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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON
JANUARY 5, 1996
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION NO. 811-7734
33-63300
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
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Pre-Effective Amendment No.
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Post-Effective Amendment No. 8 X
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REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
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Amendment No. 10
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(Check appropriate box or boxes.)
RESERVE PRIVATE EQUITY SERIES
(Exact Name of Registrant as Specified in Charter)
810 Seventh Avenue, New York, NY 10019
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (212) 977-9982
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Marc C. Cozzolino, Esq., 810 Seventh Avenue, 17th Floor, New York, NY 10019
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(Name and Address of Agent for service)
It is proposed that filing will become effective (check appropriate box)
immediately upon filing pursuant to paragraph (b) of Rule 485
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X on January 5, 1996 pursuant to paragraph (b) of Rule 485
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60 days after filing pursuant to paragraph (a) of Rule 485
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on (date) pursuant to paragraph (a) of Rule 485
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The Commission is requested to send copies of all communications to:
Paul F. Roye, Esq.
Dechert Price & Rhoads
1500 K Street, N.W.
Washington, D.C. 20005
The Registrant has filed a declaration pursuant to Rule 24f-2 under the
Investment Company Act of 1940 electing to register an indefinite number of
shares of beneficial interest. Registrant intends to file the notice required
by Rule 24f-2 with respect to its fiscal year ending May 31, 1996 on or before
July 31, 1996.
Total Pages:
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CROSS-REFERENCE SHEET PURSUANT TO RULE 495(a)
<TABLE>
<CAPTION>
FORM PROSPECTUS AND STATEMENT
N-1A OF ADDITIONAL INFORMATION
ITEM FORM CAPTION CAPTION
- ---- ----------------------------------- -----------------------------------------------------
<S> <C>
Part A
1 Cover Page Cover Page
2 Synopsis Fund Expenses
3 Condensed Financial Information Financial Highlights
4 General Description of Registrant The Trust; Investment Objective and Policies;
Investment Techniques and Investments
5 Management of the Fund Management, Trustees and Officers of the Trust
6 Capital Stock and Other Securities Shares of Beneficial Interest; Taxes; Dividends and
Distributions
7 Purchase of Securities Being Offered How to Buy shares
8 Redemption or Repurchase Redemptions
9 Legal Proceedings (omitted)
Part B
10 Cover Page Statement of Additional Information
11 Table of Contents Table of Contents
12 General Information and History (omitted)
13 Investment Objective and Policies Investment Policies; Other Policies
14 Management of the Registrant Trustees and Officers of the Trust
15 Control Person and Principal Trustees and Officers of the Trust
Holders of Securities
16 Investment Advisory and Other Investment Management and Other Agreement
Services
17 Brokerage Allocation Portfolio Turnover, Transaction Charges and
Allocation
18 Capital Stock and Other Securities Shares of Beneficial Interest
19 Purchase, Redemption, and Pricing Purchase, Redemption and Pricing of Shares;
of Securities Being Offered Dividends and Taxes
20 Tax Status Distributions and Taxes
21 Underwriters Investment Management and Other Agreements
22 Calculation of Performance Date Performance Information
23 Financial Statements Financial Statements
</TABLE>
3
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THE GENERAL INFORMATION, PURCHASES AND REDEMPTIONS
RESERVE CALL 800-637-1700 FAX 212-977-9987
FUNDS
THE RESERVE PRIVATE EQUITY SERIES
<TABLE>
<S> <C>
-- Reserve Blue Chip Growth Fund -- Reserve International Equity Fund
-- Reserve Emerging Growth Fund -- Reserve Large-Cap Value Equity Fund
-- Reserve Growth and Income Fund -- Reserve Mid-Cap Growth Fund
-- Reserve Informed Investors Growth Fund -- Reserve North American Growth Fund
</TABLE>
TABLE OF CONTENTS PAGE
---------------------------------------------- -------
Annual Fund Expense Information............. 2
Financial Highlights........................ 4
The Trust................................... 8
Investment Objectives and Policies.......... 8
Investment Techniques and Investments....... 12
Risk Considerations......................... 19
Management of the Funds..................... 21
How to Buy Shares........................... 25
Shares of Beneficial Interest............... 29
Taxes....................................... 29
Foreign Income Taxes........................ 30
Dividends and Distributions................. 30
Redemptions................................. 31
General Information......................... 32
Glossary.................................... 34
Each "Fund" or "Portfolio" (is a series of shares issued by The Reserve Private
Equity Series ("Trust"), an open-end mutual fund. This Prospectus, dated
January 5, 1996, sets forth concisely the information which a prospective
investor should know about each Fund before investing. A Statement of
Additional Information, dated January 5, 1996, for each Fund has been filed
with the Securities and Exchange Commission and is incorporated herein by
reference. A copy of each Statement of Additional Information may be obtained
without charge by writing or calling the Fund at the telephone number shown
above.
Each Fund offers two classes of shares which may be purchased at a price equal
to their net asset value (i) plus an initial sales charge imposed at the time
of purchase (the "Class A shares"), or (ii) without any initial sales charge
(the "Class D shares"). See "How to Buy Shares."
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
PROSPECTUS DATED JANUARY 5, 1996
Investors are advised to read this Prospectus carefully and to retain it for
future reference.
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ANNUAL FUND EXPENSE INFORMATION
SHAREHOLDER TRANSACTION EXPENSES are one of several factors to consider when
you invest in a Fund. The following tables summarize your maximum transaction
costs when investing in a Fund and the annual expenses for each class of shares
of each Fund.
<TABLE>
<CAPTION>
CLASS CLASS
A D
SHARES SHARES
-------- --------
<S> <C> <C>
Maximum Sales charge imposed on Purchases (as a percentage
of offering price)........................................... 4.50%(1) None
Sales charges imposed on Dividend Reinvestment............... None None
Deferred Sales charge (as a percentage of original purchase
price or redemption proceeds, whichever is lower)............ None None
Redemption Fee*.............................................. None None
Exchange Fee................................................. None None
</TABLE>
*The Fund charges a $10 fee for wire redemptions of less than $10,000.
(1) Sales Charges may be reduced or eliminated for larger investments and
certain classes of investors. See "How to Buy Shares."
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS). Listed
below are the annual expenses paid by each class of shares for each Fund
regardless of the amount of your investment.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS D SHARES
------------------------------------------ ----------------------------------------
COMPREHENSIVE TOTAL COMPREHENSIVE TOTAL
MANAGEMENT 12b-1 OPERATING MANAGEMENT 12b-1 OPERATING
FEE FEE EXPENSES FEE FEE EXPENSES
---------------- -------- ------------- ---------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Reserve Blue
Chip Growth 1.50% 0.25% 1.75% 1.50% 1.00% 2.50%
Reserve
Emerging
Growth 1.50% 0.25% 1.75% 1.50% 1.00% 2.50%
Reserve Growth
and Income 1.50% 0.25% 1.75% 1.50% 1.00% 2.50%
Reserve
Informed
Investors
Growth 1.50% 0.25% 1.75% 1.50% 1.00% 2.50%
Reserve
International
Equity 1.75% 0.25% 2.00% 1.75% 1.00% 2.75%
Reserve
Large-Cap
Value 1.50% 0.25% 1.75% 1.50% 1.00% 2.50%
Reserve
Mid-Cap Growth 1.50% 0.25% 1.75% 1.50% 1.00% 2.50%
Reserve North
American
Growth 1.50% 0.25% 1.75% 1.50% 1.00% 2.50%
</TABLE>
The purpose of this table is to assist the shareholder in
understanding the costs and expenses that shareholders of each Fund will bear
directly or indirectly. Because the 12b-1 fee is an annual charge, long-term
shareholders in a Fund may pay more than the economic equivalent of the maximum
front-end sales charge permitted by the rules of the National Association of
Securities Dealers, Inc.
The Funds are charged a comprehensive fee (see "Management of the
Funds" on page ____) which includes all management fees and ordinary operating
expenses.
The following example illustrates the expenses that a shareholder
would pay on a $1,000 investment over various time periods assuming: (1) a 5%
annual rate of return and (2) redemption at the end of each time period.
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<TABLE>
<CAPTION>
CLASS A SHARES CLASS D SHARES
----------------------------- -----------------------------
1 3 5 10 1 3 5 10
YEAR YEARS YEARS YEARS YEAR YEARS YEARS YEARS
----- ----- ----- ----- ---- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Reserve Blue Chip Growth $62 $98 $136 $242 $25 $78 $133 $284
Reserve Emerging Growth $62 $98 $136 $242 $25 $78 $133 $284
Reserve Growth and Income $62 $98 $136 $242 $25 $78 $133 $284
Reserve Informed Investors Growth $62 $98 $136 $242 $25 $78 $133 $284
Reserve International Equity $64 $105 $148 $267 $28 $85 $145 $308
Reserve Large-Cap Value $62 $98 $136 $242 $25 $78 $133 $284
Reserve Mid-Cap Growth $62 $98 $136 $242 $25 $78 $133 $284
Reserve North American Growth $62 $98 $136 $242 $25 $78 $133 $284
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
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FINANCIAL HIGHLIGHTS
The following information applies to a share of the Reserve Private Equity
Series-- Reserve Blue Chip Growth Fund ("Blue Chip"), Reserve Emerging Growth
Fund ("Emerging"), and Reserve Informed Investors Growth Fund ("Informed")
outstanding throughout the period. It should be read in conjunction with the
financial statements and related notes appearing in the Statement of Additional
Information for each Fund. Such information has been audited by Coopers &
Lybrand L.L.P. as indicated in their reports appearing in the Statements of
Additional Information.
<TABLE>
<CAPTION>
RESERVE RESERVE RESERVE
BLUE CHIP GROWTH FUND EMERGING GROWTH FUND INFORMED GROWTH FUND
--------------------- -------------------- --------------------
OCTOBER 28, 1994 NOVEMBER 14, 1994 DECEMBER 28, 1994
(COMMENCEMENT OF (COMMENCEMENT OF (COMMENCEMENT OF
OPERATIONS) THROUGH OPERATIONS) THROUGH OPERATIONS) THROUGH
MAY 31, 1995 MAY 31, 1995 MAY 31, 1995
===================== ==================== ====================
<S> <C> <C> <C>
Net asset value, beginning
of period.................... $ 10.00 $ 10.00 $ 10.00
Income from investment
operations...................
Net investment loss.......... (.03) (.09) (.07)
Net realized and unrealized
gain......................... 2.06 2.30 2.06
------- ------- -------
Total from investment
operations................... 2.03 2.21 1.99
------- ------- -------
Net asset value, end of
period....................... $ 12.03 $ 12.21 $ 11.99
======= ======= =======
Total Return................. 20.30% (2) 22.10% (2) 19.90% (2)
RATIOS/SUPPLEMENTAL DATA
Net assets in thousands,
end of period................ $1,993 $1,241 $6,837
Ratio of expenses to
average net assets before
waivers...................... 1.75% (1)
Ratio of expenses to
average net assets, net of
waiver....................... 1.73% (1) 1.75% (1) 1.75% (1)
Ratio of net investment
loss to average net assets,
before waivers
(Notes 3 and 4).............. -.72% (1) -1.62% (1)
Ratio of net investment
loss to average net assets,
net of waiver................ -.70% (1) -1.62% (1)
Portfolio turnoer rate....... 68% 43% 59%
Dividends or Distributions... 0 0 0
</TABLE>
-----------------------
(1) Annualized
(2) Total return is not annualized, and does not reflect impact of sales
charge
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RESERVE BLUE CHIP GROWTH FUND
[FIGURE 2]
The performance of Reserve Blue Chip Growth Fund reflects the maximum 4.5%
sales load.
Past performance is not indicative of future performance.
RESERVE BLUE CHIP GROWTH FUND
To the Shareholders of the Reserve Blue Chip Growth Fund:
Since inception of the Reserve Blue Chip Growth Fund on October 28, 1994, the
market has been surprisingly strong, benefiting from declining interest rates
and excellent corporate earnings. Given our outlook for only modest economic
growth and the high valuation at which the market is currently trading, we
believe stock selection will be the key to above average performance. We are
focusing on companies in areas that have steady and predictable growth
potential such as the technology, financial and drug sectors. Also, companies
with major operations abroad and opportunities for market penetration should do
well, as should companies generating substantial free cash flow that are in a
position to increase dividends and buy back their shares.
Charles V. Moore, President
Trainer, Wortham & Company, Inc.
Sub-Adviser
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RESERVE EMERGING GROWTH FUND
[FIGURE 1]
The performance of Reserve Emerging Growth Fund reflects the maximum 4.5% sales
load.
Past performance is not indicative of future performance.
RESERVE EMERGING GROWTH FUND
To the Shareholders of the Reserve Emerging Growth Fund:
At the beginning of 1995, the capital markets reflected generally negative
expectations including continued economic growth at unacceptably high rates,
significant increases in inflation and rising interest rates until the economy
slipped into recession. Interest rates were then about 8.0% and the S&P 500
had made no progress in over a year. Six months later it is obvious that the
gap between perception and reality was large. Economic activity slowed without
any serious dislocations to the economy, increasing inflation was nonexistent
and corporate profitability exceeded even the most optimistic forecasts.
Interest rates declined to 6.7% and the S&P 500 produced a return of over 16%.
Now we are in a time frame when investors have a much more positive outlook
leaving less room for the significant upside surprises experienced in the first
half. What we see ahead is a solid environment for stocks and bonds with the
direction of interest rates continuing down. The stocks most likely to
outperform will be those companies with superior growth rates. As the economy
moves into a slower growth pattern and corporate profits slow from the torrid
pace of the first half, the relative valuation of companies with above average
secular growth rates driven by new products and services will increase. The
technology area has been an important focus of Roanoke's and this sector was a
strong contributor to this year's performance. Given the strong underlying
fundamentals of this group, we remain committed to the area even though the
short term price volatility of the group has increased. We continue to maintain
a well diversified portfolio with commitments in a number of diverse sectors
including consumer, capital goods, health care and telecommunications.
Edwin G. Vroom, President
Roanoke Asset Management
Sub-Adviser
6
<PAGE> 9
RESERVE INFORMED INVESTORS GROWTH FUND
[FIGURE 3]
The performance of Reserve Informed Investors Growth Fund reflects the maximum
4.5% sales load.
Past performance is not indicative of future performance.
RESERVE INFORMED INVESTORS GROWTH FUND
To the Shareholders of the Reserve Informed Investors Growth Fund:
The single factor most materially affecting the Fund's performance in the
recently completed fiscal year was its relatively heavy concentration in the
category broadly-defined as "technology" stocks, which produced
greater-than-average price volatility to the Fund's portfolio valuation. The
Fund's holdings of this group should decrease significantly over time.
However, the Fund will continue to emphasize stocks of companies with strong,
accelerating and sustained earnings growth trends.
The Fund also intends to remain as fully invested in common stocks as is
possible; market timing is not part of the investment management philosophy,
which will mean that the Fund will experience greater-than-average price
volatility from time to time. There is no intention to change these investment
techniques.
Thomas H. Fitzgerald, Jr., President
and Chief Investment Officer
T.H. Fitzgerald & Co.
Sub-Adviser
7
<PAGE> 10
THE TRUST
The Trust was formed on April 22, 1993, under Delaware law and is commonly
known as a Delaware business trust. It is an open-end management investment
company consisting, as of the date of this Prospectus, of eight separate
series. Additional series may be added in the future by the Board of Trustees.
The Reserve Blue Chip Growth Fund, Reserve Emerging Growth Fund, Reserve Growth
and Income Fund, Reserve Informed Investors Growth Fund, Reserve International
Equity Fund , Reserve Large-Cap Value Equity Fund, Reserve Mid-Cap Growth Fund,
and Reserve North American Growth Fund which are offered by this Prospectus,
are classified as non-diversified mutual funds.
The Funds are advised and managed by Reserve Management Company, Inc. (the
"Adviser"), which supervises the day-to-day investment operations of the Funds.
The Adviser and the Trust, on behalf of each Fund, have entered into
sub-advisory agreements with each of the registered investment advisers (the
"Sub-Advisers"): Trainer, Wortham & Company, Inc. ("Trainer"), 845 Third
Avenue, New York, NY 10022 for Reserve Blue Chip Growth Fund; Roanoke Asset
Management ("Roanoke"), 529 Fifth Avenue, New York, NY 10017, for the Reserve
Emerging Growth Fund; Gerbino & Company ("Gerbino"), 9595 Wilshire Boulevard,
Suite 200, Beverly Hills, CA 90212, for Reserve Growth and Income Fund; T.H.
Fitzgerald & Co. ("Fitzgerald"), 180 Church Street, Naugatuck, CT 06770, for
Reserve Informed Investors Growth Fund; Pinnacle Associates, Ltd. ("Pinnacle"),
666 Fifth Avenue, New York, NY 10103, for Reserve International Equity Fund;
Siphron Capital Management ("Siphron"), 280 S. Beverly Drive, Beverly Hills, CA
90212, for Reserve Large-Cap Value Equity Fund; Cambridge Equity Advisors
("Cambridge"), 5214 Maryland Way, Suite 309, Brentwood, TN 37027, for Reserve
Mid-Cap Growth Fund; and Southern Capital Advisors ("SCA"), 50 Front Street,
Memphis, TN 38103, for Reserve North American Growth Fund.
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of the Funds are not fundamental and may be changed
without the approval of shareholders.
RESERVE BLUE CHIP GROWTH FUND. The Reserve Blue Chip Growth Fund's investment
objective is to seek capital appreciation through investment in a portfolio of
U.S. common stocks believed to offer favorable possibilities of capital
appreciation. Any production of income is secondary to this objective. There
can be no assurance that the Fund will achieve its investment objective.
Generally, the Fund will seek to invest in U.S. equities with investment
characteristics such as earnings growth, financial strength and projected
positive cash flow. These equity securities are usually traded as shares in the
U.S. but sometimes they may be represented by American Depository Receipts
("ADRs"). The Fund will invest at least 65% of its total assets in securities
of "blue chip" companies that have demonstrated long-term earnings growth,
financial stability and attractive valuation, unless the Fund has adopted a
temporary defensive position.
RESERVE EMERGING GROWTH FUND. The Reserve Emerging Growth Fund's investment
objective is to seek capital appreciation through investment in a portfolio of
small and medium sized U.S. companies. Any production of income is secondary to
this objective. There can be no assurance that the Fund will achieve its
investment objective.
Generally, the Fund will seek to invest in equity securities issued by
companies with investment characteristics such as accelerating rates of revenue
and earnings growth, market dominance or a strong defensible market niche, unit
growth coupled with stable or rising profit margins, a sound balance sheet and
skilled management with an ownership stake. The Fund is designed for investors
seeking the opportunity for substantial long-term growth who can accept
above-average stock market risk and little or no current income. At least 65%
of the value of the Fund's assets will be invested in smaller-sized companies
whose outstanding shares have an aggregate market value of $1 billion or less,
unless the Fund has adopted a temporary defensive position.
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<PAGE> 11
It is the Sub-Adviser's view that small and medium sized companies are
generally expected to show growth over time that is above the growth rate of
the overall economy and that of large established companies. The Fund may also
invest in companies presenting special situations when it is believed that the
shares offer a strong potential for capital appreciation due to the market
underestimating earnings potential, changes in management or other similar
opportunities.
Investing in small and medium sized companies involves greater risk than is
customarily associated with investments in larger, more established companies
due to the greater business risks of small size, limited markets and financial
resources and lack of information. The securities of smaller companies are
often traded over-the-counter and have less liquidity than larger stocks.
Therefore, shares of the Fund may be subject to greater fluctuation on value
than shares of a conservative equity fund which invests in larger
capitalization companies.
RESERVE GROWTH AND INCOME FUND. The Reserve Growth and Income Fund's
investment objective is to provide income and some growth of principal while
moderating risk through variation and hedging strategies. Additionally a
portion of the Fund may be invested in natural resource securities in an
attempt to hedge the erosion of the purchasing power of the assets resulting
from inflation. The Fund seeks to achieve its objective by primarily investing
in convertible bonds, convertible preferred stocks, higher yielding common
stocks, and other debt instruments including government and corporate bonds
unless the Fund has adopted a temporary defensive position. Typically the Fund
will seek to invest in companies where emphasis is placed upon sound balance
sheets, steady dividend growth, high cash-flow, and low debt. There can be no
assurance that the Fund will achieve its investment objective.
RESERVE INFORMED INVESTORS GROWTH FUND. The Reserve Informed Investors Growth
Fund's investment objective is to seek growth through investment in a portfolio
of U.S. securities which are seasoned, well-managed, financially sound
companies with demonstrated superior earnings growth, accelerating cash flow
and profit margins and high or sharply rising return-on-equity. Priority
companies are those where management and/or large outside investors are buyers
or owners of the stock, or where the company itself is repurchasing its own
shares on the open market. These are the "Informed Investors". Any production
of income is secondary to this objective. There can be no assurance that the
Fund will achieve its investment objective.
Common sense suggests that the "Informed Investors" of the corporate world are
far closer to the day-to-day activities of the companies they own or
manage--and often in a much more informed position to gauge the long-term
effect certain publicly disclosed information or developments may have on the
future price of their company's stock. Basic to the "Informed Investors"
strategy is the belief that it is far more prudent to invest in intrinsically
under-valued stocks which some of the nation's more knowledgeable investors own
or are buying with their own money, rather than to chase fad or glamour stocks
masquerading as disciplines.
The Fund emphasizes investment in small and medium-sized companies whose
outstanding shares have an aggregate market value of $200 million to $4
billion. At least 65% of the value of the Fund's total assets will be invested
in such companies, unless the Fund has adopted a temporary defensive position.
It is expected that under normal market conditions the Fund will be
substantially fully invested in equity securities believed to have a potential
for capital growth which will result in greater-than-average share price
fluctuations and greater market risk than is involved in other securities.
RESERVE INTERNATIONAL EQUITY FUND. The Reserve International Equity Fund's
investment objective is to seek capital appreciation through investment in a
portfolio of equity securities. Companies of resident in countries experiencing
more rapid economic growth than mature economies such as the U.S. and Western
Europe. Any production of income is secondary to this objective. There can be
no assurance that the Fund will achieve its investment objective.
The Fund seeks to achieve its objective by following a structured and
disciplined investment policy of making investments in ADR's and common stocks
of non-U.S. companies. On occasion, warrants, convertible securities and fixed
income instruments will also be used. Generally, the Fund will seek to invest
in foreign equity securities
9
<PAGE> 12
listed on foreign exchanges and issued by companies with investment
characteristics, such as earnings growth, financial strength, and projected
positive cash flow as significant factors in assessing value. When the
Sub-Adviser deems it advisable because of unusual economic, political or market
conditions, the Fund may reduce or eliminate positions in one country and
switch the funds to other countries.
The Fund focuses on quality companies with high visibility and growth
characteristics in sales and earnings. Companies frequently are dominant
within their industry niche and many have a near monopoly position within their
country. Every stock in the Fund has been carefully selected through research
and often direct management contact.
The Sub-Adviser favors companies where management has a significant ownership
stake. The companies that are usually avoided are those that depend heavily on
commodity price levels for their future earnings growth. Portfolios are
structured by combining a top-down quantitative country weighting process,
which looks at macroeconomics factors nationally and internationally, with a
bottom-up individual company selection procedure, which focuses on
microeconomic factors in a particular company. To attempt to control risk the
Fund spreads its assets among 80 to 110 companies in 15 to 23 foreign markets
with an initial position in any single issue between 1% and 2% of assets. Since
investments are in companies that have strong earnings growth, the policy is to
keep the Fund as fully invested as is prudently possible. Therefore, portfolio
investments in cash equivalents usually will not exceed 10% of assets. Stocks
are selected for their long-term investment attractiveness. With a three to
five-year time horizon usual minimum holding period; therefore, portfolio
turnover is low. In all circumstances, the Fund will invest at least 65% of its
total assets in equity securities of issuers associated with at least three
different countries, excluding the United States, unless the Fund has taken a
temporary defensive position. The Fund will restrict investment in the
combination of warrants, and stock options to 5% of total assets at the time of
purchase. Short-term profits are not pursued as an objective, and there is no
trading type activity in stocks.
Summary of Investment Philosophy. The primary goal is to obtain consistent
portfolio performance by investing in quality companies with superior growth
records in sales and earnings. The Sub-Adviser's experience has shown that the
best way to make money in common stocks is to buy growth companies at
attractive prices and to maintain those positions for as long as the growth
momentum continues and their valuations do not reach extremes after an advance.
Portfolios of foreign investments are affected by different economic trends. By
participating in a large variety of investment opportunities, the probability
of investment success increases, and international diversification reduces the
effect that events in any one country will have on the portfolios. Portfolios
of foreign securities are often effected by different economic trends than
those which effect U.S. securities, which is a basic reason to diversify the
traditional U.S. based portfolio.
Investment Process
Country Allocation. Nine variables have been identified by the Sub-Adviser
which are deemed to be key in determining the future direction of stock
markets. The five macro economic factors are: real GDP growth rate and outlook;
current inflation rate and its trend; relative interest rates and their trend;
outlook for the currency; and current account/trade balance levels. The four
stock market technical variables are: intermediate and long-term trends of the
stock prices versus the outlook for corporate profit; relative price/earnings
ratios and dividend yields; country pension fund regulations that can affect
the supply/demand factors for equities; and political stability and government
efforts to promote equity investments.
Stock Selection. After the top-down country allocation is in place, bottom-up
stock selection becomes the dominant activity. The focus is on quality
individual stock selection of companies with high visibility and growth in
sales and earnings. In emerging economies with less developed capital markets,
a strong balance sheet is essential. Stocks are not selected for industry
balancing purposes. Highly cyclical stocks and recovery situations are rarely
used as is the case with companies that are primarily market-share and sales
driven, regardless of profitability and shareholder benefit.
Selling Disciplines. A stock is sold when the fundamental factors (excessive
price/exchange ratio, slowed growth, excessive debt, etc.) have changed to such
an extent that the company no longer qualifies or when industry
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<PAGE> 13
conditions or governmental regulations have changed so that they negatively
impact the company's future. On rare occasions, a stock is sold if a
significantly more attractive opportunity develops in that country.
RESERVE LARGE-CAP VALUE EQUITY FUND. The Reserve Large-Cap Value Equity Fund's
investment objective is to seek long term capital appreciation through
investment in a portfolio of large, high quality U.S. companies. Any
production of income is secondary to this objective. There can be no assurance
that the Fund will achieve its investment objective.
The Fund seeks to achieve its objective by primarily investing in attractively
valued and undervalued equity securities believed to offer favorable
possibilities of capital appreciation. Generally, the Fund will seek to
invest in equity securities issued by companies with investment characteristics
such as high return on shareholder's equity, strong company management that
enhances shareholder value, good cash flow generation and favorable profit
trends. Fundamentally, investment candidates are understandable businesses
that can generate consistent earnings growth where the company is believed to
be undervalued as a whole. The Fund emphasizes investment in larger U.S.
companies whose outstanding shares have an aggregate market value of $5 billion
or more and is designed for investors seeking the opportunity for
above-average, long-term growth with below-average overall risk (defined as
loss capital) and nominal current income. The Fund will invest at least 65% of
its total assets in equity securities and at least 65% of total assets in the
securities of companies, whose aggregate market value is $5 billion or more,
i.e., "large cap", unless the Fund has adopted a temporary defensive position.
It is the Sub-Adviser's view that high quality, large companies can generate
consistent growth over time that is above the growth rate of the overall
economy. The Fund may also invest in companies presenting special situations
when it is believed that the shares offer a strong potential for capital
appreciation due to the market underestimating earnings potential, changes in
management or other similar opportunities.
RESERVE MID-CAP GROWTH FUND. The Reserve Mid-Cap Growth Fund's investment
objective is to seek capital appreciation through investment in a common stock
portfolio of medium and small sized U.S. companies that offer potential for
significant capital appreciation. Any production of income is secondary to
this objective. There can be no assurance that the Fund will achieve its
investment objective.
The Fund will generally invest in equity securities of companies that display
earnings growing at a rate faster than the market averages; have consistently
outperformed analyst expectations for revenue and earnings growth; have clean
balance sheets and strong financial statements; have outstanding management
with a vested interest in share performance; have a strong market niche in a
rapidly expanding or new industry; and are just beginning to receive brokerage
firm sponsorship and analyst coverage. The Fund is designed for investors
seeking the opportunity for substantial long-term growth who can accept above
average stock market risk and little or no current income. The Fund emphasizes
investment in medium and small sized companies whose outstanding shares have an
aggregate market value of $4 billion or less. The Fund will invest at least of
65% its total assets in the securities of such companies, unless the Fund has
adopted a temporary defensive position. It is expected that under normal market
conditions the Fund will be substantially fully invested in equity securities
emphasizing capital appreciation which may result in greater-than-average share
price fluctuations. The securities of smaller companies are often traded
over-the-counter and have less liquidity than larger stocks. Therefore, shares
of the Fund may be subject to greater fluctuation on value than shares of a
conservative equity fund which invests in larger capitalization companies.
RESERVE NORTH AMERICAN GROWTH FUND. The Reserve North American Growth Fund's
investment objective is to seek capital appreciation through investment in a
portfolio of medium sized companies. It is the Sub-Adviser's view that
companies in the United States, Canada, and Mexico are generally expected to
show growth over time that is above the growth rate of the overall U.S. economy
and that of large established companies. In general, this requirement is a
cornerstone of the Fund's investment objective which offers more
diversification to the shareholder without venturing into underdeveloped or
eccentric markets. The Fund will invest at least 65% of its total assets in
securities of issuers in North American countries, unless the Fund has adopted
a temporary defensive position. The Fund does not choose investments for
dividend or interest income, nor does it try to "time" the market. The Fund
will not employ any hedging strategies, and, in all but the more dire of
political or economic
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circumstances intends to stay fully invested. Any production of income is
secondary to this objective. There can be no assurance that the Fund will
achieve its investment objective.
A varied portfolio of stocks will generally be selected based on the following
criteria: accelerating year-over-year, quarterly and annual per share earnings;
rising quarterly, year-over-year and annual profit margins; a price-earnings
multiple which is below that of the company's projected growth rate; a company
which occupies a significant position in its industry; a balance sheet that is
above average in quality for the company relative to its recent past or for the
industry in which it operates; a definitive source of the earnings
acceleration; and stocks which have a relative strength which is above the
average for all stocks.
