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THE RESERVE FUND
"AMERICA'S FIRST MONEY FUND"
810 SEVENTH AVENUE - NEW YORK, NY 10019-5868
212-977-9982 - 800-637-1700
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24-HOUR YIELD AND BALANCE INFORMATION
Nationwide 800-637-1700 - www.reservefunds.com
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information ("SAI") describes The Reserve
Fund ("Fund") and three of its four Funds: the Primary Fund, the U.S.
Government Fund, and the U.S. Treasury Fund (each a "Fund", together the
"Funds". The Primary, U.S. Government, and the U.S. Treasury Funds are
hereinafter referred to as the "Primary, Government and Treasury Fund",
respectively). This Statement is not a Prospectus, but provides detailed
information to supplement the Prospectus dated July 31, 1998 and should be read
in conjunction with it. A copy of the Prospectus may be obtained without charge
by writing or calling the Fund at the above address or telephone number. The
Securities and Exchange Commission ("SEC") maintains a web site
(http://www.sec.gov) that contains the SAI, the Prospectus, material
incorporated by reference & other information regarding the Fund electronically
filed with the SEC. This Statement is dated July 31, 1998.
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TABLE OF CONTENTS PAGE
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Investment Objective and Policies . . . . . . . . . . . . . . . . 2
Trustees and Executive Officers . . . . . . . . . . . . . . . . . 3
Investment Management, Distribution, and Custodian Agreements . . 4
Portfolio Turnover, Transaction Charges and Allocation . . . . . 7
Shares of Beneficial Interest . . . . . . . . . . . . . . . . . . 7
Purchase, Redemption and Pricing of Shares . . . . . . . . . . . 8
Distributions and Taxes . . . . . . . . . . . . . . . . . . . . . 10
Fund Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Reserve Cash Performance Account . . . . . . . . . . . . . . . . 13
Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Financial Statements . . . . . . . . . . . . . . . . . . . . . . 15
Report of Independent Accountants . . . . . . . . . . . . . . . . 24
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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.
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INVESTMENT OBJECTIVE AND POLICIES
The primary investment objective of each Fund is to seek as high a
level of current income as is consistent with preservation of capital and
liquidity.
SUPPLEMENTAL INVESTMENT POLICIES. Each Funds investment objective and the
following investment policies may not be changed without the affirmative vote
of a majority of the outstanding shares of a Fund. A majority of the
outstanding shares of a Fund means the vote of the lesser of (i) 67% or more of
the shares of a Fund present at a meeting, if the holders of more than 50% of
the outstanding shares of the Fund are present or represented by proxy, or (ii)
more than 50% of the outstanding shares of the Fund. A Fund 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 except 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 ("1940 Act");
(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 1940 Act.
OTHER POLICIES. The Primary and U.S. 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 be, 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 Funds 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 Funds may also pay reasonable finders, custodian and administrative fees.
Loan arrangements made by a Fund will comply with all other applicable
regulatory requirements including the rules of the New York Stock Exchange
("NYSE"), which require the borrower, after notice, to redeliver the securities
within the normal settlement time of three (3) Business Days. While voting
rights may pass with the loaned securities, if a material event occurs
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 and if rated A-1 and P-1 by Standard & Poor's Corporation
("S&P") and Moody's Investors Service, Inc. Moody's, 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
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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.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS. A repurchase agreement
transaction occurs when the Fund purchases and simultaneously contracts to
resell securities at fixed prices determined by the negotiated yields. Each
Fund will limit repurchase agreement transactions to those domestic financial
institutions and securities dealers who are deemed credit-worthy pursuant to
guidelines established by the Funds' 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 Fund will make
payment for such instruments only upon their physical delivery to, or evidence
of their book-entry transfer to, the account of a Fund's Custodian. If the
seller defaults on the repurchase obligation, the Fund 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 with a term greater than seven (7) days.
The Primary Fund and U.S. Government Fund may sell securities in a
reverse repurchase agreement when it is considered advantageous, such as to
cover net redemptions or to avoid a premature outright sale of its portfolio
securities. In a typical reverse repurchase agreement transaction, the seller
(Fund) retains the right to receive interest and principal payments on the
security, but transfers title to and possession of 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 EXECUTIVE OFFICERS
++BRUCE R. BENT, 61, President, Treasurer and Trustee, 810 Seventh
Avenue, New York, NY 10019-5868.
Mr. Bent is President, Treasurer, and Trustee of The Reserve Funds
("RF"), Reserve Institutional Trust ("RIT"), Reserve Tax-Exempt Trust ("RTET"),
Reserve New York Tax-Exempt Trust ("RNYTET") and Reserve Private Equity Series
("RPES"); Director, Vice President and Secretary of Reserve Management Company,
Inc. ("RMCI") and Reserve Management Corporation ("RMC"); and Chairman and
Director of Resrv Partners, Inc. ("RESRV").
+EDWIN EHLERT, JR., 67, Trustee, 125 Elm Street, Westfield, NJ 07091.
Mr. Ehlert is President and Director of Ehlert Travel Associates, Inc.
(travel agency) and Ehlert Travel Associates of Florida, Inc. (travel agency),
and Trustee of RF, RIT, RTET, RNYTET, and RPES.
+HENRI W. EMMET, 72, Trustee, 1535 Presidential Drive, Apt. 4A,
Columbus, OH 43212.
Mr. Emmet retired as the Managing Director of Servus Associates, Inc.
in 1994, and U.S.A. Representative of the First National Bank of Southern
Africa in 1996. Since 1995, Mr. Emmet has served as Principal of Global
Interaction, which provides consulting services to international banking
interests. He is currently Trustee of RF, RIT, RTET, RNYTET, and RPES.
+DONALD J. HARRINGTON, C.M., 53, Trustee, St. John's University,
Jamaica, NY 11439.
The Reverend Harrington is President of St. John's University, NY, a
Trustee of RF, RIT, RTET, RNYTET and RPES and a Director of Bear Stearns
Companies, Inc. since 1993.
BRUCE R. BENT II, 32, Senior Vice President and Assistant Secretary,
810 Seventh Avenue, New York, NY 10019-5868.
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Mr. Bent II joined The Reserve Funds in 1992 and is Senior Vice
President and Assistant Secretary of RF, RIT, RNYTET, RTET and RPES.
MARYKATHLEEN FOYNES, 28, Counsel and Secretary, 810 Seventh Avenue,
New York, NY 10019-5858.
Ms. Foynes is Counsel and Secretary of RF, RIT, RTET, RNYTET, and
RPES. Before joining The Reserve Funds in 1998, Ms. Foynes was a staff
attorney at PaineWebber, Inc.
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+Messrs. Ehlert, Emmet and Harrington are members of a Review Committee which
performs the functions of an Audit Committee and reviews compliance procedures
and practices.
++Interested Trustee within the meaning of the Investment Company Act of 1940.
The members of the Board of Trustees who are not Interested Trustees will be
paid a stipend of $3,500 for each joint Board meeting that they attend and an
annual fee of $16,000 for service to all of the trusts in the complex.
Under the Declaration of Trust, the Trustees and officers are entitled to be
indemnified by the Trust to the fullest extent permitted by law against all
liabilities and expenses reasonably incurred by them in connection with any
claim, suit or judgment or other liability of obligation of any kind in which
they become involved by virtue of their service as a Trustee or officer of the
Trust, except liabilities incurred by reason of their willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of their office.
As of May 31, 1998, Trustees and officers directly or indirectly as a group
owned less than 1% of the outstanding shares of the Funds. The Trust does not
pay any pension or retirement benefits.
COMPENSATION TABLE
FOR FISCAL YEAR ENDED MAY 31, 1998
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AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM FUND AND FUND COMPLEX
NAME OF TRUSTEE, POSITION FROM FUNDS (4 ADDITIONAL TRUSTS) PAID TO TRUSTEE
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Bruce R. Bent, President and Trustee $ 0 $ 0
Edwin Ehlert, Jr., Trustee $ 14,498 $30,000
Henri W. Emmet, Trustee $ 14,498 $30,000
Rev. Donald J. Harrington, Trustee $ 14,498 $30,000
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The following executive officers of the Fund had allocated cash remuneration in
excess of $60,000 during the last fiscal year ending May 31, 1998 for services
rendered to the Fund.
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ESTIMATED ANNUAL
AGGREGATE BENEFITS UPON
NAME CAPACITY REMUNERATION RETIREMENT
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Bruce R. Bent President $256,555 $ 150,000
Pat A. Colletti Controller $ 98,675 $ 60,000
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INVESTMENT MANAGEMENT, DISTRIBUTION
AND CUSTODIAN AGREEMENTS
INVESTMENT MANAGEMENT AGREEMENT. Reserve Management Company, Inc. ("RMCI" or
"Adviser"), 14 Locust Place, Manhasset, NY 11030, a registered investment
adviser, manages the Funds and provides them with investment advice. Under the
Investment Management Agreement, RMCI manages the Funds' investments, including
effecting purchases and sales thereof, in furtherance of each Funds' 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).
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For these services, the Primary and Government Funds periodically pay
RMCI a management fee at the annual rate of 0.50% of the first $500 million of
average daily net assets, 0.475% of the next $500 million of such assets, 0.45%
of the next $500 million of such assets, 0.425% per annum of the next $500
million of such assets, and 0.40% of such assets in excess of $2 billion. For
the fiscal years ended May 31, 1996, 1997 and 1998, RMCI received management
fees of $8,120,156, $8,976,244 and $10,995,380 respectively, from the Primary
Fund and $3,471,243, $2,858,951 and $3,181,655, 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 Fund. For these services the Treasury Fund periodically pays RMCI a
comprehensive management fee at an annual rate of 0.80% of average daily net
assets. For the fiscal year ended May 31, 1996, 1997 and 1998 RMCI received a
comprehensive management fee of $719,287, $988,183 and $1,329,283, respectively
which reflects a waiver of 0.20% of average daily net assets.
