be
invested in Taxable Investments at any time. A Fund may enter into repurchase
agreements with regard to the taxable obligations listed above. 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, each Fund is
permitted to have all its assets invested in a limited number of issuers.
Accordingly, since a relatively high percentage of a Fund's assets may be
invested in the securities of a limited number of issuers, a Fund's investment
securities may be more susceptible to any single economic, political or
regulatory occurrence than the investment securities of a diversified investment
11
<PAGE> 14
company. However, each Fund intends to qualify as a "regulated investment
company" for purposes of the Internal Revenue Code. This limits the aggregate
value of all investments (except United States government securities, securities
of other regulated investment companies, cash and cash items) so that, with
respect to at least 50% of its total assets, not more than 5% of such assets are
invested in the securities of a single issuer.
Each Fund's concentration in securities issued by the respective state and
its political subdivisions involves greater risks than a fund broadly invested
across many states and municipalities.
RISK FACTORS 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. From mid-1990 to late 1993, the State
suffered a recession with the worst economic, fiscal and budget conditions since
the 1930s. As a result, the State was plagued by recurring budget deficits. As
of June 30, 1994, according to California's Department of Finance, the State's
special Fund for Economic Uncertainties had an accumulated deficit, on a budget
basis, of approximately $1.8 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. As a result
of the deterioration in the State's budget and cash situation, between October
1991 and July 1994, the ratings on the State's general obligation bonds were
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 obligations. However, since 1993 the State's financial and
economic condition suggests that California, following a period of stability, is
in the midst of a recovery. The General Fund GAAP-basis deficit has been reduced
from a peak of $4.6 billion in 1992-93 to $2.1 billion at fiscal 1996. In
addition, the gap between the national and California unemployment rate narrowed
from 3.4% in 1994 to 1.9% at the close of 1996.
RISK FACTORS IN CONCENTRATING IN CONNECTICUT. Specifically, the credit quality
of the Connecticut Tax-Exempt Fund will depend on the continued financial
strength of the State of Connecticut and its political subdivisions.
Connecticut's economy relies in part on activities that may be adversely
affected by cyclical change, and recent declines in defense spending have had a
significant impact on unemployment levels. Connecticut reported deficits from
its General Fund operations for the fiscal years 1988 through 1991. Together
with the deficit carried forward from the State's 1990 fiscal year, the total
General Fund deficit for the 1991 fiscal year was $965.7 million. The total
deficit was funded by the issuance of General Obligations Economic Recovery
Notes. Moreover, as of June 30, 1995 and 1996, the General Fund had cumulative
deficits under GAAP of $576.9 million and $639.9 million, respectively. As a
result of the recurring budgetary problems, S&P downgraded the State's general
obligation bonds from AA+ to AA in April 1990 and to AA- in September 1991. In
April 1990, Moody's downgraded Connecticut's bonds from Aa1 to Aa (since revised
to Aa3 in March 1997). In March 1995, Fitch downgraded Connecticut's bonds from
AA+ to AA.
RISK FACTORS IN CONCENTRATING IN FLORIDA. You should consider carefully the
special risks inherent in the Fund's investment in Florida Municipal
Obligations. The Florida Constitution and Statutes mandate that the State budget
as a whole, and each separate fund within the State budget, be kept in balance
from currently available revenues each fiscal year. Florida's Constitution
permits issuance of Florida Municipal Obligations pledging the full faith and
credit of the State, with a vote of the electors, to finance or refinance fixed
capital outlay projects authorized by the legislature provided that the
outstanding principal does not exceed 50% of the total tax revenues of the State
for the two preceding years. Florida's Constitution also provides that the
legislature shall appropriate monies sufficient to pay debt service on State
bonds pledging the full faith and credit of the State as the same becomes due.
All State tax revenues, other than trust funds dedicated by Florida's
Constitution for other purposes, would be available for such an appropriation,
if required. Revenue bonds may be issued by the State or its agencies without a
vote of Florida's electors only to finance or refinance the cost of State fixed
capital outlay projects which may be payable solely from funds derived directly
from sources other than State tax revenues. Fiscal year 1995-96 estimated
General Revenue and Working Capital and Budget Stabilization funds available
totaled $15.311 billion, a 3.3% increase over 1994-95, resulting in unencumbered
reserves of approximately $502.7 million at the end of fiscal 1995-96. General
Revenue and Working Capital and Budget Stabilization funds available for fiscal
1996-97 are estimated to total $16.095 billion, a 5.1% increase over 1995-96,
resulting in unencumbered reserves of approximately $518.2 million at the end of
fiscal 1996-97.
RISK FACTORS IN CONCENTRATING IN MASSACHUSETTS. Specifically, the credit
quality of the Massachusetts Tax-Exempt Fund will depend on the continued
financial strength of the Commonwealth of Massachusetts and its political
subdivisions. Since 1989, Massachusetts has experienced growth rates
significantly below the national average and an economic recession in 1990 and
1991 caused negative growth rates. Massachusetts' economic and fiscal problems
in the late 1980s and early 1990s caused several rating agencies to lower their
ratings of Massachusetts Municipal Obligations. A return of persistent serious
financial difficulties could adversely affect the market values and
marketability of, or result in default in payment on, outstanding Massachusetts
Municipal Obligations. The State's operating losses in fiscal 1989 and 1990,
which totaled $672 million and $1.25 billion, respectively, were covered
primarily through deficit borrowings and a fiscal 1991 operating loss of $21
million was covered by drawing on the adjusted 1990 fund balance of $258
million.
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However, Massachusetts ended fiscal years 1992 through 1996 with a positive
fiscal balance in its general operating funds. At present, Massachusetts'
general obligation bonds are rated by S&P, Fitch and Moody's A+, A+ and A1,
respectively.
RISK FACTORS IN CONCENTRATING IN NEW JERSEY. The State's economy performed
strongly for much of the 1980s. Like much of the Northeast in the 1980s, the
State's economy outpaced national trends. However, from 1989 to 1992, the
State's economic performance trailed the rest of the nation. Reflecting the
economic downturn, the State's unemployment rate rose from a low of 3.6% in the
first quarter of 1989 to a peak of 8.5% during 1992. Since then, the State's
unemployment rate fell to an average of 6.4% during 1995 and 6.1% for the
four-month period from May 1996 through August 1996. In July 1991, S&P lowered
its rating for the State's general obligation debt from AAA to AA+. The State's
general obligation debt is rated AA+ and Aa1 by Fitch and Moody's, respectively.
RISK FACTORS IN CONCENTRATING IN NEW YORK. You should consider carefully the
special risks inherent in investing in New York Municipal Obligations. These
risks result from the financial condition of New York State, certain of its
public bodies and municipalities, and New York City. Beginning in early 1975,
New York State, New York City and other State entities faced serious financial
difficulties which jeopardized the credit standing and impaired the borrowing
abilities of such entities and contributed to high-interest rates on, and lower
market prices for, debt obligations issued by them. A recurrence of such
financial difficulties or a failure of certain financial recovery programs could
result in defaults or declines in the market values of various New York
Municipal Obligations in which the Fund may invest. If there should be a default
or other financial crisis relating to New York State, New York City, a State or
City agency, or a State municipality, the market value and marketability of
outstanding New York Municipal Obligations in the Fund's portfolio and the
interest income to the Fund could be adversely affected. Moreover, the national
recession and the significant slowdown in the New York and regional economies in
the early 1990s added substantial uncertainty to estimates of the State's tax
revenues, which, in part, caused the State to incur cash-basis operating
deficits in the General Fund and issue deficit notes during the fiscal years
1989 through 1992. The State's financial operations have improved, however,
during recent fiscal years. For its fiscal years 1993 through 1996, the State
recorded balanced budgets on a cash-basis, with substantial fund balances in the
General Fund in fiscal 1992-93 and 1993-94 and smaller fund balances in fiscal
1994-95 and 1995-96. There can be no assurance that New York will not face
substantial potential budget gaps in future years. In January 1992, Moody's
lowered from A to Baa1 the ratings on certain appropriation-backed debt of New
York State and its agencies. The State's general obligation, State-guaranteed
and New York State Local Government Assistance Corporation bonds continued to be
rated A by Moody's. As of February 1997, New York State's general obligation
debt is rated A2 by Moody's. In January 1992, S&P lowered its ratings of New
York State general obligation bonds from A to A- and stated that it continued to
assess the ratings outlook as negative. The ratings of various agency debt,
state moral obligations, contractual obligations, lease purchase obligations and
state guarantees also were lowered. In February 1991, Moody's lowered its rating
on New York City's general obligation bonds from A to Baa1 and in July 1995, S&P
lowered its rating on such bonds from A- to BBB+. The rating changes reflected
the rating agencies' concerns about the financial condition of New York State
and City, the heavy debt load of the State and City, and economic uncertainties
in the region.
RISK FACTORS IN CONCENTRATING IN PENNSYLVANIA. Many different social,
environmental and economic factors may affect the financial condition of
Pennsylvania and its political subdivisions. From time to time, Pennsylvania and
certain of its political subdivisions have encountered financial difficulties
which have adversely affected their respective credit standings. For example,
the financial condition of the City of Philadelphia had impaired its ability to
borrow and resulted in its obligations generally being downgraded below
investment grade by the major rating services. Other factors which may
negatively affect economic conditions in Pennsylvania include adverse changes in
employment rates, Federal revenue sharing or laws governing tax-exempt
financing. Currently, Pennsylvania's general obligation bonds are rated AA-, AA
and A1 by S&P, Fitch and Moody's, respectively. The Adviser does not believe
that the current economic conditions in Pennsylvania will have a significant
adverse effect on the Fund's ability to invest in high-quality Pennsylvania
Municipal Obligations.
In order to provide liquidity, each Fund limits its average maturity to 90
days or less; buys securities which mature in 397 days or less; and buys only
high quality securities.
MANAGEMENT
INVESTMENT MANAGEMENT AGREEMENTS. Since November 15, 1971 Reserve Management
Company, Inc. ("Adviser") and its affiliates have provided investment advice to
The Reserve Funds which currently have assets of over $4 billion, pursuant to an
Investment Management Agreement. Under the Agreement, the Adviser manages the
Funds and invests in furtherance of its objectives and policies subject to the
overall control and direction of the Funds' Board of Trustees.
The Primary, U.S. Government, Interstate, California, Connecticut, Florida,
Massachusetts, New Jersey, New York and Pennsylvania Funds each pay the Adviser
a management fee, which is a percentage of the average daily net assets of each
of the Funds, 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
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<PAGE> 16
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, 1997, the
Adviser received a management fee of .46% of the average daily net assets of the
Primary Fund and .50% of the average daily net assets of the U.S. Government,
Interstate, California, Connecticut, Florida, New Jersey and New York Funds and
..46% of the Massachusetts Tax-Exempt Fund. During the year, the Adviser
voluntarily agreed to a reduction of the management fee for the Massachusetts
Tax-Exempt Fund. The U.S. Treasury Fund pays the Adviser a comprehensive
management fee calculated at .80% per annum of the average daily net assets.
Under the terms of the Investment Management Agreement with the U.S. Treasury
Fund, the Adviser pays all employee and ordinary operating costs of the Fund.