The Fund may also invest in companies presenting special situations when it is
believed the shares offer a strong potential for capital appreciation due to
the market underestimating future earnings, changes in management or other
similar opportunities.
A result of the Fund's stock selection criteria is likely that the median
market capitalization for its portfolio companies will be about $1 billion and
such companies would be considered be "mid-cap" or medium sized companies. The
Fund will not invest in any company with a market capitalization of less than
$150 million or more than $5 billion. The "mid-cap" nature of the portfolio may
result in some increased volatility over that of the general market average.
The Fund will be at least 50% invested in U.S. based companies.
The Fund's Adviser and Sub-Adviser believe that the Fund's objective provides
investors with a vehicle to take advantage of opportunities in the United
States as well as in other North American countries, where investing may be
more rewarding. They also believe that the ability to invest on an
international basis decreases the degree to which events in any one country can
affect the Fund's entire portfolio. The percentage of the Fund's total assets
invested in U.S. securities and non-U.S. securities denominated in foreign
currencies will vary depending on the potential for capital appreciation, the
relative yield for such securities, the state of the economies of the countries
in which investments are made and such countries' financial markets and the
relationship of such countries' currencies to the U.S. dollar. Therefore, the
Sub-Adviser will vary the Fund's investment portfolio in countries where it
considers investment opportunities to be most attractive.
To the extent the Fund is invested in non-U.S. securities, it may be subject to
greater risks from foreign investments and higher brokerage fees than other
mutual funds. See "Investment in Foreign Securities."
INVESTMENT TECHNIQUES AND INVESTMENTS
The investments and techniques described in this section are subject to the
specific requirements or minimum investment policies found in the Investment
Objectives and Policies section of each Fund.
CASH EQUIVALENTS. Each Fund may invest in cash equivalents, which are
short-term obligations issued or guaranteed as to interest and principal by the
U.S. Government or any instrumentality thereof (including repurchase agreements
collateralized by such securities); and deposit type obligations of domestic
and foreign banks or the equivalent thereof. Instruments which are not rated
may also be purchased by a Fund provided such instruments are determined to be
of comparable quality by the Sub-Adviser under the supervision of the Adviser
and the Board of Trustees to those instruments in which the Fund may invest.
REPURCHASE AGREEMENTS. Each Fund may engage in repurchase agreement
transactions. A repurchase agreement is a transaction by which a Fund purchases
a security and simultaneously commits to resell that security to the seller (a
bank or securities dealer) at an agreed upon price at a later date. Each Fund
will limit repurchase agreements to those securities dealers who are deemed
credit worthy pursuant to guidelines adopted by the Board of Trustees. The
Sub-Advisers will follow procedures to assure that all repurchase agreements
are always fully collateralized as to principal and interest. If the other
party to the repurchase agreement defaults or becomes insolvent or declares
bankruptcy, a Fund may encounter difficulties and incur costs and possibly a
loss upon disposition of the underlying securities.
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LENDING OF PORTFOLIO SECURITIES. Each Fund may from time to time lend
securities on a short-term basis to banks, brokers and dealers (but not
individuals) and receive as collateral, cash, bank letters of credit or
securities issued by the U.S. Government or its agencies or instrumentalities
(or any combination thereof), which collateral will be required to be
maintained at all times in an amount equal to at least 100% of the current
value of the loaned securities plus accrued interest. The value of the
securities loaned cannot exceed 25% of each Fund's total assets. Loan
arrangements made by a Fund will require the borrower, after notice, to
redeliver the securities within the normal settlement time of three (3)
business days. In connection with a loan of securities, a Fund may pay
reasonable finders, custodian and administrative fees. Loans of securities
involve risks of delay in receiving additional collateral or in recovering the
securities lent or even loss of rights in the collateral in the event of
insolvency of the borrower of the securities. Each Statement of Additional
Information further explains each Fund's securities lending policies.
U.S. TREASURY SECURITIES. Each Fund may invest in securities issued,
guaranteed or collateralized by U.S. Treasury obligations, including Bills,
Notes, Bonds, all of which are backed by the full faith and credit of the
United States.
SECURITIES OF U.S. GOVERNMENT AGENCIES AND INSTRUMENTALITIES. Each Fund may
invest in both adjustable rate and fixed rate securities issued, guaranteed, or
collateralized by agencies or instrumentalities of the U.S. Government,
including, but not limited to, Government National Mortgage Association (GNMA),
Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage
Corporation (FHLMC) securities. Obligations of GNMA, the Farmers Home
Administration and the Export-Import Bank are backed by the full faith and
credit of the United States. In the case of securities not backed by the full
faith and credit of the United States, the Funds must look principally to the
agency issuing or guaranteeing the obligation for ultimate repayment. Such
securities include obligations issued by the Student Loan Marketing Association
(SLMA), FNMA and FHLMC, each of which may borrow from the U.S. Treasury to meet
its obligations although the U.S. Treasury is under no obligation to lend to
such entities. GNMA, FNMA and FHLMC may also issue collateralized mortgage
obligations.
Each Fund may also invest in component parts of these securities or instruments
collateralized thereby, namely either the corpus (principal) of such
obligations (principal only or "PO" class) or one of the interest payments
scheduled to be paid on such obligations (interest only or "IO" class). These
obligations may take the form of (i) obligations from which the interest
coupons have been stripped; (ii) the interest coupons that are stripped; (iii)
book-entries at a Federal Reserve member bank representing ownership of
obligation components; or (iv) receipts evidencing the component parts (corpus
or coupons) of U.S. Government obligations that have not actually been
stripped. Such receipts evidence ownership of component parts of U.S.
Government obligations (corpus or coupons) purchased by a third party
(typically an investment banking firm) and held on behalf of the third party in
physical or book-entry form by a major commercial bank or trust company
pursuant to a custody agreement with the third party. A "stripped security"
issued by an investment banking firm or other private organization is not
considered to be a U.S. Government security.
CONVERTIBLE SECURITIES. The Reserve Growth and Income and Reserve
International Equity Funds may invest in convertible securities. Prior to
conversion, convertible securities have the same general characteristics as
non-convertible debt securities, which provide a stable stream of income with
generally higher yields than those of equity securities of the same or similar
issuers. The price of a convertible security will normally vary with changes in
the price of the underlying stock, although the higher yield tends to make the
convertible security less volatile than the underlying common stock. As with
debt securities, the market value of convertible securities tends to decline as
interest rates increase, and increase as interest rates decline. While
convertible securities generally offer lower interest or dividend yields than
non-convertible debt securities of similar quality, they enable investors to
benefit from increases in the market price of the underlying common stock. The
Funds will invest in such securities that are investment grade, rated Baa/BBB
or higher. These bonds have speculative characteristics and share some of the
same characteristics of lower-rated securities. For example, sustained periods
of deteriorating economic conditions or of rising interest rates are more
likely to lead to a weakening in the issuer's capacity to pay interest and
repay principal than would be the case of higher-rated securities. If a
downgrade below the minimum
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<PAGE> 16
rating occurs, the Funds will sell the securities. Foreign convertible
securities, which may be held by the Reserve International Equity Fund, are not
rated.
RIGHTS AND WARRANTS. The Reserve International Equity Fund will invest in
rights or warrants only if the underlying equity securities themselves are
deemed appropriate by the Sub-Adviser for inclusion in the Fund's portfolio.
Rights and warrants may be considered more speculative than certain other types
of investments in that they do not entitle a holder to dividends or voting
rights with respect to the underlying securities, nor do they represent any
rights to the assets of the issuing company. The value of a right or warrant
does not necessarily change with the value of the underlying security, although
it may decline because of a decrease in the value of the underlying security,
the passage of time or a change in perception as to the potential of the
underlying security, or any combination thereof. If the market price of the
underlying security is below the exercise price set forth in the warrant on the
expiration date, the warrant will expire worthless. Moreover, a right or
warrant ceases to have value if it is not exercised prior to the expiration
date.
DEPOSITORY RECEIPTS. The Reserve International Equity Fund may invest in
depository receipts which may not necessarily be denominated in the same
currency as the underlying securities into which they may be converted. In
addition, the issuers of the stock of unsponsored depository receipts are not
obligated to disclose material information in the United States and, therefore,
there may not be a correlation between such information and the market value of
the depository receipts. ADRs are depository receipts typically issued by a
U.S. bank or trust company that evidence ownership of underlying securities
issued by a foreign corporation. Global Depository Receipts ("GDRs") and other
types of depository receipts are typically issued by foreign banks or trust
companies and evidence ownership of underlying securities issued by either a
foreign or a U.S. company. Generally, depository receipts in registered form
are designed for use in the U.S. securities markets, and depository receipts in
bearer form are designed for use in foreign securities markets. Investments of
the Fund in ADRs are deemed to be investments in securities issued by U.S.
issuers and those in GDRs and other types of depository receipts are deemed to
be investments in the underlying foreign securities.
The Fund may also invest in securities of supernational entities such as the
World Bank or the European Investment Bank.
ILLIQUID SECURITIES. The Funds may hold up to 15% or the value of their net
assets in securities as to which a liquid trading market does not exist and
therefore may not be able to readily sell such securities. Such securities
include securities that are not readily marketable, such as certain securities
that are subject to legal or contractual restrictions on resales, repurchase
agreements providing for settlement in more than seven (7) days after notice,
and certain asset-backed and mortgage-backed securities. The Fund will treat
U.S. Government POs and IOs as illiquid securities so long as the staff of the
Securities and Exchange Commission maintains its position that such securities
are illiquid. Restricted securities eligible for resale pursuant to Rule 144A
under the Securities Act of 1933 that have a readily available market are not
considered illiquid for purposes of this limitation if they meet guidelines
established by the Board of Trustees.
Purchased over-the-counter ("OTC") options and the assets used as cover for
written OTC options will be treated as illiquid securities so long as the staff
of the Securities and Exchange Commission maintains its position that such
securities are illiquid. However, the Fund may treat a certain portion of the
securities it uses as cover for written OTC options as liquid provided it
follows a specified procedure. The Fund may sell OTC options only to qualified
dealers who agree that the Fund may repurchase any options it writes for a
maximum price to be calculated by a predetermined formula. In such cases, OTC
options would be considered liquid only to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the option.
The Sub-Advisers will monitor the liquidity of such restricted securities under
the supervision of the Adviser and Board of Trustees.
Many of the foreign countries in which the Reserve International Equity Fund
invests do not have a Securities Act similar to the United States requiring an
issuer to register the sale of securities with a governmental agency or
imposing legal restrictions on resales of securities, either as to length of
time the securities may be held or manner of resale. However, there may be
contractual restrictions on resale of securities.
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PUT AND CALL OPTIONS ON SPECIFIC SECURITIES. The Reserve Emerging Growth,
Reserve Growth and Income, Reserve Informed Investors Growth and Reserve
Mid-Cap Growth Funds may invest up to 5% of the value of their total assets,
represented by the premium paid, in the purchase of put and call options on
specific securities. Such options may be traded on national securities
exchanges or over-the-counter. The Funds may write and sell covered put option
contracts to the extent of 25% of the value of its total assets at the time
such option contracts are written.
There is no limitation on the amount of call options a Funds may write. A call
option gives the purchaser of the option, in exchange for the premium paid, the
right to buy the security subject to the option at the exercise price at any
time prior to expiration of the option. The writer of a call option, in return
for the premium, has the obligation, upon the exercise of the option, to
deliver, depending upon the terms of the options contract, the underlying
securities or a specified amount of cash to the purchaser upon receipt of the
exercise price. A put option gives the purchaser, in return for a premium, the
right to sell the security subject to the option at the exercise price at any
time prior to the expiration of the option. The writer of a put option, in
return for the premium, has the obligation, upon exercise of the option, to
acquire the security underlying the option at the exercise price. If a call
written by the Funds is exercised, the Funds forgo any possible profit from an
increase in the market price of the underlying security or other asset over the
exercise price plus the premium paid. In writing puts, there is a risk that the
Funds may be required to take delivery of the underlying security or other
asset at a disadvantageous price. Also, an option purchased by the Funds may
expire worthless, in which case the Funds would lose the premium paid therefor.
OTC options differ from exchange traded options in several respects. They are
transacted directly with dealers and not with a clearing corporation, and there
is a risk of non-performance by the dealer as a result of insolvency of the
dealer or otherwise, in which event the Funds may experience material losses.
However, in writing options the premium is paid in advance by the dealer. OTC
options are available for a greater variety of securities and other assets, and
a wider range of expiration dates and exercise prices, than for exchange traded
options.
The Funds will only write covered options. An option is covered if, so long as
a Fund is obligated under the option owns an offsetting position in the
underlying security or maintains cash, U.S. Government securities or other
liquid high-grade debt obligations with a market value sufficient to cover its
obligations in a segregated account with its Custodian bank.
The successful use of options by a Fund is subject to its Sub-Adviser's ability
to correctly predict movements in the market. If the Sub-Adviser is not
successful in employing options in managing a Fund's investments, performance
will be worse than if the Fund did not make such investments. In addition, a
Fund would pay commissions and other costs in connection with such investments,
which may increase its expenses and reduce its return.
STOCK INDEX OPTIONS. The Growth and Income and Reserve Mid-Cap Growth Fund may
purchase and write put and call options on stock indexes listed on national
securities exchanges or traded in the over-the-counter market as an investment
vehicle for the purpose of realizing its investment objective or for the
purpose of hedging its portfolio. The Fund may invest up to 5% of the value of
its total assets, represented by the price paid, in the purchase of put and
call options on stock indexes. A stock index fluctuates with changes in the
market values of the stocks included in the index. The Funds may write put
options on stock indexes to the extent of 25% of the value of its total assets
at the time such options are written.
The effectiveness of purchasing or writing stock index options will depend upon
the extent to which price movements in the Funds' underlying investment
securities correlate with the price movements of the stock index selected.
Because the value of an index option depends upon movements in the level of the
index rather than the price of an individual stock, their successful use is
dependent upon the Sub-Adviser's ability to correctly predict movements in the
direction of the stock market generally or of a particular industry. This
requires different skills and techniques than those used in predicting changes
in the price of individual stocks.
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When a Fund writes an option on a stock index, it will place in a segregated
account with its custodian, cash or liquid securities in an amount at least
equal to the market value of the underlying stock index and will maintain the
account while the option is open or will otherwise cover the transaction. Index
options also involve risks similar to those risks relating to put and call
options described previously.
FUTURES TRANSACTIONS IN GENERAL. The Reserve Growth and Income Fund is not a
commodity pool but may engage in futures and options on futures transactions as
described below for the purpose of hedging against changes in values of the
Fund's investment securities. Futures transactions require different skills
and techniques than those used in predicting changes in the price of individual
investment securities.
The Fund's ability to invest in futures and options thereon is limited to bona
fide hedging pursuant to regulations promulgated by the Commodity Futures
Trading Commission. In addition, the Fund may not engage in such activities if
the sum of the amount of initial margin deposits and premiums paid for
unexpired options on futures contracts will exceed 5% of the value of the
Fund's total assets, after taking into account unrealized profits and
unrealized losses on such contracts it has entered into; provided, however,
that in the case of an option that is in-the-money at the time of purchase, the
in-the-money amount is excluded in calculating the 5%.
Initially, the Fund will be required to deposit with the broker an amount of
cash or cash equivalents equal to approximately 5% of the contract amount.
This amount is known as "initial margin" and is in the nature of a deposit on
the contract which is returned to the Fund upon termination of the futures
contract, assuming all obligations thereunder have been satisfied. Subsequent
payments, known as "variation margin," to and from the broker, are made daily
as the price of the index or securities underlying the futures contract
fluctuates, making the long and short positions in the futures contract more or
less valuable, a process known as "marking-to-market". At any time prior to
the expiration of a futures contract, the Fund may elect to close the position
by taking an opposite position at the then prevailing price, which will
terminate the Fund's existing position in the contract.
Although the Fund intends to purchase or sell futures contracts only if there
is an active market for such contracts, no assurance can be given that a liquid
market will exist for the contracts at any particular time. Most futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a
price beyond that limit. Futures contract prices could move to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and possibly subjecting some
traders therein to substantial losses. If the Fund cannot close a futures
position in anticipation of adverse price movements, the Fund will be required
to make daily cash payments of variation margin. In such circumstances, an
increase in the value of the investment securities being hedged, if any, may
offset partially or completely losses on the futures contract. However, no
assurance can be given that the price of the securities being hedged will
correlate with the price movements in a futures contract and thus provide an
offset to losses on the futures contract.
In addition, due to the risk of an imperfect correlation between the Fund's
investment securities that are subject to the hedging transaction and the
futures contract being used as a hedging device, it is possible that the hedge
will not be fully effective, in that losses on the investment securities may be
in excess of gains on the futures contract, or losses on the futures contract
may be in excess of the gains on the investment securities that were the
subject of the hedge. If the Sub-Adviser is not successful in employing
futures contracts and options thereon as hedging transactions, the Fund's
performance will be worse than if the Fund did not make such investments. In
futures contracts based on indexes, the risk of improper correlation increases
as the composition of the Fund's investment securities varies from the
composition of the index. In an effort to compensate for the imperfect
correlation of movements in the price of the securities being hedged and
movements in the price of the futures contracts, the Fund may buy or sell
futures contracts in a greater or lesser dollar amount than the dollar amount
of the securities being hedged if the historical volatility of the futures
contract has been lesser or greater than that of the underlying securities.
Such "over hedging" or "under hedging" may adversely affect the net asset value
of the Fund if market movements are not as anticipated when the hedge was
established.
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The Fund will not purchase or sell futures contracts or related options for
which the aggregate initial margin and initial premiums exceed 5% of the value
of the Fund's total assets. In order to prevent leverage in connection with
the purchase of futures contracts or options thereon by the Fund, an amount of
cash, U.S. Government securities or other liquid high-grade debt obligations
with a daily market value equal to the value of the obligation under the
futures contract or option thereon (less any related margin deposits) will be
maintained in a segregated account at the Custodian Bank. Further, the
Internal Revenue Code's requirements for qualification as a regulated
investment company may also limit the extent to which the Fund can engage in
futures transactions. See "Distributions and Taxes" in the Statement of
Additional Information.
Participation in the options or futures markets involves investment risks and
transaction costs to which the Fund would not be subject absent the use of
these strategies. If the Sub-Adviser's predictions of movements in the
direction of the securities and interest rate markets are inaccurate, the
adverse consequences to the Fund may leave the Fund in a worse position than if
such strategies were not used. Risks inherent in the use of options and
futures contracts and options on futures contracts include (1) dependence on
the Investment Adviser's ability to predict correctly movements in the
direction of interest rates, securities prices and markets; (2) imperfect
correlation between the price of futures contracts and options thereon and
movements in the prices of the securities being hedged; (3) the fact that
skills needed to use these strategies are different from those needed to select
portfolio securities; (4) the possible absences of a liquid secondary market
for any particular instrument at any time; (5) the possible need to defer
closing out certain hedged positions to avoid adverse consequences; and (6) the
possible inability of the Fund to purchase or sell a portfolio security at a
time that otherwise would be favorable to do so, or the possible need for the
Fund to sell a portfolio security at a disadvantageous time, due to the need
for the Fund to maintain "cover" or to segregate securities in connection with
hedging transactions. See "Distributions and Taxes" in the Statement of
Additional Information.
STOCK INDEX FUTURES. The Reserve Growth and Income Fund may purchase and sell
stock index futures. A stock index future obligates the seller to deliver (and
the purchaser to take) an amount of cash equal to a specific dollar amount
times the difference between the value of a specific stock index at the close
of the last trading day of the contract and the price at which the agreement is
made. No physical delivery of the underlying stocks in the index is made.
There can be no assurance of the successful use of stock index futures as a
hedging device. In addition to the possibility that there may be an imperfect
correlation between movements in the stock index future and the investment
securities being hedged, the price of stock index futures may not correlate
perfectly with the movement in the stock index because of various market
distortions. The risk of imperfect correlation increases as the composition of
the Fund's investment securities differs from the securities contained in the
applicable stock index. Although all participants in the futures market are
subject to margin deposit and maintenance requirements, certain investors may
close futures contracts through offsetting transactions rather than meeting
additional margin deposit requirements thus distorting the normal relationship
between the index and futures markets. In addition, for speculators the
deposit requirements in the futures market are less burdensome than margin
requirements in the securities market. Therefore, increased participation by
speculators in the futures market may also cause temporary price distortions.
As a result of the foregoing, a correct forecast for general market trends by
the Sub-Adviser still may not result in a successful hedging transaction.
The successful use of stock index futures by the Fund is also subject to the
Sub-Adviser's ability to correctly predict movements in the market. If, for
example, the Fund has hedged against the possibility of a decline in the market
adversely affecting its investment securities and stock prices increase
instead, the Fund will lose part or all of the benefit of the increased value
of the stocks it has hedged due to the offsetting losses in its futures
positions. In addition, in such situations, if the Fund has insufficient cash
to meet its daily variation margin requirements, it may have to sell its
investment securities. Such sales may be, but will not necessarily be, at
increased prices which reflect the rising market. The Fund may have to sell
investment securities at a time when it is not advantageous to do so.
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INVESTMENT IN FOREIGN SECURITIES. The Reserve North American Growth and
Reserve International Equity Funds may purchase foreign equity and debt
securities, including foreign government securities. The Reserve North
American Growth Fund will not invest more than 25%, and the Reserve
International Equity Fund will not invest more than 10% of its total assets in
the securities of issuers of any single foreign country. Foreign securities
markets generally are not as developed or efficient as those in the United
States and securities traded there are less liquid and more volatile than those
traded in the U.S.
The Funds may be subject to additional risks because stock certificates and
other evidence of ownership of foreign issuers may be held outside the United
States. Such additional risks include: adverse political and economic
developments; nationalization of foreign issuers and possible adoption of
government restrictions which might affect the payment of principal, interest
and dividends to U.S. investors. In addition, there may be less publicly
available information about a foreign issuer, since they are generally not
subject to the timely accounting and financial reporting disclosure standards
of U.S. companies.
In making the allocation of assets in foreign markets, the Sub-Advisers will
consider such factors as prospects for relative economic growth, inflation,
interest rates, government policies influencing business conditions, the range
of individual investment opportunities available, and other pertinent
financial, tax, social, political and national factors, all in relation to the
prevailing prices of securities in each country. Nearly all foreign securities
in which the Reserve International Equity Fund may invest will be traded on
foreign stock exchanges or issued by foreign governments.
The Reserve International Equity Fund will invest in developing countries,
which involves exposure to economic structures that are typically less diverse
and mature than in the United States, and to political systems which are less
stable. A developing country may be considered to be one which is in the
initial stages of its conversion from an agrarian insular society to an
international manufacturing participant.
FOREIGN CURRENCY TRANSACTIONS. The Reserve International Equity and Reserve
North American Growth Funds may engage in foreign currency transactions in
connection with its investment in foreign securities but will not speculate in
foreign currency exchange. The value of the assets of a Fund as measured in
U.S. dollars may be affected favorably or unfavorably by changes in foreign
currency exchange rates and exchange control regulations, and a Fund may incur
costs in connection with conversions between various currencies. A Fund will
conduct its foreign currency exchange transactions either on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange market
or through forward contracts to purchase or sell foreign currencies. A forward
foreign currency exchange contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are traded directly between currency traders
(usually large commercial banks) and their customers.
When the Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may want to establish the U.S. dollar
cost or proceeds, as the case may be. By entering into a forward contract in
U.S. dollars for the purchase or sale of the amount of foreign currency
involved in an underlying security transaction, the Fund is able to protect
itself from possible loss between trade and settlement dates resulting from an
adverse change in the relationship between the U.S. dollar and such foreign
currency. However, this tends to limit potential gains that might result from a
positive change in such currency relationships. The Fund may also hedge its
foreign currency exchange rate risk by engaging in foreign currency financial
futures and options transactions.
When the Fund's Sub-Adviser believes that the currency of a particular foreign
country may suffer a substantial decline against the U.S. dollar, it may enter
into a forward contract to sell an amount of foreign currency approximating the
value of some or all of the Fund's securities denominated in such foreign
currency. In this situation the Fund may, in the alternative, enter into a
forward contract to sell a different foreign currency for a fixed U.S. dollar
amount where the Fund's Sub-Adviser believes that the U.S. dollar value of the
currency to be sold pursuant to the forward contract will fall whenever there
is a decline in the U.S. dollar value of the currency in
18
<PAGE> 21
which portfolio securities of the Fund are denominated ("cross-hedge"). The
forecasting of short-term currency market movements is extremely difficult and
whether such a short-term hedging strategy will be successful is highly
uncertain.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of a contract. Accordingly, it may be
necessary for the Fund to purchase additional currency on the spot market (and
bear the expense of such purchase) if the market value of the security is less
than the amount of foreign currency the Fund is obligated to deliver when a
decision is made to sell the security and make delivery of the foreign currency
in settlement of a forward contract. Conversely, it may be necessary to sell on
the spot market some of the foreign currency received upon the sale of the
portfolio security if its market value exceeds the amount of foreign currency
the Fund is obligated to deliver.
The Fund will not enter into forward contracts or maintain a net exposure in
such contracts where the Fund would be obligated to deliver an amount of
foreign currency in excess of the value of the Fund's securities or other
assets (a) denominated in that currency or (b) in the case of a "cross-hedge,"
denominated in a currency or currencies that the Fund's Sub-Adviser believes
will have price movements that tend to correlate closely with that currency.
The Fund's Custodian bank segregates cash or liquid high-grade debt securities
in an amount not less than the value of the Fund's total assets committed to
forward foreign currency exchange contracts entered into for the purchase of a
foreign currency. If the value of the securities segregated declines,
additional cash or securities are added so that the segregated amount is not
less than the amount of the Fund's commitments with respect to such contracts.
There is no limitation as to the percentage of the Fund's assets that may be
committed to such foreign currency exchange contracts. The Fund generally will
not enter into a forward contract with a term longer than one year.
DEFENSIVE POSITION. For temporary defensive purposes, each Fund may invest in
certain types of short-term, liquid, high-grade debt securities. These
securities may include U.S. Government securities, qualifying bank deposits,
money market instruments, and other types of short-term debt securities
including notes and bonds. For Funds that may invest in foreign countries, such
securities may also include short-term, foreign-currency denominated securities
issued by foreign governmental entities, companies and supranational
organizations. For a complete description of the types of securities each Fund
may invest in while in a temporary defensive position, please see such Fund's
Statement of Additional Information.
NON-DIVERSIFIED STATUS. As a non-diversified mutual fund, each Fund is
permitted to have all its assets invested in a limited number of issuers. As a
result, an investment in a Fund could entail greater risk than a mutual fund
with a policy of diversification.
RISK CONSIDERATIONS
Investment in certain Funds involves the special risk considerations described
below. These risks may be heightened when investing in emerging markets.
CURRENCY CONSIDERATIONS. Some of the assets of the Reserve International
Equity and Reserve North American Growth Funds will be invested in securities
denominated in foreign currencies, and a corresponding portion of the Fund's
revenues will be received in such currencies. Therefore, the dollar equivalent
of their net assets, distributions and income will be adversely affected by
reductions in the value of certain foreign currencies relative to the U.S.
dollar. If the value of the foreign currencies in which a Fund receives its
income falls relative to the U.S. dollar between receipt of the income and the
making of Fund distributions, the Fund may be required to liquidate securities
in order to make distributions if it has insufficient cash in U.S. dollars to
meet distribution requirements that the Fund must satisfy to qualify as a
regulated investment company for federal income tax purposes. Similarly, if an
exchange rate declines between the time a Fund incurs expenses in U.S. dollars
and the time cash expenses are paid, the amount of the currency required to be
converted into U.S. dollars in order to pay expenses in U.S. dollars, could be
greater than the equivalent amount of such expenses in the currency at the time
they were incurred. In light of these risks, a Fund may engage in certain
currency hedging transactions, which themselves involve certain special risks.
See " Investment Techniques and Investments."
19
<PAGE> 22
FOREIGN INVESTMENT. The securities markets of many foreign countries are
relatively small, with the majority of market capitalization and trading volume
concentrated in a limited number of companies representing a small number of
industries. Consequently, the Funds whose investment portfolios include such
securities may experience greater price volatility and significantly lower
liquidity than a portfolio invested solely in equity securities of U.S.
companies. These markets may be subject to greater influence by adverse events
affecting the general market, and by large investors trading significant blocks
of securities, than is usual in the U.S. Securities settlements may in some
instances be subject to delays and related administrative uncertainties. These
problems are particularly severe in India, where settlement is through physical
delivery and where a severe shortage of vault capacity exists among custodial
banks. Efforts are being undertaken to alleviate the shortage. Certain foreign
countries require governmental approval prior to investments by foreign persons
or limit investment by foreign persons to only a specified percentage of an
issuer's outstanding securities or a specific class of securities which may
have less advantageous terms (including price) than securities of the company
available for purchase by nationals. These restrictions or controls may at
times limit or preclude investment in certain securities and may increase the
costs and expenses of a Fund. In addition, the repatriation of investment
income, capital or the proceeds of sales of securities from certain of the
countries is controlled under regulations, including, in some cases, the need
for certain advance government notification or authority, and if a
deterioration occurs in a country's balance of payments, the country could
impose temporary restrictions on foreign capital remittances.
A Fund could be adversely affected by delays in, or a refusal to grant, any
required governmental approval for repatriation, as well as by the application
to it of other restrictions on investments. Investing in local markets may
require a Fund to adopt special procedures, which may involve additional costs
to a Fund. The liquidity of a Fund's investments in any country in which any of
these factors exist could be affected and the Sub-Adviser will monitor the
effect of any such factor or factors on a Fund's investments. Furthermore,
transaction costs including brokerage commissions for transactions both on and
off the securities exchanges in many foreign countries are generally higher
than in the U.S.
Issuers of securities in foreign jurisdictions are generally not subject to the
same degree of regulation as are U.S. issuers with respect to such matters as
insider trading rules, restrictions on market manipulation, shareholder proxy
requirements and timely disclosure of information. The reporting, accounting
and auditing standards of foreign countries may differ, in some cases
significantly, from U.S. standards in important respects and less information
may be available to investors than is available about U.S. issuers.