From time to time, RMCI may waive receipt of its fees and/or
voluntarily assume certain expenses of a fund which would have the effect of
lowering the Fund 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 U.S.
Government Funds 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 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 or by vote of a majority of outstanding
voting shares of a Fund or by RMCI.
Pursuant to the Service Agreement (see Service Agreement in the
Prospectus), during the fiscal year ended May 31, 1998 the Primary Fund
reimbursed RMCI $7,511,553 and the U.S. Government Fund reimbursed RMCI
$2,011,920 for expenses. For the fiscal years ended May 31, 1996 and 1997, RMCI
was reimbursed $5,794,060 and 6,616,435 by the Primary Fund and $2,210,243 and
1,778,491 by the U.S. Government Fund for expenses, respectively.
EXPENSE LIMITATION. The Investment Management Agreements for the Primary and
U.S. Government Funds provide that RMCI will reimburse the Funds for the amount
by which their costs and expenses paid by 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"); 206 North Jackson Street, Suite 201,
Glendale, California 91206; NWNL Northstar Distributors ("NWNL") Two Pickwick
Plaza, Greenwich, Connecticut 06830 and Resrv Partners, Inc. ("RESRV"), 810
Seventh Avenue, New York, NY 10019-5968. 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 Funds 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. PGFDI's NWNL's and RESRV'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 four fiscal years. During the fiscal year
ended May 31, 1998, no distribution assistance payments were made to PGFDI,
NWNL or RESRV.
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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 Fund
makes assistance payments to brokers, financial institutions and other
financial intermediaries ("Firms") for shareholder accounts ("qualified
accounts") at an annual rate of 0.20 % of the average daily NAV of all Firms'
qualified accounts. Such distribution assistance may include, but is not
limited to, establishment of shareholder accounts, delivering prospectuses to
prospective investors and processing automatic investment in Fund shares of
client account balances. Substantially all such monies (together with
significant amounts from RMCI's own resources) are paid by RMCI to payees for
their distribution assistance or administrative services, with any remaining
amounts being used to partially defray other expenses incurred by RMCI in
distributing Fund shares. In addition to the amounts required by the Plan, RMCI
may, at its discretion, pay additional amounts from its resources. The rate of
any additional amounts that may be paid will be based upon RESRV's and RMCI's
analysis of the contribution that a Firm makes to the Fund by increasing assets
under management, and reducing expense ratios and the cost to the Fund if such
services were provided directly by the Fund or other authorized persons and
RESRV and RMCI will also consider the need to respond to competitive offers of
others, which could result in assets being withdrawn from the Fund 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, 1998, $4,365,202 was paid under
the Plan by the Primary Fund, $1,188,306 was paid under the Plan by the U.S.
Government Fund and $ 381,997 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, 1998, 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 the majority of the outstanding
voting securities of each series, or by vote of the disinterested Trustees. The
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Plan and related agreements may be renewed from year to year, if approved by
the vote of a majority of the disinterested Trustees cast in person at a
meeting called for the purpose of voting on such renewal. The Plan may not be
amended to increase materially the amount to be spent for distribution without
shareholder approval. All material amendments to the Plan must be approved by a
vote of the Board of Trustees and of the disinterested Trustees, cast in person
at a meeting called for the purpose of such vote.
CUSTODIAL SERVICES AND INDEPENDENT ACCOUNTANT. The Chase Manhattan Bank, 4 New
York Plaza, New York, NY 10004 is Custodian of the Fund's securities and cash
pursuant to a Custodian Agreement. The Bank of New York, 48 Wall Street, New
York, NY 10015; and Custodial Trust Company, 28 West State Street, Trenton, NJ
08608 are Custodians for the Fund for limited purposes in connection with
certain repurchase agreements. PricewaterhouseCoopers, LLP, 1301 Avenue of the
Americas, New York, NY 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 ("NAV") or yield of the Fund.
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 Fund; however, any such sales will be neither a
qualifying nor disqualifying factor in the selection of brokers or dealers.
When orders to purchase or sell the same security on identical terms
are simultaneously placed for the Fund and other investment companies managed
by RMCI, the transactions are allocated as to amount in accordance with each
order placed for 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 Trust 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 classes would be comparable, unless otherwise
required, to respond to the particular situation. Upon liquidation of any Fund,
shareholders are entitled to share, pro rata, in the net assets of their
respective Funds available for distribution to such shareholders. It is
possible, although considered highly unlikely in view of the
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method of operation of mutual funds, that should the assets of one class of
shares be insufficient to satisfy its liabilities, the assets of another class
could be subject to claims arising from the operations of the first class of
shares. No changes can be made to the Fund's issued shares without shareholder
approval.
Each Fund share, when issued, is fully paid, non-assessable (except as
set forth below), and fully transferable or redeemable at the shareholder's
option. Each share has an equal interest in the net assets of the respective
Funds, equal rights to all dividends and other distributions, and one vote for
all purposes. Shares of all classes vote together for the election of Trustees
and have 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, the shareholders and trustees of a business
trust can be personally liable for the Funds' obligations unless, as in this
instance, the Declaration of Trust provides, in substance, that no shareholder
or trustee shall be personally liable for the Fund's, and each investment
portfolio's, obligations to third parties, and requires that every written
contract made by a Fund contain a provision to that effect. The Declaration of
Trust also requires the Fund to indemnify its shareholders and Trustees against
such liabilities and any related claims or expenses.
The Declaration of Trust further provides that the Trustees will not
be liable for errors of judgment or mistakes of fact or law; but nothing in the
Declaration protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
SEC regulations provide that if a class is separately affected by a
matter requiring shareholder vote (election of Trustees, ratification of
independent auditor selection, and approval of an underwriting agreement are
not considered to have such separate effect and may be voted upon by the
shareholders of the Fund as a whole), each class will vote separately on such
matters as approval of the Investment Management Agreement, material amendments
to the Plan of Distribution, and changes in the fundamental policies of the
Fund. These items require approval by a majority of the affected shareholders.
For this purpose a "majority" is constituted by either 50 percent of all shares
voting as a group or 67 percent of the shares voted as a group at an annual
meeting of shareholders at which at least 50 percent of the shares of each
group are represented.
As of June 30, 1998, 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
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.
IF SHARES OF THE FUND ARE PURCHASED BY CHECK OR RESERVE AUTOMATIC
TRANSFER, THE FUND MAY DELAY TRANSMITTAL OF REDEMPTION PROCEEDS UNTIL SUCH TIME
AS IT HAS ASSURED ITSELF THAT GOOD PAYMENT HAS BEEN COLLECTED FOR THE PURCHASE
OF SUCH SHARES, WHICH MAY BE UP TO 10 BUSINESS DAYS.
NET ASSET VALUE. Shares are offered at their NAV which is calculated at the
close of each Business Day as defined in the Prospectus. The NAV is not
calculated on New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good
Friday, Memorial Day (observed), Independence Day, Labor Day, Columbus Day,
Veterans Day, Thanksgiving Day, Christmas Day, on other days the New York Stock
Exchange ("NYSE") is closed for trading, and on certain regional banking
holidays. The NAV of each Fund is normally maintained at $1.00 per share. Each
Fund cannot guarantee that its net asset value will always remain at $1.00 per
share.
8
<PAGE> 9
Redemption payments will normally be made by check or wire transfer
but the Fund is authorized to make payment of redemptions partly or wholly in
kind (that is, by delivery of investment securities valued at the same time as
the redemption NAV is determined). The Fund has elected to permit any
shareholder of record to make redemptions wholly in cash to the extent the
shareholder's redemptions in any 90-day period do not exceed the lesser of
$250,000 or 1% of the net assets of the respective Portfolio. The election is
irrevocable pursuant to rules and regulations under the 1940 Act unless
withdrawal is permitted by order of the SEC. Redemptions in kind are further
limited by the Fund's practice of holding instruments typically with a minimum
value of $1,000,000 and its intention to redeem in kind only when necessary to
reduce a disparity between amortized cost and market value. In disposing of
such securities, an investor might incur transaction costs and on the date of
disposition might receive an amount less than the NAV of the redemption.
The NAV per share of each Fund is determined by adding the value of
all of the Fund's securities, cash and other assets, subtracting its
liabilities, and dividing the result by the number of its shares outstanding.
The Board of Trustees have determined the most practical method currently
available for valuing investment securities is the amortized cost method. This
procedure values a 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 the Fund's 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 NAV of a Fund from
$1.00 a share determined by valuing its assets at amortized cost as opposed to
valuing them based on market factors. If the deviation exceeds 1/2 of one
percent, the Trustees will promptly consider what action if any should be
initiated. If they believe that the deviation may result in material dilution
or other unfair results to shareholders, the Trustees have undertaken to apply
appropriate corrective remedies which may include the sale of a Fund asset
prior to maturity to realize capital gains or losses or to shorten the average
maturity of the Fund, withholding dividends, redemption of shares of the Fund
in kind, or reverting to valuation based upon market prices and estimates.