Excluded from the definition of ordinary operating costs are interest, taxes,
brokerage fees, extraordinary legal and accounting fees and expenses, and the
fees of the disinterested Trustees, for which it pays its direct or allocated
share. For the fiscal year ended May 31, 1997, the U.S. Treasury Fund paid the
Adviser a comprehensive management fee of .60% of its average daily net assets.
During the year, the Adviser voluntarily agreed to a reduction of its
comprehensive fee.
The Investment Management Agreements provide that the Adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Funds 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.
SERVICE AGREEMENT. The Adviser furnishes to the Primary, U.S. Government,
Interstate, California, Connecticut, Florida, Massachusetts, New Jersey, New
York and Pennsylvania Funds pursuant to a Service Agreement, at cost, all
personnel required for the operations of the Funds such as executive,
administrative, clerical, recordkeeping, bookkeeping, shareholder accounting and
servicing, as well as suitable office space and necessary equipment and supplies
used by such personnel in performing these functions. Operating costs for which
each Fund reimburses the Adviser includes salaries and other personnel expense,
rent, depreciation of equipment and facilities, interest and amortization of
loans which finance equipment used by the Funds, and all other expenses incurred
in the conduct of the Funds' 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 Funds' shares and of printing and mailing all
prospectuses, proxy statements and shareholder reports furnished to current
shareholders and the fees and expenses of the Funds' custodians, auditors,
lawyers and disinterested Trustees.
The Adviser has agreed to repay the Primary, U.S. Government, Interstate,
California, Connecticut, Florida, Massachusetts, New Jersey, New York and
Pennsylvania Funds promptly any amount which a majority of disinterested
Trustees reasonably determines is not properly attributable to the Funds. The
Service Agreement is nonassignable and continues until terminated by either
party on 120 days' notice.
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 Fund's
shareholders.
TRANSFER AGENT AND DIVIDEND PAYING AGENT. The Reserve Fund, Reserve Tax-Exempt
Trust and Reserve New York Tax-Exempt Trust each acts as its own transfer agent
and dividend paying agent.
HOW TO BUY SHARES
METHOD OF PAYMENT. The minimum initial investment is $1,000 and $250 for
subsequent investments (denominated in U.S. dollars). An initial purchase must
be accompanied by an Application or equivalent information. For clients of
certain broker-dealers and financial institutions, shares may be purchased
directly through such Firm. You can buy shares of the Funds each business day at
the net asset value determined after receipt by the Funds of a properly
completed order and payment in Federal funds (member bank deposits with the
Federal Reserve Bank System). Payments must be made:
- By check (drawn on a U.S. bank) payable to The Reserve Funds, 810 Seventh
Avenue, New York, NY 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 Funds or within the endorsement for each
check endorsed to The Reserve Funds.
- 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 account to be credited
may be returned or delay the purchase of shares. If you have an account in more
than one Fund and do not specify the account number and portfolio, all money
sent will be invested in the U.S. Government Fund. 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
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<PAGE> 17
for same-day order entry, the Funds must be notified before 11:00 AM (New York
time) (2:00 PM for the Primary and U.S. Government Funds) of the amount to be
transmitted and the account to be credited. Payment by check not immediately
convertible into Federal funds will be entered as of the business day when
covering Federal funds are received or bank checks are converted into Federal
funds. This usually occurs within two (2) business days, but may take longer.
Checks delivered to the Fund's offices after 11:00 AM (2:00 PM for the Primary
and U.S. Government Funds) 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 Funds or payable to the
shareholder/payee of the check and endorsed to The Reserve Funds. The Funds do
not accept travelers checks.
RESERVE AUTOMATIC ASSET-BUILDER PLAN. If you have an account balance of $5,000
or more, you may purchase shares of a Fund ($25 minimum) from a checking, NOW,
or bank money market deposit account or from a U.S. government distribution ($25
minimum) such as Social Security, federal salary, or certain veterans' benefits,
or other payment from the federal government. Call the Funds at 800-637-1700 for
an application.
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
PM New York time) by taking the sum of the value of each 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 of $1.00 per share, although this share price is
not guaranteed.
DISTRIBUTORS. The Funds' Distributors are Resrv Partners, Inc., 810 Seventh
Avenue, New York, NY 10019-5868, which is a wholly-owned subsidiary of the
Advisor; NWNL/Northstar Distributors, Inc., Two Pickwick Plaza, Greenwich, CT
06830; and Pacific Global Fund Distributors, Incorporated, 215 North Marengo
Avenue, Pasadena, CA 91101.
EXCHANGE PRIVILEGE. The shares offered by this Prospectus may be exchanged for
shares in other Reserve investment alternatives at net asset value. These
exchange privileges may be modified or terminated at any time, or from time to
time, upon 60 days' notice to shareholders. Shares to be acquired in an exchange
must be registered for sale in the investor's state. Exchanges of shares of one
fund for another is a taxable event and may result in a gain or loss for federal
income tax purposes. The exchange privileges described under this heading may
not be available to clients of certain broker-dealers or Firms and some Firms
may impose conditions on their clients which are different from those described
in this Prospectus.
INDIVIDUAL RETIREMENT ACCOUNTS. Investors may use the Taxable Funds as an
investment for Individual Retirement Accounts ("IRAs"). A master IRA plan, with
information regarding administration fees and other details is available from
the Funds.
DISTRIBUTION AND SERVICE PLAN. Accounts may be opened through brokers,
financial intermediaries and institutions ("Firms"), some of which participate
in each Fund's Plan of Distribution ("Plan"). Under Rule 12b-1 of the 1940 Act,
each Fund makes assistance payments at an annual rate of .20% of net assets,
substantially all of which are paid to those Firms for distribution assistance
and administrative services provided to the Funds. The Adviser is required by
the Plan to pay an equivalent amount and may, at its discretion, pay additional
amounts based upon assets committed to the Funds by such Firms. The Plan does
not permit the carrying over of payments from year to year. The Adviser also
reimburses Firms for a portion of their costs of advertising and marketing
shares of a Fund. All such arrangements are designed to facilitate the sale of a
Fund's shares.
CLIENTS OF FIRMS. Firms provide varying arrangements for their clients with
respect to the purchase and redemption of a Fund's shares and may arrange with
their clients for other investment or administrative services. Some Firms which
utilize a centralized purchase method for Fund shares, may have an earlier cut
off for purchase orders than stated above in order to facilitate the
transmission of purchase orders by bulk wire. Firms are responsible for the
prompt transmission of purchase and redemption orders. Some Firms may establish
higher minimum investment requirements than set forth above. Some Firms may
independently establish and charge additional fees for their services, which
would reduce their clients' yield or return. Firms may also hold Fund shares in
nominee or street name on behalf of their clients. In such instances, the Funds'
transfer agents will have no information with respect to or control over the
accounts of specific shareholders. Such shareholders may obtain access to their
accounts and information about their accounts only from their Firm. Some Firms
may receive compensation for recordkeeping and other services relating to these
nominee accounts. In addition,
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<PAGE> 18
certain privileges with respect to the purchase and redemption of shares (such
as check writing redemptions) or the reinvestment of dividends may not be
available through such Firms or may only be available subject to certain
conditions or limitations. Some Firms may participate in a program allowing them
access to their clients' accounts for servicing including, without limitation,
changes of registration and dividend-payees and may perform functions such as
generation of confirmations and periodic statements and disbursement of cash
dividends. The Prospectus should be read in connection with such Firm's material
regarding its fees and services.
SHARES OF BENEFICIAL INTEREST
The Reserve Fund was originally incorporated on February 1, 1970 as a
Maryland corporation and was reorganized as a Massachusetts business trust on
October 28, 1986; Reserve New York Tax-Exempt Trust and Reserve Tax-Exempt Trust
were organized as Massachusetts business trusts on July 12, 1983 and January 25,
1983, respectively, and are open-end management investment companies commonly
known as mutual funds. At the date of this Prospectus, there were four separate
series of The Reserve Funds, seven separate series of Reserve Tax-Exempt Trust
and one separate series of Reserve New York Tax-Exempt Trust authorized and
outstanding. Additional series may be added in the future by the Board of
Trustees. Although The Reserve Fund is a non-diversified mutual fund, each of
its separate investment portfolios intends to comply with the diversification
requirement of Rule 2a-7 under the 1940 Act which generally limits a money
market fund to investing no more than 5% of its total assets in securities,
except U.S. government securities, of any one issuer. The Reserve Fund, Reserve
Tax-Exempt Trust and Reserve New York Tax-Exempt Trust are authorized to issue
an unlimited number of shares of beneficial interest which may be issued in any
number of series. Shares issued will be fully paid and non-assessable and will
have no preemptive rights. The shareholders of each series 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, redemptions and in
the net assets of their series upon liquidation. The Trustees do not intend to
hold annual meetings but will call such special meetings of shareholders as may
be required under the 1940 Act (e.g. to approve a new Investment Advisory
Agreement or changing the fundamental investment policies) or by the 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 provides, in substance, that
no shareholder or Trustee shall be personally liable for The Reserve Fund,
Reserve Tax-Exempt Trust and Reserve New York Tax-Exempt Trust and each
investment portfolio's obligations to third parties, and requires that every
written contract made by the Fund and the Trusts contain a provision to that
effect. The Declaration of Trust also requires The Reserve Fund, Reserve
Tax-Exempt Trust and Reserve New York Tax-Exempt Trust to indemnify its
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.
TAXES FOR THE PRIMARY, U.S. GOVERNMENT AND U.S. TREASURY FUNDS
To maintain its regulated investment company status for federal income tax
purposes, each Fund intends to satisfy certain requirements imposed by the
Internal Revenue Code, so as to avoid any federal income or excise tax
liability. For federal income tax purposes, distributions out of interest earned
by a Fund and net realized short-term capital gains are taxable as ordinary
income.
The U.S. Treasury Fund intends to invest only in U.S. Treasury securities
and obligations of those agencies and instrumentalities of the U.S. government
that provide interest income exempt from state and local income taxes except to
the extent uninvested cash is invested in repurchase agreements. Some states
have minimum investment requirements that must be met by the U.S. Treasury Fund.
Distributions attributable to net capital gains, if any, are generally subject
to state and local taxes. It is possible that a state or local taxing authority
may in the future seek to tax an investor on a portion of the interest income of
an obligation held by the U.S. Treasury Fund. Shareholders should consult with
their own tax advisers with respect to the application of their state and local
tax laws to these distributions.
Shareholders are advised to retain all statements to maintain accurate
records of their investments. The Funds will report to its shareholders before
the end of February each year as to the source of dividends and other
distributions, if any, paid or declared by each Fund during the previous
calendar year which may be exempt from state income taxes. Shareholders should
consult their own tax advisers regarding specific questions as to federal, state
or local taxes.
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TAXES FOR THE TAX-EXEMPT MONEY MARKET FUNDS OF INTERSTATE, CALIFORNIA,
CONNECTICUT,
FLORIDA, MASSACHUSETTS, NEW JERSEY, NEW YORK AND PENNSYLVANIA
To maintain its regulated investment company status for federal income tax
purposes, each Fund intends to satisfy certain requirements imposed by the
Internal Revenue Code, so as to avoid any federal income or excise tax
liability. Dividends derived from the interest earned on Municipal Obligations
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 gains earned by the Interstate
Tax-Exempt Fund are taxable to shareholders as such regardless of the length of
time the fund's shares have been owned by the shareholder.