The economies of individual foreign countries may differ favorably or
unfavorably from the U.S. economy in such respects as to growth of the gross
domestic product or gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Nationalization, expropriation or confiscator taxation, currency blockage,
political changes, government regulation, political or social instability or
diplomatic developments could affect adversely the economy of a foreign country
or the Fund's investments in such country. In the event of expropriation,
nationalization or other confiscation, a Fund could lose its entire investment
in the country involved. In addition, laws in foreign countries governing
business organizations, bankruptcy and insolvency may provide less protection
to security holders such as the Fund than that provided by U.S. laws.
INVESTMENT IN CANADIAN ISSUERS. The Reserve North American Growth and Reserve
International Equity Funds may invest in the securities of Canadian issuers.
Canada consists of a federation of ten provinces and two federal territories
(which generally fall under federal authority) with a constitutional division
of powers between the federal and provincial governments. The Parliament of
Canada has jurisdiction over all areas not assigned exclusively to the
provincial legislatures, and has jurisdiction over such matters as the federal
public debt and property, the regulation of trade and commerce, currency and
coinage, banks and banking, national defense, the postal services, navigation
and shipping, and unemployment insurance.
The Canadian economy is based on the free enterprise system with business
organizations ranging from small owner-operated businesses to large
multinational corporations. Manufacturing and resource industries are large
contributors to the country's economic output, but as in many other highly
developed countries, there has been a
20
<PAGE> 23
gradual shift from a largely goods-producing economy to a predominantly
service-based one. Agriculture and other primary production play a small but
key role in the economy. Canada is also an exporter of energy to the United
States in the form of natural gas (of which Canada has substantial reserves)
and hydroelectric power, and has significant mineral resources. The Canadian
economy had experienced little or no growth over the past several years, and
the rate of growth of Canada's gross domestic product (on an inflation-adjusted
basis) has declined.
Canadian dollars are fully exchangeable into U.S. dollars without foreign
exchange controls or other legal restriction. Since the major developed country
currencies were permitted to float freely against one another, the range of
fluctuation in the U.S. dollar/Canadian dollar exchange rate has been narrower
than the range of fluctuation between the U.S. dollar and most major
currencies. Recently, however, Canada has experienced a weakening of its
currency. Through January 31, 1995, the Canadian dollar decreased in value
compared to the U.S. dollar by approximately 5% from September 1994. The range
of fluctuation that occurred in the past is not necessarily indicative of the
range of fluctuation that will occur in the future. Future rates of exchange
cannot be predicted.
INVESTMENT IN MEXICAN ISSUERS. The Reserve North American Growth and Reserve
International Equity Funds may invest in the securities of Mexican issuers. The
United Mexican States ("Mexico") is a nation formed by 31 states and a Federal
District (Mexico City). The Political Constitution of Mexico, which took effect
on May 1, 1917, established Mexico as a Federal Republic and provides for the
separation of executive, legislative and judicial branches. The President and
the members of the General Congress are elected by popular vote.
While in recent years the Mexican economy has experienced improvement in a
number of areas, including five consecutive years of growth in gross domestic
product and a substantial reduction in the rate of inflation and in public
sector financial deficit, beginning in 1994, Mexico has experienced an economic
crisis that led to the devaluation of the peso in December 1994. Much of the
past improvement in the Mexican economy has been attributable to a series of
economic policy initiatives instituted by the Mexican government over the past
decade, which seek to modernize and reform the Mexican economy, control
inflation, reduce the financial deficit, increase public revenues through the
reform of the tax system, establish a competitive and stable currency exchange
rate, liberalize trade restrictions and increase investment and productivity,
while reducing the government's role in the economy. In this regard, the
Mexican government has been proceeding with a program for privatizing certain
state-owned enterprises, developing and modernizing the securities markets,
increasing investment in the private sector and permitting increased levels of
foreign investment. The recent adoption by Canada, the United States and Mexico
of the North American Free Trade Agreement ("NAFTA") could also contribute to
the growth of the Mexican economy. Relatively high rates of interest,
inflation, unemployment and, most recently, the economic crisis that led to the
devaluation of the peso beginning in December 1994 continue to affect the
Mexican economy adversely. Mexico is currently the second largest debtor nation
(among developing countries) to commercial banks and foreign governments. The
successful implementation of the economic policy initiatives and the growth of
the Mexican economy involve significant structural changes to the Mexican
economy and will necessitate continued economic and fiscal discipline. In
addition, as a condition to receiving assistance from the United States, other
countries and certain international agencies to stabilize the Mexican economy,
the Mexican government has agreed to adhere to a program of strict economic
reform. An important aspect of Mexico's economic policy is the ability of the
government to be successful in its continuing efforts to control its financial
deficit, finance its current account deficit, further reduce inflation and
stabilize the Mexican peso. Mexico's economy may also be influenced by
international economic conditions, particularly those in the United States, and
by world prices for oil and other commodities. There is no assurance that
Mexico's economic policy initiatives will be successful or that succeeding
administrations will continue these initiatives.
In August 1976, the Mexican government established a policy of allowing the
Mexican peso to float against the U.S. dollar and other currencies. Under this
policy, the value of the Mexican Peso consistently declined against the U.S.
dollar. Under economic policy initiatives implemented since December 1987, the
Mexican government introduced a series of schedules allowing for the gradual
devaluation of the Mexican Peso against the U.S. dollar. These gradual
devaluations continued until December 1994. On December 20, 1994, the Mexican
government announced a new policy that would allow a more substantial yet still
controlled devaluation of the Mexican peso.
21
<PAGE> 24
On December 22, 1994, the Mexican government announced that it would not
continue with the policy announced two days earlier and would instead permit
the Peso to float against other currencies, resulting in a continued decline
against the U.S. dollar.
In 1982, Mexico imposed strict foreign exchange controls which shortly
thereafter were relaxed and were eliminated in 1991. There is no assurance that
future regulatory actions in Mexico would not affect the Fund's ability to
obtain U.S. dollars in exchange for Mexican pesos.
U.S. AND FOREIGN TAXES. Foreign taxes paid by a Fund may be creditable or
deductible by U.S. shareholders for U.S. income tax purposes. No assurance can
be given that applicable tax laws and interpretations will not change in the
future. Moreover, non-U.S. investors may not be able to credit or deduct such
foreign taxes. Investors should review carefully the information discussed
under the heading "Taxes" and "Foreign Taxes" and should discuss with their tax
advisers the specific tax consequences of investing in a Fund.
FIXED-INCOME SECURITIES. The value of the Fund's shares will fluctuate with
the value of its investments. The value of fixed-income securities will decline
in value as interest rates rise and increase in value as interest rates
decline.
MANAGEMENT OF THE FUNDS
RESERVE PRIVATE EQUITY SERIES--ADVISER. The Funds' Investment Adviser is
Reserve Management Company, Inc.("RMCI" or "Adviser"), 14 Locust Place,
Manhasset, N.Y. 11030, which manages The Reserve Funds with over $3 billion in
assets. The Adviser supervises a continuous investment program for the Funds,
evaluates and monitors each of the Sub-Advisers' performances, investment
programs, and compliance with applicable laws and regulations, and recommends
to the Board of Trustees whether the Sub-Adviser's contract should be continued
or modified. The Adviser is also responsible for the day-to-day administration
of the Fund's activities. Under the Investment Management Agreement, the
Adviser pays all employee costs, costs of the Sub-Advisers and other ordinary
operating expenses of each Fund. Excluded from ordinary operating expenses are
interest, taxes, brokerage fees, extraordinary legal and accounting fees and
expenses, payments made pursuant to the Trust's Distribution Plan and the fees
of the disinterested Trustees.
For its services under the Investment Management Agreement, the Adviser is paid
a comprehensive fee of 1.50% per annum of the average daily net assets of each
Fund, except for the Reserve International Equity Fund, for which the Adviser
is paid a comprehensive fee of 1.75%.
SUB-ADVISERS. The Investment Management Agreement and Sub-Advisory Agreement
provide that the Adviser and each Sub-Adviser, respectively, shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
a Fund in connection with the matters to which the agreements relate, except a
loss resulting from the willful misfeasance, bad faith or gross negligence on
the part of the Adviser or Sub-Adviser in the performance of their duties or
from reckless disregard by them of their duties under each respective
agreement.
The Adviser and Trust have retained the following Sub-Advisers: Trainer,
Wortham & Company, Inc., 845 Third Avenue, New York, NY 10022 for Reserve Blue
Chip Growth Fund; Roanoke Asset Management, 529 Fifth Avenue, New York, NY
10017, for Reserve Emerging Growth Fund; Gerbino & Company, 9595 Wilshire
Boulevard, Suite 200, Beverly Hills, CA 90212, for Reserve Growth and Income
Fund; T.H. Fitzgerald & Co., 180 Church Street, Naugatuck, CT 06770, for
Reserve Informed Investors Growth Fund; Pinnacle Associates, Ltd., 666 Fifth
Avenue, New York, NY 10103, for Reserve International Equity Fund; Siphron
Capital Management, 280 S. Beverly Drive, Beverly Hills, CA 90212, for the
Reserve Large-Cap Value Equity Fund; Cambridge Equity Advisors, 5214 Maryland
Way, Suite 309, Brentwood, TN 37027, for Reserve Mid-Cap Growth Fund; and
Southern Capital Advisors, 50 Front Street, Memphis, TN 38103, for Reserve
North American Growth Fund. None of these organizations have previously served
as either Adviser or Sub-Adviser to a registered investment company.
22
<PAGE> 25
TRAINER, WORTHAM & COMPANY, INC. was formed in 1924 and manages over $1 billion
for individuals, family trusts and employee benefit plans and has over seventy
years experience using the investment policies discussed herein. Charles V.
Moore, the Fund's portfolio manager has been the President of the Sub-Adviser
since 1978 years and is responsible for the day-to-day investment decisions of
the Fund.
ROANOKE ASSET MANAGEMENT was formed in 1978 and currently manages over $200
million for high net worth individuals, foundations, endowments, corporations
and municipalities and has over fifteen years experience in using the
investment policies discussed herein. Edwin G. Vroom, President, Brian J.
O'Connor, Executive Vice President, and Adele S. Weisman, Senior Vice
President, serve as the Fund's portfolio managers, and have worked together as
a team for over twenty years.
GERBINO & COMPANY was formed in 1977 and currently manages $60 million for high
net worth individuals, pensions, and trusts. The principals of the company
have a combined experience of over fifty years in using the investment policies
discussed herein. Kenneth J. Gerbino has been an independent money manager for
over twenty years and is responsible for macroeconomic trends and investment
strategies for the Fund. Raymond Baker has over thirty years of investment
experience and is Director of Investments at Gerbino & Company, and will be
responsible for the day-to-day investment recommendations and decisions for the
Fund.
T.H. FITZGERALD & CO. was formed in 1959 and currently manages over $200
million for employee benefit plans, bank trust departments, an insurance
company and a public authority and has over ten years' experience in using the
investment policies discussed herein. Thomas H. Fitzgerald, Jr., who founded
his firm in 1959, serves as the Fund's portfolio manager and is responsible for
the day-to-day investment decisions.
PINNACLE ASSOCIATES, LTD. was formed in 1984 and currently manages over $400
million for individuals, family trusts and employee benefit plans. Nicholas
Reitenbach is Director of International Investments, Partner of Pinnacle
Associates, Ltd., and serves as the Fund's primary portfolio manager. Mr.
Reitenbach has over thirty years' experience in utilizing the investment
techniques discussed herein.
SIPHRON CAPITAL MANAGEMENT was formed in 1991 and currently manages over $200
million for tax-exempt, institutional clients. The senior management of Siphron
Capital has over thirty years' experience in using the investment policies
discussed herein. David C. Siphron and Peter D. Siphron, both partners of the
firm, serve as the Fund's portfolio managers, providing investment
recommendations based on a proprietary combination of fundamental and technical
analysis. Portfolio actions are based on mutual consent, with David Siphron
having final approval.
CAMBRIDGE EQUITY ADVISORS was formed in 1989 and currently manages $250 million
for high net worth individuals, corporations, and foundations, and the
principals of have over ten years of experience in using the investment
policies discussed herein. Michael Goldston, President, and Gary Smith,
Vice-President, serve as the Fund's portfolio managers and act as a team in
making investment decisions.
SOUTHERN CAPITAL ADVISORS has been in existence since 1986 as part of Morgan
Keegan, Inc., a financial services holding company. SCA manages approximately
$260 million for individuals, employee benefit plans, foundations and
endowments, and has over nine years experience in dealing with the investment
policies discussed herein. Richard A. McStay, C.F.A., its President, has more
than thirty years of experience in the investment business, and is the
principal portfolio manager for the Fund. He has been associated with Morgan
Keegan & Co., Inc., since 1974.
For their services, all of the Sub-Advisers receive a fee of up to .75% per
annum of the respective Fund's average daily net assets except for Pinnacle
Associates, Ltd., who receives a fee of up to .875%.
PERFORMANCE INFORMATION. Set forth below are certain performance data provided
by the respective Sub-Advisers calculated as follows and a comparison thereof
to an appropriate market index.
23
<PAGE> 26
The annual market value of the Sub-Adviser's portfolio was determined as the
sum of the market value of all of its assets (including cash, cash equivalents,
interest, dividends and securities). The annual rate of return for the
Sub-Adviser's portfolio was determined on a time weighted basis as the
percentage change of the portfolio assets after allowing for the effect of any
cash additions or withdrawals which occurred during the year. The investment
performance reflects the cost of brokerage commissions and most other expenses.
The accounts were managed utilizing the same investment objectives and policies
of the respective Funds.
<TABLE>
<CAPTION>
SUB-ADVISER INDEX
YEAR ENDED ------------------------------------------------------------------------------------ -------
DECEMBER S&P
31 CAMBRIDGE TRAINER FITZGERALD SCA ROANOKE SIPHRON GERBINO 500
----------- ----------- --------- ------------ -------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1991 78.2% 32.2% 61.6% 46.9% 95.5% 25.6% 24.3% 30.5%
1992 8.6 2.3 13.6 16.9 22.3 10.2 18.3 7.7
1993 16.1 26.9 21.6 24.1 37.7 19.0 34.5 10.0
1994 (3.4) 2.0 0.1 (2.4) 4.8 7.4 (7.0) 1.3
Annualized
Return for
the period
1/1/91 to
12/31/94 21.4% 15.0% 22.3% 20.1% 36.3% 15.3% 16.5% 11.85%
============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
SUB-ADVISER INDEX SUB-ADVISER INDEX
--------------- --------- --------------- ---------------------
YEAR ENDED MORGAN STANLEY
DECEMBER RUSSELL* CAPITAL INTERNATIONAL
31 ROANNOKE* 2000 PINNACLE+ EAFE+
----------- --------------- --------- --------------- ---------------------
<S> <C> <C> <C> <C>
1991 95.5% 46.1% 23.4% 12.13%
1992 22.3 18.4 2.5 (12.17)
1993 37.7 18.9 69.7 32.56
1994 4.8 (1.8) (9.5) 7.77
Annualized
Return for
the period
1/1/91 to
12/31/94 36.3% 19.2% 18.1% 8.91%
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
</TABLE>
There are no advisory fees included in the gross return calculations. In
addition, any initial sales charges and distribution fees, that are applicable
to the Funds, have not been deducted from the above performance figures. These
performance calculations assume the reinvestment of dividends and distributions
in the above performance figures.
Investors should not rely on the above performance as an indication of the
future performance. It should be noted that management of each Fund will be
affected by its obligation to redeem its shares upon request, and requirements
of the Investment Company Act of 1940 and of the Internal Revenue Code of 1986,
as amended, to qualify as a regulated investment company.
The Standard & Poor's 500 Stock Price Index is widely regarded by investors as
representative of the securities markets in general. Roanoke's performance is
also compared to the *Russell 2000 Index, which consists of 2,000 of the
smallest stocks in the Russell 3000 Index and is widely regarded as a standard
benchmark of small capitalization stock performance. Pinnacle uses the +Morgan
Stanley Capital International EAFE (Europe,
24
<PAGE> 27
Australia, Far East) Index, which is widely regarded by investors as
representative of the international securities markets in general.
PORTFOLIO TRANSACTIONS. Decisions as to the purchase and sale of securities
for each Fund and the execution of these transactions, including the
negotiation of brokerage commission on such transactions, are the
responsibility of each Sub-Adviser. In general, each Sub-Adviser seeks to
obtain prompt and reliable execution of purchase and sale orders at the most
favorable net prices or yields. In determining the best net price and
execution, each Sub-Adviser may take into account a broker's or dealer's
operational and financial capabilities and the type of transaction involved.
The Sub-Advisers may consider statistical, research, or other services provided
by brokers or dealers, some of which may be useful to each Sub-Adviser in their
other business functions. 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 as determined in good faith
by each Sub-Adviser. Each Sub-Adviser is authorized to place portfolio
transactions with brokers or dealers participating in the distribution of
shares of a Fund, but only if the Sub-Advisers reasonably believe that the
execution and commission are comparable to those available from other qualified
firms. Further, subject to procedures adopted by, and under the supervision of
the Board of Trustees, each Sub-Adviser is authorized to place portfolio
transactions with brokers or dealers affiliated with each Sub-Adviser, provided
the commission or fee paid on the transaction is reasonable and fair when
compared to the commission or fee charged by other brokers or dealers on
comparable transactions involving similar securities being purchased or sold on
a securities exchange during a comparable period of time.
The annual portfolio turnover rate of each Fund is expected to approximate
100%, except for Reserve International Equity Fund, which is expected to be
less than 100% under normal market conditions. See "Portfolio Turnover,
Transaction Charges and Allocation" in the Statement of Additional Information.
TRUSTEES. Under the Declaration of Trust, which is governed by the laws of the
State of Delaware, the Trustees are ultimately responsible for the conduct of
the its affairs. The Trustees serve indefinite terms (subject to certain
removal procedures) and they appoint their own successors, provided that at
least a majority of the Trustees have been elected by shareholders. The
Declaration of Trust provides that a Trustee may be removed at any special
meeting of shareholders by a vote of a majority of the Trust's outstanding
shares.
TRANSFER AGENT AND DIVIDEND PAYING AGENT. The Trust acts as its own transfer
agent and divided paying agent.
HOW TO BUY SHARES
METHOD OF PAYMENT. The minimum initial investment is $1,000 for Class A shares
and $250 for Class D shares and the minimum subsequent investment for both
Classes of shares is $100, except for IRAs. However, shareholders (except
IRAs) must achieve a balance of $2,500 within twelve (12) months or the Fund
may choose to impose a fee (currently $5 monthly), see "Small Accounts". The
initial minimum investment for an IRA is $250, and subsequent investments are
accepted in any amount. The Funds reserve the right, with respect to any
person or class of persons, under certain circumstances to waive or lower
investment minimums. An initial purchase must be accompanied by an Account
Application. If no dealer or broker is named in the Account Application, the
Distributor will act as dealer for you. You can buy shares of a Fund each
business day at the public offering price next determined after receipt of
payment and a request in proper form by a Fund or by an investment dealer which
has a sales agreement with the Fund's Distributor. The public offering price
is equal to the net asset value of a Fund (plus a sales charge for Class A
shares as set forth in the table below). Payments (denominated in U.S.
dollars) must be made (if purchasing directly from a Fund):
- By check - Drawn on a U.S. bank, payable to or endorsed to Reserve
Private Equity Series. You must include your account number on each check
unless it is an initial purchase. Checks should be mailed to Reserve
Private Equity Series, 810 Seventh Avenue, New York, N.Y. 10019-5868. A
fee (currently $15) will be imposed if any check used for investment in
your account does not clear. The investor is also liable to reimburse
the Fund for any loss incurred due to a returned check.
25
<PAGE> 28
- By wire - Prior to calling your bank, call the Fund for specific
instructions at (800) 637-1700.
Investments in a Fund may also be made through investment dealers which have
sales agreements with Resrv Partners, Inc., the distributor of the Fund's
shares ("Authorized Dealer"). Such dealers should send the investor's Account
Application and payment to the Fund. Payment may be made by check or wire.
Purchase orders will be confirmed at the public offering price calculated next
after receipt by a Fund or an Authorized Dealer, (which order must be promptly
transmitted to the Fund), of a properly completed Account Application and
payment. The Fund must be notified before 4:00 P.M. (New York time) of the
amount to be transmitted and the account to be credited and the Fund must
receive the credit at its bank by 4:00 P.M. (New York time). Orders received
by a Fund or an Authorized Dealer after 4:00 P.M. (New York time) will be
priced at the public offering price in effect at 4:00 P.M. (New York time) on
the next business day.
GENERAL INFORMATION. Each class of shares of each Fund will have the same
relative rights and privileges and be subject to the same sales charges, fees
and expenses except as set forth below. The Board of Trustees may determine in
the future that other allocations of expenses are appropriate and amend this
plan accordingly without the approval of shareholders of any class. Unless a
class of shares is otherwise designated, it shall have the terms set forth
below with respect to Class A shares. Income, realized and unrealized capital
gains and losses, and expenses of a Fund of the Trust not allocated to a
particular class as set forth below shall be allocated to each class of shares
of a Fund on the basis of net asset value of that class in relation to the net
asset value of the Fund. Expenses of the Trust not allocable to a specific Fund
shall be allocated to each Fund on the basis of the net asset value of that
Fund in relation to the net asset value of the Trust.
CLASS A SHARES - INITIAL SALES CHARGE ALTERNATIVE. Class A shares of each Fund
of the Trust are sold at net asset value plus a maximum sales charge of 4.50%,
of the public offering price imposed at the time of purchase and are subject to
the minimum purchase requirements set forth in this prospectus. The initial
sales charge may be reduced or waived for certain purchases..
SALES TABLE. Share purchases of each Fund are made at the public offering
price. The public offering price is the net asset value per share plus a sales
charge as shown below:
<TABLE>
<CAPTION>
DEALERS'
AS A % OF AS A % OF REALLOWANCE
OFFERING NET ASSET AS A % OF
PRICE PER VALUE PER OFFERING
AMOUNT OF TRANSACTION SHARE SHARE PRICE
---------------------------- ------------ ------------ --------------
<S> <C> <C> <C>
Less than $50,000 ................... 4.50 4.71 4.00
$50,000 to less than $100,000........ 3.50 3.63 3.00
$100,000 to less than $250,000....... 3.00 3.09 2.50
$250,000 to less than $500,000....... 2.50 2.56 2.00
$500,000 to less than $1,000,000..... 1.50 1.52 1.00
Over $1,000,000 or more.............. 0 0 0
</TABLE>
It is the position of the staff of the Securities and Exchange Commission that
if the dealer reallowance exceeds 90%, a dealer may be considered an
underwriter under the Securities Act of 1933.
Class A shares of each Fund may be purchased at net asset value, without sales
charge, by employees of brokers or broker-dealers who have a signed dealer
agreement with the Fund, full time employees, their spouses and minor children
of the Adviser, Sub-Adviser, Resrv Partners, Inc., and other affiliated
companies; any Trustee of a Fund and their spouses; any trust, pension, profit
sharing, or other benefit plan; Sub-Adviser advisory clients and related
persons of such; by a bank or broker-dealer that charges an asset management
fee, provided the bank or broker-dealer has an agreement with the Funds; and
through reinvestment of dividends and capital gains distributions.
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<PAGE> 29
Direct clients of Resrv Partners, Inc., who were Reserve money fund
shareholders as of September 30, 1995, may purchase Class A shares of each Fund
at net asset value until February 1, 1996, and thereafter as long as they are
qualified shareholders of Reserve money funds at net asset value plus a maximum
sales charge of 1%.
CLASS D SHARES - ASSET-BASED SALES CHARGE ALTERNATIVE. Class D shares of each
Fund of the Trust are sold at net asset value without a sales charge and are
subject to the minimum purchase requirements set forth in this prospectus.
A Fund will thus receive the full amount of your purchase, and you will receive
the entire net asset value of your shares upon redemption. Class D shares incur
higher distribution fees than Class A shares and do not convert to any other
class of shares of a Fund. The higher fees mean a higher expense ratio, so
Class D shares pay correspondingly lower dividends and may have a lower net
asset value than Class A shares.
VOTING RIGHTS. Each class of shares of a Fund shall have exclusive voting
rights on any matter submitted to shareholders that relates solely to its
arrangement. Each class of shares of a Fund shall have separate voting rights
on any matter submitted to shareholders in which the interests of one class
differ from the interests of any other class.
RIGHT OF ACCUMULATION (ROA). Reduced sales charges apply to any purchase of
Class A shares of a Fund where the aggregate investment, among all the Reserve
Private Series Class A Shares, including such purchase, is $50,000 or more. If,
for example, you previously purchased and still hold shares of a Fund with a
current market value of $50,000 and subsequently purchase shares of a Fund
having a current value of $10,000, the sales charge applicable to the
subsequent purchase would be reduced to 3.50% of the offering price.
To qualify for reduced sales charges, at the time of purchase you or your
dealer must notify the Fund or Resrv Partners, Inc., that such purchase should
be combined.
LETTER OF INTENT (LOI). Investors who anticipate that they will invest $50,000
(other than through exchanges) or more in Class A shares of a Fund within
thirteen months may execute an LOI on the form in the Account Application. The
execution of an LOI will result in an investor paying a lower sales charge, at
the appropriate quantity purchase level shown above on all purchases during a
thirteen-month period. Purchases of Class A shares in other Funds in the
Reserve Private Equity Series, other than money funds, that may be offered, can
be included to fulfill the LOI.
Out of an investor's initial purchase (or subsequent purchases) 5% of the
specified dollar amount of the LOI will be held in escrow by the transfer agent
in their account until their total purchases of the Fund plus their
accumulation credit (if any) equal the amount specified. A purchase not
originally made pursuant to an LOI may be included under a backdated letter
executed within ninety (90) days of such purchase (accumulation credit).
If total purchases plus an investor's accumulation credit are less than the
specified amount, the investor agrees to remit to the distributor an amount
equal to the difference in the dollar amount of the sales charge the investor
had actually paid and the amount of the sales charges which they would have
paid on their aggregate purchases if the total of such purchases had been made
at a single time. If the investor does not pay such difference in sales charges
within twenty (20) business days after written request by the dealer, bank or
distributor, the transfer agent, upon instructions from the distributor is
authorized to effect the repurchase of an appropriate number of escrowed shares
in order to realize such difference.
RESERVE PRIVATE EQUITY SERIES AUTOMATIC ASSET-BUILDER PLAN. If you have an
account balance of $5,000 or more, you may purchase shares of a Fund ($25
minimum) from a checking, NOW, or bank money market deposit account or from a
U.S. Government distribution ($50 minimum) such as Social Security, federal
salary, or certain veteran's benefits, or other payments from the federal
government. Fill out the Reserve Private Equity Series Automatic Asset-Builder
form included in the account application or call the Funds at (800) 637-1700.
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<PAGE> 30
DOLLAR COST AVERAGING. Shareholders may elect to have a specified amount
automatically exchanged, either monthly or quarterly (on or about the 10th or
25th day of the applicable month), from one of their accounts into one or more
Reserve Private Equity Series Funds, provided that Class A or D shares may only
be exchanged for Class A or D shares of another Reserve Private Equity Series
Fund. The account from which exchanges are to be made must have a value of at
least $5,000 when a shareholder elects to begin this program, and the exchange
minimum is $50 per transaction. All of the accounts that are part of this
program must have identical registrations. The net asset value of shares
purchased under this program may vary, and may be more or less advantageous
than if shares were not exchanged automatically. There is no charge for
entering the Dollar Cost Averaging program. Sales charges may apply, as
described under the caption "Exchange Privilege."
PRIVATE EQUITY CASH ACCOUNT. The Private Equity Cash Account acts as an
omnibus account of The Reserve a U.S. Treasury Fund, a money market fund which
invests exclusively in full-faith and credit obligations of the United States
Treasury, and may be utilized for dollar-cost averaging.
NET ASSET VALUE. Fund shares are issued at net asset value plus a sales charge
(for Class A shares) and redeemable at the net asset value next determined
after receipt by the Fund of a request in proper form. The net asset value of
the shares of each Fund and each class is calculated at the close of business
of the New York Stock Exchange on each day the New York Stock Exchange is open
which is currently 4:00 P.M. (New York time). The net asset value of each Fund
and each class will not be determined on those days that the New York Stock
Exchange is closed for trading or on days on which no orders to purchase, sell
or redeem shares have been received by a Fund. The New York Stock Exchange is
closed on the following holidays: New Year's Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas. The
net asset value per share of each Fund and each class is determined by adding
the value of a Fund's portfolio securities, cash and other assets, subtracting
its liabilities, and dividing the result by the number of class' shares
outstanding.
INDIVIDUAL RETIREMENT ACCOUNTS. Investors may use each Fund as an investment
for Individual Retirement Accounts ("IRAs"). A master IRA plan, with
information regarding administration fees and other details are available from
Resrv Partners, Inc. The initial minimum investment is $250. Subsequent
investments are accepted in any amount.
DISTRIBUTOR. The Funds' Distributor is Resrv Partners, Inc. ("RPI"), 810
Seventh Avenue, New York, N.Y. 10019-5868. The Distributor is a wholly owned
subsidiary of the Adviser.
All orders for the purchase of shares of each Fund are subject to acceptance or
rejection by Resrv Partners, Inc., in its sole discretion. The sale of shares
will be suspended during any period when the determination of net asset value
is suspended, and may be suspended by the Board of Trustees whenever in its
judgment it is in the best interests of the Funds to do so.
EXCHANGE PRIVILEGE. Shares of each Fund may be exchanged for shares in the
Reserve money market funds and other separate investment portfolios that may be
offered by the Trust at net asset value. No sales charge applies to exchanges
between identical classes of shares or from the Reserve money market funds to
no-load classes of shares. Exchanges of shares from the Reserve money market
funds to classes other than no-load classes are subject to applicable sales
charges on the Fund unless a waiver of the sales charge is applicable. A waiver
of the sales charge may apply if the shares being exchanged from the Reserve
money market funds were acquired: (a) by a previous exchange from shares of a
Fund purchased with a sales charge, or (b) through investments of dividends or
capital gains distributions with respect to the foregoing category of shares.
Shares of any of the money market funds or any Reserve Private Equity Series
Fund must be registered for sale in the investor's state.
The exchange privilege is not available for shares which have been held for
less than fifteen (15) days. Exchanges by telephone are an automatic privilege
unless the shareholder notifies the Fund on the Account Application that his
authorization has been withheld. Unless authorization is withheld, the Fund
will honor requests by any person by telephone at (800) 637-1700, that the Fund
deems to be valid. The Funds and their affiliates may be liable for any losses
caused by their failure to employ reasonable procedures to avoid unauthorized
or fraudulent instructions.