EXCHANGE PRIVILEGE. A shareholder of the Funds may exchange shares at
net asset value with all Reserve Money-Market Funds. A shareholder of the
Funds may also exchange shares for shares of The Reserve Private Equity Series,
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 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 being exchanged were acquired:
(a) by a previous exchange for shares 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 Pacific Advisors or the
Northstar Series may exchange, 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
9
<PAGE> 10
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. 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 U.S.
dollars, and are credited to shareholder accounts only upon their conversion
into federal funds, which normally takes one or two Business Days following
receipt. Checks delivered to the Fund after 2:00 P.M. (New York time) (11:00
A.M. New York time for the Treasury Fund) 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 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 ADVISER OR
THE DISTRIBUTOR.
SHARE CERTIFICATES. Share certificates are not issued by the Fund.
DISTRIBUTIONS AND TAXES
Each Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended ("the Code"), so
long as such qualification is in the best interests of shareholders. To qualify
as a regulated investment company, each Fund must, among other things, (a)
derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stock, securities or foreign currencies or other income
derived with respect to its business of investing in such stock, securities or
currencies; (b) diversify its holdings so that, at the end of each quarter of
the taxable year, (i) at least 50% of the market value of the Fund's assets is
represented by cash and cash items (including receivables), U.S. Government
securities, the securities of other regulated investment companies and other
securities, with such other securities of any one issuer limited for the
purposes of this calculation to an amount not greater than 5% of the value of
the Fund's total assets and not greater than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
assets is invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other regulated investment
companies); and (c) distribute at least 90% of its investment company taxable
income (which includes, among other items, dividends, interest and net
short-term capital gains in excess of net long-term capital losses) and its net
tax-exempt interest income each taxable year.
As a regulated investment company, each Fund generally will not be
subject to U.S. federal income tax on its investment company taxable income and
net capital gains (the excess of net long-term capital gains over net short-
10
<PAGE> 11
term capital losses), if any, that it distributes to shareholders. Each Fund
intends to distribute to its shareholders, at least annually, substantially all
of its investment company taxable income and net capital gains. Amounts not
distributed on a timely basis in accordance with a calendar year distribution
requirement are subject to a nondeductible 4% excise tax. To prevent imposition
of the excise tax, each Fund must distribute during each calendar year an
amount equal to the sum of (1) at least 98% of its ordinary income (not taking
into account any capital gains or losses) for the calendar year, (2) at least
98% of its capital gains in excess of its capital losses for the one-year
period ending on October 31 of the calendar year, and (3) any ordinary income
and capital gains for previous years that was not distributed during those
years. A distribution will be treated as paid on December 31 of the current
calendar year if it is declared by a Fund in October, November or December with
a record date in such a month and paid by the Fund during January of the
following calendar year. Such distributions will be taxable to shareholders in
the calendar year in which the distributions are declared, rather than the
calendar year in which the distributions are received. To prevent application
of the excise tax, each Fund intends to make its distributions in accordance
with the calendar year distribution requirement.
The Treasury Fund intends to invest only in the U.S. Government
securities that provide interest income exempt in many states from state and
local personal income taxes, but may invest up to 5 percent of its assets in
repurchase agreements pending the investment of uninvested cash. 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 Fund.
Dividends paid out of a Fund's investment company taxable income will
be taxable to a U.S. shareholder as ordinary income. Because no portion of a
Fund's income is expected to consist of dividends paid by U.S. corporations, no
portion of the dividends paid by the Funds is expected to be eligible for the
corporate dividends-received deduction. Distributions of net capital gains, if
any, designated as capital gain dividends are taxable to individual
shareholders at the applicable 20% or 28% capital gains rate, regardless of how
long the shareholder has held the Fund's shares, and are not eligible for the
dividends-received deduction. Shareholders receiving distributions in the form
of additional shares, rather than cash, generally will have a cost basis in
each such share equal to the net asset value of a share of the Fund on the
reinvestment date. Shareholders will be notified annually as to the U.S.
federal tax status of distributions, and shareholders receiving distributions
in the form of additional shares will receive a report as to the net asset
value of those shares.
Upon the sale or other disposition of shares of a Fund, in the event that the
Fund fails to maintain a constant NAV per share, a shareholder may realize a
capital gain or loss which will be long-term or short-term, generally depending
upon the shareholder's holding period for the shares. Any loss realized on a
sale or exchange will be disallowed to the extent the shares disposed of are
replaced (including shares acquired pursuant to a dividend reinvestment plan)
within a period of 61 days beginning 30 days before and ending 30 days after
disposition of the shares. In such a case, the basis of the shares acquired
will be adjusted to reflect the disallowed loss. Any loss realized by a
shareholder on a disposition of Fund shares held by the shareholder for six
months or less will be treated as a long-term capital loss to the extent of any
distributions of net capital gains received by the shareholder with respect to
such shares.
Investments by a Fund in zero coupon securities generally will result
in income to the Fund equal to a portion of the excess of the face value of the
securities over their issue price (the "original issue discount") each year
that the securities are held, even though the Fund receives no cash interest
payments.
Gain derived by a Fund from the disposition of any market discount
bonds (i.e., bonds purchased other than at original issue, where the face value
of the bonds exceeds their purchase price) held by the Fund generally will be
taxed as ordinary income to the extent of the accrued market discount on the
bonds, unless the Fund elects to include the market discount in income as it
accrues.
Gains or losses attributable to fluctuations in exchange rates which
occur between the time the Primary Fund accrues receivables or liabilities
denominated in a foreign currency, and the time the Primary Fund actually
collects such receivables or pays such liabilities, generally are treated as
ordinary income or ordinary loss. Similarly, on disposition of debt securities
denominated in a foreign currency, gains or losses attributable to fluctuations
in the
11
<PAGE> 12
value of foreign currency between the date of acquisition of the security and
the date of disposition also are treated as ordinary gain or loss. These gains
or losses, referred to under the Code as "section 988" gains or losses, may
increase or decrease the amount of the Primary Fund's investment company
taxable income to be distributed to its shareholders as ordinary income.
Income received by the Primary Fund from sources within foreign countries may
be subject to withholding and other taxes imposed by such countries.
Each Fund may be required to withhold U.S. federal income tax at the rate of
31% of all taxable distributions payable to shareholders who fail to provide
the Fund with their correct taxpayer identification number or to make required
certifications, or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. Corporate shareholders and certain
other shareholders specified in the Code generally are exempt from such backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
may be credited against the shareholder's U.S. federal income tax liability.
The tax consequences to a foreign shareholder of an investment in a Fund may be
different from those described herein. Foreign shareholders are advised to
consult their own tax advisers with respect to the particular tax consequences
to them of an investment in the Fund.
Shareholders are advised to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in a Fund.
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 the current yield,
raising the sum to a power equal to 365 divided by the number of days in the
base period seven (days), and subtracting one from the result according to the
following formula: Effective Yield = [(Base Period Return + 1) 365/7] - 1.
Effective annual yields are a 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 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.
12
<PAGE> 13
RESERVE CASH PERFORMANCE ACCOUNT
The Reserve Cash Performance Account ("CPA") provides a comprehensive
package of additional services to investors. Reserve CPA is a check arrangement
where checks are issued to Reserve shareholders which may be used to redeem
shares in the account in any amount. If a bank accepts a check, it will be paid
in the order received by redemption of shares from the investor's Reserve
account. Any check in an amount exceeding the Reserve account balance will be
returned to the payee. Reserve CPA checks can be used in the same manner as any
other bank checks. Paid checks will not be returned but complete information on
such paid checks will be provided monthly.
A VISA Gold Check Card (a debit card) is also available. The VISA card
functions exactly as does a conventional VISA credit card except that the
cardholder's Reserve account is automatically charged for all purchases and
cash advances, thus eliminating the usual monthly finance charges. As with the
checking facility, VISA charges are paid by liquidating shares in The Reserve
Fund account, but any charges that exceed the balance will be rejected. VISA
card issuance is subject to credit approval. Reserve, VISA or the bank may
reject any application for checks or cards and may terminate an account at any
time. Conditions for obtaining a VISA check card may be altered or waived by
the Funds either generally or in specific instances. The checks and VISA cards
are intended to provide investors with easy access to their account balances.
The Funds will charge a nonrefundable annual CPA Plus Service fee
(currently $60 which may be charged to the account at the rate of $5 monthly).
Participants will be charged for specific costs incurred in placing stop
payment orders, obtaining check copies and in processing returned checks. These
charges may be changed at any time upon 30 days' notice. In addition,
broker/dealers or other financial institutions in the CPA program may charge
their own service fees.
VISA cardholders may be liable for the unauthorized use of their card
up to the amount set by governing Federal regulations, currently $500 if the
Fund or the bank is not notified of the theft or loss within two (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 cardholder should report
the loss immediately by telephoning the issuing bank, currently BankOne at
614-248-4242, which can be reached 24 hours a day, seven (7) 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 Application and VISA Account Shareholder Agreement.
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
13
<PAGE> 14
obligations will be denoted with a plus (+) sign designation. Those issues
determined to have a high certainty of timely payment and whose risk factors
are very small will be denoted with a minus (-) sign designation.
FITCH IBCA. F1: This designation indicates a very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F1+". Those issues determined to possess and
exceptionally strong credit quality will be denoted with a plus (+) sign
designation. Issues assigned the rating of F1+ are regarded as having the
strongest degree assurance for timely payment.