Shareholders of the Florida Tax-Exempt Fund that are subject to the Florida
intangibles tax will not be required to include the value of their Fund shares
in their taxable intangible property if all of the Fund's investments on the
annual assessment date are obligations that would be exempt from such tax if
held directly by such shareholders, such as Florida and U.S. government
obligations. As described earlier, the Fund will normally attempt to invest
substantially all of its assets in securities which are exempt from the Florida
intangibles tax. However, if the portfolio consists of any assets which are not
so exempt on the annual assessment date, only the portion of the shares of the
Fund which relate to securities issued by the United States and its possessions
and territories will be exempt from the Florida intangibles tax, and the
remaining portions of those shares will be fully subject to the intangibles tax,
even if they partly relate to Florida tax-exempt securities.
In a majority of states that have an income tax, dividends paid by a mutual
fund attributable to investments in a particular state's Municipal Obligations
are exempt from both federal and that state's income tax. If Florida were to
adopt an income tax in the future, and assuming that its income tax policy with
respect to mutual funds investing in Florida state and local Municipal
Obligations would be similar to the general tax policy of other states,
dividends paid by the Fund would be exempt from Florida state income tax. A
constitutional amendment approved by referendum would be required before an
individual income tax could be imposed.
Shares of the Pennsylvania Tax-Exempt Fund are exempt from Pennsylvania
county personal property taxes to the extent that the Fund's portfolio consists
of Pennsylvania Municipal Obligations and direct obligations of the U.S.
government.
Shareholders are advised to retain all statements to maintain accurate
records of their investments. If any dividends are not exempt from federal,
state or local income taxes, shareholders will be advised of the percentage by
February of the following year. Shareholders should consult their tax advisers
regarding specific questions as to federal, state or local taxes.
REDEMPTIONS
TIME AND METHOD OF REDEMPTION. Shares of each Fund are redeemed at their NAV
determined after receipt by the Fund of a request in proper form. Each Fund
usually transmits payment the same day when requests are received before 11:00
AM (New York time) (12:00 NOON for the Primary and U.S. Government Funds) and
the next day for requests received after 11:00 AM (12:00 NOON for the Primary
and U.S. Government Funds), however, this is not always possible, and
transmission of redemption proceeds may be delayed. Orders received after 11:00
AM (12:00 NOON for the Primary and U.S. Government Funds) are not processed
until 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 AM (12:00 NOON for the
Primary and U.S. Government Funds).
WRITTEN AND TELEPHONE REDEMPTION REQUESTS. The Funds strongly suggest (but do
not require) that each redemption, written or by telephone, be at least $1,000,
except for redemptions which are intended to liquidate the account. A
shareholder will be charged $2 for redemption checks issued for less than $100.
Upon request, redemptions will be made by bank wire, however, wire redemptions
of less than $10,000 will be charged a fee (currently $10). The Funds assume no
responsibility for delays in the receipt of wired or mailed funds. The use of a
predesignated financial institution, such as a savings bank, credit union or
savings and loan association, which is not a member of the Federal Reserve wire
system could cause such a delay. If a Fund has previously been advised in
writing of your brokerage or bank account, telephone requests will be accepted
by calling 800-637-1700. The Funds may be liable for any losses caused by their
failure to employ reasonable procedures. To reduce the risk of loss, proceeds of
telephone redemptions may be sent only (1) to the bank or brokerage account
designated by the shareholder on the Application or in a letter with the
signature(s) guaranteed; or (2) to the address of record if all the conditions
listed below are met. To change the designated brokerage or bank account it is
necessary to contact the Firm through which shares of the Fund were purchased or
if purchased directly from the Funds, it is necessary to send a written request
to the Funds 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
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<PAGE> 20
bank, credit union or savings association; or a member firm of a national
securities exchange. Guarantees from notaries public are unacceptable. The Funds
will waive the signature guarantee requirement on a redemption request once
every thirty (30) days if all of the following conditions apply: if the
redemption check is (1) for $5,000 or less; (2) payable to the shareholder(s) of
record; and (3) mailed to the shareholder(s) at the address of record. 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 Funds reserve 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 Funds at any time. During times of drastic economic or
market conditions shareholders may experience difficulty in contacting the Funds
by telephone to request a redemption or exchange of a Fund's shares. In such
cases shareholders should consider using another method of redemption, such as a
written request or a redemption by check.
CHECKING. The Funds offer a comprehensive package of services which enhance
access to your account. By completing the Application or a signature card (for
existing accounts) and certain other documentation if the owner of record is a
fiduciary, corporation, partnership, trust or other organization, you can write
checks in any amount against your account. Redemptions by check lengthen the
time your money earns dividends, since redemptions are not made until the check
is processed by the Fund. Because of this, you cannot write a check to
completely liquidate your account, nor may a check be presented for
certification or immediate payment, otherwise, you may use your Reserve checking
account as you would any checking account. Your checks will be returned
(bounced) and a fee charged if they are postdated, contain an irregularity in
the signature, amount or otherwise, or are written against accounts with
insufficient funds. All transaction activity, including check redemptions, will
be reported on your account statement. A fee will be charged for providing check
copies. Upon proper notice, the Funds may choose to impose a fee if it deems a
shareholder's actions to be burdensome. Checking may not be available to clients
of some Firms and a Firm may establish its own minimum check amount. For more
information call 800-637-1700.
STOP PAYMENTS. The Funds will honor stop payment requests on unpaid shareholder
checks provided they are advised of the correct check number, payee, check
amount and date. Stop payment requests received by the Funds by 2:00 PM (New
York time) in proper form will be effective the next business day. Oral stop
payment requests are effective for fourteen (14) calendar days, at which time
they will be canceled unless confirmed in writing. Written stop payment requests
will remain in effect for one year. A fee will be charged for this service.
AUTOMATIC WITHDRAWAL PLANS. If you have an account with a balance of at least
$5,000, you may, upon written notice, participate in either of the following:
(i) an Income Distribution Plan providing for monthly, quarterly or annual
payments by redemption of shares from reinvested dividends or distributions paid
to your account during the preceding period; or (ii) a Fixed Amount Withdrawal
Plan providing for the automatic redemption of a sufficient number of shares of
your account to make a specified monthly, quarterly or annual payment of a fixed
amount. Changes to instructions must be in writing with signature(s) guaranteed.
In order for such payments to continue under 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 Funds. The Funds
may impose a charge, modify or terminate any Automatic Withdrawal Plan at any
time after the participant has been duly notified. This privilege may not be
available to clients of some Firms or may be available subject to conditions or
limitations.
AUTOMATIC TRANSFER PLANS. You may redeem shares of a Fund by telephone (minimum
$100) if you have filed a separate Reserve Automatic Transfer application with
the Fund. The proceeds will be transferred between your Fund account and the
checking, NOW or bank money market deposit account (as permitted) designated in
the application. Only such an account maintained in a domestic financial
institution which is an Automated Clearing House member may be so designated.
Redemption proceeds will be on deposit in your account at the Automated Clearing
House member bank ordinarily two (2) business days after receipt of the
redemption request. The Funds may impose a charge, modify or terminate this
privilege at any time after the participant has been duly notified. This
privilege may not be available to clients of some Firms or may be available
subject to conditions or limitations.
RESTRICTIONS. The right of redemption may be suspended or the date of payment
postponed for more than seven (7) days only (a) when the 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 the Fund or for it to determine fairly the value
of its net assets, or (c) for such periods as the SEC may permit. If shares of a
Fund are purchased by check or Reserve Automatic Transfer, the Fund may delay
transmittal of redemption proceeds until such time as it has assured itself that
good payment has been collected for the purchase of such shares, which may
generally take up to ten (10) business days. Shareholder checks written against
funds which are not yet considered collected will be
18
<PAGE> 21
returned and a fee charged against the account. When a purchase is made by wire
and subsequently redeemed, the proceeds from such redemptions normally will not
be transmitted until two (2) business days after the purchase.
GENERAL INFORMATION
JOINT OWNERSHIP. When an account is registered in the name of one person and
another, for example a husband and wife, either person is entitled to redeem
shares in the account. The Application provides that persons so registering
their account indemnify and hold the Funds harmless for actions taken by either
party.
BACKUP WITHHOLDING (FOR THE PRIMARY FUND, U.S. GOVERNMENT FUND, AND THE U.S.
TREASURY FUND). 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) a
Fund is 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, a Fund may be fined $50 annually for each account for
which a certified TIN is not provided or is incorrect. In the event that such a
fine is imposed, a corresponding charge will be made against the account.
REPORTS AND STATEMENTS. Shareholders receive an annual report containing
audited financial statements and an unaudited semi-annual report. A statement is
sent to each shareholder at least quarterly. Shareholders who are clients of
some Firms will receive a statement combining transactions in Fund shares with
statements covering other brokerage or mutual fund accounts.
SMALL BALANCES. Because of the expense of maintaining accounts with small
balances (less than $1,000), the Funds will either levy a monthly charge
(currently $5) or redeem the account and remit the proceeds. Some Firms may
establish variations of minimum balances and fee amounts if those variations are
approved by the Funds.
RESERVE EASY ACCESS. Easy Access is The Reserve Funds' 24 hour toll-free
telephone service that lets customers use a touch-tone phone to obtain yields
and account balances. To use it, call 800-637-1700 and follow the instructions
you will receive. Clients may also access full account activity for the previous
six months on the Internet at www.reservefunds.com.
INQUIRIES. Shareholders should direct their inquiries to the Firm from which
they received this Prospectus or to the Funds.
SPECIAL SERVICES. The Funds reserve the right to charge shareholder accounts
for specific costs incurred in processing unusual transactions for shareholders.
Such transactions include, but are not limited to, stop payment requests, copies
of Fund redemption or shareholder checks and special research services.
CASH PERFORMANCE ACCOUNT (CPA). A Reserve CPA can be used for everything from
daily expenses to the special luxuries of life or just to have cash when you
need it. It's the smartest way to manage your money -- keep it in a Reserve Cash
Performance Account. For more information see page 18, Checking, or call
800-637-1700.
PERFORMANCE. The Funds may compare their performance to other income producing
alternatives such as (i) money market funds (based on yields cited by IBC's
Money Fund Report and other industry publications); and (ii) various bank
products (based on average rates of bank and thrift institution certificates of
deposit, money market deposit accounts and NOW accounts as reported by the Bank
Rate Monitor and other industry publications). An investment in shares of a Fund
is not insured by the Federal Deposit Insurance Corporation.
Yield information is useful in reviewing each Fund's performance relative to
other funds that hold investments of similar quality. Because yields will
fluctuate, yield information may not provide a basis for comparison with bank
and thrift certificates of deposit which normally pay a fixed rate for a fixed
term and are subject to a penalty for withdrawals prior to maturity which will
reduce their return.