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<PAGE> 31
To reduce such risk, the registration of the account into which shares are to
be exchanged must be identical to the registration of the originating account
and all telephone exchange requests will be recorded. The Fund may also
require the use of a password or other form of personal identification. In
addition, each Fund will provide written confirmation of exchange transactions.
During periods of volatile economic and market conditions, a shareholder may
have difficulty making an exchange request by telephone, in which case an
exchange request would have to be made in writing.
The Trust may modify or discontinue the exchange privilege at any time, and
will do so on sixty (60) days' notice, if such notice is required by
regulations adopted under the Investment Company Act of 1940. The notice period
may be shorter if applicable law permits. The Trust reserves the right to
reject telephone or written requests submitted in bulk on behalf of ten (10) or
more accounts. A pattern of frequent exchanges may be deemed by the Adviser to
be abusive and contrary to the best interests of the Fund's other shareholders
and, at the Adviser's discretion, may be limited by the Fund's refusal to
accept additional purchases and/or exchanges from the investor and/or the
imposition of fees. The Funds do not have any specific definition of what
constitutes a pattern of frequent exchanges. Any such restriction will be made
on a prospective basis, upon notice to the shareholder not later than ten (10)
days following such shareholder's most recent exchange. Telephone and written
exchange requests must be received by the Funds by 4:00 P.M. (New York time) on
a regular business day to take effect that day. Exchange requests received
after 4:00 P.M. (New York time) will be effected at the next calculated net
asset value (plus a sales charge for Class A shares).
Exchanges of shares are taxable events and may result in a gain or loss for
federal income tax purposes. A prospectus for any of the Reserve money market
funds or other series of the Trust may be obtained from the Distributor or any
Authorized Dealer. An investor considering an exchange should refer to the
appropriate fund prospectus for additional information since each Fund has
different investment objectives and policies.
DISTRIBUTION PLAN. Under the Plan of Distribution ("Plan") adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940, each Fund pays Resrv
Partners, Inc., for advertising, marketing and distributing each Fund's shares
and for servicing each Fund's shareholders at an annual rate of .25% of the
value of each Fund's average daily net assets for Class A shares and 1.00% of
the value of each Fund's average daily net assets for Class D shares. The Funds
are not obligated to pay any distribution expense in excess of such
distribution service fee. If the Plan were terminated or not continued, no
amounts (other than amounts accrued but not yet paid) would be owed by the
Funds.
Under the Plan, Resrv Partners, Inc., may make payments to brokers, financial
institutions and financial intermediaries for administration and for servicing
Fund shareholders who are also their clients and/or for distribution. RPI
determines the amounts to be paid to brokers, financial institutions and
financial intermediaries ("Firms"). Firms receive such fees with respect to
the average daily net asset value of each Fund's shares owned by shareholders
for whom the Firm performs services or for whom the Firm is the dealer of
record. Financial institutions providing distribution assistance or
administrative services for each Fund may be required to register as securities
dealers in certain states. The fees, payable to "RPI," under the Plan for
advertising, marketing and distributing each Fund's shares and for payments to
Firms are payable without regard to actual expenses incurred. Thus, if fees
exceed distribution expenses, RPI will incur a profit; however, if expenses
exceed fees, then they will incur a loss. RPI may use such fees to promote the
sale of shares for by paying for the preparation, printing and distribution of
prospectuses to other than current shareholders or other promotional
activities.
The Glass-Steagall Act and other applicable laws prohibit federally chartered
or supervised banks from engaging 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 Trust shares
(such as administrative and account maintenance services) may include banks,
upon advice of their 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
29
<PAGE> 32
maintenance services for which the bank may also receive compensation from the
bank accounts they service. It is management's position that payments to banks
pursuant to the Plan for activities not primarily intended to result in the
sale of Trust 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.
SHARES OF BENEFICIAL INTEREST
The Trust is an open-end management investment company commonly known as a
mutual fund. The Trust was organized as an unincorporated Delaware business
trust on April 22, 1993, and is authorized to issue an unlimited number of
shares of beneficial interest, which may be issued in any number of series.
Shareholders are entitled to a full vote for each full share held (and
fractional votes for fractional shares) and have equal rights with respect to
earnings, dividends, redemption and in the net assets of their respective
series on liquidation. The Trust has no intention of issuing share
certificates. All shares issued will be fully paid and non-assessable and will
have no preemptive or conversion rights. The Trustees do not intend to hold
annual meetings of shareholders. The Trustees will call such special meetings
of shareholders as may be required under the Investment Company Act of 1940
(e.g., to approve a new investment advisory agreement or to change the
fundamental investment policies) or by the Declaration of Trust.
TAXES
Each Fund intends to maintain its regulated investment company status for
federal income tax purposes, so that it will not be liable for federal income
taxes to the extent its net income and net capital gains are distributed. The
requirement for maintaining its status as a regulated investment company under
the Internal Revenue Code ("Code") may cause the Funds to restrict the degree
to which they engage in short-term trading, short sales and transactions in
options and futures contracts. Dividends paid by each Fund from net investment
income, including net short term capital gains, whether in cash or in
additional shares of each Fund, will be taxable as ordinary income.
The Code imposes a non-deductible, 4% excise tax on regulated investment
companies that do not distribute to their shareholders in each calendar year an
amount equal to 98% of their calendar year ordinary income, plus 98% of their
capital gain net income (the excess of short and long term capital gains over
short and long term capital losses) for the one year period ending October 31.
Dividends declared in December of any year to shareholders of record on any
date in December will be deemed to have been received by the shareholders and
paid by each Fund on the record date, provided such dividends are paid during
January of the following year.
Distributions from long term capital gains designated by each Fund as capital
gain dividends, whether paid in cash or additional shares of each Fund, are
taxable for federal income tax purposes as long term capital gains, regardless
of the length of time Trust shares have been held and are not eligible for the
dividends received deduction available to corporations. Dividends and other
distributions may also be subject to state and local taxes. A purchase of Fund
shares shortly before the ex-dividend date or capital gains distribution could
result in the receipt of an amount which, although in effect a return of
principal, is subject to income taxes.
Under the Code, exchanges and redemptions of shares, including transfers of
shares of each Fund for shares of another fund with which the Funds have
exchange privileges, are taxable events and, accordingly, may result in a
capital gain or loss for shareholders participating in such transactions.
Deductions for losses recognized on the disposition of shares may in some
circumstances be disallowed or deferred. However, if the shares exchanged have
been held less than ninety-one (91) days, the sales charge paid on such shares
is not included in the tax basis of the exchanged shares, but is carried over
and included in the tax basis of the shares acquired. Furthermore, shareholders
electing to reinvest dividends or other distributions in new shares will
nevertheless be treated as having received such distributions for tax purposes.
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<PAGE> 33
For tax purposes, each Fund will send shareholders an annual notice of
dividends and distributions paid during the prior year. Shareholders are
advised to retain all statements received from each Fund to maintain accurate
records of their investments. The tax treatment of non-resident alien
individuals, foreign corporations, and other non-U.S. shareholders may differ
from that described above. Shareholders should consult their own tax advisers
regarding specific questions as to foreign, federal, state and local taxes with
specific reference to their own tax situation.
FOREIGN INCOME TAXES
Investment income received by the Reserve International Equity and Reserve
North American Growth Funds from sources within foreign countries may be
subject to foreign income taxes withheld at the source. To the extent that a
Fund is liable for such foreign income taxes, it will attempt to meet the
requirements of the Code to "pass through" to its shareholders credits for such
taxes, but there can be no assurance that it will be able to do so.
DIVIDENDS AND DISTRIBUTIONS
All dividends and capital gains distributions, if any, are paid in the form of
additional shares credited to an investor's account at net asset value unless
the shareholder has requested on the Account Application or in writing to the
Fund one of the following three options:
(1) Dividend Option - to receive income dividends in cash and capital gains
distributions in additional shares.
(2) Distribution Option - to receive capital gains distributions in cash and
income dividends in additional shares.
(3) Distribution Option - to receive both income dividends and capital gains
distributions in cash.
These three options are not available, however, for retirement plans or an
account with a net asset value of less than $1,000 and/or if the distribution
would be less than $25.
Any net investment income will be distributed quarterly as dividends to
shareholders. Any net realized short and long term capital gains, if any, will
be paid to shareholders at least annually. The payment date will be used to
determine net asset value when dividends and capital gains distributions are
reinvested.
REDEMPTIONS
TIME AND METHOD OF REDEMPTION. Each Fund's shares are redeemed at net asset
value determined as of the next close of the New York Stock Exchange on a
regular business day after the written request by any person in proper form is
received by the Fund, at 810 Seventh Avenue, New York, New York 10019-5868.
Redemptions may be effected during regular business days from 9:00 A.M. to 4:00
P.M. (New York time). Redemption requests received after the close of business
will be effected at the next calculated net asset value. If the Funds have
previously been advised in writing of your brokerage or bank account, telephone
requests by any person for redemptions are accepted for payment to such account
by calling (800) 637-1700. The procedures and potential liability of the Funds
and their affiliates in connection with telephone exchanges as discussed in
"Exchange Privilege" above also apply to telephone redemptions. To reduce such
risk, proceeds of telephone redemptions may be sent only to a bank or brokerage
account designated by the shareholder, in writing, on the Account Application
or in a letter with the signature(s) guaranteed and telephone redemption
requests will be recorded. All other redemption requests must be signed by the
registered owner(s) with signature(s) guaranteed by a member firm of a national
securities exchange, a domestic commercial bank, credit union, savings bank,
savings and loan association or domestic trust company. If an account has
multiple owners, the Fund may rely on the instructions of any one owner unless
otherwise instructed in writing. Guarantees from notaries public are
unacceptable. Additional documentary evidence of authority is required in the
event a redemption is requested by a corporation, partnership, trust,
fiduciary, executor, or administrator. Changes in redemption instructions,
registration or authorized signatures must be in writing with the signature(s)
guaranteed. Payments of $10,000 or more will be wired upon request without
charge. A fee, currently $10, will be charged for wires of less than $10,000.
The Funds assume no responsibilities for delays in
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<PAGE> 34
the receipt of wired or mailed funds. The use of a predesignated financial
institution, such as a savings bank, savings and loan association or credit
union, which is not a member of the Federal Reserve wire system to receive your
wire could cause such a delay.
The Funds ordinarily will make payment for all shares redeemed within seven (7)
days after receipt of a redemption request in proper form except as provided by
rules of the Securities and Exchange Commission or until your purchase check
has cleared (see "Restrictions" below). The Funds will provide written
confirmation of redemption transactions.
The Funds reserve the right to refuse a telephone redemption if it believes it
is advisable to do so. Procedures for telephone redemptions may be modified or
terminated by the Funds at any time upon proper notice to shareholders. During
times of drastic economic or market conditions, shareholders may experience
difficulty in contacting the Fund by telephone to request a redemption of
shares. In such cases shareholders should consider using another method of
redemption, such as a written request.
REDEMPTIONS THROUGH BROKERS AND FINANCIAL INSTITUTIONS. Redemptions through
brokers and financial institutions may involve such other parties' own
redemption minimums, service fees, and other redemption requirements.
SMALL ACCOUNTS. If a shareholder account (other than an IRA) does not achieve
a balance of $2,500 within twelve (12) months, the Fund reserves the right to
impose a fee (currently $5 monthly), after thirty (30) days' written notice to
the shareholder. The minimum balance requirement will be waived if the account
balance drops below $2,500 due to market depreciation. Class D-share accounts
offered in conjunction with a broker sweep are exempt unless shareholders have
been notified to the contrary.
RESTRICTIONS. The right of redemption may be suspended or the date of payment
postponed for more than seven (7) days only (a) when the New York Stock
Exchange is closed (other than for customary closings); (b) when, as determined
by the Securities and Exchange Commission ("SEC"), trading on the Exchange is
restricted or an emergency exists making it not reasonably practicable to
dispose of securities owned by each Fund or for it to determine the fair value
of its net assets; or (c) for such periods as the SEC may by order permit. If
shares of a Fund are purchased by check, the Fund may delay transmittal of
redemption proceeds until such time as it has assured itself that good payment
has been collected for the purchase of such shares, which will generally be up
to ten (10) business days. When a purchase is made by wire and subsequently
redeemed, the proceeds from such redemption normally will not be transmitted
until two (2) business days after the purchase by wire.
GENERAL INFORMATION
BACKUP WITHHOLDING. Each Fund is required by federal law, subject to certain
exemptions, to withhold 31% of dividends, capital gains distributions and
payments for shares redeemed. In order to avoid this withholding requirement
investors are required to certify, on the Account Application or separate W-9
Form, that their taxpayer identification number is correct, or that they are
not currently subject to backup withholding. Shareholders should be aware that,
under regulations promulgated by the IRS, the Funds may be fined $50 annually
for each account for which a certified taxpayer identification number is not
provided. In the event that such a fine is imposed a corresponding charge will
be made against the account.
USE OF JOINT PROSPECTUS. Although each Fund is offering only its own shares,
it is possible that a Fund might become liable for any misstatement in the
Prospectus about the other Funds.
REPORTS AND STATEMENTS. Shareholders receive an annual report containing
audited financial statements and an unaudited semi-annual report. A statement
is mailed to each shareholder at least quarterly.
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<PAGE> 35
SPECIAL SERVICES. The Funds reserve the right, upon notice, to charge
shareholder accounts for specific costs incurred in processing unusual
transactions for shareholders. Such transactions include, but are not limited
to, stop payment requests on official Trust checks, returned checks and special
research services.
PERFORMANCE. From time to time, in advertisements and sales literature, the
Funds may present information regarding the total return on a hypothetical
investment in a Fund for various periods of performance and may make
comparisons of such total return to various stock indices (group of unmanaged
common stocks), including the New York Stock Exchange Composite Index, Standard
& Poor's 500 Stock Index, the Dow Jones Industrial Average, the NASDAQ
Composite Index, the Russell 2000 Index, and the Morgan Stanley Capital
International EAFE Index, or to groups of comparable mutual funds.
Total return for a period is the percentage change in value during the period
of an investment in the Fund's shares, including the value of shares acquired
through reinvestment of all dividends and capital gains distributions. The
average annual total return for a given period may be calculated by finding the
average annual compounded rate of return that would equate a hypothetical
$1,000 investment to the value that the investment could be redeemed for at the
end of the period. All of the calculations described above will assume the
reinvestment of dividends and distributions in additional shares of the Fund
and the deduction of the maximum sales charge (Class A shares) from the initial
investment.
In addition to the figures described above, a Fund might use rankings or
ratings determined by Lipper Analytical Services, Inc., an independent service
that monitors the performance of over 1,000 mutual funds, Morningstar, Inc., or
another service to compare the performance of the Fund with the performance of
(i) other funds of similar size and investment objective or (ii) broader groups
of funds. Such comparative performance information will also be stated in the
same terms in which the comparative data or indices are stated. For these
purposes, the performance of a Fund, as well as the performance of the mutual
funds, do not reflect sales charges, the inclusion of which would reduce a
Fund's performance.
Performance of a Fund will vary from time to time, and past results are not
necessarily indicative of future results. Performance information supplied by
each Fund may not provided a basis of comparison with other investments using
different reinvestment assumptions or time periods.
------------------------------------
THIS PROSPECTUS IS INTENDED TO CONSTITUTE AN OFFER BY EACH FUND ONLY OF THE
SECURITIES OF WHICH IT IS THE ISSUER AND IS NOT INTENDED TO CONSTITUTE AN OFFER
BY ANY FUND OF THE SECURITIES OF ANY OTHER FUND WHOSE SECURITIES ARE ALSO
OFFERED BY THIS PROSPECTUS. NO FUND INTENDS TO MAKE ANY REPRESENTATION AS TO
THE ACCURACY OR COMPLETENESS OF THE DISCLOSURE IN THIS PROSPECTUS RELATING TO
ANY OTHER FUND.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
------------------------------------
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GLOSSARY
The following terms are frequently used in this Prospectus.
EQUITY SECURITIES are, (i) common stocks, partnership interests, business trust
shares and other equity or ownership interests in business enterprises, and
(ii) securities convertible into, and rights and warrants to subscribe for the
purchase of, such stocks, shares and interests.
DEBT SECURITIES are bonds, debentures, notes, bills, repurchase agreements,
loans, other direct debt instruments and other fixed, floating and variable
rate debt obligations.
FIXED-INCOME SECURITIES are debt securities and dividend-paying preferred
stocks and include floating rate and variable rate instruments.
CONVERTIBLE SECURITIES are fixed-income securities that are convertible into
common stock.
U.S. GOVERNMENT SECURITIES are securities issued or guaranteed by the United
States Government, its agencies or other federal governmental entities.
FOREIGN GOVERNMENT SECURITIES are securities issued or guaranteed, as to
payment of principal and interest, by governments, quasi-governmental entities,
governmental agencies or other federal governmental entities, other than the
U.S. Government.
QUALIFYING BANK DEPOSITS are certificates of deposit, bankers' acceptances and
interest-bearing savings deposits of banks having total assets of more than $1
billion and which may or may not be members of the Federal Deposit Insurance
Corporation.
RULE 144A SECURITIES are securities that may be resold without registration
pursuant to Rule 144A under the Securities Act of 1933, as amended (the
"SECURITIES ACT").
COMMISSION is the Securities and Exchange Commission.
1940 ACT is the Investment Company Act of 1940, as amended.
CODE is the Internal Revenue Code of 1986, as amended.
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RESERVE PRIVATE EQUITY SERIES
RESERVE EMERGING GROWTH FUND
810 SEVENTH AVENUE, NEW YORK, N.Y. 10019
(800) 637-1700
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STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information describes Reserve Private Equity
Series ("Trust") and the Reserve Emerging Growth Fund ("Emerging Growth Fund"
or "Fund"). This Statement is not a Prospectus, but provides detailed
information to supplement the Prospectus and should be read in conjunction with
the Prospectus. A copy of the Prospectus may be obtained (without charge) from
Reserve Private Equity Series. This Statement is dated 1996.
TABLE OF CONTENTS
Page
----
Investment Policies 2
Other Policies 2
Trustees and Officers of the Trust 5
Investment Management and Other Agreements 7
Portfolio Turnover, Transaction Charges and
Allocation 8
Shares of Beneficial Interest 8
Purchase, Redemption and Pricing of Shares 9
Distributions and Taxes 10
Performance Information 12
Report of Independent Accountants 14
Financial Statements 15
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INVESTMENT POLICIES
The Fund has adopted as fundamental policies the following limitations on
its investment activities. These fundamental policies may not be changed
without a majority vote of the Fund shareholders, as defined in the Investment
Company Act of 1940. The Emerging Growth Fund may not:
(1) borrow money except as a temporary measure for extraordinary or emergency
purposes and then only in an amount not to exceed 33 1/3% of the market value of
its assets; (2) issue senior securities as defined in the Investment Company
Act of 1940 except that the Fund may borrow money in accordance with limitation
(1); (3) act as an underwriter with respect to the securities of others except
to the extent that, in connection with the disposition of portfolio securities,
it may be deemed to be an underwriter under certain federal securities laws; (4)
invest 25% or more of the value of its total assets in the securities of issuers
in any particular industry; (5) purchase, sell or otherwise invest in real
estate or commodities or commodity contracts except the Fund may purchase
readily marketable securities of companies holding real estate or interests
therein and interest rate futures contracts, stock index futures contracts, and
put and call options on interest rate futures contracts; (6) invest in voting
securities or in companies for the purpose of exercising control; and (7)
purchase securities on margin, except to obtain such short-term credits as may
be necessary for the clearance of transactions; however, the Fund may make
margin deposits in connection with options and financial futures transactions.
The Fund has reserved the right to purchase and write interest rate
futures contracts, and put and call options on interest rate futures
contracts. The Fund does not intend to use these techniques for the
foreseeable future and that shareholders will be given notice should the Fund
determine that they will be used.
In addition to the fundamental investment policies listed above, the Fund
has voluntarily adopted certain policies that may be changed or amended by
action of the Trustees without requiring prior notice to or approval of
shareholders. In accordance with such policies and restrictions the Fund
cannot:
(1) purchase from or sell investment securities to any of the officers or
Trustees of the Trust, its investment Adviser, its investment Sub-Adviser, its
principal underwriter or the officers, principals or directors of its
investment Adviser, investment Sub-Adviser or principal underwriter; and (2)
purchase or retain securities of an issuer any of whose officers, directors,
trustees or securityholders is an officer or Trustee of the Trust or a member,
officer, director or trustee of the investment Adviser or Sub- Adviser of the
Fund if one or more of such individuals owns beneficially more than one-half of
one percent (1/2 of 1%) of the securities (taken at market value) of such
issuer and such individuals owning more than one-half of one percent (1/2 of
1%) of such securities together beneficially own more than 5% of such
securities or both.
As a non-diversified company, the Fund is permitted to invest all of its
assets in a limited number of issuers. However, it intends to comply with
Subchapter M of the Internal Revenue Code in order to qualify as a regulated
investment company for federal income tax purposes. To so qualify, the Fund
must diversify its holdings so that, at the close of each quarter of its
taxable year, (a) at least 50% of the value of its total assets is represented
by cash, cash items, securities issued by the U.S. Government or its agencies
or instrumentalities, securities of other regulated investment companies, and
other securities limited generally with respect to any one issuer to an amount
not more than 5% of the total assets of the Fund and not more than 10% of the
outstanding voting securities of such issuer, and (b) not more than 25% of the
value of its total assets is invested in the securities of any one issuer
(other than the U.S. Government or its agencies or instrumentalities or
regulated investment companies), or in two or more issuers that the Fund
controls and that are engaged in the same or similar trades or businesses. In
the event of a decline in the market value of the securities of one or more
such issuers exceeding 5%, an investment in the Fund could entail greater risk
than in a fund which has a policy of diversification.
OTHER POLICIES
LENDING OF SECURITIES. The Fund may, to increase its income, lend its
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
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Guidelines, the loan collateral must, on each business day, at least equal the
value of the loaned securities and must consist of cash, bank letters of credit
or securities of the United States Government (or its agencies or
instrumentalities). To be acceptable as collateral, letters of credit must
obligate a bank to pay amounts demanded by the Fund if the demand meets the
terms of the letter. Such terms and the issuing bank would have to be
satisfactory to the Fund. Any loan might be secured by any one or more of the
three types of collateral. The Fund receives amounts equal to the dividends or
interest on loaned securities and also receives one or more 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, which require the borrower, after notice, to
redeliver the securities within the normal settlement time of five business
days. While voting rights may pass with the loaned securities, if a material
event will occur affecting an investment on loan, the loan must be called and
the securities voted.
WARRANTS. The Fund also may invest up to 5% of its net assets in warrants.
Included within this amount, may be warrants which are not listed on the New
York or American Stock Exchanges. A reason for investing in warrants is to
permit the Fund to participate in an anticipated increase in the market value
of a security without having to purchase the security to which the warrants
relate. Warrants convey no rights to dividends or voting rights, but only an
option to purchase equity securities of the issuer at a fixed price. If such
securities appreciate, the warrants may be exercised and sold at a gain, but a
loss will be incurred if such securities decrease in value or the term of the
warrant expires before it is exercised. The 5% limitation does not include
warrants acquired by the Fund in units or attached to other securities.
ILLIQUID SECURITIES. The Fund may not invest more than 15% of its net assets
in repurchase agreements which have a maturity of longer than seven days or in
other illiquid securities, including securities that are illiquid by virtue of
the absence of a readily available market or legal or contractual restriction
on resale. Historically, illiquid securities have included securities subject
to contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended ("Securities Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have
an adverse effect on the marketability of portfolio securities and a mutual
fund might be unable to dispose of restricted or other illiquid securities
promptly or at reasonable prices and might thereby experience difficulty
satisfying redemptions within seven days. A mutual fund might also have to
register such restricted securities in order to dispose of them resulting in
additional expense and delay. Adverse market conditions could impede such a
public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be
readily resold or on an issuer's ability to honor a demand for repayment. The
fact that there are contractual or legal restrictions on resale to the general
public or to certain institutions may not be indicative of the liquidity of
such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The Sub-Adviser anticipates that the market
for certain restricted securities such as institutional commercial paper will
expand further as a result of this new regulation and the development of
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the NASD.
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 for which there is a readily available market will not
be deemed to be illiquid if they meet guidelines established by the Board of
Trustees. The Adviser will monitor the liquidity of such restricted
securities subject to the supervision of the Board of Trustees. In reaching
liquidity decisions, the Adviser will consider, inter alia, the following
factors: (1) the frequency of trades and quotes for the security; (2) the
number of dealers wishing to purchase or sell the security and the number of
potential purchasers; (3) dealer undertakings to make a market in the security
and (4) the nature of the
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<PAGE> 40
security and the nature of the marketplace trades (e.g. the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer). Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period.
RISKS OF OPTIONS TRANSACTIONS. An exchange-traded option position may be
closed out only on a national securities exchange ("Exchange") which provides a
secondary market for an option of the same series. Although the Fund will
generally purchase or write only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market
on an Exchange will exist for any particular option at any particular time, and
for some exchange-traded options, no secondary market on an Exchange may exist.
In such event, it might not be possible to effect closing transactions in
particular options with the result that the Fund would have to exercise its
exchange-traded options in order to realize any profit and may incur
transaction costs in connection therewith. If the Fund as a covered call
option writer is unable to effect a closing purchase transaction in a secondary
market, it will not be able to sell the underlying security until the option
expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an Exchange
include the following (a) insufficient trading interest in certain options; (b)
restrictions or transactions imposed by an Exchange; (c) trading halts,
suspension or other restrictions imposed with respect to particular classes or
series of options or underlying securities; (d) interruption of the normal
operations on an Exchange; (e) inadequacy of the facilities of an Exchange or
the Options Clearing Corporation ("OCC") to handle current trading volume; or
(f) a decision by one or more Exchanges to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on the Exchange (or in the class or series of options) would cease to
exist, although outstanding options on that Exchange that had been issued by
the OCC as a result of trades on that Exchange would generally continue to be
exercisable in accordance with their terms.
In the event of the bankruptcy of a broker through which the Fund engages
in options transactions, the Fund could experience delays and/or losses in
liquidating open positions purchased or sold through the broker and/or incur a
loss of all or part of its margin deposits with the broker. Similarly, in the
event of the bankruptcy of the writer of an over-the-counter option with a
recognized United States securities dealer ("OTC option") purchased by the
Fund, the Fund could experience a loss of all or part of the value of the
option. Transactions are entered into by the Fund only with brokers or
financial institutions deemed creditworthy by the Sub-Adviser.
The hours of trading for options may not conform to the hours during
which the underlying securities are traded. To the extent that the option
markets close before the market for the underlying securities, significant
price and rate movements can take place in the underlying markets that cannot
be reflected in the option markets.
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TRUSTEES AND OFFICERS OF THE TRUST
*BRUCE R. BENT, President, Treasurer and Trustee, 810 Seventh Avenue, New
York, New York 10019.
Mr. Bent is President, Treasurer, and Trustee of The Reserve Fund ("RF"),
Reserve Institutional Trust ("RIT"), Reserve Tax-Exempt Trust ("RTET"),
Reserve New York Tax-Exempt Trust ("RNYTET") and Reserve Private Equity Series
("RPES"), Director, Vice President and Secretary of Reserve Management Company,
Inc. ("RMCI") and Reserve Management Corporation, and Chairman and Director of
Resrv Partners, Inc. Before 1968, he was associated with Stone & Webster
Securities Corp., and previously, Teachers Insurance and Annuity Association.
EDWIN EHLERT, JR., Trustee, 125 Elm Street, Westfield, New Jersey 07091.
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<PAGE> 42
Mr. Ehlert is President and Director of Ehlert Travel Associates, Inc.
(travel agency formerly called Travelong of Westfield, Inc.) and Ehlert Travel
Associates of Florida, Inc. (travel agency), and Trustee of RF, RIT, RNYTET,
RTET and RPES.
HENRI W. EMMET, Trustee, 176 East 71st Street, New York, New York 10021.
Mr. Emmet is the Managing Director of Servus Associates, Inc, and U.S.A.
Representative of the First National Bank of Southern Africa and Trustee of RF,
RET, RNYTET, RTET and RPES. Until 1989, he was Senior Vice President of the
New York branch of Banque Nationale de Paris.
BURTT R. EHRLICH, Trustee, 667 Madison Avenue, New York, New York 10021.
Mr. Ehrlich is a Director of Benson Eye Care Corp and a private investor.
Until 1992, he was President and Chairman of Ehrlich Bober Financial Corp., a
municipal securities investment firm.
*DONALD J. HARRINGTON, C.M, Trustee, St. John's University, Jamaica, New
York 11439.
The Reverend Harrington is President of St. John's University (NY) and a
Trustee of RF, RIT, RNYTET, RTET, and RPES. The Reverend Harrington served as
President of Niagara University from 1984 to 1989 and was Executive Vice
President of Niagara University from 1981 to 1984.
NIELS W. JOHNSEN, Trustee, 1 Whitehall Street, New York, New York 10004.
Mr. Johnsen is Chairman of the Board of International Shipholding Corp.
and Central Gulf Lines, Inc. (ship cargo carrier), Director of Centennial
Insurance Co. and Trustee of The Atlantic companies (insurance), RF, RIT,
RNYTET, RTET, and RPES.
THOMAS L. RHODES, Trustee, 150 East 35th Street, New York, New York 10016
Mr. Rhodes is President and a member of the Board of Directors of the
National Review. From 1976 to 1992 Mr. Rhodes was a partner with Goldman,
Sachs & Co., an investment banking firm.
MARC C. COZZOLINO, Counsel and Secretary, 810 Seventh Avenue, New York,
NY 10019.
Mr. Cozzolino is Counsel and Secretary of RF, RIT, RTET, RNYTET, and
RPES. Before joining The Reserve Funds in 1994, Mr. Cozzolino was a staff
attorney at the New Jersey Bureau of Securities.
PAT A. COLLETTI, Controller, 810 Seventh Avenue, New York, New York 10019.
Mr. Colletti is Controller of RF, RIT, RTET, RNYTET, and RPES. Prior to
joining The Reserve Funds in 1985, Mr. Colletti was Supervisor of Accounting of
Money Market Funds for the Dreyfus Corporation.