14
<PAGE> 15
THE RESERVE FUND-PRIMARY FUND
STATEMENT OF NET ASSETS - MAY 31, 1998
<TABLE>
<CAPTION>
% DAYS TO VALUE
NEGOTIABLE BANK CERTIFICATES OF DEPOSIT - 55.31% RATE MATURITY (NOTE 1)
------ ---------- ------------
<S> <C> <C> <C>
Chase Manhattan Bank 5.55 4 $130,100,208
Crestar Bank 5.555 36 125,212,170
Harris Trust and Savings Bank 5.53 11 100,322,583
Mellon Bank, N.A. 5.57 3 121,114,000
SouthTrust Bank of Alabama, N.A. 5.57 36 70,281,595
ABN-AMRO Bank N.V. (a) 5.53 15 130,379,420
Banque Nationale de Paris (b) 5.55 8 90,347,049
BHF Bank AG (b) 5.55 29 130,100,208
Canadian Imperial Bank of Commerce (b) 5.535 23 125,211,406
Deutsche Bank AG (a) 5.54 19 100,200,056
Deutsche Bank AG (b) 5.56 9 21,272,329
Dresdner Bank AG (b) 5.54 29 132,081,253
Svenska Handelsbanken (a) 5.535 15 100,292,319
Westdeutsche Landesbank Girozentrale (b) 5.57 36 20,724,100
-------------
Total Negotiable Bank Certificates of Deposit 1,497,638,696
PROMISSORY NOTES 15.44%
Commerzbank U.S. Finance, Inc. (c) 5.51 22 124,598,229
Hypo U.S. Finance, Inc. (c) 5.505 8-15 123,776,283
Societe Generale North America, Inc. (c) 5.50 17 129,682,222
Toronto-Dominion Bank (c) 5.51-5.52 2-8 39,975,506
-------------
Total Promissory Notes 418,032,240
REPURCHASE AGREEMENTS 26.53%
GNMA 6.875%-8.50% due from 12/15/22 to 8/15/27 and U.S.
Treasury Bond 6.50% due 11/15/26 (Repo with Bear, Stearns
& Co. Inc. dated May 29, 1998, resale amount $300,140,750) 5.63 1 300,140,750
FGPC 7%-8.50% due from 6/1/25 to 1/1/28, FMAR due 2/1/37,
FNAR due 7/1/34 and FNMS 6%-8% due from 2/1/12 to 11/1/27
(Repo with DLJ Securities Corporation dated May 29, 1998,
resale amount $164,076,943) 5.63 1 164,076,943
FNDN due 6/10/98 and TPRN due 5/15/17 (Repo with
Prudential Securities Inc. dated May 29, 1998, resale 5.56 1 14,006,487
amount $14,006,487)
FRRM 6.50% due 5/15/28 and GNMA 5%-10% due from
10/15/01 to 5/20/28 (Repo with Salomon Smith Barney
Inc. dated May 29, 1998, resale amount $240,112,800) 5.64 1 240,112,800
-------------
Total Repurchase Agreements 718,336,980
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
% DAYS TO VALUE
RATE MATURITY (NOTE 1)
---- -------- --------
TAXABLE MUNICIPAL BONDS - 2.60%
<S> <C> <C> <C>
Florida Housing Finance Agency Housing Revenue
Bonds 1993 Series A (d) 5.59 7 $40,192,311
Illinois Student Assistance (d) 5.56 7 25,220,027
New Hampshire Business Finance Authority
Revenue Bonds 1992 Series B (d) 5.85 7 5,020,313
---------------
Total Taxable Municipal Bonds 70,432,651
---------------
Total Primary Fund Investments -
(99.88%) (Cost $2,698,016,627) 2,704,440,567
Other assets, less liabilities - (.12%) 3,179,496
---------------
NET ASSETS (100%) equivalent to $1.00 net
asset value, offering and redemption price
per share based on 2,707,620,063 shares of
beneficial interest $.001 par value
outstanding $2,707,620,063
===============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE> 17
THE RESERVE FUND - U.S. GOVERNMENT FUND
STATEMENT OF NET ASSETS - MAY 31, 1998
<TABLE>
<CAPTION>
% DAYS TO VALUE
RATE MATURITY (NOTE 1)
---- -------- -------------
REPURCHASE AGREEMENTS - 99.72%
<S> <C> <C> <C>
GNMA 5%-8.50% due from 2/15/08 to
3/20/28 (Repos with Bear, Stearns &
Co. Inc. dated May 21, 1998,
resale amount $148,271,333) 5.50 10 $ 148,248,722
GNMA 5.50%-15% due from 12/15/99 to
4/15/38 (Repo with DLJ Securities
Corporation dated May 29, 1988,
resale amount $177,082,895) 5.62 1 177,082,895
GNMA 4.50%-8.50% due from 4/15/07 to
5/20/28 (Repos with Prudential Securities Inc.
dated May 29, 1998, resale amount $170,079,355) 5.55-5.61 1 170,079,355
GNMA 4.50%-10% due from 7/15/01 to
5/15/28 (Repo with Salomon Smith Barney
Inc. dated May 21, 1998, resale amount
$155,284,167) 5.50 1 155,260,486
--------------
Total U.S. Government Fund Investments -
(99.72%) (Cost $650,000,000) 650,671,458
Other assets, less liabilities - (.28%) 1,796,164
--------------
NET ASSETS (100%) equivalent to $1.00
net asset value, offering and redemption
prices per share based on 652,467,622
shares of beneficial interest $.001 par
value outstanding $652,467,622
==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE> 18
THE RESERVE FUND - U.S. TREASURY FUND
STATEMENT OF NET ASSETS - MAY 31, 1998
<TABLE>
<CAPTION>
% DAYS TO VALUE
RATE MATURITY (NOTE 1)
----------- ------------ ------------
U.S. TREASURY SECURITIES - 99.68%
<S> <C> <C> <C>
U.S. Treasury Bills 4.95 - 5.15 4 - 137 $214,974,692
U.S. Treasury Notes 4.75 - 5.25 61 - 92 24,018,004
-------------
Total U.S. Treasury Fund Investments
Cost $237,407,250) 238,992,696
Other assets, less liabilities - (.32%) 767,597
-------------
Net assets (100%) equivalent to $1.00 net
asset value, offering and redemption
prices per share based on 239,760,293 shares of
beneficial interest $.001 par value
outstanding $239,760,293
=============
</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, 1998. Securities payable on demand are collateralized by
bank letter of credit, other bank credit agreements or financial guaranty
assurance agencies.
GLOSSARY
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
FMAR = FHLMC Adjustable Rate Mortgage-Backed Pass-Through Participation
Certificates
FNAR = FNMA Adjustable Rate Mortgage-Backed Pass-Through Securities
FNDN = FNMA - Discount Note
FRRM = FHLMC REMIC
TPRN = U.S. Treasury Strip - Principal
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE> 19
THE RESERVE FUND - STATEMENTS OF OPERATIONS
YEAR ENDED MAY 31, 1998
<TABLE>
<CAPTION>
PRIMARY U.S. GOVERNMENT U.S. TREASURY
FUND FUND FUND
------------ --------------- -------------
<S> <C> <C> <C>
INTEREST INCOME (Note 1) $138,103,637 $36,079,602 $11,620,213
------------ ----------- -----------
EXPENSES (Note 2)
Management fee 10,995,380 3,181,655 --
Comprehensive fee -- -- 1,772,390
Shareholder servicing, administration
and general office expenses 4,824,126 1,402,039 --
Distribution assistance (Note 3) 4,365,202 1,188,306 381,997
Equipment expense 1,312,919 193,605 --
Professional fees 446,106 116,148 --
Occupancy costs 222,490 66,069 --
Stationery, printing and supplies 339,379 101,255 --
Trustee fees 38,865 11,722 --
Other expenses 327,669 121,082 --
------------ ----------- -----------
Total Expenses 22,872,136 6,381,881 2,154,387
Less: voluntary waiver -- -- (443,107)
------------ ----------- -----------
Net Expenses 22,872,136 6,381,881 1,711,280
------------ ----------- -----------
NET INVESTMENT INCOME $115,231,501 $29,697,721 $ 9,908,933
============ =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE> 20
THE RESERVE FUND - STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
PRIMARY FUND U.S. GOVERNMENT FUND
------------------------------------- --------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, 1998 MAY 31, 1997 MAY 31, 1998 MAY 31, 1997
---------------- ---------------- -------------- -----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM INVESTMENT OPERATIONS:
Net investment income paid to
shareholders as dividends (Note 1) $ (115,231,501) $ (86,925,147) $ (29,697,721) $ (25,382,282)
---------------- --------------- -------------- --------------
FROM CAPITAL SHARE TRANSACTIONS
(at net asset value of $1 per share):
Net proceeds from the sale of shares 11,543,024,341 8,848,392,468 3,252,798,210 2,757,510,343
Net asset value of shares issued
on reinvestment of dividends 115,231,501 86,925,147 29,697,721 25,382,282
---------------- --------------- -------------- --------------
Subtotal 11,658,255,842 8,935,317,615 3,282,495,931 2,782,892,625
Cost of shares redeemed (11,054,744,831) (8,495,322,653) (3,241,872,625) (2,739,545,482)
---------------- --------------- -------------- --------------
Net increase derived from capital
share transactions and from investment
operations 603,511,011 439,994,962 40,623,306 43,347,143
NET ASSETS:
Beginning of year 2,104,109,052 1,664,114,090 611,844,316 568,497,173
--------------- --------------- -------------- --------------
End of year $ 2,707,620,063 $ 2,104,109,052 $ 652,467,622 $ 611,844,316
=============== =============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
U.S. TREASURY FUND
----------------------------------
YEAR ENDED YEAR ENDED
MAY 31, 1998 MAY 31,1997
-------------- ---------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM INVESTMENT OPERATIONS:
Net investment income paid to
shareholders as dividends (Note 1) $ (9,908,933) $ (7,148,426)
------------- -------------
FROM CAPITAL SHARE TRANSACTIONS
(at net asset value of $1 per share):
Net proceeds from the sale of shares 1,135,200,601 682,830,849
Net asset value of shares issued
on reinvestment of dividends 9,908,933 7,148,426
-------------- -------------
Subtotal 1,145,109,534 689,979,275
Cost of shares redeemed (1,074,527,046) (663,567,636)
--------------
Net increase derived from capital
share transactions and from investment
operations 70,582,488 26,411,639
NET ASSETS:
Beginning of year 169,177,805 142,766,166
--------------- --------------
End of year $ 239,760,293 $ 169,177,805
=============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE> 21
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 and
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 cost plus interest
accrued to date. Under Securities and Exchange Commission Rule 2a-7, the
Fund uses amortized cost to value the portfolios, by which investments are
valued at cost and the difference between the cost of each instrument and
its value at maturity is accrued into income on a straight line basis over
the days to maturity irrespective of intervening changes in interest rates
or market value of investments. The maturity of floating or variable rate
instruments in which the Fund may invest will be deemed to be, for floating
rate instruments (1) following, and for variable rate instruments the longer
of (1) or (2) following: (1) the notice period required before the Fund is
entitled to receive payment of the principal amount of the instrument; (2)
the period remaining until the instrument's next rate adjustment, for
purposes of Rule 2a-7 and for computing the portfolio's average weighted
life to maturity.