------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
------------------------
19
<PAGE> 22
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
<CAPTION>
PAGE
----
<S> <C>
Shareholder Expenses................... 2
Financial Highlights................... 4
Yield.................................. 8
Investment Objective and Policies...... 8
Management............................. 13
How to Buy Shares...................... 14
Shares of Beneficial Interest.......... 16
Daily Dividends........................ 16
Taxes.................................. 16
Redemptions............................ 17
General Information.................... 19
</TABLE>
Investors are advised to read and retain
this Prospectus for future reference.
American Express Money Market Account is a cash management service offered by
The Reserve Funds through American Enterprise Investment Services Inc., a
subsidiary of American Express Financial Corporation. Shares offered are
shares of The Reserve Funds.
AMERICAN ENTERPRISE INVESTMENT SERVICES INC.
A subsidiary of American Express Financial Corporation
IDS Tower 10
Minneapolis, Minnesota 55440
(C) 1997 American Express Financial Corporation
All rights reserved.
AMERICAN EXPRESS
MONEY MARKET
ACCOUNTS
OFFERED BY
THE RESERVE FUNDS
PRIMARY FUND
U.S. GOVERNMENT FUND
U.S. TREASURY FUND
INTERSTATE TAX-EXEMPT FUND
CALIFORNIA TAX-EXEMPT FUND
CONNECTICUT TAX-EXEMPT FUND
FLORIDA TAX-EXEMPT FUND
MASSACHUSETTS TAX-EXEMPT FUND
NEW JERSEY TAX-EXEMPT FUND
NEW YORK TAX-EXEMPT FUND
PENNSYLVANIA TAX EXEMPT FUND
<PAGE> 23
THE RESERVE FUND
"AMERICA'S FIRST MONEY FUND"
810 SEVENTH AVENUE - NEW YORK, N.Y. 10019
(212) 977-9982
(800) 637-1700
------------------
YIELD AND BALANCE INFORMATION
(800) 637-1700 - (TOUCH TONE PHONE)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information describes The Reserve Fund ("Fund") and
three of its portfolios, the Primary Fund, the U.S. Treasury Fund and the U.S.
Government Fund (hereinafter referred to as the "Portfolio(s)"; the U.S.
Treasury Fund and the U.S. Government Fund are hereinafter referred to as the
"Treasury Portfolio"; and "Government Portfolio", respectively). This Statement
is not a Prospectus, but provides detailed information to supplement the
Prospectus. A copy of the Prospectus may be obtained from the Fund at the above
address. This Statement is dated July 31, 1997, as amended October 17, 1997.
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
<S> <C>
Investment Objective and Policies 2
Trustees and Executive Officers 3
Investment Management, Distribution,
and Custodian Agreements 5
Portfolio Turnover, Transaction Charges
and Allocation 7
Shares of Beneficial Interest 8
Purchase, Redemption and Pricing of Shares 9
Distributions and Taxes 11
Fund Yield 12
Reserve Cash Performance Account Plus 13
Ratings 14
Report of Independent Accountants 17
Financial Statements 18
</TABLE>
SHARES OF THE FUND ARE NEITHER GUARANTEED NOR INSURED BY THE U.S. GOVERNMENT AND
THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A STABLE NET
ASSET VALUE OF $1.00 PER SHARE.
<PAGE> 24
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of each Portfolio of the Fund is to seek as high
a level of current income as is consistent with preservation of capital and
liquidity.
SUPPLEMENTAL INVESTMENT POLICIES. The following investment policies may not be
changed without the affirmative vote of a majority of the outstanding shares of
a Portfolio. A majority of the outstanding shares of a Portfolio means the vote
of the lesser of (i) 67% or more of the shares of a Portfolio present at
a meeting, if the holders of more than 50% of the outstanding shares of the
Portfolio are present or represented by proxy, or (ii) more than 50% of the
outstanding shares of the Portfolio. A Portfolio cannot: (1) borrow money except
as a temporary or emergency measure and not in an amount to exceed 5% of the
market value of its total assets; (2) issue securities senior to its capital
stock; (3) act as an underwriter with respect to the securities of others; (4)
concentrate investments in any particular industry except to the extent that its
investments are concentrated exclusively in U.S. Government securities and bank
obligations or repurchase agreements secured by such obligations; (5) purchase,
sell or otherwise invest in real estate or commodities or commodity contracts;
(6) lend more than 33 1/3% of the value of its total assets to the extent its
investments may be considered loans; (7) sell any security short or write, sell
or purchase any futures contract or put or call option; (8) invest in voting
securities or in companies for the purpose of exercising control; (9) invest in
the securities of other investment companies except in compliance with the
Investment Company Act of 1940; (10) make investments on a margin basis; (11)
purchase or sell any securities (other than securities of the Fund) from or to
any officer or Trustee of the Fund, the investment adviser or affiliated person
except in compliance with the Investment Company Act of 1940.
OTHER POLICIES. The Primary and Government Funds may, to increase their income,
lend their securities to brokers, dealers and institutional investors if the
loan is collateralized in accordance with applicable regulatory requirements
(the "Guidelines") and if, after any loan, the value of the securities loaned
does not exceed 25% of the value of its assets. Under the present Guidelines,
the loan collateral must, on each business day, at least equal the value of the
loaned securities plus accrued interest and must consist of cash, or securities
of the U.S. Government (or its agencies or instrumentalities). The Portfolios
receive an amount equal to the interest on loaned securities and also receive
negotiated loan fees, interest on securities used as collateral or interest on
short-term debt securities purchased with such collateral, either of which type
of interest may be shared with the borrower. The Portfolios may also pay
reasonable finders, custodian and administrative fees. Loan arrangements made by
a Portfolio will comply with all other applicable regulatory requirements
including the rules of the New York Stock Exchange, which require the borrower,
after notice, to redeliver the securities within the normal settlement time of
five business days. While voting rights may pass with the loaned securities, if
a material event will occur affecting an investment on loan, the loan must be
called and the securities voted.
The Primary Fund may purchase corporate notes collateralized by a bank
letter of credit or securities of the U.S. Government, its agencies or
instrumentalities. Collateralized commercial paper purchased by the Fund is
rated A-1 and P-1 by Standard & Poor's Corporation and Moody's Investors
Service, Inc., respectively, or the equivalent thereof if rated by another
ratings agency. The collateral consists of U.S. Government securities having a
current market value in excess of the collateralized commercial paper
outstanding. A Trustee is usually appointed by the collateralized commercial
paper issuer to hold the collateral and administer the credit agreement for the
benefit of the holders.
The Primary Fund may invest in bank obligations which include certificates
of deposit, bankers' acceptances, letters of credit and time deposits. A
certificate of deposit is a negotiable certificate representing a financial
institution's obligation to repay funds deposited with it, earning a specified
rate of interest over a given period. A bankers' acceptance is a negotiable
obligation of a bank to pay a draft which has been drawn on it by a customer. A
time deposit is a non-negotiable deposit in a financial institution earning a
specified interest rate over a given period of time. A letter of credit is an
unconditional guarantee by the issuing bank to pay principal and interest on a
note a corporation has issued.
<PAGE> 25
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS. A repurchase agreement transaction
occurs when the Fund purchases and simultaneously contracts to resell in advance
securities at fixed prices determined by the negotiated yields. Each Portfolio
will limit repurchase agreement transactions to those domestic financial
institutions and securities dealers who are deemed credit worthy pursuant to
guidelines established by the Fund's Board of Trustees. The investment adviser
will follow procedures intended to provide that all repurchase agreements are at
least 100% collateralized as to principal and interest. A Portfolio 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 the Portfolio could incur a loss
and may incur costs in disposing of the underlying security. A Portfolio will
not hold more than 10% of its net assets in illiquid securities, including
repurchase agreements providing for settlement in more than seven days after
notice.
The Primary and U.S. Government 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 it 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 Fund's
policy that entering into a reverse repurchase agreement transaction will be for
temporary purposes only and, when aggregated with other borrowings, may not
exceed 5% of the value of the total assets of the Portfolio at the time of the
transaction.
TRUSTEES AND OFFICERS OF THE TRUST
*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") and Reserve Private Equity
Series ("RPES"), 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,
RTET and RPES.
HENRI W. EMMET, Trustee, 1535 Presidential Drive, Apt. 4A, Columbus, OH
43212.
Mr. Emmet retired as the Managing Director of Servus Associates, Inc.,
and U.S.A. Representative of the First National Bank of Southern Africa in
1996. He is currently Trustee or RF, RIT, RNYTET, RTET and RPES. Until 1989,
he was Senior Vice President of the New York branch of Banque Nationale de
Paris.
<PAGE> 26
*DONALD J. HARRINGTON, C.M, Trustee, St. John's University, Jamaica, New
York 11439.
The Reverend Harrington is President of St. John's University (NY) and a
Trustee of RF, RIT, RNYTET, RTET and RPES. 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.
MICHELLE L. NEUFELD, Counsel and Secretary, 810 Seventh Avenue, New
York, NY 10019.
MS. NEUFELD is Counsel and Secretary of RF, RIT, RTET, RNYTET and RPES.
Before joining The Reserve Funds in 1997, Ms. NEUFELD was a staff attorney at
NASD Regulation, Inc.
PAT A. COLLETTI, Controller, 810 Seventh Avenue, New York, New York
10019.
Mr. Colletti is Controller of RF, RIT, RTET, RNYTET and RPES. 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, and Harrington are members of a Review Committee which
performs the functions of Audit Committee and reviews compliance procedures and
practices. During the fiscal year ended May 31, 1997, the Trustees received
fees of $72,969 allocated to the Primary and Government Funds. As of June 30,
1997, Trustees and officers directly or indirectly as a group owned less than
1% of the outstanding shares of the Primary and Government Funds and shares of
the Treasury Fund. During the year ended May 31, 1997, the Fund held four Board
meetings and one Review Committee meeting.
<TABLE>
<CAPTION>
COMPENSATION TABLE
------------------
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM FUND AND FUND COMPLEX
NAME OF TRUSTEE FROM FUNDS* (4 ADDITIONAL TRUSTS) PAID TO TRUSTEE*
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Edwin Ehlert, Jr. $18,113 $22,197
Henri W. Emmet $18,113 $22,197
Rev. Donald J. Harrington $18,113 $22,197
</TABLE>
<PAGE> 27
*Amount shown are for the Fund's fiscal year ending May 31, 1997.
The following executive officers of the Fund had allocated cash
remuneration in excess of $60,000 during the last fiscal year for services
rendered to the Fund.
<TABLE>
<CAPTION>
ESTIMATED
AGGREGATE ANNUAL BENEFITS
NAME CAPACITY REMUNERATION UPON RETIREMENT
---- -------- ------------ ---------------
<S> <C> <C>
Bruce R. Bent President $281,800 $150,000
Pat A. Colletti Controller $108,400 $ 60,000
</TABLE>
INVESTMENT MANAGEMENT, DISTRIBUTION
AND CUSTODIAN AGREEMENTS
INVESTMENT MANAGEMENT AGREEMENT. Reserve Management Company, Inc.
("RMCI"), 14 Locust Place, Manhasset, NY 11030, of which Messrs. Henry B.R.
Brown and Bruce R. Bent are the Directors, manages the Fund and provides it with
investment advice pursuant to a separate Investment Management Agreement for
each portfolio. Messrs. Brown and Bent, together with their children, own RMCI.