- ---------------
* Interested Trustee within the meaning of the Investment Company Act of 1940.
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 or 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 regard of the duties involved in the
conduct of their office.
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM FUND AND FUND COMPLEX
NAME OF TRUSTEE FROM FUND* (4 ADDITIONAL TRUSTS) PAID TO TRUSTEE*
------------------------------------------------------------------------------
<S> <C> <C>
Edwin Ehlert, Jr. $0 $16,500
Henri W. Emmet $0 $16,600
Rev. Donald J. Harrington $0 $16,500
Niels W. Johnsen $0 $16,500
Burtt R. Ehrlich $0 $0
Thomas L. Rhodes $0 $0
</TABLE>
Amount shown are for the Fund's fiscal year ending May 31, 1995.
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INVESTMENT MANAGEMENT AND OTHER AGREEMENTS
THE ADVISER. Reserve Management Company, Inc. ("RMCI" or "Adviser"), 14
Locust Place, Manhasset, New York, NY 11030, a registered investment Adviser,
manages the Trust and provides it with investment advice pursuant to an
Investment Management Agreement. Under the Investment Management Agreement,
the Adviser manages the Fund, is responsible for the day-to-day oversight of
the Trust's operations and otherwise administers the affairs of the Trust as it
deems advisable subject to the overall control and direction of the Trustees
and the investment policies and limitations of the Trust described in the
Prospectus and Statement of Additional Information. RMCI pays all employee
costs and other ordinary operating costs of the Fund pursuant to the Investment
Management Agreement which include: registration fees paid to the commission
and state regulators, costs associated with the annual update of each Fund's
registration statement, auditing annual financial statements, and printing and
mailing costs (exclusive of those associated with the Rule 12b-1 Plans).
Excluded from ordinary operating costs are interest charges, taxes, brokerage
fees, extraordinary legal and accounting fees and expenses, payments made
pursuant to the Trust's Distribution Plan and the fees of the disinterested
Trustees, for which the Fund pays its direct or allocated share.
For its management services, and for paying all of the employee costs,
costs of the Sub-Adviser and other ordinary operating expenses of the Trust,
RMCI is periodically paid a comprehensive fee, at the annual rate of 1.50% per
annum of the average daily net assets of the Fund.
The Investment Management Agreement is subject to annual review by and
must be approved at least annually by a vote of a majority of the Board of
Trustees, including a majority of those who are not "interested persons" as
defined in the Investment Company Act of 1940, cast in person at a meeting
called for the purpose of voting on such renewal. The Agreement terminates
automatically upon its assignment and may be terminated without penalty upon 60
days' written notice by vote of the Trustees, by vote of a majority of
outstanding voting shares of the Fund or by the Adviser.
THE SUB-ADVISER. Roanoke Asset Management ("Sub-Adviser"), 529 Fifth
Avenue, New York, New York 10017, a registered investment Adviser, acts as
Sub-Adviser to the Fund. The Adviser and Trust have entered into a
Sub-Advisory Agreement with the Sub- Adviser pursuant to which the Adviser will
pay any fees of the Sub-Adviser. The Sub-Advisory Agreement is subject to
annual review by and must be approved annually by the Trustees, including a
majority of those who are not "interested persons" as defined in the Investment
Company Act of 1940, cast in person at a meeting called for purpose of voting
on such renewal. The agreement automatically terminates upon its assignment
and may be terminated without penalty upon 60 days' written notice by vote of
the Trustees, by vote of a majority of outstanding voting shares of the Fund or
by the Sub-Adviser.
CUSTODIAN. Chemical Bank, 4 New York Plaza, New York, New York 10004 is
Custodian for the cash and securities of the Trust. The Custodian maintains
custody of the Trust's cash and securities, handles its securities settlements
and performs transaction processing for receipts and disbursements in
connection with the purchase and sale of the Trust's shares.
DISTRIBUTION AGREEMENT. Resrv Partners, Inc. ("RESRV"), 810 Seventh
Avenue, New York, New York 10019, is a distributor of the shares of the Trust.
RESRV is a "principal underwriter" for the Trust within the meaning of the
Investment Company Act of 1940, and as such acts as agent in arranging for the
continuous offering of Trust shares. RESRV has the right to enter into dealer
agreements with brokers or other persons of its choice for the sale of Trust
shares. RESRV's principal business is the distribution of shares of mutual
funds and it has retained no underwriting commissions during the last three
fiscal years.
The Distribution Agreement must be approved annually by the Trustees,
including a majority of those who are not "interested persons," as defined in
the Investment Company Act of 1940.
DISTRIBUTION PLAN. The Trust maintains a Distribution Plan ("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 Board and approved by
its shareholders. Pursuant to the Plan, the Distributor or its affiliates may
make payments ("assistance payments") to brokers, financial institutions
and financial intermediaries ("payees") in respect of Trust shareholder
accounts ("qualified accounts") as to which the payee has rendered distribution
assistance or other services. The Distributor may also retain amounts to pay
for advertising and marketing expenses. Assistance payments by the
Distributor are made to payees at an annual rate of .25% of the average net
asset value for Class A shares and of 1.00% of the average net asset value for
Class D shares. The Trustees have determined that there is a reasonable
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<PAGE> 44
likelihood that the Plan will benefit the Trust and its shareholders and that
its costs are primarily intended to result in the sale of the Trust's shares.
Under the Plan, the Trust's officers report quarterly the amounts and
purposes of assistance payments to the Trustees. During the continuance of the
Plan the selection and nomination of the disinterested Trustees of the Trust
are at the discretion of the disinterested Trustees currently in office.
The Plan and related agreements may be terminated at any time by a vote
of a majority of the outstanding voting securities of the Fund. The Plan and
related agreements may be renewed from year to year if approved by a vote of a
majority of the Board of Trustees, including a majority of those who are not
"interested persons", as defined in the Investment Company Act of 1940. 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 majority vote of the Board of Trustees, including a
majority of the disinterested Trustees, cast in person at a meeting called for
the purpose of such vote.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand L.L.P. 1301 Avenue of
Americas, New York, New York 10019 is the Trust's independent accountants.
PORTFOLIO TURNOVER, TRANSACTION CHARGES AND ALLOCATION
Subject to the overall supervision of the officers of the Trust, its
Board of Trustees, and the Adviser, the Sub-Adviser places all orders for the
purchase and sale of the Fund's investment securities. In general, in the
purchase and sale of investment securities the Sub-Adviser will seek to obtain
prompt and reliable execution of orders at the most favorable prices or yields.
In determining best price and execution, the Sub-Adviser may take into account
a dealer's operational and financial capabilities, the type of transaction
involved, the dealer's general relationship with the Fund's Sub-Adviser, and
any statistical, research, or other services provided by the dealer. 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 in good faith by the Fund's
Sub-Adviser. Brokers or dealers who execute investment securities transactions
for the Fund may also sell its shares; however, any such sales will not be
either a qualifying or disqualifying factor in the selection of brokers or
dealers. Subject to procedures adopted by, and the supervision of, the Board
of Trustees, the Sub-Adviser is authorized to place portfolio transactions
with brokers or dealers affiliated with it provided the commission or fee
charged is comparable to that charged by non-affiliated brokers or dealers on
comparable transactions involving similar securities being purchased or sold
during a comparable period of time on a securities exchange. Any such
transactions will be in accordance with Rule 17e-1 under the Investment Company
Act of 1940.
When transactions are made in the over-the-counter market, the Fund deals
with the primary market makers unless more favorable prices are otherwise
obtainable.
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 Trust. Each share represents an
interest in the respective series of the Trust proportionately equal to the
interest of each other share. If they deem it advisable in the best interests
of shareholders, the Trustees of the Trust may classify or reclassify any
unissued shares of the Trust by setting or changing the preferences, conversion
or other rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or 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 series be preferred over all other
series in respect of assets specifically allocated to such class. It is
anticipated that under most circumstances, the rights of any additional series
would be comparable unless otherwise required to respond to the particular
situation. Upon liquidation of the Trust, shareholders are entitled to share
pro rata in the net assets of their respective series of the Trust available
for distribution to such shareholders. No changes can be made to the Trust's
issued shares without shareholder approval.
Each Fund share when issued is fully paid, nonassessable and fully
transferable or redeemable at the shareholder's option. Each share has an
equal interest in the net assets of its series, equal rights to all dividends
and
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<PAGE> 45
other distributions from its series, and one vote for all purposes. Shares of
separate series 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.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
Regulations of the Securities and Exchange Commission provide that if a
series is separately affected by a matter requiring a vote (election of
Trustees, ratification of independent accountant selection, and approval of an
underwriting agreement are not considered to have such separate effect and may
be voted upon by the Trust as a whole), each such series votes separately. Each
series votes separately on such matters as approval of the Investment
Management Agreement and material amendments to the Plan, which require
approval by a majority of the effected 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 a 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 are normally made by check or wire transfer, but the
Trust may be authorized to make payment of redemptions partly or wholly in kind
(that is, by delivery of portfolio instruments valued at the same time as the
redemption net asset value is determined). The Trust has made an election
committing it to pay in cash all requests for redemption from the series
involved, by any shareholder or record, limited during any 90-day period to the
lesser of $250,000 or 1% of the net assets of the series at the beginning of
the period. The election is irrevocable pursuant to rules and regulations
under the Investment Company Act or 1940 unless withdrawal is permitted by
order of the Securities and Exchange Commission. 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.
DETERMINATION OF NET ASSET VALUE. Shares are offered at net asset value
plus a sales charge (if applicable). The net asset value of each Fund
and each class is calculated at the end of each business day (currently 4:00 PM
New York time) that the New York Stock Exchange is open for trading and on
other days there is a sufficient degree of trading to materially affect the
Fund's net asset value. The net asset value is not calculated on New Year's
Day, Presidents' Day, Good Friday, Memorial Day (observed), Independence Day,
Labor Day, Thanksgiving Day, Christmas Day and on other days the New York Stock
Exchange is closed for trading. The net asset value per share of each class is
determined by adding the value of all its securities and other assets,
subtracting its liabilities and dividing the result by the total number of
outstanding shares of each class that represent an interest in the Fund.
Investment securities are valued at the last sale price on the securities
exchange or national securities market on which such securities are primarily
traded. Securities not listed on an exchange or national securities market, or
securities in which there were no transactions, are valued at the average of
the last bid and asked prices, except in the case of open short positions where
the asked price is used for valuation purposes. Bid price is used when no
asked price is available. Market quotations for foreign securities in foreign
currencies are translated into United States dollars at the prevailing rates of
exchange. Any securities or other assets for which recent market quotations
are not readily available are valued at fair value as determined in good faith
by the Board of Trustees.
REDUCED SALES CHARGE. Officers, directors, full time employees and
Trustees, and any trust, pension, profit sharing or qualified retirement plan
of the Adviser, Sub-Adviser, the distributor, the Trust and any affiliate
thereof may purchase shares of the Fund at the net asset value per share.
Spouses and minor children of the foregoing may also purchase shares at net
asset value. In addition, Sub-Adviser advisory clients and related persons of
such may purchase shares at net asset value.
38
<PAGE> 46
DISTRIBUTIONS AND TAXES
The following is a general description of certain tax rules relating to
the Fund. It is not exhaustive and prospective investors may wish to consult
their tax advisers.
The Fund intends to qualify as a regulated investment company under the
Internal Revenue Code of 1986 ("Code") so long as such qualification is in the
best interests of shareholders. If it so qualifies, in any fiscal year in
which it distributes at least 90 percent of its taxable net income, the Fund
generally will not be subjected to federal income tax on such distributed
amounts. Shareholders of the Fund, however, will be subject to federal income
tax on any ordinary net income and net capital gains realized by the Fund and
distributed to shareholders as regular or capital gains dividends, whether
distributed in cash or in the form of additional shares. Net long term capital
gains distributions will be taxable to shareholders as long term capital gains,
regardless of the length of time the corresponding shares have been held.
Upon the taxable disposition (including a sale or redemption) of shares
of the Fund, a shareholder may realize a gain or loss depending upon his basis
in his shares. Such gain or loss generally will be treated as capital gain or
loss (if the shares are capital assets in the shareholder's hands) and will be
long-term or short-term, generally depending upon the shareholder's holding
period for the shares. However, a loss realized by a shareholder on the
disposition of Fund shares with respect to which capital gain dividends have
been paid will, to the extent of such capital gain dividends, be treated as
long-term capital loss if such shares have been held by the shareholder for six
months or less. Further, a loss realized on disposition will be disallowed to
the extent the shares disposed of are replaced (whether by reinvestment of
distributions or otherwise) within a period of 61 days beginning 30 days before
and ending 30 days after the shares are disposed of. In such a case, the basis
of the shares acquired will be adjusted to reflect the disallowed loss.
Shareholders receiving distributions in the form of additional shares will have
a cost basis for Federal income tax purposes in each share received equal to
the net asset value of a share of the Funds on the reinvestment date.
In order to qualify as a "regulated investment company" under the Code,
the Fund must, among other things, in each taxable year distribute at least 90
percent of its taxable income to shareholders, derive at least 90 percent of
its gross income from dividends, interest and gains from the sale or
disposition of securities and derive less than 30 percent of its gross income
from the sale or disposition of securities held for less than three months.
Accordingly, the Fund will be subject to certain restrictions including
restrictions in the writing of options on securities which have been held for
less than three months, purchasing and selling futures contracts held for less
than three months, in the writing of options which expire in less than three
months, and in effecting closing purchase transactions, with respect to options
which have been written less than three months prior to such transactions.
The Code imposes a non-deductible, 4% excise tax on regulated investment
companies that do not distribute to their shareholders in each calendar year an
amount equal to (i) 98% of their calendar year ordinary income; plus 98% of
their capital gain net income (the excess of short and long term capital
losses) for the one year period ending October 31. Dividends declared in
December of any year to shareholders of record on any date in December will be
deemed to have been received by the shareholders and paid by the Fund on the
record date, provided such dividends are paid by February 1 as of the following
year.
Dividends and distributions declared payable to shareholders of record
after September 30 of any year and paid before February 1 of the following
year, are considered taxable income to shareholders on December 31 in the year
declared even though paid in the next year.
Dividends to shareholders who are non-resident aliens may be subject to a
United States withholding tax at a rate of up to 30% under existing provisions
of the code applicable to foreign individuals and entities unless a reduced
rate of withholding or a withholding exemption is provided under applicable
treaty laws. Non-resident aliens are urged to consult their own tax adviser
concerning the applicability of the United States withholding tax.
The Code includes rules applicable to certain listed options, futures
contracts, and options on futures contracts which the Fund may write, purchase
or sell. Such options and contracts are classified as Section 1256 contracts
under the Code. The character of gain or loss resulting from the sale,
disposition, closing out, expiration or other termination of Section 1256
contracts is generally treated as long-term capital gain or loss to the extent
of 60% thereof and short-term capital gain or loss to the extent of 40% thereof
("60/40 gain or loss"). Such contracts, generally are required to be treated
as sold at market value on the last day of such fiscal year and on certain
other dates for federal income
39
<PAGE> 47
tax purposes ("marked-to-market"). Generally, over-the-counter options are not
classified as Section 1256 contracts and are not subject to the mark-to market
rule or to 60/40 gain or loss treatment. Any gains or losses recognized by the
Fund from transactions in over-the-counter options generally constitute
short-term capital gains or losses. If over-the-counter call options written,
or over-the-counter put options purchased, by the Fund are exercised, the gain
or loss realized on the sale of the underlying securities may be either
short-term or long-term, depending on the holding period of the securities. In
determining the amount of gain or loss, the sales proceeds are reduced by the
premium paid for over-the-counter puts or increased by the premium received for
over-the counter calls.
Generally, the hedging transactions undertaken by the Fund may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may
affect the character of gains (or losses) realized by the Fund. In addition,
losses realized by the Fund on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which the losses are
realized. Because only a few regulations implementing the straddle rules have
been promulgated, the tax consequences to the Fund of engaging in hedging
transactions are not entirely clear. Hedging transactions may increase the
amount of short-term capital gain realized by the Fund which is taxed as
ordinary income when distributed to Shareholders.
The Fund may make one or more of the elections available under the Code
which are applicable to straddles. If the Fund makes any of the elections,
this amount, character and timing of gains or losses from the affected straddle
positions will be determined under rules that vary according to the election(s)
made. The rules applicable under certain of the elections may operate to
accelerate the recognition of gains or losses from the affected straddle
positions.
Because the straddle rules may affect the character of gains or losses,
defer losses and/or accelerate the recognition of gains or losses from the
affected straddle position, the amount which may be distributed to Shareholder,
and which, will be taxed as ordinary income or long-term capital gain, may be
increased or decreased as compared to a fund that did not engage in such
hedging transactions.
The Code and the Treasury Regulations thereunder are subject to change by
legislative or administrative action either prospectively or retroactively.
Dividends paid by the Fund are generally expected to be subject to any
state or local taxes on income. Shareholders should consult their own
attorneys or tax advisers about the tax consequences related to investing in
the Fund.
PERFORMANCE INFORMATION
The Fund may from time to time advertise its total return. Total return
is computed by finding the average annual compounded rates of return over the
1, 5 and 10 year periods or up to the life of the Fund that would equate the
initial amount invested to the ending redeemable value, according to the
following formula:
P (1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10
year periods at the end of the 1, 5 or 10 year
periods (or fractional portion thereof)
In advertising and sales literature, the Fund may compare its performance
to (i) the Standard & Poor's 500 Stock Index ("S&P 500"), Dow Jones Industrial
Average ("DJIA"), the Russell 2000, or other unmanaged indices so that
investors may compare the Fund's results with those of a group of unmanaged
securities widely regarded by investors as representative of the securities
markets in general; (ii) other groups of mutual funds tracked by Lipper
Analytical Services, Inc. a widely used independent research firm which ranks
mutual funds by overall performance, investment objectives and assets, or
tracked by other services, companies, publications, or persons who rank mutual
funds on overall performance or other criteria; and (iii) the Consumer Price
Index (measure for inflation) to assess the real rate of return from an
investment in the Fund. Unmanaged indices may assume the reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs and expenses.
40
<PAGE> 48
The Fund may also compute aggregate total return for specified periods
based on a hypothetical Fund account with an assumed initial investment of
$10,000. The aggregate total return is determined by dividing the net asset
value of the account at the end of the specified period by the value of the
initial investment and is expressed as a percentage. Calculation of aggregate
total return reflects payment of the maximum sales charge and assumes
reinvestment of all income dividends and capital gain distributions during the
period.
The Fund may also quote annual, average annual and annualized total
return and aggregate total performance data both as a percentage and as a
dollar amount based on a hypothetical $10,000 investment for various periods.
Such data will be computed as described above, except that (1) the rates of
return calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return and (2) the maximum sales charge will
not be included with respect to annual, annualized or aggregate rates of return
calculations.
41
<PAGE> 49
REPORT OF INDEPENDENT ACCOUNTANTS
To The Shareholders and Board of Trustees of The Reserve Private Equity Series:
We have audited the accompanying statement of assets and liabilities,
including the schedule of portfolio investments, of the Emerging Growth Fund
(one of the Funds of the Reserve Private Equity Series) as of May 31, 1995, and
the related statement of operations, the statement of changes in net assets and
the financial highlights for the period November 14, 1994 (commencement of
operations) through May 31, 1995. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1995 by correspondence with the custodian and brokers or other auditing
procedures where confirmations from brokers were not received. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of the Emerging Growth Fund of the Reserve Private Equity Series as of
May 31, 1995, the results of its operations, the changes in its net assets, and
its financial highlights for the period referred to above, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
New York, New York
June 23, 1995
42
<PAGE> 50
RESERVE EMERGING GROWTH FUND (THE "FUND")
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reserve Emerging Growth Fund is a separate series of shares issued by The
Reserve Private Equity Series (the "Trust"). The Trust was formed under
Delaware law as a Delaware business trust. The Trust is registered under the
Investment Company Act of 1940, as amended, as a non-diversified open-end
management investment company. There are an unlimited number of shares of
beneficial interest of $.001 par value authorized in each series. The
accounting policies summarized below are consistently followed in the
preparation of the financial statements in conformity with generally
accepted accounting principles.
SECURITY VALUATION
Portfolio securities are stated at value. A security listed or traded on an
exchange is valued at its last sale price on the exchange where the security
is principally traded or, lacking any sales on a particular day, the
security is valued at the mean between the closing bid and asked prices on
that day. Each security traded in the over-the-counter market is valued at
the mean between its quoted bid and asked prices.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded on the trade date. Dividend income and
distributions to shareholders are recorded on the ex-dividend dates.
Interest income is accrued daily. Realized gains and losses from securities
transactions and unrealized appreciation or depreciation of securities are
reported on the identified cost basis for both financial statement and
Federal income tax purposes.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for net operating losses. The effect of these
differences for the year ended May 31, 1995 decreased undistributed net
investment loss by $9,569, and decreased aggregate paid in capital by
$9,569.
EXPENSES
Each series is charged only for its direct or allocated (in proportion to
net assets) share of expenses.
FEDERAL INCOME TAXES
It is the Trust's policy to comply with Subchapter M of the Internal Revenue
Code and to distribute substantially all of its taxable income to its
shareholders. Accordingly, no Federal income tax provision is required.
2. INVESTMENT ACTIVITY
Purchases and sales of securities for the period November 14, 1994
(commencement of operations) through May 31, 1995, other than short-term
securities, aggregated $1,377,800 and $406,988 respectively.
43
<PAGE> 51
RESERVE EMERGING GROWTH FUND (THE "FUND")
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1995 - (CONTINUED)
3. INVESTMENT MANAGEMENT AGREEMENT
Reserve Management Company, Inc. (RMCI), serves as the Fund's investment
adviser and pays substantially all ordinary operating expenses of the Fund
for which it receives a comprehensive fee at an annual rate of 1.50% of the
average daily net assets of the Fund.
RMCI is a majority shareholder of the Fund.
4. DISTRIBUTION ASSISTANCE
Pursuant to a Distribution Plan, the Fund will make payments of .25% per
annum of the average daily net assets of shareholder accounts as to which
the payee has rendered distribution assistance. During the period the Fund
paid $1,475 in distribution expenses to RMCI.
5. CAPITAL SHARE TRANSACTIONS
Transactions in capital shares for the period November 14, 1994
(commencement of operations) through May 31, 1995 were as follows:
<TABLE>
<CAPTION>
Shares Amount
------ ------
<S> <C> <C>
Shares sold 218,209 $2,268,282
Redeemed (116,596) (1,251,282)
--------- -------------
Net Increase 101,613 $1,017,000
========= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
44
<PAGE> 52
RESERVE EMERGING GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1995
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value
(cost $1,036,354) $1,204,251
Cash 51,093
Dividends receivable 60
----------
Total Assets 1,255,404
----------
LIABILITIES
Payable for investment securities purchased 14,534
----------
NET ASSETS $1,240,870
==========
NET ASSETS CONSIST OF (NOTE 1)
Capital Stock (Par Value $.001 per share) $ 102
Additional paid in capital 1,007,329
Undistributed net realized gain on investments 65,542
Net unrealized appreciation on investments (Note 1) 167,897
----------
NET ASSETS, at value, applicable to 101,613 outstanding shares
of Beneficial Interest (Note 5) $1,240,870
==========
NET ASSET VALUE, and redemption price per share ($1,240,870 / 101,613) $ 12.21
==========
Maximum offering price per share (100/95.5 of $12.21) $ 12.79
==========
</TABLE>
RESERVE EMERGING GROWTH FUND
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NOVEMBER 14, 1994
(COMMENCEMENT OF
OPERATIONS) THROUGH
MAY 31, 1995
--------------------
<S> <C> <C>
INVESTMENT INCOME
Dividends $ 755
EXPENSES
Comprehensive fee (Note 3) $ 8,849
12b-1 Fee (Note 4) 1,475
---------
Total Expenses 10,324
NET INVESTMENT LOSS (9,569)
Realized and Unrealized Gain on Investments
Net realized gain on investment securities: (Note 1)
Proceeds from sales of securities 406,988
Cost of securities sold (341,446) 65,542
---------
Net unrealized appreciation on investments 167,897
---------
Net realized and unrealized gain on investments 233,439
---------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 223,870
=========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
45
<PAGE> 53
RESERVE EMERGING GROWTH FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
NOVEMBER 14, 1994
(COMMENCEMENT OF
OPERATIONS) THROUGH
MAY 31, 1995
-------------------
<S> <C>
INCREASE IN NET ASSETS
FROM INVESTMENT OPERATIONS:
Net investment loss $ (9,569)
Net realized gain from investments 65,542
Net unrealized appreciation 167,897
-----------
Net increase in net assets resulting from
operations 223,870
-----------
FROM CAPITAL SHARE TRANSACTIONS (Note 5)
Net proceeds from sales of shares 2,268,282
Cost of shares redeemed (1,251,282)
-----------
Net increase in net assets resulting from
share transactions 1,017,000
-----------
NET INCREASE IN NET ASSETS 1,240,870
NET ASSETS:
Beginning of period 0
-----------
End of period $ 1,240,870
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
46
<PAGE> 54
RESERVE EMERGING GROWTH FUND (THE "FUND")
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1995 - (CONTINUED)
6. FINANCIAL HIGHLIGHTS (FOR ONE SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
NOVEMBER 14, 1994
(COMMENCEMENT OF
OPERATIONS) THROUGH
MAY 31, 1995
-------------------
<S> <C>
Net asset value, beginning of period $10.00
------
Income from investment operations
Net investment loss (.09)
Net realized and unrealized gain 2.30
------
Total from investment operations 2.21
------
Net asset value, end of period $12.21
======
Total Return 22.10%(2)
RATIOS/SUPPLEMENTAL DATA
Net assets in thousands, end of period $1,241
Ratio of expenses to average net assets 1.75%(1)
Ratio of net investment loss to average
net assets (1.62)%(1)
Portfolio turnover rate 43%
</TABLE>
- -------
(1) Annualized
(2) Total return is not annualized, and does not reflect impact
of sales load.
47
<PAGE> 55
RESERVE EMERGING GROWTH FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
MAY 31, 1995
<TABLE>
<CAPTION>
COMMON STOCKS VALUE
SHARES (NOTE 1)
------ --------
<S> <C> <C>
BIO-TECHNOLOGY (2.1%)
* Genzyme Corp. 700 $ 25,900
--------
CAPITAL GOODS - DIVERSIFIED (2.4%)
Danaher Corp. 1,000 30,250
--------
CAPITAL GOODS/INDUSTRIAL (12.0%)
* Benchmark Electronics Inc. 1,000 21,500
Magna International Inc. Cl. A 700 26,600
* Quad Systems Corp. 2,300 20,700
* Richey Electronics Inc. 3,500 24,063
* Vishay Intertechnology Inc. 840 55,545
--------
148,408
--------
COMMUNICATION - CONTENT (1.8%)
* Wescott Communications 1,500 22,500
--------
COMMUNICATION - EQUIPMENT (8.9%)
* Anadrigics Inc. 1,500 25,875
E.C.I. Telecom Ltd 900 15,188
* Premisys Communications Inc. 1,000 50,750
Scientific-Atlanta Inc. 1,000 18,625
--------
110,438
--------
COMMUNICATION - NETWORK (5.4%)
* Heartland Wireless Communications Inc. 1,500 34,500
* Intelcom Group Inc. 1,000 8,875
* People's Choice TV Corp. 1,000 24,187
--------
67,562
--------
COMPUTER NETWORKING (7.4%)
* Ascend Communications Inc. 900 34,875
* Lin Television Corp. 400 14,400
* Network Peripherals Inc. 1,000 22,000
* Shiva Corp. 500 19,375
--------
90,650
--------
COMPUTER SOFTWARE (8.1%)
Autodesk Inc. 800 29,600
* Data Translation Inc. 1,000 27,250
* Symantec Corp. 800 18,400
* Tivoli Systems Inc. 700 25,375
--------
100,625
--------
CONSUMER GROWTH (3.7%)
* Conso Products Co. 1,800 25,200
* Electronic Arts Co. 800 20,600
--------
45,800
--------
ELECTRONIC COMPONENTS - SEMICONDUCTOR (16.3%)
* Cirrus Logic Inc. 500 24,625
* Gasonics International Corp. 2,000 49,000
* Integrated Device Technology Inc. 700 30,450
* KLA Instruments Corp. 500 34,875
* Kulicke & Soffa Industries Inc. 1,500 63,750
--------
202,700
--------
</TABLE>
48
<PAGE> 56
RESERVE EMERGING GROWTH FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
MAY 31, 1995 - (CONTINUED)
<TABLE>
<CAPTION>
COMMON STOCKS (CONTINUED) VALUE
SHARES (NOTE 1)
------ --------
<S> <C> <C>
ENERGY (1.9%)
Cross Timbers Oil Co. 1,500 $ 23,625
----------
HEALTH (5.8%)
* National Dentex Corp. 3,000 39,000
* Pacificare Health Systems Inc. CI.B 500 33,125
----------
72,125
----------
MANAGED CARE (7.2%)
* Healthsource Inc. 700 27,650
* Horizon Healthcare Corp. 1,000 18,250
* Humana Inc. 1,000 21,125
* Phycor Inc. 750 22,594
----------
89,619
----------
MISC. CONSUMER (2.2%)
* On Assignment Inc. 1,500 26,812
----------
RESTAURANTS (2.9%)
* Cheesecake Factory Inc. 700 17,412
* Outback Steakhouse Inc. 600 17,925
----------
35,337
----------
RETAIL - SPECIALTY (5.6%)
* AnnTaylor Stores Corp. 600 12,525
* Staples Inc. 1,000 28,250
* The Sports Authority Inc. 1,500 28,875
----------
69,650
----------
SYSTEM SOFTWARE/CLIENT SERVER (3.4%)
* Informix Corp. 1,000 42,250
----------
TOTAL COMMON STOCKS (Cost $1,036,354) (97.10%) 1,204,251
Other assets, less liabilities (2.90%) 36,619
----------
NET ASSETS ( 100%) $1,240,870
==========
</TABLE>
Value of investments are shown as a percentage of Net Assets
* Non-income producing security.
For Federal income tax purposes the tax basis of investments owned at May 31,
1995 was $1,036,354, the aggregate gross unrealized appreciation for all
investments was $225,397 and aggregate gross unrealized depreciation for all
investments was $57,500.