C. It is the Fund's policy to comply with Subchapter M of the Internal
Revenue Code and to distribute all of its taxable income to its
shareholders. Accordingly, no Federal income tax provision is required.
D. Investments are recorded as of the date of their purchase and sale.
Interest income is determined on the basis of interest accrued, premium
amortized and discount accreted.
E. The Fund's custodian holds the securities owned subject to repurchase
agreements. The Fund's investment adviser determines that the resale amount
of the repurchase agreement is fully collateralized.
F. Net investment income on investments is distributed to shareholders
daily and automatically reinvested in additional Fund shares.
G. The Primary and U.S. Government Funds are charged only for their
direct or allocated (in proportion to net assets or number of shareholder
accounts) share of expenses.
H. The Funds may enter into repurchase agreements with financial
institutions deemed to be creditworthy by the Funds' Investment Advisor,
subject to the seller's agreement to repurchase such securities at a
mutually agreed upon price. However, in the event of default or bankruptcy
by the seller, realization and/or retention of the collateral may be subject
to legal proceedings.
21
<PAGE> 22
THE RESERVE FUND (THE "FUND")
PRIMARY, U.S. GOVERNMENT AND U.S. TREASURY FUNDS (THE "FUNDS")
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(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, 1998, the advisor waived $443,107 of its
comprehensive fee. Also, under the current Service Agreement, RMCI was
reimbursed $7,511,554 (Primary Fund) and $2,011,920 (U.S. Government Fund)
during the year ended May 31, 1998 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, 1998, the Primary, U.S. Government and U.S. Treasury
Funds had accrued expenses of $212,711, $53,294, and $15,168, respectively,
due to RMCI.
(3) DISTRIBUTION ASSISTANCE
Pursuant to a Plan of Distribution, subject to the Fund's expense
limitations, the Fund will make payments of up to .20% per annum of the
average net asset value of shareholder accounts as to which the payee has
rendered assistance in distributing shares of the portfolios. The Plan
requires RMCI to pay an equivalent amount from its own resources.
(4) MANAGEMENT'S USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the dates of the financial statements and the reported amounts of income and
expenses during the reporting periods. Actual results could differ from
those estimates.
(5) COMPONENTS OF NET ASSETS
At May 31, 1998 the following funds had these components of net assets:
<TABLE>
<CAPTION>
PRIMARY U.S. GOVERNMENT U.S. TREASURY
--------------- ------------------- -----------------
<S> <C> <C> <C>
Par Value $ 2,707,620 $ 652,468 $ 239,760
Paid-in-Capital 2,704,912,443 651,815,154 239,520,533
--------------- -------------- ------------
Net Assets $ 2,707,620,063 $ 652,467,622 $ 239,760,293
=============== ============== =============
</TABLE>
------------------
FEDERAL TAX INFORMATION - (UNAUDITED)
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.
22
<PAGE> 23
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
------------------------------------------------------------------
PRIMARY FUND 1998 1997 1996 1995 1994
- ------------ ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year.......... $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
----------- ---------- ---------- ---------- ----------
Income from investment operations........... .0579 .0557 .0591 .0549 .0345
Expenses.................................... .0096 .0100 .0101 .0099 .0099
----------- ---------- ---------- ---------- ----------
Net investment income(1).................... .0483 .0457 .0490 .0450 .0246
Dividends from net investment income(1)..... (.0483) (.0457) (.0490) (.0450) (.0246)
----------- ----------- ----------- ----------- -----------
Net asset value, end of year................ $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
=========== =========== =========== =========== ===========
Total Return................................ 4.83% 4.57% 4.90% 4.50% 2.46%
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net assets in thousands, end of year........ 2,707,620 2,104,109 1,664,114 1,602,464 1,415,378
Ratio of expenses to average net assets..... .94% .98% .98% .97% .97%
Ratio of net investment income to average
net assets................................ 4.71% 4.47% 4.79% 4.42% 2.44%
</TABLE>
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
------------------------------------------------------------------
U.S. GOVERNMENT FUND 1998 1997 1996 1995 1994
- -------------------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year.......... $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
----------- ---------- ---------- ---------- ----------
Income from investment operations........... .0572 .0550 .0586 .0542 .0337
Expenses.................................... .0101 .0101 .0102 .0101 .0100
----------- ---------- ---------- ---------- ----------
Net investment income(1).................... .0471 .0449 .0484 .0441 .0237
Dividends from net investment income(1)..... (.0471) (.0449) (.0484) (.0441) (.0237)
----------- ---------- ---------- ---------- ----------
Net asset value, end of year................ $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
=========== ========== ========== ========== ==========
Total Return................................ 4.71% 4.49% 4.84% 4.41% 2.37%
Ratios/Supplemental Data
- ------------------------
Net assets in thousands, end of year........ 652,468 611,844 568,497 721,785 740,698
Ratio of expenses to average net assets..... .99% .99% 1.00% .99% .99%
Ratio of net investment income to average
net assets.................................. 4.60% 4.40% 4.75% 4.31% 2.35%
</TABLE>
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
-------------------------------------------------------
U.S. TREASURY FUND 1998 1997 1996 1995
- ------------------ --------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net asset value, beginning of year............................ $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
--------- -------- -------- --------
Income from investment operations............................. .0535 .0521 .0547 .0523
Expenses...................................................... .0079 .0078 .0081 .0067
--------- -------- -------- --------
Net investment income(1)...................................... .0456 .0443 .0466 .0456
Dividends from net investment income(1)....................... (.0456) (.0443) (.0466) (.0456)
--------- -------- -------- --------
Net asset value, end of year.................................. $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
========= ======== ======== ========
Total Return.................................................. 4.56% 4.43% 4.66% 4.56%
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net assets in thousands, end of year.......................... 239,760 169,178 142,766 95,227
Ratio of expenses to average net assets....................... .77%(3) .77%(3) .79%(3) .68%(3)
Ratio of net investment income to average net assets.......... 4.46% 4.33% 4.53% 4.64%
</TABLE>
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
--------------------------------------------------------------------
PRIMARY FUND 1993 1992 1991 1990 1989
- ------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year.......... $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
---------- ---------- ---------- ---------- ----------
Income from investment operations........... .0361 .0541 .0794 .0915 .0913
Expenses.................................... .0100 .0100 .0100 .0096 .0098
---------- ---------- ---------- ---------- ----------
Net investment income(1).................... .0261 .0441 .0694 .0819 .0815
Dividends from net investment income(1)..... (.0261) (.0441) (.0694) (.0819) (.0815)
----------- ----------- ----------- ----------- -----------
Net asset value, end of year................ $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
=========== =========== =========== =========== ===========
Total Return................................ 2.61% 4.41% 6.94% 8.19% 8.15%
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net assets in thousands, end of year........ 1,389,136 1,553,828 1,803,132 1,777,372 1,698,934
Ratio of expenses to average net assets..... .99% .99% .97% .92% .94%
Ratio of net investment income to average
net assets................................ 2.58% 4.34% 6.72% 7.85% 7.84%
</TABLE>
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
---------------------------------------------------------------------
U.S. GOVERNMENT FUND 1993 1992 1991 1990 1989
- -------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year.......... $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
---------- ---------- ---------- ---------- ----------
Income from investment operations........... .0353 .0533 .0772 .0908 .0921
Expenses.................................... .0100 .0101 .0102 .0098 .0100
---------- ---------- ---------- ---------- ----------
Net investment income(1).................... .0253 .0432 .0670 .0810 .0821
Dividends from net investment income(1)..... (.0253) (.0432) (.0670) (.0810) (.0821)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year................ $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
========== ========== ========== ========== ==========
Total Return................................ 2.53% 4.32% 6.70% 8.10% 8.21%
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net assets in thousands, end of year........ 728,138 853,823 817,604 585,023 654,571
Ratio of expenses to average net assets..... .99% .99% .98% .94% .98%
Ratio of net investment income to average
net assets.................................. 2.50% 4.21% 6.38% 7.78% 8.01%
</TABLE>
<TABLE>
<CAPTION>
February 3, 1992
FOR FISCAL YEARS ENDED MAY 31, (Commencement of
------------------------------ Operations) through
U.S. TREASURY FUND 1994 1993 May 31, 1992
- ------------------ ---------- ----------- --------------------
<S> <C> <C> <C>
Net asset value, beginning of year............................ $ 1.0000 $ 1.0000 $ 1.0000
-------- -------- --------
Income from investment operations............................. .0313 .0330 .0121
Expenses...................................................... .0073 .0092 .0031
-------- -------- --------
Net investment income(1)...................................... .0240 .0238 .0090
Dividends from net investment income(1)....................... (.0240) (.0238) (.0090)
-------- -------- --------
Net asset value, end of year.................................. $ 1.0000 $ 1.0000 $ 1.0000
======== ======== ========
Total Return.................................................. 2.40% 2.38% 2.75%(2)
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net assets in thousands, end of year.......................... 7,350 32,325 512
Ratio of expenses to average net assets....................... .73%(3) .80% .97%(2)
Ratio of net investment income to average net assets.......... 2.38% 2.07% 2.74%(2)
</TABLE>
- ------------
(1) Based on compounding of daily dividends. Not indicative of future results.