Under the Investment Management Agreements, RMCI manages the Portfolios
investments, including effecting purchases and sales thereof, in furtherance of
each Portfolio's investment objective and policies, subject to overall control
and direction of the Trustees. RMCI also makes promotional and advertising
expenditures related to the sale of the Funds 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 the Funds, or registration fees and expenses).
For these services, the Primary and Government Funds periodically pay
RMCI a management fee at an annual rate not to exceed .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, 1995, 1996 and 1997 RMCI received
management fees of $6,870,969, $8,120,156, and $8,976,244, respectively, from
the Primary Fund and, $3,613,156, $3,471,243 and $2,858,951, respectively, from
the U.S. Government Fund.
Under the terms of the Investment Management Agreement with the Treasury
Fund, RMCI also pays all employee costs and ordinary operating costs of the
Portfolio. For these services the Treasury Portfolio periodically pays RMCI a
comprehensive management fee at an annual rate of .80% of average daily net
assets. For the fiscal year ended May 31, 1995, 1996 and 1997 RMCI received a
comprehensive management fee of $298,645, $719,287 and $988,133, respectively.
From time to time, RMCI may waive receipt of its fees and/or voluntarily
assume certain expenses of a Portfolio which would have the effect of lowering
the Portfolio'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 Primary and Government Fund
were duly approved by shareholders in 1986, and 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 Investment Management Agreement for the Treasury Fund was duly approved by
shareholders in 1993 and may be renewed annually
<PAGE> 28
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. 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 the Fund or by vote of a
majority of outstanding voting shares of a Portfolio or by RMCI.
Pursuant to the Service Agreement (see Service Agreement in the
Prospectus), during the fiscal year ended May 31, 1997 the Primary Fund
reimbursed RMCI $6,616,435 and the Government Fund reimbursed RMCI $1,778,491
for expenses. For the fiscal years ended May 31, 1995 and 1996 RMCI was
reimbursed $4,673,942 and $5,794,060 by the Primary Fund and $2,260,985 and
$2,210,243 by the Government Fund for expenses, respectively.
EXPENSE LIMITATION. The Investment Management Agreements for the Primary and
Government Portfolios provide that RMCI will reimburse either Portfolio for the
amount by which the Portfolio's costs and expenses paid RMCI (exclusive of
brokerage fees and commissions, interest, taxes and extraordinary legal fees and
expenses) exceed 1% of its average daily closing net assets.
DISTRIBUTION AGREEMENT. The Fund's Distributors are Pacific Global Fund
Distributors, Incorporated ("PGFDI") 215 North Marengo Avenue, Pasadena,
California 91101; NWNL Northstar Distributors ("NWNL") Two Pickwick Plaza,
Greenwich, Connecticut 06830 and Resrv Partners, Inc. ("RESRV"), 810 Seventh
Avenue, New York, N.Y. 10019. The Fund has authorized the Distributors, in
connection with their sale of Fund shares, to give only such information and to
make only such statements and representations as are contained in the
Prospectus. Sales may be made only by the Prospectus. The Distributors may offer
and sell shares of the Fund pursuant to a separate Prospectus applicable to such
Distributor. The Distributors are "principal underwriters" for the Fund within
the meaning of the Investment Company Act of 1940, and as such act as agent in
arranging for the continuous offering of Fund shares. The Distributors have the
right to enter into selected dealer agreements with brokers or other persons of
their choice for the sale of Fund shares. Parties to selected dealer agreements
may receive assistance payments, if they qualify for such payments, under the
Plan of Distribution described below. RESRV's, NWNL's and PGFDI's principal
business is the distribution of mutual fund shares. No Distributor has retained
underwriting commissions on the sale of Fund shares during the last three fiscal
years. During the fiscal year ended May 31, 1997, no distribution assistance
payments were made to RESRV, PGFDI or NWNL.
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 approval or by the vote of a majority of the outstanding voting
securities of the Fund.
PLAN OF DISTRIBUTION. The Fund maintains a Plan of Distribution ("Plan") and
related agreements, as amended, under Rule 12b-1 of the Investment Company Act
of 1940, which provides that investment companies may pay distribution expenses,
directly or indirectly, pursuant to a Plan adopted by the investment company's
Board and approved by its shareholders. Under the Plan, each Portfolio makes
assistance payments to brokers, financial institutions and other financial
intermediaries ("payee(s)") for shareholder accounts ("qualified accounts") as
to which a payee has rendered distribution assistance services at an annual rate
of .20% of the average net asset value of the qualified accounts. Such
distribution assistance may include, but may not limited to, establishment of
shareholder accounts, delivering prospectuses to prospective investors and
processing automatic investment in Fund shares of client account balances.
Substantially all such monies (together with significant amounts from RMCI's own
resources) are paid by RMCI to payees for their distribution assistance or
administrative services with any remaining amounts being used to partially
defray other expenses incurred by RMCI in distributing Fund shares. In addition
to the
<PAGE> 29
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 a 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 the 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 Fund shares, such as
administrative and account maintenance services, do not violate the
Glass-Steagall Act. However, this is an unsettled area of the law and if a
determination contrary to management's position is made by a bank regulatory
agency or court concerning payments to banks contemplated by the Plan, any such
payments will be terminated and any shares registered in the bank's name, for
its underlying customer, will be registered in the name of that customer.
Financial institutions providing distribution assistance or administrative
services for the Fund may be required to register as securities dealers in
certain states.
Under the Plan, the Fund's Controller or Treasurer reports quarterly the
amounts and purposes of assistance payments. During the continuance of the Plan
the selection and nomination of the disinterested Trustees are at the discretion
of the disinterested Trustees currently in office.
During the fiscal year ended May 31, 1997, $3,418,651 was paid under the
Plan by the Primary Fund, $1,053,785 was paid under the Plan by the Government
Fund and $276,253 was paid under the Plan by the Treasury Fund. Any such
payments are intended to benefit the Fund by maintaining or increasing net
assets to permit economies of scale in providing services to shareholders and to
contribute to the stability of such shareholder services. During the fiscal year
ended May 31, 1997, substantially all payments made by the Fund were to brokers
or other financial institutions and intermediaries for share balances in the
Fund.
The Plan 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 each series or by vote of the disinterested Trustees. The Plan and
related agreements may be renewed from year to year if approved by a vote of the
majority of 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. The Plan may not be amended to increase materially the
amount to be spent for distribution without shareholder approval. All material
amendments to the Plan must be approved by a vote of the Board of Trustees and
of the disinterested Trustees, cast in person at a meeting called for the
purpose of such vote.
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.
<PAGE> 30
CUSTODIAL SERVICES AND INDEPENDENT ACCOUNTANT. The Chase Manhattan Bank, 4 New
York Plaza, New York, N.Y. 10004 is Custodian of the Fund's securities and cash
pursuant to a Custodian Agreement. The Bank of New York, 48 Wall Street, New
York, N.Y. 10015; Morgan Guaranty Trust Co., 60 Wall Street, New York, N.Y.
10260; and Custodial Trust Company, 28 West State Street, Trenton, N.J. 08608
are Custodians for the Fund for limited purposes in connection with certain
repurchase agreements. Coopers & Lybrand L.L.P., 1301 Avenue of the Americas,
New York, N.Y. 10019 is the Fund's independent accountant.
PORTFOLIO TURNOVER, TRANSACTION CHARGES AND ALLOCATION
As investment securities transactions made by the Fund are normally
principal transactions at net prices, the Fund does not normally incur brokerage
commissions. Purchases of securities from underwriters involve a commission or
concession paid by the issuer to the underwriter and aftermarket transactions
with dealers involve a spread between the bid and asked prices. The Fund has not
paid any brokerage commissions during the past three fiscal years.
The Fund's policy of investing in debt securities maturing within 13
months 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 the Funds.
Subject to the overall supervision of the officers of the Fund and the
Board of Trustees, RMCI places all orders for the purchase and sale of the
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 and yields. In determining best price and execution,
RMCI may take into account a dealer's operational and financial capabilities,
the type of transaction involved, the dealer's general relationship with RMCI,
and any statistical, research, or other services provided by the dealer to RMCI.
To the extent such non-price factors are taken into account the execution price
paid may be increased, but only in reasonable relation to the benefit of such
non-price factors to the Fund as determined by RMCI. Brokers or dealers who
execute investment securities transactions may also sell shares of the Funds;
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 Fund and other investment companies managed by
RMCI, the transactions are allocated as to amount in accordance with each order
placed for each fund. However, RMCI may not always be able to purchase or sell
the same security on identical terms for all investment companies affected.
SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits 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 the Fund. If they deem it
advisable and in the best interests of shareholders, the Trustees may classify
or reclassify any unissued shares of the Fund by setting or changing the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms and conditions of
redemption of the stock. Any changes would be required to comply with 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 the Fund, shareholders
are entitled to share pro rata in the net assets of their respective portfolios
available for distribution to such shareholders. It is possible, although
considered highly unlikely in view of the method of operation of mutual funds,
that should the assets of another class of shares be insufficient to satisfy its
liabilities, the assets of
<PAGE> 31
another class could be subjected to claims arising from the operations of the
first class of shares. No changes can be made to the Fund's issued shares
without shareholder approval.
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 share has an equal interest in the net assets of the respective Portfolio,
equal rights to all dividends and other distributions from the 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 Trustees could elect all
Trustees if they so choose, and in such event the holders of the remaining
shares could not elect any person to the Board of Trustees.
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable for the obligations of the
Fund. The Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the 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 Trust provides for the
indemnification out of the Fund property of any shareholder held personally
liable for the obligations of the Fund. The Declaration of Trust also provides
that the Fund shall, upon request, assume the defense of any claim made against
any shareholder for any act or obligation of the 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 the Fund itself
would be unable to meet its obligations.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law; but nothing in the
Declaration protects a Trustee against any liability to which he would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his office.
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 shareholders of 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 as a group at an annual meeting of
shareholders at which at least 50 percent of the shares of each group are
represented.
As of June 30, 1997, no person was known by the Fund to own of record
or beneficially 5% or more of the outstanding shares of the Fund.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Redemption payments will normally be made by check or wire transfer but
the Fund is authorized to make payment of redemptions partly or wholly in kind
(that is, by delivery of investment securities valued at the same time as the
redemption net asset value is determined). The Fund has elected to permit any
shareholder of record to make redemptions wholly in cash to the extent the
shareholder's redemptions in any 90 day period do not exceed the lesser of
$250,000 or 1% of the net assets of the respective Portfolio. 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 Fund's practice of
holding instruments typically with a minimum value of $1,000,000 and its
intention to redeem in kind only when necessary to reduce a disparity between
amortized cost and market
<PAGE> 32
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 THE FUND ARE PURCHASED BY CHECK OR RESERVE AUTOMATIC
TRANSFER, THE FUND MAY DELAY TRANSMITTAL OF REDEMPTION PROCEEDS UNTIL SUCH TIME
AS IT HAS ASSURED ITSELF THAT GOOD PAYMENT HAS BEEN COLLECTED FOR THE PURCHASE
OF SUCH SHARES, WHICH 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
Fund's Plan of Distribution ("Plan"). Under the Plan, payments are made to
persons who provide assistance in distributing Fund shares or other assistance
to the Fund.