SEE NOTES TO FINANCIAL STATEMENTS.
49
<PAGE> 57
RESERVE PRIVATE EQUITY SERIES
RESERVE MID-CAP GROWTH FUND
810 SEVENTH AVENUE, NEW YORK, N.Y. 10019
(800) 637-1700
---------------
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information describes Reserve Private Equity
Series ("Trust") and the Reserve Mid-Cap Growth Fund ("Mid-Cap Growth Fund" or
"Fund"). This Statement is not a Prospectus, but provides detailed information
to supplement the Prospectus and should be read in conjunction with the
Prospectus. A copy of the Prospectus may be obtained (without charge) from
Reserve Private Equity Series. This Statement is dated 1996.
TABLE OF CONTENTS
Page
----
Investment Policies
Other Policies
Trustees and Officers of the Trust
Investment Management and Other Agreements
Portfolio Turnover, Transaction Charges and
Allocation
Shares of Beneficial Interest
Purchase, Redemption and Pricing of Shares
Distributions and Taxes
Performance Information
Report of Independent Accountants
Financial Statements
50
<PAGE> 58
INVESTMENT POLICIES
The Fund has adopted as fundamental policies the following limitations on
its investment activities. These fundamental policies may not be changed
without a majority vote of the Fund shareholders, as defined in the Investment
Company Act of 1940. The Mid-Cap Growth Fund may not:
(1) borrow money except as a temporary measure for extraordinary or emergency
purposes and then only in an amount not to exceed 33 1/3% of the market value
of its assets; (2) issue senior securities as defined in the Investment
Company Act of 1940 except that the Fund may borrow money in accordance with
limitation (1); (3) act as an underwriter with respect to the securities of
others except to the extent that, in connection with the disposition of
portfolio securities, it may be deemed to be an underwriter under certain
federal securities laws; (4) invest 25% or more of the value of its total
assets in the securities of issue in any particular industry; (5) purchase,
sell or otherwise invest in real estate or commodities or commodity contracts
except the Fund may purchase readily marketable securities of companies holding
real estate or interests therein and interest rate futures contracts, stock
index futures contracts, and put and call options on interest rate futures
contracts; (6) invest in voting securities or in companies for the purpose of
exercising control; and (7) purchase securities on margin, except to obtain
such short-term credits as may be necessary for the clearance of transactions;
however, the Fund may make margin deposits in connection with options and
financial futures transactions.
The Fund has reserved the right to purchase and write interest rate
futures contracts, and put and call options on interest rate futures
contracts. The Fund does not intend to use these techniques for the
foreseeable future and that shareholders will be given notice should the Fund
determine that they will be used.
In addition to the fundamental investment policies listed above, the Fund
has voluntarily adopted certain policies that may be changed or amended by
action of the Trustees without requiring prior notice to or approval of
shareholders. In accordance with such policies and restrictions the Fund
cannot:
(1) purchase from or sell investment securities to any of the officers or
Trustees of the Trust, its investment Adviser, its investment Sub-Adviser, its
principal underwriter or the officers, principals or directors of its
investment Adviser, investment Sub-Adviser or principal underwriter; and (2)
purchase or retain securities of an issuer any of whose officers, directors,
trustees or securityholders is an officer or Trustee of the Trust or a member,
officer, director or trustee of the investment adviser or Sub- Adviser of the
Fund if one or more of such individuals owns beneficially more than one-half of
one percent (1/2 of 1%) of the securities (taken at market value) of such
issuer and such individuals owning more than one-half of one percent (1/2 of
1%) of such securities together beneficially own more than 5% of such
securities or both.
As a non-diversified company, the Fund is permitted to invest all of its
assets in a limited number of issuers. However, it intends to comply with
Subchapter M of the Internal Revenue Code in order to qualify as a regulated
investment company for federal income tax purposes. To so qualify, the Fund
must diversify its holdings so that, at the close of each quarter of its
taxable year, (a) at least 50% of the value of its total assets is represented
by cash, cash items, securities issued by the U.S. Government or its agencies
or instrumentalities, securities of other regulated investment companies, and
other securities limited generally with respect to any one issuer to an amount
not more than 5% of the total assets of the Fund and not more than 10% of the
outstanding voting securities of such issuer, and (b) not more than 25% of the
value of its total assets is invested in the securities of any one issuer
(other than the U.S. Government or its agencies or instrumentalities or
regulated investment companies), or in two or more issuers that the Fund
controls and that are engaged in the same or similar trades or businesses. In
the event of a decline in the market value of the securities of one or more
such issuers exceeding 5%, an investment in the Fund could entail greater risk
than in a fund which has a policy of diversification.
OTHER POLICIES
LENDING OF SECURITIES. The Fund may, to increase its income, lend its
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 and must
51
<PAGE> 59
consist of cash, bank letters of credit or securities of the United States
Government (or its agencies or instrumentalities). To be acceptable as
collateral, letters of credit must obligate a bank to pay amounts demanded by
the Fund if the demand meets the terms of the letter. Such terms and the
issuing bank would have to be satisfactory to the Fund. Any loan might be
secured by any one or more of the three types of collateral. The Fund receives
amounts equal to the dividends or interest on loaned securities and also
receives one or more 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,
which require the borrower, after notice, to redeliver the securities within
the normal settlement time of five business days. While voting rights may pass
with the loaned securities, if a material event will occur affecting an
investment on loan, the loan must be called and the securities voted.
WARRANTS. The Fund also may invest up to 5% of its net assets in warrants.
Included within this amount, may be warrants which are not listed on the New
York or American Stock Exchanges. A reason for investing in warrants is to
permit the Fund to participate in an anticipated increase in the market value
of a security without having to purchase the security to which the warrants
relate. Warrants convey no rights to dividends or voting rights, but only an
option to purchase equity securities of the issuer at a fixed price. If such
securities appreciate, the warrants may be exercised and sold at a gain, but a
loss will be incurred if such securities decrease in value or the term of the
warrant expires before it is exercised. The 5% limitation does not include
warrants acquired by the Fund in units or attached to other securities.
RISKS OF OPTIONS TRANSACTIONS. An exchange-traded option position may be
closed out only on a national securities exchange ("Exchange") which provides a
secondary market for an option of the same series. Although the Fund will
generally purchase or write only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market
on an Exchange will exist for any particular option at any particular time, and
for some exchange-traded options, no secondary market on an Exchange may exist.
In such event, it might not be possible to effect closing transactions in
particular options with the result that the Fund would have to exercise its
exchange-traded options in order to realize any profit and may incur
transaction costs in connection therewith. If the Fund as a covered call
option writer is unable to effect a closing purchase transaction in a secondary
market, it will not be able to sell the underlying security until the option
expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an Exchange
include the following (a) insufficient trading interest in certain options; (b)
restrictions or transactions imposed by an Exchange; (c) trading halts,
suspension or other restrictions imposed with respect to particular classes or
series of options or underlying securities; (d) interruption of the normal
operations on an Exchange; (e) inadequacy of the facilities of an Exchange or
the Options Clearing Corporation ("OCC") to handle current trading volume; or
(f) a decision by one or more Exchanges to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on the Exchange (or in the class or series of options) would cease to
exist, although outstanding options on that Exchange that had been issued by
the OCC as a result of trades on that Exchange would generally continue to be
exercisable in accordance with their terms.
In the event of the bankruptcy of a broker through which the Fund engages
in options transactions, the Fund could experience delays and/or losses in
liquidating open positions purchased or sold through the broker and/or incur a
loss of all or part of its margin deposits with the broker. Similarly, in the
event of the bankruptcy of the writer of an over-the-counter option with a
recognized United States securities dealer ("OTC option") purchased by the
Fund, the Fund could experience a loss of all or part of the value of the
option. Transactions are entered into by the Fund only with brokers or
financial institutions deemed creditworthy by the Sub-Adviser.
The hours of trading for options may not conform to the hours during
which the underlying securities are traded. To the extent that the option
markets close before the market for the underlying securities, significant
price and rate movements can take place in the underlying markets that cannot
be reflected in the option markets.
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<PAGE> 60
TRUSTEES AND OFFICERS OF THE TRUST
*BRUCE R. BENT, President, Treasurer and Trustee, 810 Seventh Avenue, New
York, New York 10019.
Mr. Bent is President, Treasurer, and Trustee of The Reserve Fund ("RF"),
Reserve Institutional Trust ("RIT"), Reserve Tax-Exempt Trust ("RTET"),
Reserve New York Tax-Exempt Trust ("RNYTET") and Reserve Private Equity Series
("RPES"), Director, Vice President and Secretary of Reserve Management Company,
Inc. ("RMCI") and Reserve Management Corporation, and Chairman and Director of
Resrv Partners, Inc. Before 1968, he was associated with Stone & Webster
Securities Corp., and previously, Teachers Insurance and Annuity Association.
EDWIN EHLERT, JR., Trustee, 125 Elm Street, Westfield, New Jersey 07091.
Mr. Ehlert is President and Director of Ehlert Travel Associates, Inc.
(travel agency formerly called Travelong of Westfield, Inc.) and Ehlert Travel
Associates of Florida, Inc. (travel agency), and Trustee of RF, RIT, RNYTET,
RTET and RPES.
HENRI W. EMMET, Trustee, 176 East 71st Street, New York, New York 10021.
Mr. Emmet is the Managing Director of Servus Associates, Inc, and U.S.A.
Representative of the First National Bank of Southern Africa and Trustee of RF,
RET, RNYTET, RTET and RPES. Until 1989, he was Senior Vice President of the
New York branch of Banque Nationale de Paris.
BURTT R. EHRLICH, Trustee, 667 Madison Avenue, New York, New York 10021.
Mr. Ehrlich is a Director of Benson Eye Care Corp and a private investor.
Until 1992, he was President and Chairman of Ehrlich Bober Financial Corp., a
municipal securities investment firm.
*DONALD J. HARRINGTON, C.M, Trustee, St. John's University, Jamaica, New
York 11439.
The Reverend Harrington is President of St. John's University (NY) and a
Trustee of RF, RIT, RNYTET, RTET and RPES. The Reverend Harrington served as
President of Niagara University from 1984 to 1989 and was Executive Vice
President of Niagara University from 1981 to 1984. The Reverend Harrington
also served as Director of the Bear Stearns Companies Inc. since 1993.
NIELS W. JOHNSEN, Trustee, 1 Whitehall Street, New York, New York 10004.
Mr. Johnsen is Chairman of the Board of International Shipholding Corp.
and Central Gulf Lines, Inc. (ship cargo carrier), Director of Centennial
Insurance Co. and Trustee of The Atlantic companies (insurance), RF, RIT,
RNYTET, RTET, and RPES.
THOMAS L. RHODES, Trustee, 150 East 35th Street, New York, New York 10016
Mr. Rhodes is President and a member of the Board of Directors of the
National Review. From 1976 to 1992 Mr. Rhodes was a partner with Goldman,
Sachs & Co., an investment banking firm.
MARC C. COZZOLINO, Counsel and Secretary, 810 Seventh Avenue, New York,
NY 10019.
Mr. Cozzolino is Counsel and Secretary of RF, RIT, RTET, RNYTET, and
RPES. Before joining The Reserve Funds in 1994, Mr. Cozzolino was a staff
attorney at the New Jersey Bureau of Securities.
PAT A. COLLETTI, Controller, 810 Seventh Avenue, New York, New York 10019.
Mr. Colletti is Controller of RF, RIT, RTET, RNYTET and RPES. Prior to
joining The Reserve Funds in 1985, Mr. Colletti was Supervisor of Accounting
of Money Market Funds for the Dreyfus Corporation.
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<PAGE> 61
- ---------------
* Interested Trustee within the meaning of the Investment Company Act of 1940.
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 or 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 regard of the duties involved in the
conduct of their office.
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM FUND AND FUND COMPLEX
NAME OF TRUSTEE FROM FUND* (4 ADDITIONAL TRUSTS) PAID TO TRUSTEE*
------------------------------------------------------------------------------
<S> <C> <C>
Edwin Ehlert, Jr. $0 $16,500
Henri W. Emmet $0 $16,600
Rev. Donald J. Harrington $0 $16,500
Niels W. Johnsen $0 $16,500
Burtt R. Ehrlich $0 $0
Thomas L. Rhodes $0 $0
</TABLE>
Amount shown are for the Fund's fiscal year ending May 31, 1995.
INVESTMENT MANAGEMENT AND OTHER AGREEMENTS
The Adviser. Reserve Management Company, Inc. ("Adviser"), 14 Locust
Place, Manhasset, New York, NY 11030, a registered investment adviser, manages
the Trust and provides it with investment advice pursuant to an Investment
Management Agreement. Under the Investment Management Agreement, the Adviser
manages the Fund, is responsible for the day-to-day oversight of the Trust's
operations and otherwise administers the affairs of the Trust as it deems
advisable subject to the overall control and direction of the Trustees and the
investment policies and limitations of the Trust described in the Prospectus
and Statement of Additional Information. RMCI pays all employee costs and other
ordinary operating costs of the Fund pursuant to the Investment Management
Agreement which include: registration fees paid to the commission and state
regulators, costs associated with the annual update of each Fund's registration
statement, auditing annual financial statements, and printing and mailing
costs (exclusive of those associated with the Rule 12b-1 Plans).
Excluded from ordinary operating costs are interest charges, taxes,
brokerage fees, extraordinary legal and accounting fees and expenses, payments
made pursuant to the Trust's Distribution Plan and the fees of the
disinterested Trustees, for which the Fund pays its direct or allocated share.
For its management services, and for paying all of the employee costs,
costs of the Sub-Adviser and other ordinary operating expenses of the Trust,
RMCI is periodically paid a comprehensive fee, at the annual rate of 1.50% per
annum of the average daily net assets of the Fund.
The Investment Management Agreement is subject to annual review by and
must be approved at least annually by a vote of a majority of the Board of
Trustees, including a majority of those who are not "interested persons" as
defined in the Investment Company Act of 1940, cast in person at a meeting
called for the purpose of voting on such renewal. The Agreement terminates
automatically upon its assignment and may be terminated without penalty upon 60
days' written notice by vote of the Trustees, by vote of a majority of
outstanding voting shares of the Fund or by the Adviser.
THE SUB-ADVISER. Cambridge Equity Advisors ("Sub-Adviser"), 5214 Maryland
Way, Suite 309, Brentwood, Tennessee 37027 a registered investment Adviser,
acts as Sub-Adviser to the Fund. The Adviser and Trust have entered into a
Sub-Advisory Agreement with the Sub-Adviser pursuant to which the Adviser will
pay any fees of the Sub-Adviser. The Sub-Advisory Agreement is subject to
annual review by and must be approved annually by the Trustees, including a
majority of those who are not "interested persons" as defined in the Investment
Company Act of 1940, cast in person at a meeting called for purpose of voting
on such renewal. The agreement automatically terminates upon its assignment
and may be terminated without penalty upon 60 days' written notice by vote of
the Trustees, by vote of a majority of outstanding voting shares of the Fund or
by the Sub-Adviser.
CUSTODIAN. Chemical Bank, 4 New York Plaza, New York, New York 10004 is
Custodian for the cash and securities of the Trust. The Custodian maintains
custody of the Trust's cash and securities, handles its securities settlements
and performs transaction processing for receipts and disbursements in
connection with the purchase and sale of the Trust's shares.
DISTRIBUTION AGREEMENT. Resrv Partners, Inc. ("RESRV"), 810 Seventh
Avenue, New York, New York 10019, is a distributor of the shares of the Trust.
RESRV is a "principal underwriter" for the Trust within the meaning of the
Investment Company Act of 1940, and as such acts as agent in arranging for the
continuous offering of Trust shares. RESRV has the right to enter into dealer
agreements with brokers or other persons of its choice for the sale of Trust
shares. RESRV's principal business is the distribution of shares of mutual
funds and it has retained no underwriting commissions during the last three
fiscal years.
The Distribution Agreement must be approved annually by the Trustees,
including a majority of those who are not "interested persons," as defined in
the Investment Company Act of 1940.
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<PAGE> 62
DISTRIBUTION PLAN. The Trust maintains a Distribution Plan ("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 Board and
approved by its shareholders. Pursuant to the Plan, the Distributor or its
affiliates may make payments ("assistance payments") to brokers, financial
institutions and financial intermediaries ("payees") in respect of Trust
shareholder accounts ("qualified accounts") as to which the payee has rendered
distribution assistance or other services. The Distributor may also retain
amounts to pay for advertising and marketing expenses. Assistance payments by
the Distributor are made to payees at an annual rate of .25% of the average
net asset value for Class A shares and at an annual rate of 1.00% of the
average net asset value for Class D shares. The Trustees have determined that
there is a reasonable likelihood that the Plan will benefit the Trust and its
shareholders and that its costs are primarily intended to result in the sale of
the Trust's shares.
Under the Plan, the Trust's officers report quarterly the amounts and
purposes of assistance payments to the Trustees. During the continuance of the
Plan the selection and nomination of the disinterested Trustees of the Trust
are at the discretion of the disinterested Trustees currently in office.
The Plan and related agreements may be terminated at any time by a vote
of a majority of the outstanding voting securities of the Fund. The Plan and
related agreements may be renewed from year to year if approved by a vote of a
majority of the Board of Trustees, including a majority of those who are not
"interested persons", as defined in the Investment Company Act of 1940. 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 majority vote of the Board of Trustees, including a
majority of the disinterested Trustees, cast in person at a meeting called for
the purpose of such vote.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand L.L.P., 1301 Avenue of
Americas, New York, New York 10019 is the Trust's independent accountants.
PORTFOLIO TURNOVER, TRANSACTION CHARGES AND ALLOCATION
Subject to the overall supervision of the officers of the Trust, its
Board of Trustees, and the Adviser, the Sub-Adviser places all orders for the
purchase and sale of the Fund's investment securities. In general, in the
purchase and sale of investment securities the Sub-Adviser will seek to obtain
prompt and reliable execution of orders at the most favorable prices or yields.
In determining best price and execution, the Sub-Adviser may take into account
a dealer's operational and financial capabilities, the type of transaction
involved, the dealer's general relationship with the Fund's Sub-Adviser, and
any statistical, research, or other services provided by the dealer. 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 in good faith by the Fund's
Sub-Adviser. Brokers or dealers who execute investment securities transactions
for the Fund may also sell its shares; however, any such sales will not be
either a qualifying or disqualifying factor in the selection of brokers or
dealers. Subject to procedures adopted by, and the supervision of, the Board
of Trustees, the Sub-Adviser is authorized to place portfolio transactions
with brokers or dealers affiliated with it provided the commission or fee
charged is comparable to that charged by non-affiliated brokers or dealers on
comparable transactions involving similar securities being purchased or sold
during a comparable period of time on a securities exchange. Any such
transactions will be in accordance with Rule 17e-1 under the Investment Company
Act of 1940.
When transactions are made in the over-the-counter market, the Fund deals
with the primary market makers unless more favorable prices are otherwise
obtainable.
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 Trust. Each share represents an
interest in the respective series of the Trust proportionately equal to the
interest of each other share. If they deem it advisable in the best interests
55
<PAGE> 63
of shareholders, the Trustees of the Trust may classify or reclassify any
unissued shares of the Trust by setting or changing the preferences, conversion
or other rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or 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 series be preferred over all other
series in respect of assets specifically allocated to such class. It is
anticipated that under most circumstances, the rights of any additional series
would be comparable unless otherwise required to respond to the particular
situation. Upon liquidation of the Trust, shareholders are entitled to share
pro rata in the net assets of their respective series of the Trust available
for distribution to such shareholders. No changes can be made to the Trust's
issued shares without shareholder approval.
Each Fund share when issued is fully paid, nonassessable and fully
transferable or redeemable at the shareholder's option. Each share has an
equal interest in the net assets of its series, equal rights to all dividends
and other distributions from its series, and one vote for all purposes. Shares
of separate series 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.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
Regulations of the Securities and Exchange Commission provide that if a
series is separately affected by a matter requiring a vote (election of
Trustees, ratification of independent accountant selection, and approval of an
underwriting agreement are not considered to have such separate effect and may
be voted upon by the Trust as a whole), each such series votes separately. Each
series votes separately on such matters as approval of the Investment
Management Agreement and material amendments to the Plan, which require
approval by a majority of the effected 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 a 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 are normally made by check or wire transfer, but the
Trust may be authorized to make payment of redemptions partly or wholly in kind
(that is, by delivery of portfolio instruments valued at the same time as the
redemption net asset value is determined). The Trust has made an election
committing it to pay in cash all requests for redemption from the series
involved, by any shareholder or record, limited during any 90-day period to the
lesser of $250,000 or 1% of the net assets of the series at the beginning of
the period. The election is irrevocable pursuant to rules and regulations
under the Investment Company Act or 1940 unless withdrawal is permitted by
order of the Securities and Exchange Commission. 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.
DETERMINATION OF NET ASSET VALUE. Shares are offered at net asset value
plus a sales charge (if applicable). The net asset value of the Fund is
calculated at the end of each business day (currently 4:00 PM New York time)
that the New York Stock Exchange is open for trading and on other days there is
a sufficient degree of trading to materially affect the Fund's net asset value.
The net asset value is not calculated on New Year's Day, Presidents' Day, Good
Friday, Memorial Day (observed), Independence Day, Labor Day, Thanksgiving Day,
Christmas Day and on other days the New York Stock Exchange is closed for
trading. The net asset value per share of the Fund is determined by adding the
value of all its securities and other assets, subtracting its liabilities and
dividing the result by the total number of the class' outstanding shares that
represent the class' proportionate interest in the Fund.
Investment securities are valued at the last sale price on the securities
exchange or national securities market on which such securities are primarily
traded. Securities not listed on an exchange or national securities market, or
securities in which there were no transactions, are valued at the average of
the last bid and asked prices, except in the case of open short positions where
the asked price is used for valuation purposes. Bid price is used when no
56
<PAGE> 64
asked price is available. Market quotations for foreign securities in foreign
currencies are translated into United States dollars at the prevailing rates of
exchange. Any securities or other assets for which recent market quotations
are not readily available are valued at fair value as determined in good faith
by the Board of Trustees.
REDUCED SALES CHARGE. Officers, directors, full time employees and
Trustees, and any trust, pension, profit sharing or qualified retirement plan
of the Adviser, Sub-Adviser, the distributor, the Trust and any affiliate
thereof may purchase shares of the Fund at the net asset value per share.
Spouses and minor children of the foregoing may also purchase shares at net
asset value. In addition, Sub-Adviser advisory clients and related persons of
such may purchase shares at net asset value.
DISTRIBUTIONS AND TAXES
The following is a general description of certain tax rules relating to
the Fund. It is not exhaustive and prospective investors may wish to consult
their tax advisers.
The Fund intends to qualify as a regulated investment company under the
Internal Revenue Code of 1986 ("Code") so long as such qualification is in the
best interests of shareholders. If it so qualifies, in any fiscal year in
which it distributes at least 90 percent of its taxable net income, the Fund
generally will not be subjected to federal income tax on such distributed
amounts. Shareholders of the Fund, however, will be subject to federal income
tax on any ordinary net income and net capital gains realized by the Fund and
distributed to shareholders as regular or capital gains dividends, whether
distributed in cash or in the form of additional shares. Net long term capital
gains distributions will be taxable to shareholders as long term capital gains,
regardless of the length of time the corresponding shares have been held.
Upon the taxable disposition (including a sale or redemption) of shares
of the Fund, a shareholder may realize a gain or loss depending upon his basis
in his shares. Such gain or loss generally will be treated as capital gain or
loss (if the shares are capital assets in the shareholder's hands) and will be
long-term or short-term, generally depending upon the shareholder's holding
period for the shares. However, a loss realized by a shareholder on the
disposition of Fund shares with respect to which capital gain dividends have
been paid will, to the extent of such capital gain dividends, be treated as
long-term capital loss if such shares have been held by the shareholder for six
months or less. Further, a loss realized on disposition will be disallowed to
the extent the shares disposed of are replaced (whether by reinvestment of
distributions or otherwise) within a period of 61 days beginning 30 days before
and ending 30 days after the shares are disposed of. In such a case, the basis
of the shares acquired will be adjusted to reflect the disallowed loss.
Shareholders receiving distributions in the form of additional shares will have
a cost basis for Federal income tax purposes in each share received equal to
the net asset value of a share of the Funds on the reinvestment date.
In order to qualify as a "regulated investment company" under the Code,
the Fund must, among other things, in each taxable year distribute at least 90
percent of its taxable income to shareholders, derive at least 90 percent of
its gross income from dividends, interest and gains from the sale or
disposition of securities and derive less than 30 percent of its gross income
from the sale or disposition of securities held for less than three months.
Accordingly, the Fund will be subject to certain restrictions including
restrictions in the writing of options on securities which have been held for
less than three months, purchasing and selling futures contracts held for less
than three months, in the writing of options which expire in less than three
months, and in effecting closing purchase transactions, with respect to options
which have been written less than three months prior to such transactions.
The Code imposes a non-deductible, 4% excise tax on regulated investment
companies that do not distribute to their shareholders in each calendar year an
amount equal to (i) 98% of their calendar year ordinary income; plus 98% of
their capital gain net income (the excess of short and long term capital
losses) for the one year period ending October 31. Dividends declared in
December of any year to shareholders of record on any date in December will be
deemed to have been received by the shareholders and paid by the Fund on the
record date, provided such dividends are paid by February 1 as of the following
year.
Dividends and distributions declared payable to shareholders of record
after September 30 of any year and paid before February 1 of the following
year, are considered taxable income to shareholders on December 31 in the year
declared even though paid in the next year.
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<PAGE> 65
Dividends to shareholders who are non-resident aliens may be subject to a
United States withholding tax at a rate of up to 30% under existing provisions
of the code applicable to foreign individuals and entities unless a reduced
rate of withholding or a withholding exemption is provided under applicable
treaty laws. Non-resident aliens are urged to consult their own tax adviser
concerning the applicability of the United States withholding tax.
The Code includes rules applicable to certain listed options, futures
contracts, and options on futures contracts which the Fund may write, purchase
or sell. Such options and contracts are classified as Section 1256 contracts
under the Code. The character of gain or loss resulting from the sale,
disposition, closing out, expiration or other termination of Section 1256
contracts is generally treated as long-term capital gain or loss to the extent
of 60% thereof and short-term capital gain or loss to the extent of 40% thereof
("60/40 gain or loss"). Such contracts, generally are required to be treated
as sold at market value on the last day of such fiscal year and on certain
other dates for federal income tax purposes ("marked-to-market"). Generally,
over- the-counter options are not classified as Section 1256 contracts and are
not subject to the mark-to market rule or to 60/40 gain or loss treatment. Any
gains or losses recognized by the Fund from transactions in over-the-counter
options generally constitute short-term capital gains or losses. If
over-the-counter call options written, or over-the-counter put options
purchased, by the Fund are exercised, the gain or loss realized on the sale of
the underlying securities may be either short-term or long-term, depending on
the holding period of the securities. In determining the amount of gain or
loss, the sales proceeds are reduced by the premium paid for over-the-counter
puts or increased by the premium received for over-the counter calls.
The Code and the Treasury Regulations thereunder are subject to change by
legislative or administrative action either prospectively or retroactively.
Dividends paid by the Fund are generally expected to be subject to any
state or local taxes on income. Shareholders should consult their own
attorneys or tax advisers about the tax consequences related to investing in
the Fund.
PERFORMANCE INFORMATION
The Fund may from time to time advertise its total return. Total return
is computed by finding the average annual compounded rates of return over the
1, 5 and 10 year periods or up to the life of the Fund that would equate the
initial amount invested to the ending redeemable value, according to the
following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10
year periods at the end of the 1, 5 or 10 year
periods (or fractional portion thereof)
In advertising and sales literature, the Fund may compare its performance
to (i) the Standard & Poor's 500 Stock Index ("S&P 500"), Dow Jones Industrial
Average ("DJIA"), the Russell 2000, or other unmanaged indices so that
investors may compare the Fund's results with those of a group of unmanaged
securities widely regarded by investors as representative of the securities
markets in general; (ii) other groups of mutual funds tracked by Lipper
Analytical Services, Inc. a widely used independent research firm which ranks
mutual funds by overall performance, investment objectives and assets, or
tracked by other services, companies, publications, or persons who rank mutual
funds on overall performance or other criteria; and (iii) the Consumer Price
Index (measure for inflation) to assess the real rate of return from an
investment in the Fund. Unmanaged indices may assume the reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs and expenses.
The Fund may also compute aggregate total return for specified periods
based on a hypothetical Fund account with an assumed initial investment of
$10,000. The aggregate total return is determined by dividing the net asset
value of the account at the end of the specified period by the value of the
initial investment and is expressed as a percentage. Calculation of aggregate
total return reflects payment of the maximum sales charge and assumes
reinvestment of all income dividends and capital gain distributions during the
period.
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The Fund may also quote annual, average annual and annualized total
return and aggregate total performance data both as a percentage and as a
dollar amount based on a hypothetical $10,000 investment for various periods.
Such data will be computed as described above, except that (1) the rates of
return calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return and (2) the maximum sales charge will
not be included with respect to annual, annualized or aggregate rates of return
calculations.
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RESERVE PRIVATE EQUITY SERIES
RESERVE BLUE CHIP GROWTH FUND
810 SEVENTH AVENUE, NEW YORK, N.Y. 10019
(800) 637-1700
---------------
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information describes Reserve Private Equity
Series and the Reserve Blue Chip Growth Fund ("Growth Fund" or "Fund"). This
Statement is not a Prospectus, but provides detailed information to supplement
the Prospectus and should be read in conjunction with the Prospectus. A copy
of the Prospectus may be obtained (without charge) from Reserve Private Equity
Series. This Statement is dated 1995.