(2) Annualized.
(3) During this period the manager waived a portion of fees and expenses.
If there were no reductions in expenses, the actual expenses would have
been approximately 0.20%, 0.20%, 0.20%, 0.25% and 0.12% higher,
respectively.
23
<PAGE> 24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Trustees of The Reserve Fund:
In our opinion, the accompanying statements of net assets and the
related statement of operations and the statements of changes in net assets and
financial highlights present fairly, in all material respects, the financial
position of The Primary, U.S. Government and U.S. Treasury Funds (three of the
four series constituting The Reserve Funds) Fund at May 31, 1998, the results
of their operations for the year then ended, the changes in each of its net
assets for each of the two years in the period then ended and the financial
highlights for each of the periods presented in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Funds management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards, which require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at May 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
New York, N.Y.
July 24, 1998
24
<PAGE> 25
STRATEGIST MONEY-MARKET FUND
P.O. BOX 59196
MINNEAPOLIS, MN 55459-9801
800-297-7378
------------------------------
24-HOUR YIELD AND BALANCE INFORMATION
NATIONWIDE 800-297-7378 - WWW.RESERVEFUNDS.COM
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information ("SAI") describes the Strategist
Money-Market Fund (the "Fund"). This SAI is not a Prospectus, but provides
detailed information to supplement the Prospectus dated July 31, 1998 and
should be read in conjunction with it. A copy of the Prospectus may be obtained
by writing or calling the Fund at the above address or telephone number. The
Securities and Exchange Commission ("SEC") maintains a web site
(http://www.sec.gov) that contains this SAI, the Prospectus, material
incorporated by reference, and other information regarding the Fund
electronically filed with the SEC. This SAI is dated July 31, 1998.
<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...................................................... 7
Purchase, Redemption and Pricing of Shares......................................... 8
Distributions and Taxes............................................................10
Fund Yield.........................................................................11
Ratings............................................................................12
Financial Statements...............................................................13
Report of Independent Accountants..................................................19
</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.
1
<PAGE> 26
INVESTMENT OBJECTIVE AND POLICIES
The investment objective 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
the Fund. A majority of the outstanding shares of the Fund means the vote of
the lesser of (i) 67% or more of the shares of the Fund present at a meeting,
if the holders of more than 50% of the outstanding shares of the Fund are
present or represented by proxy, or (ii) more than 50% of the outstanding
shares of the Fund. The Fund cannot:
(1) 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 except 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 ("1940 Act"),
(10) make investments on a margin basis; (11)
(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 of 1940 Act.
OTHER POLICIES. The Fund may, to increase its income, lend 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 Fund receives an amount equal to
the interest on loaned securities and also receives 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 Fund may also pay reasonable finders,
custodian and administrative fees. Loan arrangements made by the Fund will
comply with all other applicable regulatory requirements including the rules of
the New York Stock Exchange ("NYSE"), which require the borrower, after notice,
to redeliver the securities within the normal settlement time of three (3)
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 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 ("S&P") and Moody's Investors Service, Inc.,
("Moody's") respectively, or the equivalent 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 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'
2
<PAGE> 27
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.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS. A repurchase agreement
transaction occurs when the Fund purchases and simultaneously contracts to
resell securities at fixed prices determined by the negotiated yields. The Fund
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. The Fund will make
payment for such instruments only upon their physical delivery to, or evidence
of their book-entry transfer to, the account of the Fund's Custodian. If the
seller defaults on the repurchase obligation the Fund could incur a loss and
may incur costs in disposing of the underlying security. The Fund will not hold
more than 10% of its net assets in illiquid securities, including repurchase
agreements providing for settlement in more than seven days after notice.
The Fund may sell securities in a reverse repurchase agreement when it is
considered advantageous, such as to cover net redemptions or to avoid a
premature outright sale of its portfolio securities. In a typical reverse
repurchase agreement transaction, the seller (Fund) retains the right to
receive interest and principal payments on the security, but transfers title to
and possession of 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 Fund
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 Fund at the time of the transaction.
TRUSTEES AND EXECUTIVE OFFICERS
++BRUCE R. BENT, 61, President, Treasurer and Trustee, 810 Seventh Avenue,
New York, NY 10019-5968.
Mr. Bent is President, Treasurer, and Trustee of The Reserve Funds ("RF"),
Reserve Institutional Trust ("RIT"), Reserve Tax-Exempt Trust ("RTET"), Reserve
New York Tax-Exempt Trust ("RNYTET") and Reserve Private Equity Series
("RPES"); Director, Vice President and Secretary of Reserve Management Company,
Inc. ("RMCI") and Reserve Management Corporation ("RMC"); and Chairman and
Director of Resrv Partners, Inc. ("RESRV").
+EDWIN EHLERT, JR., 67, Trustee, 125 Elm Street, Westfield, NJ 07091.
Mr. Ehlert is President and Director of Ehlert Travel Associates, Inc.
(travel agency) and Ehlert Travel Associates of Florida, Inc. (travel agency),
and Trustee of RF, RIT, RNYTET, RTET and RPES.
+HENRI W. EMMET, 72, Trustee, 1535 Presidential Drive, Apt. 4A, Columbus, OH
43212.
Mr. Emmet retired as the Managing Director of Servus Associates, Inc. in
1994, and U.S.A. Representative of the First National Bank of Southern Africa
in 1996. Since 1995, Mr. Emmet has served as Principal of Global Interaction,
which provides consulting services to international banking interests. He is
currently Trustee of RF, RIT, RNYTET, RTET and RPES.
+DONALD J. HARRINGTON, C.M., 53, Trustee, St. John's University, Jamaica, NY
11439.
The Reverend Harrington is President of St. John's University (NY), a Trustee
of RF, RIT, RNYTET, RTET and RPES and a Director of Bear Stearns Companies,
Inc. since 1993.
3
<PAGE> 28
BRUCE R. BENT II, 32, Senior Vice President and Assistant Secretary, 810
Seventh Avenue, New York, NY 10019.
Mr. Bent II joined The Reserve Funds in 1992 and is Senior Vice President and
Assistant Secretary of RF, RIT, RNYTET, RTET and RPES.
MARYKATHLEEN FOYNES, 28, Counsel and Secretary, 810 Seventh Avenue, New York,
NY 10019.
Ms. Foynes is Counsel and Secretary of RF, RIT, RNYTET, RTET, and RPES.
Before joining The Reserve Funds in 1998, Ms. Foynes was a staff attorney at
PaineWebber, Inc.
- ----------------------
++Interested Trustee within the meaning of the 1940 Act. The members of the
Board of Trustees who are not Interested Trustees will be paid a stipend of
$3,500 for each joint Board meeting they attend and an annual fee of $16,000
for service to all of the trusts in the complex.
+Messrs. Ehlert, Emmet and Harrington are members of a Review Committee which
performs the functions of an Audit Committee and reviews compliance procedures
and practices.
Under the Declaration of Trust, the Trustees and officers are entitled to be
indemnified by the Trust to the fullest extent permitted by law against all
liabilities and expenses reasonably incurred by them in connection with any
claim, suit or judgment or other liability of obligation of any kind in which
they become involved by virtue of their service as a Trustee or officer of the
Trust, except liabilities incurred by reason of their willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of their office.
As of June 30, 1998, Trustees and officers as a group owned less than 1% of
the outstanding shares of the Fund. During the year ended May 31, 1998, the
Fund held four Board meetings and one Review Committee meeting.