NET ASSET VALUE. Shares are offered at their net asset value. The net asset
value of the Fund is 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 certain regional banking holidays which may
include Martin Luther King's Birthday and Columbus Day. The net asset value of
each Portfolio is normally maintained at $1.00 per share. Each Portfolio cannot
guarantee that its net asset value will always remain at $1.00 per share.
The net asset value per share of each Portfolio is determined by adding
the value of all of the Portfolio's securities, cash and other assets,
subtracting its liabilities, and dividing the result by the number of its shares
outstanding. The Board 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 Fund will utilize the
following practices: maintain a dollar-weighted average portfolio maturity of 90
days or less; purchase only instruments having remaining maturities of 397 days
or less; and invest only in securities determined by the Board of Trustees to be
of high quality with minimal credit risk. To assess whether repurchase agreement
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 the Fund proposes to enter into
repurchase agreements. In addition, such procedures are reasonably designed,
taking into account current market conditions and the investment objective of
the Fund, to attempt to maintain 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 Portfolio
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 Portfolio's
assets prior to maturity to realize capital gains or losses or to shorten the
average maturity of the Portfolio, withholding dividends, redemption of shares
of the Portfolio in kind, or reverting to valuation based upon market prices and
estimates.
EXCHANGE PRIVILEGE. A shareholder of the Fund may exchange his shares at the net
asset value for shares of the Pacific Advisors Fund Inc. and the NWNL Northstar
Series Trust and their respective portfolios. This exchange privilege may not be
available to clients of certain firms. A sales load will be charged on such an
exchange to the Pacific Advisors Fund, Inc. and the NWNL Northstar Series Trust
unless a waiver of the sales load applies. A shareholder may qualify for waiver
of the sales load if the shares of the Fund which are
<PAGE> 33
being exchanged were acquired: (a) by a previous exchange from shares of
Pacific Advisors Fund Inc. or NWNL Northstar Series Trust purchased with a
sales load, or (b) through reinvestment of dividends or distributions paid
with respect to the foregoing category of shares. A shareholder of the Pacific
Advisors Fund Inc. or the NWNL Northstar Series Trust may exchange, at net
asset value, shares for shares of the Primary Portfolio of the Fund only.
Shares to be acquired in an exchange must be registered for sale in the
investor's state. The Fund reserves the right to record all exchange requests.
The exchange privilege may be modified or terminated at any time, or from
time to time, upon 60 days' notice to shareholders. Additional information
regarding the Pacific Advisors Fund exchange privilege is available from the
Pacific Advisors Fund at (800) 282-6693 or any authorized firm. Additional
information regarding the NWNL Northstar Series Trust is available from the NWNL
Northstar Series Trust at (203)863-6200 or (800)595-7827 or any authorized firm.
SHAREHOLDER SERVICE POLICIES. The Fund's policies concerning the shareholder
services are subject to change from time to time. The Fund reserves the right to
change the $1,000 minimum account size subject to the $5 monthly service charge
or involuntary redemption. The Fund further reserves the right to impose special
service charges for services provided to individual shareholders generally
including, but not limited to, fees for returned checks, stop payment orders on
official checks and shareholder checks, and special research services. The
Fund's standard service charges as described in the Prospectus are also subject
to adjustment from time to time. In addition, the Fund reserves the right to
increase its minimum initial investment amount at any time.
CREDITING OF INVESTMENTS. The Fund will only give credit for investments in the
Fund 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 2:00 P.M. (New York time) (11:00 A.M. New York time for the
Treasury Portfolio) of the amount to be transmitted and the account to be
credited. Checks and other items submitted to the Fund for investment are only
accepted when submitted in proper form, 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 Fund after 2:00 P.M. (New York time) (11:00 A.M. New York time
for the Treasury Portfolio) are considered received on the following business
day.
Checks drawn on foreign banks are normally not accepted by the Fund. In
addition, the Fund does not accept cash investments or travelers checks.
The Fund reserves the right to reject any investment in the Fund for any
reason and may at any time suspend all new investment in the Fund.
IF SHARES PURCHASED ARE TO BE PAID FOR BY WIRE AND THE WIRE IS NOT
RECEIVED BY THE FUND OR IF SHARES ARE PURCHASED BY CHECK WHICH, AFTER DEPOSIT,
IS RETURNED UNPAID OR PROVES UNCOLLECTIBLE, THE SHARE PURCHASE MAY BE CANCELED
OR REDEEMED IMMEDIATELY. THE INVESTOR THAT GAVE NOTICE OF THE INTENDED WIRE OR
SUBMITTED THE CHECK WILL BE HELD FULLY RESPONSIBLE FOR ANY LOSSES INCURRED BY
THE FUND, THE INVESTMENT ADVISER OR THE DISTRIBUTOR. THE FUND MAY REDEEM SHARES
FROM ANY ACCOUNT REGISTERED IN THAT PURCHASER'S NAME AND APPLY THE PROCEEDS
THEREFROM TO THE PAYMENT OF ANY AMOUNTS DUE THE FUND, THE INVESTMENT ADVISOR OR
THE DISTRIBUTOR.
SHARE CERTIFICATES. Share certificates are not issued by the Fund.
<PAGE> 34
DISTRIBUTIONS AND TAXES
The Fund intends 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 shareholders. The status of the Fund
as a regulated investment company does not involve government supervision of
management or of investment practices or policies. If it so qualifies, in any
fiscal year in which it distributes at least 90 percent of its net income, the
Fund will not be subjected to Federal income tax on such distributed amounts.
In order to qualify as a regulated investment company under the Code, the
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 its gross income from the sale or disposition
of securities held for less than three months.
The Portfolios intend to distribute all of their net investment income
and net capital gains, if any, and, therefore, do not expect to pay federal
income tax. Net investment income is made up of interest, less expenses. Because
no portion of a Portfolio's income will be comprised of dividends from domestic
corporations, none of the income distributions from a Portfolio will be eligible
for the 70% deduction for dividends received by corporations. Under the tax rate
structure enacted by the Tax Reform Act of 1986, the distinction between
ordinary income and capital gain and between long-term capital gain and
short-term capital gain is less relevant because the tax rates on ordinary
income and short-term capital gains are the same. However, the designation or
short-term capital gain is relevant for purposes of the tax rules governing the
offsetting of gains and losses and use of capital loss carryover.
The Treasury Portfolio intends to invest only in the U.S. Government
securities that provide interest income exempt from state and local income
taxes, but may invest up to 5 percent of its assets in repurchase agreements
pending the investment of uninvested cash. The Commonwealth of Pennsylvania
requires that for a mutual fund to pay exempt-interest dividends, it must have
no power to vary its portfolio investments except under five identified
circumstances. Because the Fund and each of its Portfolios may dispose of an
investment under circumstances other than the five specified instances, there
can be no assurance that dividends paid by the Fund will be eligible for
pass-through status in Pennsylvania. Distributions attributable to net capital
gains, if any, are generally subject to state and local taxes. It is possible
that a state or local taxing authority may in the future seek to tax an investor
on a portion of the interest income of an obligation held by the Treasury
Portfolio.
Dividends derived from net investment income and distributions from net
realized short-term securities gains paid by the Fund with respect to Fund
shares beneficially owned by a foreign person generally are subject to U.S.
nonresident withholding taxes at a rate of 30%, unless the foreign person claims
the benefit of a lower rate specified in a tax treaty. Distributions from net
realized long-term securities gains paid by the Fund with respect to Fund shares
beneficially owned by a foreign person generally will not be subject to any U.S.
withholding tax. However, such distributions may be subject to 31% backup
withholdings, as described in Prospectus, unless the foreign person certifies
his non-U.S. residency status.
Statements as to the tax status of each investor's dividends and other
distributions will be mailed annually. The annual statements will set forth the
dollar amount of income subject to federal tax. Distributions will be reported
under more than one tax identification number only if a separate account is
established for each number.
Shareholders are advised to consult with their tax advisers regarding the
applicability of state and local taxes to an investment or income therefrom in
the Fund which may differ from the Federal income tax consequences described
above.
<PAGE> 35
FUND YIELD
The current yield of a Fund may differ from its effective yield and
annualized dividends.
Current yield is calculated by determining the net change (exclusive of
capital changes) in the value of a hypothetical pre-existing 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 both 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) 365 /7] -1. Effective annual
yields are a representation of the effective annual rate of return produced by
the monthly compounding of Fund dividends.
Yield information may be useful in reviewing the performance of the Fund,
but because of fluctuations, it may or may not provide a basis for comparison
with bank deposits, other money market funds or bank accounts which have
fluctuating share values, or other investments which pay a fixed yield for a
stated period of time, such as Treasury bills, bank certificates of deposit,
savings certificates and NOW accounts. When making comparisons, the investor
should also consider the quality and maturity of the portfolio securities of the
various money market funds. An investor's principal is not guaranteed by the
Fund, nor is it insured by a governmental agency.
RESERVE CASH PERFORMANCE ACCOUNT
The Reserve Cash Performance ("CPA") and Reserve "CPA" Plus accounts
provide a comprehensive package of additional services to investors in the
Primary, Government, and Treasury Funds for an additional fee. Reserve CPA is a
check arrangement with BankOne Columbus NA or the Chase Manhattan Bank whereby
checks are issued to Reserve shareholders which may be used to redeem shares in
the account in any amount. If a bank accepts a check, it will be paid in the
order received by redemption of shares from the investor's Reserve account.
<PAGE> 36
Any check in an amount exceeding the Reserve account balance will be
returned to the payee. Reserve CPA checks can be used in the same manner as any
other bank checks. Paid checks will not be returned but complete information on
such paid checks will be provided monthly. Reserve CPA Plus is a checking
facility described above plus a VISA Gold debit card. The VISA card functions
exactly as does a conventional VISA credit card except that the cardholder's
Reserve account is automatically charged for all purchases and cash advances,
thus eliminating the usual monthly finance charges. As with the checking
facility, VISA charges are paid by liquidating shares in the Reserve Fund
account, but any changes that exceed the balance will be rejected. VISA card
issuance is subject to credit approval. Reserve, VISA or the bank may reject any
application for checks or cards and may terminate an account at any time.
Conditions for establishing a CPA or CPA Plus account may be altered or waived
by the Funds either generally or in specific instances. The checks and VISA
cards are intended to provide investors with easy access to their account
balances.
A Fund will charge a non-refundable annual CPA service fee (currently
$60 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 and in processing
returned checks. The annual service fee and other charges may be changed at any
time upon 30 days notice. In addition, broker/dealers or other financial
institutions in the CPA Program may charge their own service fees in addition to
the annual fee.
VISA cardholders may be liable for the unauthorized use of their card up
to the amount set by the governing Federal regulations which is currently $500
if the Fund or bank 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 CPA Plus participant should report
the loss immediately by telephoning the issuing bank, currently BankOne at (614)
248-4242 which can be reached 24 hours a day, seven days a week or the Funds at
(800) 631-7784 or (212) 977-9880 during normal business hours (9:00 A.M. to 5:00
P.M., New York time).
The use of checks and cards by participants will be subject to the terms
of your Reserve CPA Account Application and VISA Account Shareholder Agreements.