TABLE OF CONTENTS
Page
----
Investment Policies
Other Policies
Trustees and Officers of the Trust
Investment Management and Other Agreements
Portfolio Turnover, Transaction Charges and
Allocation
Shares of Beneficial Interest
Purchase, Redemption and Pricing of Shares
Distributions and Taxes
Performance Information
Report of Independent Accountants
Financial Statements
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INVESTMENT POLICIES
The Fund has adopted as fundamental policies the following limitations on
its investment activities. These fundamental policies may not be changed without
a majority vote of the Fund shareholders, as defined in the Investment Company
Act of 1940. The Blue Chip Growth Fund may not:
(1) borrow money except as a temporary measure for extraordinary or emergency
purposes and then only in an amount not to exceed 33 1/3% of the market value of
its assets; (2) issue senior securities as defined in the Investment Company Act
of 1940 except that the Fund may borrow money in accordance with limitation (1);
(3) act as an underwriter with respect to the securities of others except to the
extent that, in connection with the disposition of portfolio securities, it may
be deemed to be an underwriter under certain federal securities laws; (4) invest
25% or more of the value of its total assets in the securities of issuers in any
particular industry; (5) purchase, sell or otherwise invest in real estate or
commodities or commodity contracts except the Fund may purchase readily
marketable securities of companies holding real estate or interests therein and
interest rate futures contracts, stock index futures contracts, and put and
call options on interest rate futures contracts; (6) invest in voting
securities or in companies for the purpose of exercising control.
The Fund has reserved the right to purchase and write interest rate
futures contracts, and put and call options on interest rate futures
contracts. The Fund does not intend to use these techniques for the
foreseeable future and that shareholders will be given notice should the Fund
determine that they will be used.
In addition to the fundamental investment policies listed above, the Fund
has voluntarily adopted certain policies that may be changed or amended by
action of the Trustees without requiring prior notice to or approval of
shareholders. In accordance with such policies and restrictions the Fund cannot:
(1) purchase from or sell investment securities to any of the officers or
Trustees of the Trust, its investment Adviser its investment Sub-Adviser, its
principal underwriter or the officers, principals or directors of its investment
Adviser, investment Sub-Adviser or principal underwriter; and (2) purchase or
retain securities of an issuer any of whose officers, directors, trustees or
securityholders is an officer or Trustee of the Trust or a member, officer,
director or trustee of the investment Adviser or Sub-Adviser of the Fund if one
or more of such individuals owns beneficially more than one-half of one percent
(1/2 of 1%) of the securities (taken at market value) of such issuer and such
individuals owning more than one-half of one percent (1/2 of 1%) of such
securities together beneficially own more than 5% of such securities or both.
As a non-diversified company, the Fund is permitted to invest all of its
assets in a limited number of issuers. However, it intends to comply with
Subchapter M of the Internal Revenue Code in order to qualify as a regulated
investment company for federal income tax purposes. To so qualify, the Fund must
diversify its holdings so that, at the close of each quarter of its taxable
year, (a) at least 50% of the value of its total assets is represented by cash,
cash items, securities issued by the U.S. Government or its agencies or
instrumentalities, securities of other regulated investment companies, and other
securities limited generally with respect to any one issuer to an amount not
more than 5% of the total assets of the Fund and not more than 10% of the
outstanding voting securities of such issuer, and (b) not more than 25% of the
value of its total assets is invested in the securities of any one issuer (other
than the U.S. Government or its agencies or instrumentalities or regulated
investment companies), or in two or more issuers that the Fund controls and that
are engaged in the same or similar trades or businesses. In the event of a
decline in the market value of the securities of one or more such issuers
exceeding 5%, an investment in the Fund could entail greater risk than in a fund
which has a policy of diversification.
OTHER POLICIES
LENDING OF SECURITIES. The Fund may, to increase its income, lend its 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 and must
consist of cash, bank letters of credit or securities of the United States
Government (or its agencies or
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<PAGE> 69
instrumentalities). To be acceptable as collateral, letters of credit must
obligate a bank to pay amounts demanded by the Fund if the demand meets the
terms of the letter. Such terms and the issuing bank would have to be
satisfactory to the Fund. Any loan might be secured by any one or more of the
three types of collateral. The Fund receives amounts equal to the dividends or
interest on loaned securities and also receives one or more 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, which require the borrower, after notice, to redeliver the
securities within the normal settlement time of five business days. While voting
rights may pass with the loaned securities, if a material event will occur
affecting an investment on loan, the loan must be called and the securities
voted.
WARRANTS. The Fund also may invest up to 5% of its net assets in warrants.
Included within this amount, may be warrants which are not listed on the New
York or American Stock Exchanges. A reason for investing in warrants is to
permit the Fund to participate in an anticipated increase in the market value of
a security without having to purchase the security to which the warrants relate.
Warrants convey no rights to dividends or voting rights, but only an option to
purchase equity securities of the issuer at a fixed price. If such securities
appreciate, the warrants may be exercised and sold at a gain, but a loss will be
incurred if such securities decrease in value or the term of the warrant expires
before it is exercised. The 5% limitation does not include warrants acquired by
the Fund in units or attached to other securities.
TRUSTEES AND OFFICERS OF THE TRUST
*BRUCE R. BENT, President, Treasurer and Trustee, 810 Seventh Avenue,
New York, New York 10019.
Mr. Bent is President, Treasurer, and Trustee of The Reserve Fund
("RF"), Reserve Institutional Trust ("RIT"), Reserve Tax-Exempt Trust ("RTET"),
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
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<PAGE> 70
Corporation, and Chairman and Director of Resrv Partner, Inc. Before 1968, he
was associated with Stone & Webster Securities Corp., and previously, Teachers
Insurance and Annuity Association.
EDWIN EHLERT, JR., Trustee, 125 Elm Street, Westfield, New Jersey 07091.
Mr. Ehlert is President and Director of Ehlert Travel Associates, Inc.
(travel agency formerly called Travelong of Westfield, Inc.) and Ehlert Travel
Associates of Florida, Inc. (travel agency), and Trustee of RF, RIT, RNYTET,
RTET, and RPES.
HENRI W. EMMET, Trustee, 176 East 71st Street, New York, New York 10021.
Mr. Emmet is the Managing Director of Servus Associates, Inc. and U.S.A.
Representative of the First National Bank of Southern Africa and Trustee of RF,
RET, RNYTET, RTET, and RPES. Until 1989, he was Senior Vice President of the
New York branch of Banque Nationale de Paris.
BURTT R. EHRLICH, Trustee, 667 Madison Avenue, New York, New York 10021.
Mr. Ehrlich is a Director of Benson Eye Care Corp and a private investor.
Until 1992, he was President and Chairman of Ehrlich Bober Financial Corp., a
municipal securities investment firm.
*DONALD J. HARRINGTON, C.M, Trustee, St. John's University, Jamaica, New
York 11439.
The Reverend Harrington is President of St. John's University (NY) and a
Trustee of RF, RIT, RNYTET, RTET, and RPES. The Reverend Harrington served as
President of Niagara University from 1984 to 1989 and was Executive Vice
President of Niagara University from 1981 to 1984.
NIELS W. JOHNSEN, Trustee, 1 Whitehall Street, New York, New York 10004.
Mr. Johnsen is Chairman of the Board of International Shipholding Corp.
and Central Gulf Lines, Inc. (ship cargo carrier), Director of Centennial
Insurance Co. and Trustee of The Atlantic companies (insurance), RF, RIT,
RNYTET, RTET, and RPES.
THOMAS L. RHODES, Trustee, 150 East 35th Street, New York, New York 10016
Mr. Rhodes is President and a member of the Board of Directors of the
National Review. From 1976 to 1992 Mr. Rhodes was a partner with Goldman, Sachs
& Co., an investment banking firm.
MARC C. COZZOLINO, Counsel and Secretary, 810 Seventh Avenue, New York,
New York 10019.
Mr. Cozzolino is Counsel and Secretary of RF, RIT, RTET, RNYTET, and RPES.
Before joining The Reserve Funds in 1994, Mr. Cozzolino was a staff attorney at
the New Jersey Bureau of Securities.
PAT A. COLLETTI, Controller, 810 Seventh Avenue, New York, New York 10019.
Mr. Colletti is Controller of RF, RIT, RTET, RNYTET, and RPES. Prior to
joining The Reserve Funds in 1985, Mr. Colletti was Supervisor of Accounting of
Money Market Funds for the Dreyfus Corporation.
- ---------------
* Interested Trustee within the meaning of the Investment Company Act of 1940.
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 or 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 regard of the duties involved in the conduct
of their office.
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM FUND AND FUND COMPLEX
NAME OF TRUSTEE FROM FUND* (4 ADDITIONAL TRUSTS) PAID TO TRUSTEE*
------------------------------------------------------------------------------
<S> <C> <C>
Edwin Ehlert, Jr. $0 $16,500
Henri W. Emmet $0 $16,600
Rev. Donald J. Harrington $0 $16,500
Niels W. Johnsen $0 $16,500
Burtt R. Ehrlich $0 $0
Thomas L. Rhodes $0 $0
</TABLE>
Amount shown are for the Fund's fiscal year ending May 31, 1995.
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<PAGE> 71
INVESTMENT MANAGEMENT AND OTHER AGREEMENTS
THE ADVISER. Reserve Management Company, Inc. ("Adviser"), 14 Locust Place,
Manhasset, New York 11030, a registered investment Adviser, manages the Trust
and provides it with investment advice pursuant to an Investment Management
Agreement. Under the Investment Management Agreement, the Adviser manages the
Fund, including effecting purchases and sales of investment securities, is
responsible for the day-to-day oversight of the Trust's operations and to
otherwise administer the affairs of the Trust as it deems advisable subject to
the overall control and direction of the Trustees and the investment policies
and limitations of the Trust described in the Prospectus and Statement of
Additional Information. RMCI pays all employee costs and other ordinary
operating costs of each Fund pursuant to the Investment Management Agreement
which include: registration fees paid to the commission and state
regulators, costs associated with the annual update of each Fund's registration
statement, auditing annual financial statements, and printing and mailing costs
(exclusive of those associated with the Rule 12b-1 Plans). Excluded from
ordinary operating costs are interest charges, taxes, brokerage fees,
extraordinary legal and accounting fees and expenses, payments made pursuant to
the Trust's Distribution Plan and the fees of the disinterested Trustees, for
which the Fund pays its direct or allocated share.
For its management services, and for paying all of the employee costs,
costs of the Sub-Adviser and other ordinary operating expenses of the Trust,
RMCI is periodically paid a comprehensive fee, at the annual rate of 1.50% per
annum of the average daily net assets of the Fund.
The Investment Management Agreement is subject to annual review by and
must be approved at least annually by a vote of a majority of the Board of
Trustees, including a majority of those who are not "interested persons" as
defined in the Investment Company Act of 1940, cast in person at a meeting
called for the purpose of voting on such renewal. The Agreement terminates
automatically upon its assignment and may be terminated without penalty upon 60
days' written notice by vote of the Trustees, by vote of a majority of
outstanding voting shares of the Fund or by the Adviser.
THE SUB-ADVISER. Trainer, Wortham & Company, Inc. ("Sub-Adviser"), 845
Third Avenue, New York, New York 10022, a registered investment Adviser, acts as
Sub-Adviser to the Fund. The Adviser and Trust have entered into a Sub-Advisory
Agreement with the Sub-Adviser pursuant to which the Adviser will pay any fees
of the Sub-Adviser. The Sub-Advisory Agreement is subject to annual review by
and must be approved annually by the Trustees, including a majority of those who
are not "interested person" as defined in the Investment Company Act of 1940,
cast in person at a meeting called for purpose of voting on such renewal. The
agreement automatically terminates upon its assignment and may be terminated
without penalty upon 60 days' written notice by vote of the Trustees, by vote of
a majority of outstanding voting shares of the Fund or by the Sub-Adviser.
CUSTODIAN. Chemical Bank, 4 New York Plaza, New York, New York 10004 is
Custodian for the cash and securities of the Trust. The Custodian maintains
custody of the Trust's cash and securities, handles its securities settlements
and performs transaction processing for receipts and disbursements in connection
with the purchase and sale of the Trust's shares.
DISTRIBUTION AGREEMENT. Resrv Partners, Inc. ("RESRV"), 810 Seventh
Avenue, New York, New York 10019, is a distributor of the shares of the Trust.
RESRV is a "principal underwriter" for the Trust within the meaning of the
Investment Company Act of 1940, and as such acts as agent in arranging for the
continuous offering of Trust shares. RESRV has the right to enter into dealer
agreements with brokers or other persons of its choice for the sale of Trust
shares. RESRV's principal business is the distribution of shares of mutual funds
and it has retained no underwriting commissions during the last three fiscal
years.
The Distribution Agreement must be approved annually by the Trustees,
including a majority of those who are not "interested persons," as defined in
the Investment Company Act of 1940.
DISTRIBUTION PLAN. The Trust maintains a Distribution Plan ("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 Board and approved by
its shareholders. Pursuant to the Plan, the Distributor or its affiliates may
make payments ("assistance payments") to brokers, financial institutions and
financial intermediaries ("payees") in respect of Trust shareholder accounts
("qualified accounts") as to which the payee has rendered distribution
assistance or other services. The Distributor may also retain amounts to pay for
advertising and marketing expenses. Assistance payments by the Distributor are
made to payees at an annual rate of .25% of the average net asset
value for Class A shares and of 1.00% of the
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<PAGE> 72
average net asset value for Class D shares. The Trustees have determined that
there is a reasonable likelihood that the Plan will benefit the Trust and its
shareholders and that its costs are primarily intended to result in the sale of
the Trust's shares.
Under the Plan, the Trust's officers report quarterly the amounts and
purposes of assistance payments to the Trustees. During the continuance of the
Plan the selection and nomination of the disinterested Trustees of the Trust are
at the discretion of the disinterested Trustees currently in office.
The Plan and related agreements may be terminated at any time by a vote of
a majority of the outstanding voting securities of the Fund. The Plan and
related agreements may be renewed from year to year if approved by a vote of a
majority of the Board of Trustees, including a majority of those who are not
"interested persons", as defined in the Investment Company Act of 1940. 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 majority vote of the Board of Trustees, including a
majority of the disinterested Trustees, cast in person at a meeting called for
the purpose of such vote.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand L.L.P, 1301 Avenue of
Americas, New York, New York 10019 is the Trust's independent accountants.
PORTFOLIO TURNOVER, TRANSACTION CHARGES AND ALLOCATION
The Fund will not attempt to achieve, nor will it be limited to, a
predetermined rate of portfolio turnover. Turnover rate is the lesser of
purchases or sales of portfolio securities for a year (excluding all securities
with maturities of one year or less) divided by the monthly average of the
market value of such securities.
Subject to the overall supervision of the officers of the Trust, its Board
of Trustees, and the Adviser, the Sub-Adviser places all orders for the purchase
and sale of the Fund's investment securities. In general, in the purchase and
sale of investment securities the Sub-Adviser will seek to obtain prompt and
reliable execution of orders at the most favorable prices or yields. In
determining best price and execution, the Sub-Adviser may take into account a
dealer's operational and financial capabilities, the type of transaction
involved, the dealer's general relationship with the Fund's Sub-Adviser, and any
statistical, research, or other services provided by the dealer. 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 in good faith by the Fund's Sub-Adviser.
Brokers or dealers who execute investment securities transactions for the Fund
may also sell its shares; however, any such sales will not be either a
qualifying or disqualifying factor in the selection of brokers or dealers. The
Sub- Adviser is authorized to place portfolio transactions with brokers or
dealers affiliated with it provided the commission or fee charged is comparable
to that charged by non-affiliated brokers or dealers on comparable transactions
involving similar securities being purchased or sold during a comparable period
of time on a securities exchange. Any such transactions will be in accordance
with Rule 17e-1 under the Investment Company Act of 1940.
When transactions are made in the over-the-counter market, the Fund deals
with the primary market makers unless more favorable prices are otherwise
obtainable.
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 Trust. Each share represents an
interest in the respective series of the Trust proportionately equal to the
interest of each other share. If they deem it advisable in the best interests of
shareholders, the Trustees of the Trust may classify or reclassify any unissued
shares of the Trust by setting or changing the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or 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 series be preferred over all other
series in respect of assets specifically allocated to such class. It is
anticipated that under most circumstances, the rights of any additional series
would be comparable unless otherwise required to respond to the particular
situation. Upon liquidation of the Trust, shareholders are entitled to share pro
rata in the net assets of their respective series
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<PAGE> 73
of the Trust available for distribution to such shareholders. No changes can be
made to the Trust's issued shares without shareholder approval.
Each Fund share when issued is fully paid, nonassessable and fully
transferable or redeemable at the shareholder's option. Each share has an equal
interest in the net assets of its series, equal rights to all dividends and
other distributions from its series, and one vote for all purposes. Shares of
separate series 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.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration protects a Trustee against any liability to which he would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his office.
Regulations of the Securities and Exchange Commission provide that if a
series is separately affected by a matter requiring a vote (election of
Trustees, ratification of independent accountant selection, and approval of an
underwriting agreement are not considered to have such separate effect and may
be voted upon by the Trust as a whole), each such series votes separately. Each
series votes separately on such matters as approval of the Investment Management
Agreement, material amendments to the Service Plan, and majority of the effected
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 are normally made by check or wire transfer, but the
Trust may be authorized to make payment of redemptions partly or wholly in kind
(that is, by delivery of portfolio instruments valued at the same time as the
redemption net asset value is determined). The Trust has made an election
committing it to pay in cash all requests for redemption from the series
involved, by any shareholder or record, limited during any 90-day period to the
lesser of $250,000 or 1% of the net assets of the series at the beginning of the
period. The election is irrevocable pursuant to rules and regulations under the
Investment Company Act or 1940 unless withdrawal is permitted by order of
Securities and Exchange Commission. 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.
DETERMINATION OF NET ASSET VALUE. Shares are offered at net asset value
plus a sales charge (if applicable). The net asset value of each Fund is
calculated at the end of each business day (currently 4:00 PM New York time)
that the New York Stock Exchange is open for trading and on other days there is
a sufficient degree of trading to materially affect the Fund's net asset value.
The net asset value is not calculated on New Year's Day, Presidents' Day, Good
Friday, Memorial Day (observed), Independence Day, Labor Day, Thanksgiving Day,
Christmas Day and on other days the New York Stock Exchange is closed for
trading. The net asset value per share of the Fund is determined by adding the
value of all its securities and other assets, subtracting its liabilities and
dividing the result by the total number of the class' outstanding shares that
represent the class' proportionate interest in the Fund.
Investment securities are valued at the last sale price on the securities
exchange or national securities market on which such securities are primarily
traded. Securities not listed on an exchange or national securities market, or
securities in which there were no transactions, are valued at the average of the
last bid and asked prices, except in the case of open short positions where the
asked price is used for valuation purposes. Bid price is used when no asked
price is available. Market quotations for foreign securities in foreign
currencies are translated into United States dollars at the prevailing rates of
exchange. Any securities or other assets for which recent market quotations are
not readily available are valued at fair value as determined in good faith by
the Board of Trustees.
REDUCED SALES CHARGE. Officers, directors, full time employees and
Trustees, and any trust, pension, profit sharing or qualified retirement plan of
the Adviser, Sub-Adviser, the distributor, the Trust and any affiliate thereof
may purchase shares of the Fund at the net asset value per share. Spouses and
minor children of the foregoing may also purchase shares at net asset value. In
addition, Sub-Adviser advisory clients and related persons of such may purchase
shares at net asset value.
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DISTRIBUTIONS AND TAXES
The following is a general description of certain tax rules relating to
the Fund. It is not exhaustive and prospective investors may wish to consult
their tax advisers.
The Fund intends to qualify as a regulated investment company under the
Internal Revenue Code of 1986 ("Code") so long as such qualification is in the
best interests of shareholders. If it so qualifies, in any fiscal year in which
it distributes at least 90 percent of its taxable net income, the Fund generally
will not be subjected to federal income tax on such distributed amounts.
Shareholders of the Fund, however, will be subject to federal income tax on any
ordinary net income and net capital gains realized by the Fund and distributed
to shareholders as regular or capital gains dividends, whether distributed in
cash or in the form of additional shares. Net long term capital gains
distributions will be taxable to shareholders as long term capital gains,
regardless of the length of time the corresponding shares have been held.
Upon the taxable disposition (including a sale or redemption) of shares of
the Fund, a shareholder may realize a gain or loss depending upon his basis in
his shares. Such gain or loss generally will be treated as capital gain or loss
(if the shares are capital assets in the shareholder's hands) and will be
long-term or short-term, generally depending upon the shareholder's holding
period for the shares. However, a loss realized by a shareholder on the
disposition of Fund shares with respect to which capital gain dividends have
been paid will, to the extent of such capital gain dividends, be treated as
long-term capital loss if such shares have been held by the shareholder for six
months or less. Further, a loss realized on disposition will be disallowed to
the extent the shares disposed of are replaced (whether by reinvestment of
distributions or otherwise) within a period of 61 days beginning 30 days before
and ending 30 days after the shares are disposed of. In such a case, the basis
of the shares acquired will be adjusted to reflect the disallowed loss.
Shareholders receiving distributions in the form of additional shares will have
a cost basis for Federal income tax purposes in each share received equal to the
net asset value of a share of the Funds on the reinvestment date.
In order to qualify as a "regulated investment company" under the Code,
the Fund must, among other things, in each taxable year distribute at least 90
percent of its taxable income to shareholders, derive at least 90 percent of its
gross income from dividends, interest and gains from the sale or disposition of
securities and derive less than 30 percent of its gross income from the sale or
disposition of securities held for less than three months. Accordingly, the Fund
will be subject to certain restrictions including restrictions in the writing of
options on securities which have been held for less than three months,
purchasing and selling futures contracts held for less than three months, in the
writing of options which expire in less than three months, and in effecting
closing purchase transactions, with respect to options which have been written
less than three months prior to such transactions.
The Code imposes a non-deductible, 4% excise tax on regulated investment
companies that do not distribute to their shareholders in each calendar year an
amount equal to (i) 98% of their calendar year ordinary income; plus 98% of
their capital gain net income (the excess of short and long term capital losses)
for the one year period ending October 31. Dividends declared in December of any
year to shareholders of record on any date in December will be deemed to have
been received by the shareholders and paid by the Fund on the record date,
provided such dividends are paid by February 1 as of the following year.
Dividends and distributions declared payable to shareholders of record
after September 30 of any year and paid before February 1 of the following year,
are considered taxable income to shareholders on December 31 in the year
declared date even though paid in the next year.
Dividends to shareholders who are non-resident aliens may be subject to a
United States withholding tax at a rate of up to 30% under existing provisions
of the code applicable to foreign individuals and entities unless a reduced rate
of withholding or a withholding exemption is provided under applicable treaty
laws. Non-resident aliens are urged to consult their own tax adviser concerning
the applicability of the United States withholding tax.
The Code includes rules applicable to certain listed options, futures
contracts, and options on futures contracts which the Fund may write, purchase
or sell. Such options and contracts are classified as Section 1256 contracts
under the Code. The character of gain or loss resulting from the sale,
disposition, closing out, expiration or other termination of Section 1256
contracts is generally treated as long-term capital gain or loss to the extent
of 60% thereof and short-term capital gain or loss to the extent of 40% thereof
("60/40 gain or loss"). Such contracts,
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<PAGE> 75
generally are required to be treated as sold at market value on the last day of
such fiscal year and on certain other dates for federal income tax purposes
("marked-to-market"). Generally, over-the-counter options are not classified as
Section 1256 contracts and are not subject to the mark-to market rule or to
60/40 gain or loss treatment. Any gains or losses recognized by the Fund from
transactions in over-the-counter options generally constitute short-term capital
gains or losses. If over-the-counter call options written, or over-the-counter
put options purchased, by the Fund are exercised, the gain or loss realized on
the sale of the underlying securities may be either short-term or long-term,
depending on the holding period of the securities. In determining the amount of
gain or loss, the sales proceeds are reduced by the premium paid for
over-the-counter puts or increased by the premium received for over-the counter
calls.
Generally, the hedging transactions undertaken by the Fund may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may affect
the character of gains (or losses) realized by the Fund. In addition, losses
realized by the Fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which the losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences to the Fund of engaging in hedging
transactions are not entirely clear. Hedging transactions may increase the
amount of short-term capital gain realized by the Fund which is taxed as
ordinary income when distributed to Shareholders.
The Fund may make one or more of the elections available under the Code
which are applicable to straddles. If the Fund makes any of the elections, this
amount, character and timing of gains or losses from the affected straddle
positions will be determined under rules that vary according to the election(s)
made. The rules applicable under certain of the elections may operate to
accelerate the recognition of gains or losses from the affected straddle
positions.
Because the straddle rules may affect the character of gains or losses,
defer losses and/or accelerate the recognition of gains or losses from the
affected straddle position, the amount which may be distributed to Shareholder,
and which, will be taxed as ordinary income or long-term capital gain, may be
increased or decreased as compared to a fund that did not engage in such
hedging transactions.
The Fund may be subject to non-U.S. tax on income and gains received from
securities of non-U.S. issuers which generally is withheld by a foreign country
at the source. The United States has entered into tax treaties with many foreign
countries which may entitle the Fund to a reduced rate of tax or exemption from
tax on income. It is impossible to determine the effective rate of foreign tax
in advance since the amount of the Fund's assets to be invested within various
countries is not known. The Fund intends to operate so as to qualify for tax
treaty benefits where applicable. To the extent that the Fund is liable for
foreign income taxes withheld at the source, the Fund may operate so as to meet
the requirements of the Code to "pass through" to its shareholders tax benefits
attributable to foreign income taxes paid by the Fund. If more than 50% of the
value of the Fund's total assets at the close of its taxable year is comprised
of securities issued by foreign corporations, the Fund may elect to "pass
through" to its shareholder the amount of foreign income taxes paid by the Fund.
Pursuant to this election, shareholders will be required to (i) include in gross
income, even though not actually received, their respective pro rata share of
foreign taxes paid by the Fund; (ii) treat their pro rata share of foreign taxes
as paid by them; and (iii) subject to certain limitations, either deduct their
pro rata share of foreign taxes in computing their taxable income, or use such
share as foreign tax credit against U.S. income tax (but not both). No deduction
for foreign taxes may be claimed by a non-corporate shareholder who does not
itemize deductions. The Fund may meet the requirements to "pass through" to its
shareholders foreign income taxes paid, but there can be no assurance that the
Fund will be able to do so. Each shareholder will be notified within 60 days
after the close of the taxable year of the Fund if the foreign taxes paid by the
Fund will "pass through" for that year, and, if so, the amount of each
shareholder's pro rata share (by country) of (i) the foreign taxes paid and (ii)
the Fund's gross income from foreign sources.
Generally, a credit for foreign taxes paid or accrued is subject to the
limitation that it may not exceed the shareholder's U.S. tax attributable to his
or her total foreign source taxable income. For this purpose, the source of the
Fund's income flows through to its shareholders. Gains from the sale of
securities by the Fund will be treated as derived from U.S. sources and Section
988 gains will be treated as derived from U.S. sources. The limitation on the
foreign tax credit is applied separately to foreign source passive income,
including foreign source passive income received from the Fund. Shareholders may
be unable to claim a credit for the full amount of their proportionate share of
the foreign taxes paid by the Fund. The foreign tax credit can be applied to
offset no more than 90% of the alternative minimum tax imposed on corporations
and individuals. The foregoing is only a general
68
<PAGE> 76
description of the foreign tax credit. Because application of a credit depends
on the particular circumstances of each shareholder, shareholders are advised to
consult their own tax advisers.
The Fund may invest in shares of foreign corporations which may be
classified under the Code as passive foreign investment companies ("PFICs"). In
general, a foreign corporation is classified as a PFIC if at least one-half of
its assets constitute investment-type assets, or 75% or more of its gross income
is investment-type income. If the Fund receives a so-called "excess
distribution" with respect to PFIC stock, the Fund itself may be subject to a
tax on a portion of the excess distribution, whether or not the corresponding
income is distributed by the Fund to shareholders. In general, under the PFIC
rules, an excess distribution is treated as having been realized ratably over
the period during which the Fund held the PFIC shares. The Fund itself will be
subject to tax on the portion, if any, of an excess distribution that is so
allocated to prior Fund taxable years and an interest factor will be added to
the tax, as if the tax had been payable in such prior taxable years. Certain
distributions from a PFIC as well as gain from the sale of PFIC share are
treated as excess distributions. Excess distributions are characterized as
ordinary income even though, absent application of the PFIC rules, certain
excess distributions might have been classified as capital gain.
The Fund may be eligible to elect alternative tax treatment with respect
to PFIC shares. Under an election that currently is available in some
circumstances, the Fund generally would be required to include in its gross
income its share of the earnings of a PFIC on a current basis, regardless of
whether distributions are received from the PFIC in a given year. If this
election were made, the special rules, discussed above, relating to the taxation
of excess distributions, would not apply. In addition, another election may be
available that would involve marking to market the Fund's PFIC shares at the end
of each taxable year (and on certain other dates prescribed in the Code), with
the result that unrealized gains are treated as though they were realized. If
this election were made, tax at the Fund level under the PFIC rules would
generally be eliminated, but the Fund could, in limited circumstances, incur
nondeductible interest charges. The Fund's intention to qualify annually as a
regulated investment company may limit its elections with respect to PFIC
shares.
Because the application of the PFIC rules may affect, among other things,
the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC shares, as well as subject the Fund
itself to tax on certain income from PFIC shares, the amount that must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not invest in PFIC shares.
The foregoing is a general summary of certain provisions of the Code and
Treasury Regulations in effect. For the complete provisions, reference should be
made to the pertinent Code sections and Treasury Regulations promulgated
thereunder. The Code and the Treasury Regulations thereunder are subject to
change by legislative or administrative action either prospectively or
retroactively.
Dividends paid by the Fund are generally expected to be subject to any
state or local taxes on income. Shareholders should consult their own attorneys
or tax advisers about the tax consequences related to investing in the Fund.
PERFORMANCE INFORMATION
The Fund may from time to time advertise its total return. Total return is
computed by finding the average annual compounded rates of return over the 1, 5
and 10 year periods or up to the life of the Fund that would equate the initial
amount invested to the ending redeemable value, according to the following
formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the 1, 5
or 10 year periods at the end of the 1, 5 or 10
year periods (or fractional portion thereof)
In advertising and sales literature, the Fund may compare its performance
to (i) the Standard & Poor's 500 Stock Index ("S&P 500"), Dow Jones Industrial
Average ("DJIA"), the Russell 2000, or other unmanaged indices
69
<PAGE> 77
so that investors may compare the Fund's results with those of a group of
unmanaged securities widely regarded by investors as representative of the
securities markets in general; (ii) other groups of mutual funds tracked by
Lipper Analytical Services, Inc. a widely used independent research firm which
ranks mutual funds by overall performance, investment objectives and assets, or
tracked by other services, companies, publications, or persons who rank mutual
funds on overall performance or other criteria; and (iii) the Consumer Price
Index (measure for inflation) to assess the real rate of return from an
investment in the Fund. Unmanaged indices may assume the reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs and expenses.