COMPENSATION TABLE
For fiscal year ending May 31, 1998
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM FUND AND FUND COMPLEX
NAME OF TRUSTEE FROM FUND (4 ADDITIONAL TRUSTS) PAID TO TRUSTEE
- --------------- --------- -------------------------------------
<S> <C> <C>
Edwin Ehlert, Jr. $ 464 $30,000
Henri W. Emmet $ 464 $30,000
Rev. Donald J. Harrington $ 464 $30,000
</TABLE>
4
<PAGE> 29
INVESTMENT MANAGEMENT, DISTRIBUTION
AND CUSTODIAN AGREEMENTS
INVESTMENT MANAGEMENT AGREEMENT. Reserve Management Company, Inc. ("RMCI or
Adviser"), 14 Locust Place, Manhasset, NY 11030, a registered investment
adviser, manages the Fund and provide it with investment advice. Since November
15, 1971, the Adviser and its affiliates have been advising The Reserve Funds,
which currently have assets in excess of $4.7 billion. Under the Investment
Management Agreement, RMCI manages the Fund's investments, including effecting
purchases and sales thereof, in furtherance of each the Fund's investment
objective and policies, subject to overall control and direction of the
Trustees.
For its management and advisory services, and for paying the ordinary
operating expenses of the Fund, the adviser is paid a comprehensive fee by the
Fund calculated at 0.80% per annum of the average daily net assets of the Fund.
For the fiscal years ended May 31, 1996 and 1997, RMCI waived all of its
comprehensive fee and for fiscal year ended May 31, 1998, RMCI waived 0.40% of
its comprehensive fee.
From time to time, RMCI may waive receipt of its fees and/or voluntarily
assume certain expenses of the Fund which would have the effect of lowering the
Fund's 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.
EXPENSE LIMITATION. The Investment Management Agreement for the Fund provide
that RMCI will reimburse the Fund for the amount by which the Fund'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 Distributor is Resrv Partners, Inc.
("RESRV"), 810 Seventh Avenue, New York, NY 10019. The Fund has authorized the
Distributor, in connection with its sale of Fund shares, to give only such
information and to make only such statements and representations as are
contained in the Prospectus dated July 31, 1998. 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 1940 Act, 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
principal business is the distribution of mutual fund shares. No Distributor
has retained underwriting commissions on the sale of Fund shares during the
last two fiscal years.
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 1940 Act , which
provides that investment companies may pay distribution expenses, directly or
indirectly, pursuant to a Plan adopted by the investment company's Board and
approved by its shareholders. Under the Plan, the Fund makes assistance
payments to brokers, financial institutions and other financial intermediaries
("payee(s)") for shareholder accounts ("qualified accounts") at an annual rate
of 0.20% of the average net asset value of the qualified accounts. Such
distribution assistance may include, but is not limited to, establishment of
shareholder accounts, delivering prospectuses to prospective investors and
processing automatic investment in Fund shares of client account balances.
Substantially all such monies (together with significant amounts from RMCI's
own resources) are paid by RMCI to payees for their distribution assistance or
administrative services, with any remaining amounts being used to partially
defray other expenses incurred by RMCI in distributing Fund shares. In addition
to the amounts required by the Plan, RMCI may, in its discretion, pay
5
<PAGE> 30
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, 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. For the fiscal
years ended May 31, 1996, 1997 and 1998, no payments were made under the Plan.
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 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.
CUSTODIAL SERVICES AND INDEPENDENT ACCOUNTANT. The Chase Manhattan Bank, 4 New
York Plaza, New York, NY 10004 is Custodian of the Fund's securities and cash
pursuant to a Custodian Agreement. The Bank of New York, 48 Wall Street, New
York, NY 10015; Morgan Guaranty Trust Co., 60 Wall Street, New York, NY 10260;
and Custodial Trust Company, 28 West State Street, Trenton, NJ 08608; are
Custodians for the Fund for limited purposes in connection with certain
repurchase agreements. PricewaterhouseCoopers LLP, 1301 Avenue of the Americas,
New York, NY 10019 is the Fund's independent accountant.
6
<PAGE> 31
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 materially adverse
effect upon the net asset value or yield of the Fund.
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 Fund; however, any such sales will not be either a qualifying or
disqualifying factor in the selection of brokers or dealers.
When orders to purchase or sell the same security on identical terms are
simultaneously placed for the 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 classes
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 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 chose, and in such event the holders of the remaining
shares could not elect any person to the Board of Trustees.
Under Massachusetts law, the shareholders and trustees of a business trust
can be personally liable for the Funds' obligations unless, as in this
instance, the Declaration of Trust provides, in substance, that no shareholder
or trustee
7
<PAGE> 32
shall be personally liable for the Fund's , and each investment portfolio's,
obligations to third parties, and requires that every written contract made by
a Fund contain a provision to that effect. The Declaration of Trust also
requires the Fund to indemnify its shareholders and Trustees against such
liabilities and any related claims or expenses.
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 SEC 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.
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 1940 Act unless
withdrawal is permitted by order of the SEC. Redemptions in kind are further
limited by the Fund's practice of holding instruments typically with a minimum
value of $1,000,000 and its intention to redeem in kind only when necessary to
reduce a disparity between amortized cost and market value. In disposing of
such securities, an investor might incur transaction costs and on the date of
disposition might receive an amount less than the 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 MAY BE UP TO TEN (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 ("NAV") which is
calculated at the close of each Business Day as defined in the Prospectus. The
NAV is not calculated on New Year's Day, Presidents' Day, Good Friday, Memorial
Day (observed), Independence Day, Labor Day, Martin Luther King Jr. Day,
Thanksgiving Day, Christmas Day, on other days the NYSE is closed for trading,
and on certain regional banking holidays. The NAV of the Fund is normally
maintained at $1.00 per share. The Fund cannot guarantee that its net asset
value will always remain at $1.00 per share.
The NAV per share of the Fund 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
8
<PAGE> 33
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 the Fund's 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 (1) 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.
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 $20,000 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. 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) 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 U.S. dollars, and are credited to shareholder accounts
only upon their conversion into federal funds, which normally takes one or two
Business Days following receipt. Checks delivered to the Fund after 2:00 P.M.
(New York time) 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 ADVISER OR
THE DISTRIBUTOR.
SHARE CERTIFICATES. Share certificates are not issued by the Fund.
9
<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, as amended ("the 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.
To qualify as a regulated investment company, the Fund must, among other
things, (a) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stock, securities or foreign currencies or
other income derived with respect to its business of investing in such stock,
securities or currencies; (b) diversify its holdings so that, at the end of
each quarter of the taxable year, (i) at least 50% of the market value of the
Fund's assets is represented by cash and cash items (including receivables),
U.S. Government securities, the securities of other regulated investment
companies and other securities, with such other securities of any one issuer
limited for the purposes of this calculation to an amount not greater than 5%
of the value of the Fund's total assets and not greater than 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its total assets is invested in the securities of any one issuer
(other than U.S. Government securities or the securities of other regulated
investment companies); and (c) distribute at least 90% of its investment
company taxable income (which includes, among other items, dividends, interest
and net short-term capital gains in excess of net long-term capital losses) and
its net tax-exempt interest income each taxable year.
As a regulated investment company, the Fund generally will not be subject to
U.S. federal income tax on its investment company taxable income and net
capital gains (the excess of net long-term capital gains over net short-term
capital losses), if any, that it distributes to shareholders. Each Fund intends
to distribute to its shareholders, at least annually, substantially all of its
investment company taxable income and net capital gains. Amounts not
distributed on a timely basis in accordance with a calendar year distribution
requirement are subject to a nondeductible 4% excise tax. To prevent imposition
of the excise tax, each Fund must distribute during each calendar year an
amount equal to the sum of (1) at least 98% of its ordinary income (not taking
into account any capital gains or losses) for the calendar year, (2) at least
98% of its capital gains in excess of its capital losses for the one-year
period ending on October 31 of the calendar year, and (3) any ordinary income
and capital gains for previous years that was not distributed during those
years. A distribution will be treated as paid on December 31 of the current
calendar year if it is declared by a Fund in October, November or December with
a record date in such a month and paid by the Fund during January of the
following calendar year. Such distributions will be taxable to shareholders in
the calendar year in which the distributions are declared, rather than the
calendar year in which the distributions are received. To prevent application
of the excise tax, each Fund intends to make its distributions in accordance
with the calendar year distribution requirement.
Dividends paid out of a Fund's investment company taxable income will be
taxable to a U.S. shareholder as ordinary income. Because no portion of a
Fund's income is expected to consist of dividends paid by U.S. corporations, no
portion of the dividends paid by the Funds is expected to be eligible for the
corporate dividends-received deduction. Distributions of net capital gains, if
any, designated as capital gain dividends are taxable to individual
shareholders at the applicable 20% or 28% capital gains rate, regardless of how
long the shareholder has held the Fund's shares, and are not eligible for the
dividends-received deduction. Shareholders receiving distributions in the form
of additional shares, rather than cash, generally will have a cost basis in
each such share equal to the net asset value of a share of the Fund on the
reinvestment date. Shareholders will be notified annually as to the U.S.
federal tax status of distributions, and shareholders receiving distributions
in the form of additional shares will receive a report as to the net asset
value of those shares.
Upon the sale or other disposition of shares of a Fund, in the event that the
Fund fails to maintain a constant net asset value per share, a shareholder may
realize a capital gain or loss which will be long-term or short-term, generally
depending upon the shareholder's holding period for the shares. Any loss
realized on a sale or exchange will be disallowed to the extent the shares
disposed of are replaced (including shares acquired pursuant to a dividend
10
<PAGE> 35
reinvestment plan) within a period of 61 days beginning 30 days before and
ending 30 days after disposition of the shares. In such a case, the basis of
the shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized by a shareholder on a disposition of Fund shares held by the
shareholder for six months or less will be treated as a long-term capital loss
to the extent of any distributions of net capital gains received by the
shareholder with respect to such shares.