<PAGE> 37
RATINGS
The following are the rating designations of short term instruments and
their respective meanings.
STANDARD & POOR'S CORPORATION
A-1: This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be denoted with a plus (+) sign
designation.
MOODY'S INVESTORS SERVICE, INC.
Prime-1 (P-1): Issuers rated P-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. P-1
repayment will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternative liquidity.
DUFF & PHELPS CREDIT RATING CO.
Duff-1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors are
minor. Those issues determined to have the highest certainty of timely payment
and whose safety is just below risk-free U.S. Treasury short-term obligations
will be denoted with a plus (+) sign designation. Those issues determined to
have a high certainty of timely payment and whose risk factors are very small
will be denoted with a minus (-) sign designation.
IBCA LTD.
A-1: Obligations supported a very strong capacity for timely repayment.
Those obligations supported by the highest capacity for timely repayment will be
denoted with a plus (+) sign designation.
<PAGE> 38
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, 1997, and the related statements of operations for the year then ended,
the statements of changes in net assets for each of the two years in the period
then ended 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, 1997, 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 the
Primary, U.S. Government and U.S. Treasury Funds of The Reserve Fund as of May
31, 1997, 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 27, 1997
THE RESERVE FUND -- PRIMARY FUND
STATEMENT OF NET ASSETS -- MAY 31, 1997
<TABLE>
<CAPTION>
% DAYS TO VALUE
RATE MATURITY (NOTE 1)
--------- -------- --------------
<S> <C> <C> <C>
NEGOTIABLE BANK CERTIFICATES OF DEPOSIT -- 78.10%
Bankers Trust Company........................................................ 5.72 41 $ 75,631,939
Mellon Bank, N.A............................................................. 5.55-5.60 24-52 100,170,347
Harris Trust and Savings Bank................................................ 5.55 5 75,323,750
Old Kent Bank................................................................ 5.71 66 50,222,762
SouthTrust Bank of Alabama, N.A.............................................. 5.63 10 20,172,028
Union Bank of California, N.A................................................ 5.63 7 50,430,069
Abbey National PLC (a)....................................................... 5.69-5.71 34-55 100,773,094
ABN-AMRO Bank N.V. (b)....................................................... 5.42 11 50,653,252
Bank of Tokyo -- Mitsubishi, Ltd. (b)........................................ 5.81 69 50,209,806
Banque Nationale de Paris (b)................................................ 5.63-5.72 10-73 100,644,676
Barclays Bank PLC (b)........................................................ 5.62-5.63 3-4 85,802,464
Bayerische Landesbank Girozentrale (a)....................................... 5.525 25 50,537,303
Bayerische Hypotheken-und Wechsel Bank AG (b)................................ 5.55 31 50,030,833
BHF Bank AG (a).............................................................. 5.73 38 27,254,652
Caisse Nationale de Credit Agricole (b)...................................... 5.60 53 50,085,556
Canadian Imperial Bank of Commerce (a)....................................... 5.45-5.50 12-42 50,632,299
Canadian Imperial Bank of Commerce (b)....................................... 5.55 24 50,084,792
Deutsche Bank AG (a)......................................................... 5.43-5.61 3-53 75,561,202
Deutsche Bank AG (b)......................................................... 5.57 24 25,282,512
Dresdner Bank AG (b)......................................................... 5.56 31 50,030,889
ING Bank N.V. (a)............................................................ 5.64 47 100,267,544
Landesbank Hessen -- Thueringen Girozentrale (b)............................. 6.01 49 5,267,542
Sanwa Bank, Ltd. (b)......................................................... 5.61 12 50,646,832
Societe Generale (b)......................................................... 5.40 4 45,614,250
Svenska Handelsbanken (a).................................................... 5.445 17 50,612,658
</TABLE>
12
<PAGE> 39
THE RESERVE FUND -- PRIMARY FUND
STATEMENT OF NET ASSETS -- MAY 31, 1997 -- (CONTINUED)
<TABLE>
<CAPTION>
% DAYS TO VALUE
RATE MATURITY (NOTE 1)
--------- -------- --------------
<S> <C> <C> <C>
NEGOTIABLE BANK CERTIFICATES OF DEPOSIT -- (CONTINUED)
Svenska Handelsbanken (b).................................................... 5.66-5.70 39-70 $ 50,197,222
Toronto -- Dominion Bank (a)................................................. 5.37 5 50,701,083
Westdeutsche Landesbank Girozentrale (b)..................................... 5.60-5.63 3-59 100,515,833
--------------
Total Negotiable Bank Certificates of Deposit.................................. 1,643,357,189
--------------
PROMISSORY NOTES -- 10.89%
ABN Bank Canada (c).......................................................... 5.56 59 49,567,556
Commerzbank U.S. Finance, Inc. (c)........................................... 5.52 20 74,804,500
Societe Generale North America, Inc. (c)..................................... 5.61 34 54,734,304
Toronto Dominion Holdings (U.S.A.), Inc. (c)................................. 5.40 13 49,924,931
--------------
Total Promissory Notes......................................................... 229,031,291
--------------
REPURCHASE AGREEMENTS -- 5.52%
FGPC 7% due 6/1/24, FNMS 6.50%-7.50% due from 6/1/14 to 2/1/27 (Repo with CS
First Boston Corporation dated May 30, 1997, resale amount $88,041,067).... 5.60 3 88,041,067
GNMA 5.50% due 6/20/26 (Repo with Merrill Lynch GSI dated May 30, 1997,
resale amount $28,012,833)................................................. 5.50 3 28,012,833
--------------
Total Repurchase Agreements.................................................... 116,053,900
--------------
TAXABLE MUNICIPAL BONDS -- 5.43%
Florida Housing Finance Agency Housing Revenue Bonds 1993 Series A (d)....... 5.62 7 40,703,254
Illinois Student Assistance (d).............................................. 5.59 7 25,225,298
Maricopa County Industrial Development Authority Revenue Bonds for Phoenix
Multi-Purpose Arena Project Series 1990 (d)................................ 5.75 7 43,380,660
New Hampshire Business Finance Authority Revenue Bonds 1992 Series B (d)..... 5.75 7 5,025,555
--------------
Total Taxable Municipal Bonds.................................................. 114,334,767
--------------
Total Primary Fund Investments -- (99.94%) (Cost $2,089,617,798)............... 2,102,777,147
Other assets, less liabilities -- (.06%)....................................... 1,331,905
--------------
NET ASSETS (100%) equivalent to $1.00 net asset value, offering and redemption
price per share based on 2,104,109,052 shares of beneficial interest $.001
par value outstanding........................................................ $2,104,109,052
=============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE> 40
THE RESERVE FUND -- U.S. GOVERNMENT FUND
STATEMENT OF NET ASSETS -- MAY 31, 1997
<TABLE>
<CAPTION>
% DAYS TO VALUE
RATE MATURITY (NOTE 1)
---- -------- ------------
<S> <C> <C> <C>
REPURCHASE AGREEMENTS -- 99.70%
- -------------------------------------------------------------------------------
GNMA 6.50%-9.50% due from 1/15/09 to 12/15/29 (Repos with Bear, Stearns & Co,
Inc. dated May 23, 1997, resale amount $100,258,306)....................... 5.47 10 $100,151,944
GNMA 6.50%-13% due from 2/15/98 to 3/15/26 (Repo with CS First Boston
Corporation dated May 7, 1997, resale amount $110,557,608)................. 5.53 10 110,439,328
GNMA 6.50%-12.75% due from 12/15/97 to 4/15/23 (Repo with DLJ Securities
Corporation dated May 30, 1997, resale amount $54,025,200)................. 5.60 3 54,025,200
GNMA 7%-8% due from 5/15/26 to 5/15/27 (Repos with Merrill Lynch GSI dated
March 12, 1997, resale amount $110,346,500)................................ 5.40 3 110,346,500
GNMA 5%-10% due from 1/1/00 to 10/15/30 (Repo with Prudential Securities Inc.
dated May 1, 1997, resale amount $110,541,689)............................. 5.54 3 110,541,689
GNMA 6.875%-16.25% due from 1/1/00 to 2/20/27 (Repo with Smith Barney Inc.
dated May 5, 1997, resale amount $124,533,338)............................. 5.53 3 124,533,338
------------
Total U.S. Government Fund Investments -- (99.70%) (Cost $608,000,000)......... 610,037,999
Other assets, less liabilities -- (.30%)....................................... 1,806,317
------------
NET ASSETS (100% ) equivalent to $1.00 net asset value, offering and redemption
prices per share based on 611,844,316 shares of beneficial interest $.001 par
value outstanding............................................................ $611,844,316
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE> 41
THE RESERVE FUND -- U.S. TREASURY FUND
STATEMENT OF NET ASSETS -- MAY 31, 1997
<TABLE>
<CAPTION>
% DAYS TO VALUE
RATE MATURITY (NOTE 1)
---------- -------- ------------
<S> <C> <C> <C>
U.S. TREASURY BILLS -- 97.99%
U.S. Treasury Bills (Cost $164,471,729)........................................ 4.96-5.265 6-139 $165,769,769
Other assets, less liabilities -- (2.01%)...................................... 3,408,036
------------
NET ASSETS (100% ) equivalent to $1.00 net asset value, offering and redemption
prices per share based on 169,177,805 shares of beneficial interest $.001 par
value outstanding............................................................ $169,177,805
============
</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, 1997. Securities payable on demand are collateralized by
bank letter of credit, other bank credit agreements or financial guaranty
assurance agencies.