Income received by the Strategist Fund from sources within foreign countries
may be subject to withholding and other taxes imposed by such countries.
The Fund may be required to withhold U.S. federal income tax at the rate of 31%
of all taxable distributions payable to shareholders who fail to provide the
Fund with their correct taxpayer identification number or to make required
certifications, or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. Corporate shareholders and certain
other shareholders specified in the Code generally are exempt from such backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
may be credited against the shareholder's U.S. federal income tax liability.
The tax consequences to a foreign shareholder of an investment in a Fund may be
different from those described herein. Foreign shareholders are advised to
consult their own tax advisers with respect to the particular tax consequences
to them of an investment in the Fund. Shareholders are advised to consult their
own tax advisers with respect to the particular tax consequences to them of an
investment in a Fund.
FUND YIELD
The current yield of the 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 the current yield, raising the
sum to a power equal to 365 divided by the number of days in the base period
(seven days), and subtracting one from the result according to the following
formula: Effective Yield = [(Base Period Return + 1) 365/7] - 1. Effective
annual yields are a 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 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.
11
<PAGE> 36
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.
FITCH IBCA
F1: This designation indicates a very strong credit quality. Issues assigned
this rating reflect an assurance of timely payment only slightly less in degree
than issues rated "F1+". Those issues determined to possess and exceptionally
strong credit quality will be denoted with a plus (+) sign designation. Issues
assigned the rating of F-1+ are regarded as having the strongest degree
assurance for timely payment.
12
<PAGE> 37
THE RESERVE FUND - STRATEGIST MONEY-MARKET FUND
STATEMENT OF NET ASSETS - MAY 31, 1998
<TABLE>
<CAPTION>
% DAYS TO VALUE
RATE MATURITY (NOTE 1)
--------- ---------- --------
<S> <C> <C> <C>
NEGOTIABLE BANK CERTIFICATES OF DEPOSIT - 42.80%
------------------------------------------------
Crestar Bank 5.555 36 $ 2,003,394
Chase Manhattan Bank 5.55 4 2,001,541
Harris Trust and Savings Bank 5.53 11 2,006,452
Mellon Bank, N.A. 5.57 3 3,027,850
SouthTrust Bank of Alabama, N.A. 5.57 36 2,008,046
ABN-AMRO Bank N.V. (a) 5.53 15 2,005,837
BHF Bank AG (b) 5.55 29 2,001,542
Canadian Imperial Bank of Commerce (b) 5.535 23 2,003,382
Deutsche Bank AG (a) 5.54 19 2,004,001
Dresdner Bank AG (b) 5.54 29 2,001,231
Westdeutsche Landesbank Girozentrale (b) 5.57 36 3,018,103
-----------
Total Negotiable Bank Certificates of Deposit 24,081,379
PROMISSORY NOTES 10.64%
-----------------------
Commerzbank U.S. Finance, Inc. (c) 5.51 22 1,993,572
Hypo U.S. Finance, Inc.(c) 5.505 8 1,997,859
Societe Generale North America, Inc. (c) 5.50 17 1,995,111
-----------
Total Promissory Notes 5,986,542
REPURCHASE AGREEMENTS 45.34%
----------------------------
GNMA 6.875%-8% due from 3/20/21 to 1/15/36 (Repo with
Bear, Stearns & Co. Inc. dated May 29, 1998, resale
amount $13,006,099) 5.63 3 13,006,099
FNAR due 4/1/34 (Repo with DLJ Securities Corporation 5.63 3 12,505,865
dated May 29, 1998, resale amount $12,505,865) -----------
Total Repurchase Agreements 25,511,964
-----------
Total Strategist Fund Investments - (98.78%)
(Cost $55,471,253) 55,579,885
Other assets, less liabilities - (1.22%) 688,903
-----------
NET ASSETS (100%) equivalent to $1.00 net
asset value, offering and redemption prices
per share based on 56,268,788 shares of
beneficial interest $.001 par value
outstanding $56,268,788
===========
</TABLE>
(a) Eurodollar Certificates of Deposit - London Branch, United Kingdom.
(b) Yankee Certificates of Deposit.
(c) Collateralized by Bank Letter of Credit.
(d) FNAR - FNMA Adjustable Rate Mortgage-Backed Pass-Through Securities
(e) GNMA - Government National Mortgage Association Mortgage-Backed Pass-
Through Securities
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE> 38
THE RESERVE FUND
STRATEGIST MONEY-MARKET FUND
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
MAY 31, 1998
------------
<S> <C>
INTEREST INCOME (NOTE 1) $4,264,971
----------
EXPENSES (Note 2)
Comprehensive fee 605,330
Less: voluntary waiver (354,118)
----------
Net Expenses 251,212
----------
NET INVESTMENT INCOME $4,013,759
==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE> 39
THE RESERVE FUND
STRATEGIST MONEY-MARKET FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MAY 31, 1998 MAY 31, 1997
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM INVESTMENT OPERATIONS:
Net investment income paid to
shareholders as dividends (Note 1) $ (4,013,759) $ (2,656,398)
------------- ------------
FROM CAPITAL SHARE TRANSACTIONS
(at net asset value of $1 per share):
Net proceeds from the sale of shares 129,839,697 185,017,047
Net asset value of shares issued
on reinvestment of dividends 4,013,759 2,656,398
------------- ------------
Subtotal 133,853,456 187,673,445
Cost of shares redeemed (177,288,649) (88,979,109)
------------- ------------
Net increase (decrease) in net assets derived from
capital share transactions and from
investment operations (43,435,193) 98,694,336
NET ASSETS:
Beginning of year 99,703,981 1,009,645
------------- ------------
End of year $ 56,268,788 $ 99,703,981
============= ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE> 40
THE RESERVE FUND
STRATEGIST MONEY-MARKET FUND
NOTES TO FINANCIAL STATEMENTS
(1)SIGNIFICANT ACCOUNTING POLICIES:
The Strategist Money Market Fund, a series of The Reserve Fund (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
and divided into four series, Primary, U.S. Government, U.S.
Treasury and Strategist Funds. These financial statements and
notes apply only to the Strategist Fund.
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
portfolio, 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. Net investment income on investments is distributed to
shareholders daily and automatically reinvested in additional Fund
shares.
F. The Fund may enter into repurchase agreements with financial
institutions deemed to be creditworthy by the Fund Investment
Advisor, subject to the seller's agreement to repurchase such
securities at a mutually agreed upon price. However, in the event
of default or bankruptcy by the seller, realization and/or
retention of the collateral may be subject to legal proceedings.
G. The Fund may enter into repurchase agreements with financial
institutions deemed to be creditworthy by the Fund Investment
Advisor, subject to the seller's agreement to repurchase such
securities at a mutually agreed upon price. However, in the event
of default or bankruptcy by the seller, realization and/or
retention of the collateral may be subject to legal proceedings.
16
<PAGE> 41
THE RESERVE FUND
STRATEGIST MONEY MARKET FUND
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(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. RMCI receives a comprehensive fee from the Fund at an annual
rate of .80% of the average daily net assets. For the year ended May
31, 1998 RMCI waived $354,118 of its comprehensive fee.
(3) DISTRIBUTION ASSISTANCE:
Pursuant to a Plan of Distribution under Rule 12b-1, 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
portfolio. The Plan requires RMCI to pay an equivalent amount from its
own resources. For the year ended May 31, 1998, all distribution fees
were waived.
(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 date of the financial statements and the reported
amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
(5) COMPONENTS OF NET ASSETS:
At 5/31/98, the Strategist Money Market Fund's net assets consisted of
$56,269 par value and $56,212,518 paid-in-capital.
FEDERAL TAX INFORMATION - (UNAUDITED)
The dividends distributed by Strategist Money Market Fund are treated
for Federal tax purposes as ordinary income.
17
<PAGE> 42
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
MAY 1, 1996
(COMMENCEMENT OF
YEAR ENDED YEAR ENDED OPERATIONS) TO
MAY 31, 1998 MAY 31, 1997 MAY 31, 1996
------------ ------------ ----------------
<S> <C> <C> <C>
STRATEGIST MONEY MARKET FUND
----------------------------
Net asset value, beginning of year $ 1.0000 $ 1.0000 $ 1.0000
-------- -------- --------
Income from investment operations .0576 .0552 .0479
Expenses .0034 .0000 .0017
-------- -------- --------
Net investment income (1) .0542 .0552 .0462
Dividends from net investment (.0542) (.0552) (.0462)
income (1) -------- -------- --------
Net asset value, end of year $ 1.0000 $ 1.0000 $ 1.0000
======== ======== ========
Total Return 5.42% 5.52% 5.13%(2)
RATIOS/SUPPLEMENTAL DATA
------------------------
Net assets in thousands, end of year 56,269 99,704 1,010
Ratio of expenses to average net .33% .00% .18%(2)
assets (3)
Ratio of net investment income
to average net assets 5.29% 5.44% 5.12%(2)
</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 reduction in expenses, the actual expenses
would have been .80%.
18
<PAGE> 43
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Trustees of Strategist Money Market Fund:
In our opinion, the accompanying statement of net assets and the related
statement of operations and the statements of changes in net assets and
financial highlights present fairly, in all material respects, the financial
position of Strategist Money Market (one of the four series constituting The
Reserve Fund) at May 31, 1998, the results of its operations, the changes in
each of its net assets and the financial highlights for each of the periods
presented in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Funds management; our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards,
which require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at May 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
New York, NY PRICEWATERHOUSECOOPERS LLP
July 24, 1998
19