GLOSSARY
<TABLE>
<S> <C> <C>
FGPC = FHLMC Gold Mortgage-Backed Pass-Through Participation Certificates
FNMS = FNMA Mortgage-Backed Pass-Through Securities
GNMA = Government National Mortgage Association Mortgage-Backed Pass-Through Securities
</TABLE>
THE RESERVE FUND -- STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, 1997
------------------------------------------------
PRIMARY U.S. GOVERNMENT U.S. TREASURY
FUND FUND FUND
------------ --------------- -------------
<S> <C> <C> <C>
INTEREST INCOME (Note 1).......................................... $105,936,477 $31,073,509 $ 8,412,863
------------ --------------- -------------
EXPENSES (Note 2)
Management fee.................................................. 8,976,244 2,858,951 --
Comprehensive fee............................................... -- -- 1,317,868
Shareholder servicing, administration and general office
expenses...................................................... 4,530,412 1,205,154 --
Distribution assistance (Note 3)................................ 3,418,651 1,053,785 276,253
Equipment expense............................................... 669,057 177,758 --
Professional fees............................................... 502,936 120,463 --
Occupancy costs................................................. 259,671 69,287 --
Stationery, printing and supplies............................... 364,568 97,310
Trustee fees.................................................... 71,802 20,257 --
Other expenses.................................................. 217,989 88,262 --
------------ --------------- -------------
Total Expenses................................................ 19,011,330 5,691,227 1,594,121
Less: voluntary waiver.......................................... -- -- (329,684)
------------ --------------- -------------
Net Expenses.................................................... 19,011,330 5,691,227 1,264,437
------------ --------------- -------------
NET INVESTMENT INCOME............................................. $ 86,925,147 $25,382,282 $ 7,148,426
============= ============== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE> 42
THE RESERVE FUND -- 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, 1997 MAY 31, 1996 MAY 31, 1997 MAY 31, 1996 MAY 31, 1997 MAY 31, 1996
--------------- --------------- --------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE)
IN NET
ASSETS FROM
INVESTMENT
OPERATIONS:
Net investment
income paid to
shareholders as
dividends (Note
1).............. $ (86,925,147) $ (82,535,957) $ (25,382,282) $ (33,256,499) $ (7,148,426) $ (5,400,705)
-------------- -------------- -------------- ------------ ------------
FROM CAPITAL SHARE
TRANSACTIONS
(at net asset
value of $1
per share):
Net proceeds
from the sale
of shares..... 8,848,392,468 7,548,966,022 2,757,510,343 3,341,970,451 682,830,849 595,400,649
Net asset value
of shares
issued on
reinvestment
of
dividends..... 86,925,147 82,535,957 25,382,282 33,256,499 7,148,426 5,400,705
-------------- -------------- -------------- ------------ ------------
Subtotal...... 8,935,317,615 7,631,501,979 2,782,892,625 3,375,226,950 689,979,275 600,801,354
Cost of shares
redeemed.... (8,495,322,653) (7,569,851,461) (2,739,545,482) (3,528,514,569) (663,567,636) (553,261,868)
-------------- -------------- -------------- ------------ ------------
Net increase
(decrease)
derived from
capital share
transactions
and from
investment
operations.... 439,994,962 61,650,518 43,347,143 (153,287,619) 26,411,639 47,539,486
NET ASSETS:
Beginning of
year............ 1,664,114,090 1,602,463,572 568,497,173 721,784,792 142,766,166 95,226,680
-------------- -------------- -------------- ------------ ------------
End of year....... $ 2,104,109,052 $ 1,664,114,090 $ 611,844,316 $ 568,497,173 $ 169,177,805 $ 142,766,166
============== ============== ============== ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE> 43
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 series, 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 Fund's are charged only for their direct
or allocated (in proportion to net assets or number of shareholder accounts)
share of expenses.
(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, 1997, the advisor waived a portion of its
comprehensive fee. Also, under the current Service Agreement, RMCI was
reimbursed $6,616,435 (Primary Fund) and $1,778,491 (U.S. Government Fund)
during the year ended May 31, 1997 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, 1997, the Primary, U.S. Government and U.S. Treasury
Funds had accrued expenses of $167,589, $50,040, and $10,981, 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.
17
<PAGE> 44
THE RESERVE FUND (THE "FUND")
PRIMARY, U.S. GOVERNMENT AND U.S. TREASURY FUNDS (THE "FUNDS")
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(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.
(5) COMPONENTS OF NET ASSETS:
At 5/31/97, the following funds had these components of net assets:
<TABLE>
<CAPTION>
PRIMARY U.S. GOVERNMENT U.S. TREASURY
-------------- --------------- -------------
<S> <C> <C> <C>
Par Value................................................ $ 2,104,109 $ 611,844 $ 169,178
Paid-in-Capital.......................................... 2,102,004,943 611,232,472 169,008,627
-------------- ------------ ------------
Net Assets............................................... $2,104,109,052 $ 611,844,316 $ 169,177,805
============== ============ ============
</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.
18
<PAGE> 45
THE RESERVE FUND
PART C
<TABLE>
<CAPTION>
Item 24. Financial Statements and Exhibits Page
--------------------------------- ----
<S> <C>
(a) Financial Statements Included in Part A for the Primary,
U.S. Government and U.S. Treasury Funds
(1) Financial Highlights
(b) Financial Statements Included in Part A and Part B
for the Primary and U.S. Government Funds
(1) Statements of Net Assets at May 31, 1997
(2) Statements of Operations for the year ended
May 31, 1997
(3) Statements of Changes in Net Assets for the
years ended May 31, 1996 and 1997
(4) Notes to Financial Statements
(5) Report of Independent Accountants.
(c) Financial Statements included in Part B for
the U.S. Treasury Fund
(1) Statements of Net Assets at May 31, 1997
(2) Statements of Operations for year ended May 31, 1997
(3) Statements of Changes in Net Assets for the years
ended May 31, 1996 and 1997
(4) Notes to Financial Statements
(5) Report of Independent Accountants
(d) Exhibits
(1)* Declaration of Trust was filed as an exhibit
to Registrant's Post-Effective Amendment No.
43 dated July 31, 1987.
(2)* Bylaws were filed as an exhibit to Registrant's Post-
Effective Amendment No. 42 dated November 24, 1986.
Amendment No. 1 filed as an exhibit to Post-Effective
Amendment No. 46 dated July 31, 1990.
(3) Not Applicable.
</TABLE>
- ---------------
*Incorporated by reference
<PAGE> 46
<TABLE>
<S> <C>
(4) Not Applicable.
(5)* Form of Investment Management Agreement for the
Primary and U.S. Government Funds filed as an Exhibit
to Post-Effective Amendment No. 42 dated November 24,
1986. Form of Investment Management Agreement for
the U.S. Treasury and Federal Government Funds filed
as an Exhibit to Post-Effective Amendment No. 48 dated
October 31, 1991.
(6)* Form of Distribution Agreement and Plan of Distribution
filed as an exhibit to Registrant's Post-Effective Amendment
No. 42 dated November 24, 1986.
(7)* Pension Plan of Reserve Management Corporation was
filed as an exhibit to Post-Effective Amendment No. 32;
Amendments to Pension Plan filed as an exhibit to Post-
Effective Amendment No. 45 dated July 31, 1989.
(8)* (a) Custodian Agreement with Chemical Bank filed as
an exhibit to Registrant's Post-Effective Amendment
No.1; Amendments thereto filed as to Post Effective
Amendment No. 35.
(b) Custodian Agreement with Custodial Trust Company
filed as an Exhibit to Post-Effective Amendment No. 43
filed July 31, 1987.
(c) Custodian Agreement with Bank of New York filed as
an Exhibit to Post-Effective Amendment No. 50 filed
May 28, 1992.
(9)* (a) Form of Service Agreement filed as an exhibit to Post-
Effective Amendment No. 42 dated November 24, 1986.
Transfer Agent Agreement with First Wisconsin Trust
Company filed as an exhibit to Post-Effective Amendment
No. 46 dated July 31, 1990.
(10) Opinion of Counsel filed herewith.
(11) Consent of Auditors filed herewith
(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 for computation of each performance
quotation provided in Registration Statement
(17) Powers of Attorney filed herewith.
(18) Not Applicable
</TABLE>
- ---------------
*Incorporated by reference
<PAGE> 47
Item 25. Persons Controlled by or Under Common Control with Registrant
Not Applicable
Item 26. Number of Holders of Securities
<TABLE>
<CAPTION>
Title Number of Record
of Holders
Class at September 30, 1997
----- ------------------------
<S> <C>
Primary Fund 145,183
U.S. Government Fund 42,576
U.S. Treasury Fund 4,830
</TABLE>
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 Director of 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 and Director of Reserve
Management Corporation and
Director of Resrv Partners,
Inc. both of the same
address as the Trust.
</TABLE>
<PAGE> 48
Item 29. Principal Underwriters
(a) Resrv Partners, Inc., a principal underwriter of the Registrant, also acts
as principal underwriter to Reserve Tax-Exempt Trust, Reserve Institutional
Trust, Reserve New York 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> 49
(b) Pacific Global Fund Distributors, Inc. ("Pacific Global") also acts
as a principal underwriter of Reserve Fund Tax-Exempt Trust and Pacific Advisors
Fund Inc.
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address with,Pacific Global with Registrant
- ------------------ --------------------- ---------------------
<S> <C> <C>
George A. Henning Chairman None
215 North Marengo Ave.
Suite 115
Pasadena, CA 91101
Thomas H. Hanson President None
1900 State Street
Suite H
Santa Barbara, CA 93101
Eileen P. Hannemann Financial Principal None
600 Hampshire Road
Westlake Village, CA 91361
</TABLE>
(c) NWNL Northstar Distributors, Inc. ("Northstar") also acts as a
principal underwriter for NWNL Northstar Series Trust.
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address with Northstar with Registrant
- ------------------ --------------------- ---------------------
<S> <C> <C>
Mark L. Lipson Chairman & Director None
Two Greenwich Plaza
Greenwich, CT 06830
Robert J. Adler President & Director None
Two Greenwich Plaza
Greenwich, CT 06830
Agnes Mullady Treasurer None
Two Greenwich Plaza
Greenwich, CT 06830
Lisa Hurley Secretary None
Two Greenwich Plaza
Greenwich, CT 06830
</TABLE>
<PAGE> 50
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> 51
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. 58 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
17th day of October 1997.
/s/ Bruce R. Bent
--------------------------
Bruce R. Bent, President
Attest:
/s/ Michelle Neufeld
- ---------------------------
Michelle Neufeld, Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 58 to its Registration Statement has been below
signed by the following persons in the capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/ Bruce R. Bent Date 10/17/97
- -------------------------------------------------- --------------------
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
/s/ Michelle Neufeld Date 10/17/97
- ------------------------------------------------- -------------------
Michelle Neufeld, *Attorney-in-Fact
General Counsel
</TABLE>
<PAGE> 52
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibit No. Description
- ----------- -----------
<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 Agree-
ment between the Registrant and Reserve
Management Company Inc.*
6. (a) Form of Distribution Agreement between the Registrant
and Resrv Partners, 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 for computation of each performance quotation
provided in Registration Statement*
17. Powers of Attorney
18. Not Applicable
</TABLE>
- ---------------
*Previously filed
<PAGE> 1
[The Reserve Funds letterhead] EXHIBIT 10
October 17, 1997
Board of Trustees
The Reserve Fund
810 Seventh Avenue
New York, New York 10019
Gentlemen:
I have acted as counsel to The Reserve Fund, a Massachusetts business trust
(the "Fund"), in connection with the registration of shares of the Primary,
U.S. Government and U.S. Treasury Fund ("Portfolios") 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 Portfolios and the registration of their shares.
3. To the best of my knowledge, the shares of the Portfolios, 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/ Michelle Neufeld
Michelle Neufeld
Counsel
<PAGE> 1
[COOPERS & LYBRAND LETTERHEAD] EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANTS
---------------
We consent to the inclusion in this Post-Effective Amendment No. 58 to
the Registration Statement on Form N-1A (File No. 2-36429) of our report dated
June 27, 1997, on our audits of the financial statements and financial
highlights of The Reserve Fund.
We also consent to the reference to our firm under the caption "Financial
Highlights" in the prospectus.
COOPERS & LYBRAND L.L.P
New York, New York
October 16, 1997.
<PAGE> 1
POWER OF ATTORNEY EXHIBIT 17
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of THE
RESERVE FUND, a Massachusetts business trust, does hereby constitute and appoint
Michelle Neufeld 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 14th
day of July , 1997.
/s/ Edwin Ehlert, Jr.
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Edwin Ehlert Jr., Board Member
/s/ Henri W. Emmet
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Henri W. Emmet, Board Member
/s/ Donald J. Harrington
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Donald J. Harrington, Board Member