The Fund may also compute aggregate total return for specified periods
based on a hypothetical Fund account with an assumed initial investment of
$10,000. The aggregate total return is determined by dividing the net asset
value of the account at the end of the specified period by the value of the
initial investment and is expressed as a percentage. Calculation of aggregate
total return reflects payment of the maximum sales charge and assumes
reinvestment of all income dividends and capital gain distributions during the
period.
The Fund may also quote annual, average annual and annualized total return
and aggregate total performance data both as a percentage and as a dollar amount
based on a hypothetical $10,000 investment for various periods. Such data will
be computed as described above, except that (1) the rates of return calculated
will not be average annual rates, but rather, actual annual, annualized or
aggregate rates of return and (2) the maximum sales charge will not be included
with respect to annual, annualized or aggregate rates of return calculations.
70
<PAGE> 78
REPORT OF INDEPENDENT ACCOUNTANTS
To The Shareholders and Board of Trustees of The Reserve Private Equity Series:
We have audited the accompanying statement of assets and liabilities,
including the schedule of portfolio investments, of the Blue Chip Fund (one of
the Funds of the Reserve Private Equity Series) as of May 31, 1995, and the
related statement of operations, the statement of changes in net assets and the
financial highlights for the period October 28, 1994 (commencement of
operations) through May 31, 1995. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1995 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of the Blue Chip Fund of the Reserve Private Equity Series as of May
31, 1995, the results of its operations, the changes in its net assets, and its
financial highlights for the period referred to above, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
New York, New York
June 23, 1995
71
<PAGE> 79
RESERVE BLUE CHIP GROWTH FUND (THE "FUND")
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reserve Blue Chip Growth Fund is a separate series of shares issued by The
Reserve Private Equity Series (the "Trust"). The Trust was formed under
Delaware law as a Delaware business trust. The Trust is registered under
the Investment Company Act of 1940, as amended, as a non-diversified
open-end management investment company. There are an unlimited number of
shares of beneficial interest of $.001 par value authorized in each series.
The accounting policies summarized below are consistently followed in the
preparation of the financial statements in conformity with generally
accepted accounting principles.
SECURITY VALUATION
Portfolio securities are stated at value. A security listed or traded on an
exchange is valued at its last sale price on the exchange where the
security is principally traded or, lacking any sales on a particular day,
the security is valued at the mean between the closing bid and asked prices
on that day. Each security traded in the over-the-counter market is valued
at the mean between its quoted bid and asked prices.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded on the trade date. Dividend income and
distributions to shareholders are recorded on the ex-dividend dates.
Interest income is accrued daily. Realized gains and losses from securities
transactions and unrealized appreciation or depreciation of securities are
reported on the identified cost basis for both financial statement and
Federal income tax purposes.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for net operating losses. The effect of these
differences for the year ended May 31, 1995 decreased undistributed net
investment loss by $5,361, and decreased aggregate paid in capital by
$5,361.
EXPENSES
Each series is charged only for its direct or allocated (in proportion to
net assets) share of expenses.
FEDERAL INCOME TAXES
It is the Trust's policy to comply with Subchapter M of the Internal
Revenue Code and to distribute substantially all of its taxable income to
its shareholders. Accordingly, no Federal income tax provision is required.
2. INVESTMENT ACTIVITY
Purchases and sales of securities, for the period October 28, 1994
(commencement of operations) through May 31, 1995, other than short-term
securities, aggregated $2,462,898 and $843,868 respectively.
72
<PAGE> 80
RESERVE BLUE CHIP GROWTH FUND (THE "FUND")
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1995 - (CONTINUED)
3. INVESTMENT MANAGEMENT AGREEMENT
Reserve Management Company, Inc. (RMCI), serves as the Fund's investment
adviser and pays substantially all ordinary operating expenses of the Fund
for which it receives a comprehensive fee at an annual rate of 1.50% of the
average daily net assets of the Fund. RMCI waived comprehensive fees of
$120. Both RMCI and the Sub-Adviser, Trainer, Wortham & Company are
shareholders of the Fund.
4. DISTRIBUTION ASSISTANCE
Pursuant to a Distribution Plan, the Fund will make payments of .25% per
annum of the average daily net assets of shareholder accounts as to which
the payee has rendered distribution assistance. RMCI waived distribution
assistance of $20. During the period, the Fund paid $1,923 in distribution
expenses to RMCI.
5. CAPITAL SHARE TRANSACTIONS
Transactions in capital stock for the period October 28, 1994 (commencement
of operations) through May 31, 1995 were as follows:
<TABLE>
<CAPTION>
Shares Amount
------ ------
<S> <C> <C>
Share sold 214,923 $ 2,257,822
Redeemed (49,164) (520,420)
-----------
Net Increase 165,759 $ 1,737,402
===========
</TABLE>
73
<PAGE> 81
RESERVE BLUE CHIP GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1995
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value
(cost $1,711,582) $1,880,444
Cash 506,014
Dividends receivable 2,207
----------
Total Assets 2,388,665
LIABILITIES
Payable for investment securities purchased 395,210
NET ASSETS $1,993,455
==========
Net Assets consist of (Note 1)
Capital Stock (Par Value $.001 per share) $ 166
Additional paid in capital 1,731,875
Undistributed net realized gain on investments 92,552
Net unrealized appreciation on investments (Note 1) 168,862
----------
NET ASSETS, at value, applicable to 165,759 outstanding shares
of Beneficial Interest (Note 5) $1,993,455
==========
NET ASSET VALUE, and redemption price per share ($1,993,455 / 165,759) $ 12.03
==========
Maximum offering price per share (100/95.5 of $12.03) $ 12.60
==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
74
<PAGE> 82
RESERVE BLUE CHIP GROWTH FUND
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
OCTOBER 28, 1994
(COMMENCEMENT OF
OPERATIONS) THROUGH
MAY 31, 1995
-------------------
<S> <C> <C>
INVESTMENT INCOME
Dividends $ 7,957
EXPENSES
Comprehensive fee (Note 3) $ 11,535
12b-1 Fee (Note 4) 1,923
---------
Total expenses 13,458
Less: Fees voluntarily waived by
RMCI (Notes 3 and 4) 140
---------
Net Expenses 13,318
---------
NET INVESTMENT LOSS (5,361)
---------
Realized and Unrealized Gain on Investments
Net realized gain on investment securities: (Note 1)
Proceeds from sales of securities 843,868
Cost of securities sold (751,316) 92,552
---------
Net unrealized appreciation on investments 168,862
---------
Net realized and unrealized gain on investments 261,414
---------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 256,053
=========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
75
<PAGE> 83
RESERVE BLUE CHIP GROWTH FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
OCTOBER 28, 1994
(COMMENCEMENT OF
OPERATIONS) THROUGH
MAY 31, 1995
-------------------
<S> <C>
INCREASE IN NET ASSETS
FROM INVESTMENT OPERATIONS:
Net investment loss $ (5,361)
Net realized gain from investments 92,552
Net unrealized appreciation from investments 168,862
-----------
Net increase in net assets resulting from
operations 256,053
-----------
FROM CAPITAL SHARE TRANSACTIONS (Note 5)
Net proceeds from sales of shares 2,257,822
Cost of shares redeemed (520,420)
-----------
Net increase in net assets resulting from
share transactions 1,737,402
-----------
NET INCREASE IN NET ASSETS 1,993,455
NET ASSETS:
Beginning of period 0
-----------
End of period $ 1,993,455
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
76
<PAGE> 84
RESERVE BLUE CHIP GROWTH FUND (THE "FUND")
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1995 - (CONTINUED)
6. FINANCIAL HIGHLIGHTS (FOR ONE SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
OCTOBER 28, 1994
(COMMENCEMENT OF
OPERATIONS) THROUGH
MAY 31, 1995
-------------------
<S> <C>
Net asset value, beginning of period $10.00
-------
Income from investment operations
Net investment loss (.03)
Net realized and unrealized gain 2.06
-------
Total from investment operations 2.03
-------
Net asset value, end of period $12.03
=======
Total Return 20.30%(2)
RATIOS/SUPPLEMENTAL DATA
Net assets in thousands, end of period $1,993
Ratio of expenses to average net assets
before waivers (Notes 3 and 4) 1.75%(1)
Ratio of expenses to average net assets,
net of waiver 1.73%(1)
Ratio of net investment loss to average
net assets, before waivers (Notes 3 and 4) (.72)%(1)
Ratio of net investment loss to average
net assets, net of waiver (.70)%(1)
Portfolio turnover rate 68%
</TABLE>
- -----------
(1) Annualized
(2) Total return is not annualized, and does not eflect
impact of sales load.
RESERVE BLUE CHIP GROWTH FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
MAY 31, 1995
<TABLE>
<CAPTION>
COMMON STOCKS VALUE
SHARES (NOTE 1)
------ --------
<S> <C> <C>
BUSINESS EQUIPMENT (4.5%)
Xerox Corp. 800 $ 90,700
--------
CHEMICALS (3.5%)
First Mississippi Corp. 3,000 69,375
--------
COMMUNICATION - NETWORK (6.0%)
Capital Cities/ABC Inc. 700 67,550
Comcast Corp. Special - Cl.A 3,000 52,500
--------
120,050
COMPUTER SOFTWARE (8.2%)
* Microsoft Corp. 700 59,281
National Data Corp. 5,000 103,750
--------
163,031
DRUGS (4.0%)
Abbott Laboratories 2,000 80,000
--------
ELECTRICAL EQUIPMENT (1.1%)
* American Superconductor Corp. 1,500 22,875
--------
ELECTRONIC COMPONENTS - SEMICONDUCTOR (3.4%)
Intel Corp. 600 67,350
--------
ELECTRONICS (3.7%)
General Signal Corp. 2,000 74,000
--------
ENTERTAINMENT (2.3%)
* Viacom Inc. - CI.B 1,000 46,625
--------
FINANCIAL SERVICES (4.6%)
Citicorp 1,700 90,950
--------
FOOD WHOLESALERS (2.0%)
Sysco Corp. 1,500 40,688
--------
MACHINERY - INDUSTRY/SPEC (4.3%)
Thermo Electron Corp. 2,400 86,400
--------
MULTI-LINE INSURANCE (4.0%)
American International Group Inc. 700 79,625
--------
</TABLE>
77
<PAGE> 85
RESERVE BLUE CHIP GROWTH FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
MAY 31, 1995 - (CONTINUED)
<TABLE>
<CAPTION>
COMMON STOCKS (CONTINUED) VALUE
SHARES (NOTE 1)
------ --------
<S> <C> <C>
OIL/GAS EQUIPMENT SERVICES (5.4%)
* Petroleum Geo-Services - ADR 2,000 $ 55,000
Schlumberger Ltd. 800 52,000
----------
107,000
OIL - INTERNATIONAL (2.7%)
Texaco Inc. 800 54,800
----------
PHARMACEUTICALS (8.5%)
Johnson & Johnson 1,500 99,375
Merck & Co. 1,500 70,688
----------
170,063
PUBLISHING (2.5%)
* Harte-Hanks Communications Inc. 2,000 49,000
----------
RESTAURANTS (2.9%)
McDonalds Corp. 1,500 56,812
----------
RETAIL (2.4%)
Tandy Corp. 1,000 46,750
----------
RETAIL - SPECIALTIES (3.7%)
* Department 56 Inc. 2,000 73,250
----------
RETAIL STORES-DEPARTMENT (2.3%)
* Federated Department Stores Inc. 2,000 46,000
----------
TELECOMMUNICATIONS (2.7%)
* Commnet Cellular Inc. 2,000 53,750
----------
TELECOMMUNICATIONS EQUIPMENT (9.6%)
* Glenayre Technologies Inc. 1,700 107,525
Motorola Inc. 1,400 83,825
----------
191,350
TOTAL COMMON STOCKS (Cost $1,711,582) (94.30%) 1,880,444
Other assets, less liabilities (5.70%) 113,011
---------
NET ASSETS (100%) $1,993,455
==========
</TABLE>
Value of investments are shown as a percentage of Net Assets.
* Non-income producing security.
For federal income tax purposes the tax basis for investments owned at May 31,
1995 was $1,711,582, the aggregate gross unrealized appreciation for all
investments was $194,550 and aggregate gross unrealized depreciation for all
investments was $25,688.
SEE NOTES TO FINANCIAL STATEMENTS.
78
<PAGE> 86
RESERVE PRIVATE EQUITY SERIES
RESERVE INFORMED INVESTORS GROWTH FUND
810 SEVENTH AVENUE, NEW YORK, N.Y. 10019
(800) 637-1700
---------------
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information describes Reserve Private Equity
Series and the Reserve Informed Investors Growth Fund ("Fund"). This Statement
is not a Prospectus, but provides detailed information to supplement the
Prospectus and should be read in conjunction with the Prospectus. A copy of the
Prospectus may be obtained (without charge) from Reserve Private Equity Series.
This Statement is dated , 1996.
TABLE OF CONTENTS
Page
----
Investment Policies
Trustees and Officers of the Trust
Investment Management and Other Agreements
Portfolio Turnover, Transaction Charges and
Allocation
Shares of Beneficial Interest
Purchase, Redemption and Pricing of Shares
Distributions and Taxes
Performance Information
Report of Independent Accounts
Financial Statements
79
<PAGE> 87
INVESTMENT POLICIES
The Fund has adopted as fundamental policies the following limitations on
its investment activities. These fundamental policies may not be changed without
a majority vote of the Fund shareholders, as defined in the Investment Company
Act of 1940. The Fund may not:
(1) borrow money except as a temporary measure for extraordinary or
emergency purposes and then only in an amount not to exceed 33 1/3% of the
market value of its assets; (2) issue senior securities as defined in the
Investment Company Act of 1940 except that the Fund may borrow money in
accordance with limitation (1); (3) act as an underwriter with respect to the
securities of others except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter under
certain federal securities laws; (4) invest 25% or more of the value of its
total assets in the securities of issuers in any particular industry; (5)
purchase, sell or otherwise invest in real estate or commodities or commodity
contracts except the Fund may purchase readily marketable securities of
companies holding real estate or interests therein and interest rate futures
contracts, stock index futures contracts, and put and call options on interest
rate futures contracts; (6) invest in voting securities or in companies for the
purpose of exercising control; and (7) purchase securities on margin, except to
obtain such short-term credits as may be necessary for the clearance of
transactions; however, the Fund may make margin deposits in connection with
options and financial futures transactions.
The Fund has reserved the right to purchase and write interest rate
futures contracts, and put and call options on interest rate futures
contracts. The Fund does not intend to use these techniques for the
foreseeable future and that shareholders will be given notice should the Fund
determine that they will be used.
In addition to the fundamental investment policies listed above, the Fund
has voluntarily adopted certain policies that may be changed or amended by
action of the Trustees without requiring prior notice to or approval of
shareholders. In accordance with such policies and restrictions that the Fund
cannot:
(1) purchase from or sell investment securities to any of the officers or
Trustees of the Trust, its investment Adviser its investment Sub-Adviser, its
principal underwriter or the officers, principals or directors of its investment
Adviser, investment Sub-Adviser or principal underwriter; (2) purchase or retain
securities of an issuer any of whose officers, directors, trustees or
securityholders is an officer or Trustee of the Trust or a member, officer,
director or trustee of the investment Adviser or Sub- Adviser of the Fund if one
or more of such individuals owns beneficially more than one-half of one percent
(1/2 of 1%) of the securities (taken at market value) of such issuer and such
individuals owning more than one-half of one percent (1/2 of 1%) of such
securities together beneficially own more than 5% of such securities or both;
and (3) invest in initial public offerings.
As a non-diversified company, the Fund is permitted to invest all of its
assets in a limited number of issuers. However, it intends to comply with
Subchapter M of the Internal Revenue Code in order to qualify as a regulated
investment company for federal income tax purposes. To so qualify, the Fund must
diversify its holdings so that, at the close of each quarter of its taxable
year, (a) at least 50% of the value of its total assets is represented by cash,
cash items, securities issued by the U.S. Government or its agencies or
instrumentalities, securities of other regulated investment companies, and other
securities limited generally with respect to any one issuer to an amount not
more than 5% of the total assets of the Fund and not more than 10% of the
outstanding voting securities of such issuer, and (b) not more than 25% of the
value of its total assets is invested in the securities of any one issuer (other
than the U.S. Government or its agencies or instrumentalities or regulated
investment companies), or in two or more issuers that the Fund controls and that
are engaged in the same or similar trades or business. In the event of a decline
in the market value of the securities of one or more such issuers exceeding 5%,
an investment in the Fund could entail greater risk than in a fund which has a
policy of diversification.
TRUSTEES AND OFFICERS OF THE TRUST
*BRUCE R. BENT, President, Treasurer and Trustee, 810 Seventh Avenue, New
York, NY 10019.
80
<PAGE> 88
Mr. Bent is President, Treasurer, and Trustee of The Reserve Fund ("RF"),
Reserve Institutional Trust ("RIT"), Reserve Tax-Exempt Trust ("RTET") and
Reserve New York Tax-Exempt Trust ("RNYTET") and Reserve Private Equity Series
("RPES"), Director, Vice President and Secretary of Reserve Management Company,
Inc. ("RMCI") and Reserve Management Corporation, and Chairman and Director of
Resrv Partner, Inc. Before 1968, he was associated with Stone & Webster
Securities Corp., and previously, Teachers Insurance and Annuity Association.
EDWIN EHLERT, JR., Trustee, 125 Elm Street, Westfield, New Jersey 07091.
Mr. Ehlert is President and Director of Ehlert Travel Associates, Inc.
(travel agency formerly called Travelong of Westfield, Inc.) and Ehlert Travel
Associates of Florida, Inc. (travel agency), and Trustee of RF, RIT, RNYTET
RTET and RPES.
HENRI W. EMMET, Trustee, 176 East 71st Street, Avenue, New York, New York
10021.
Mr. Emmet is the Managing Director of Servus Associates, Inc. and U.S.A.
Representative of the First National Bank of Southern Africa and Trustee of RF,
RET, RNYTET, RTET and RPES. Until 1989, he was Senior Vice President of the New
York branch of Banque Nationale de Paris.
BURTT R. EHRLICH, Trustee, 667 Madison Avenue, New York, New York 10021.
Mr. Ehrlich is a Director of Benson Eye Care Corp. and a private investor.
Until 1992, he was President and Chairman of Ehrlich Bober Financial Corp., a
municipal securities investment firm.
*DONALD J. HARRINGTON, C.M, Trustee, St. John's University, Jamaica, New
York 11439.
The Reverend Harrington is President of St. John's University (NY) and a
Trustee of RF, RIT, RNYTET, RTET and RPES. The Reverend Harrington served as
President of Niagara University from 1984 to 1989 and was Executive Vice
President of Niagara University from 1981 to 1984.
NIELS W. JOHNSEN, Trustee, 1 Whitehall Street, New York, New York 10004.
Mr. Johnsen is Chairman of the Board of International Shipholding Corp.
and Central Gulf Lines, Inc. (ship cargo carrier), Director of Centennial
Insurance Co. and Trustee of The Atlantic companies (insurance), RF, RIT,
RNYTET, RTET and RPES.
THOMAS L. RHODES, Trustee, 150 East 35th Street, New York, New York 10016.
Mr. Rhodes is President and a member of the Board of Directors of the
National Review. From 1976 to 1992 Mr. Rhodes was a partner with Goldman, Sachs
& Co., an investment banking firm.
MARC C. COZZOLINO, Counsel and Secretary, 810 Seventh Avenue, New York,
New York 10019.
Mr. Cozzolino is Counsel and Secretary of RF, RIT, RTET, RNYTET and RPES.
Before joining The Reserve Funds in 1994, Mr. Cozzolino was a staff attorney at
the New Jersey Bureau of Securities.
PAT A. COLLETTI, Controller, 810 Seventh Avenue, New York, New York 10019.
Mr. Colletti is Controller of RF, RIT, RTET, RNYTET and RPES. Prior to
joining the Reserve funds in 1985, Mr. Colletti was Supervisor of Accounting of
Money Market Funds for the Dreyfus Corporation.
- ---------------
* Interested Trustee within the meaning of the Investment Company Act of 1940.
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 or obligation of any kind in which
they become involved by virtue of their
81
<PAGE> 89
service as a Trustee or officer of the Trust, except liabilities incurred
by reason of their willful misfeasance, bad faith, gross negligence or
reckless regard of the duties involved in the conduct of their office.
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM FUND AND FUND COMPLEX
NAME OF TRUSTEE FROM FUND* (4 ADDITIONAL TRUSTS) PAID TO TRUSTEE*
------------------------------------------------------------------------------
<S> <C> <C>
Edwin Ehlert, Jr. $0 $16,500
Henri W. Emmet $0 $16,600
Rev. Donald J. Harrington $0 $16,500
Niels W. Johnsen $0 $16,500
Burtt R. Ehrlich $0 $0
Thomas L. Rhodes $0 $0
</TABLE>
Amount shown are for the Fund's fiscal year ending May 31, 1995.
INVESTMENT MANAGEMENT AND OTHER AGREEMENTS
THE ADVISER. Reserve Management Company, Inc. ("Adviser"), 14 Locust
Place, Manhasset, New York, New York 11030, a registered investment Adviser,
manages the Trust and provides it with investment advice pursuant to an
Investment Management Agreement. Under the Investment Management Agreement, the
Adviser manages the Portfolio, including effecting purchases and sales of
investment securities, is responsible for the day-to-day oversight of the
Trust's operations and to otherwise administer the affairs of the Trust as it
deems advisable subject to the overall control and direction of the Trustees and
the investment policies and limitations of the Trust described in the Prospectus
and Statement of Additional Information. RMCI pays all employee costs and other
ordinary operating costs of each Fund pursuant to the Investment Management
Agreement which include: registration fees paid to the commission and state
regulators, costs associated with the annual update of each Fund's registration
statement, auditing annual financial statements, and printing and mailing
costs (exclusive of those associated with the Rule 12b-1 Plans).
Excluded from ordinary operating costs are interest charges, taxes,
brokerage fees, extraordinary legal and accounting fees and expenses, payments
made pursuant to the Trust's Distribution Plan and the fees of the disinterested
Trustees, for which the Fund pays its direct or allocated share.
For its management services, and for paying all of the employee costs,
costs of the Sub-Adviser and other ordinary operating expenses of the Trust,
RMCI is periodically paid a comprehensive fee, at the annual rate of 1.50% per
annum of the average daily net assets of the Fund. The Fund's comprehensive fee
is higher than the advisory fee of most other funds; however, this comprehensive
fee covers most operating expenses.
The Investment Management Agreement is subject to annual review by and
must be approved at least annually by a vote of a majority of the Board of
Trustees, including a majority of those who are not "interested persons" as
defined in the Investment Company Act of 1940, cast in person at a meeting
called for purpose of voting on such renewal. The agreement terminates
automatically upon its assignment and may be terminated without penalty upon 60
days' written notice by vote of the Trustees, by vote of a majority of
outstanding voting shares of a Fund or by the Adviser.
THE SUB-ADVISER. T.H. Fitzgerald & Co., ("Sub-Adviser"), 80 Wall Street,
New York, New York 10005, a registered investment Adviser, acts as Sub-Adviser
to the Fund. The Adviser and Trust have entered into a Sub-Advisory Agreement
with the Sub-Adviser pursuant to which the Adviser will pay any fees of the
Sub-Adviser. The Sub-Advisory Agreement is subject to annual review by and must
be approved annually by the Trustees, including a majority of those who are not
"interested person" as defined in the Investment Company Act of 1940, cast in
person at a meeting called for purpose of voting on such renewal. The agreement
automatically terminates upon its assignment and may be terminated without
penalty upon 60 days' written notice by vote of the Trustees, by vote of a
majority of outstanding voting shares of the Fund or by the Sub-Adviser.
CUSTODIAN. Chemical Bank, 4 New York Plaza, New York, New York 10004 is
Custodian for the cash and securities of the Trust. The Custodian maintains
custody of the Trust's cash and securities, handles its securities settlements
and performs transaction processing for receipts and disbursements in connection
with the purchase and sale of the Trust's shares.
DISTRIBUTION AGREEMENT. Resrv Partners, Inc. ("RESRV"), 810 Seventh
Avenue, New York, New York 10019, is a distributor of the shares of the Trust.
RESRV is a "principal underwriter" for the Trust within the meaning of the
Investment Company Act of 1940, and as such acts as agent in arranging for the
continuous offering of Trust shares. RESRV has the right to enter into dealer
agreements with brokers or other persons of its choice for the sale of Trust
shares. RESRV's principal business is the distribution of shares of mutual funds
and it has retained no underwriting commissions during the last three fiscal
years.
The Distribution Agreement must be approved annually by the Trustees,
including a majority of those who are not "interested persons," as defined in
the Investment Company Act of 1940.
DISTRIBUTION PLAN. The Trust maintains a Distribution Plan ("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 Board and approved by
its shareholders. Pursuant
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<PAGE> 90
to the Plan, the Distributor or its affiliates may make payments ("assistance
payments") to brokers and financial institutions ("payees") in respect of Trust
shareholder accounts ("qualified accounts") as to which the payee has rendered
distribution assistance or other services. The Distributor may also retain
amounts to pay for advertising and marketing expenses. Assistance payments by
the Distributor are made to payees at an annual rate of .25% of the
average net asset value for Class A shares and 1.00% of the average net
asset value for Class D shares. The Trustees have determined that there is a
reasonable likelihood that the Plan will benefit the Trust and its shareholders
and that its costs are primarily intended to result in the sale of the Trust's
shares.
Under the Plan, the Trust's officers report quarterly the amounts and
purposes of assistance payments to the Trustees. During the continuance of the
Plan the selection and nomination of the disinterested Trustees of the Trust are
at the discretion of the disinterested Trustees currently in office.
The Plan and related agreements may be terminated at any time by a vote of
a majority of the outstanding voting securities of the Fund. The Plan and
related agreements may be renewed from year to year if approved by a vote of a
majority of the Board of Trustees, including a majority of those who are not
"interested persons", as defined in the Investment Company Act of 1940. 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 majority vote of the Board of Trustees, including a
majority of the disinterested Trustees, cast in person at a meeting called for
the purpose of such vote.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand L.L.P., 1301 Avenue of
Americas, New York, New York 10019 is the Trust's independent accountants.
PORTFOLIO TURNOVER, TRANSACTION CHARGES AND ALLOCATION
The Fund will not attempt to achieve, nor will it be limited to, a
predetermined rate of portfolio turnover. Turnover rate is the lesser of
purchases or sales of portfolio securities for a year (excluding all securities
with maturities of one year or less) divided by the monthly average of the
market value of such securities.
Subject to the overall supervision of the officers of the Trust, its Board
of Trustees, and the Adviser; the Sub-Adviser places all orders for the purchase
and sale of the Trust's investment securities. In general, in the purchase and
sale of investment securities the investment Adviser will seek to obtain prompt
and reliable execution of orders at the most favorable prices or yields. In
determining best price and execution, the investment Adviser may take into
account a dealer's operational and financial capabilities, the type of
transaction involved, the dealer's general relationship with the Trust's
investment Adviser, and any statistical, research, or other services provided by
the dealer. 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 Trust as determined in good faith by
the Trust's investment Adviser. Brokers or dealers who execute investment
securities transactions for the Trust may also sell its shares; however, any
such sales will not be either a qualifying or disqualifying factor in the
selection of brokers or dealers.
When transactions are made in the over-the-counter market, the Trust deals
with the primary market makers unless more favorable prices are otherwise
obtainable.
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 Trust. Each share represents an
interest in the respective series of the Trust proportionately equal to the
interest of each other share. If they deem it advisable in the best interests of
shareholders, the Trustees of the Trust may classify or reclassify any unissued
shares of the Trust by setting or changing the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or 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 series be preferred over all other
83
<PAGE> 91
series in respect of assets specifically allocated to such class. It is
anticipated that under most circumstances, the rights of any additional series
would be comparable unless otherwise required to respond to the particular
situation. Upon liquidation of the Trust, shareholders are entitled to share pro
rata in the net assets of their respective series of the Trust available for
distribution to such shareholders. No changes can be made to the Trust's issued
shares without shareholder approval.
Each Fund share when issued is fully paid, nonassessable and fully
transferable or redeemable at the shareholder's option. Each share has an equal
interest in the net assets of its series, equal rights to all dividends and
other distributions from its series, and one vote for all purposes. Shares of
separate series 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.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration protects a Trustee against any liability to which he would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his office.
Regulations of the Securities and Exchange Commission provide that if a
series is separately affected by a matter requiring a vote (election of
Trustees, ratification of independent accountant selection, and approval of an
underwriting agreement are not considered to have such separate effect and may
be voted upon by the Trust as a whole), each such series votes separately. Each
series votes separately on such matters as approval of the Investment Management
Agreement, material amendments to the Service Plan, and majority of the effected
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 are normally made by check or wire transfer, but the
Trust may be authorized to make payment of redemptions partly or wholly in kind
(that is, by delivery of portfolio instruments valued at the same time as the
redemption net asset value is determined). The Trust has made an election
committing it to pay in cash all requests for redemption from the series
involved, by any shareholder or record, limited during any 90-day period to the
lesser of $250,000 or 1% of the net assets of the series at the beginning of the
period. The election is irrevocable pursuant to rules and regulations under the
Investment Company Act or 1940 unless withdrawal is permitted by order of
Securities and Exchange Commission. 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.
DETERMINATION OF NET ASSET VALUE. Shares are offered at net asset value
plus a sales charge (if applicable). The net asset value of the Fund is
calculated at the end of each business day (currently 4:00 PM New York time)
that the New York Stock Exchange is open for trading and on other days there
is a sufficient degree of trading to materially affect the Fund's net asset
value. The net asset value is not calculated on New Year's Day, Presidents'
Day, Good Friday, Memorial Day (observed), Independence Day, Labor Day,
Thanksgiving Day, Christmas Day and on other days the New York Stock Exchange
is closed for trading. The net asset value per share of the Fund is determined
by adding the value of all its securities and other assets, subtracting its
liabilities and dividing the result by the total number of each class'
outstanding shares that represent each class' proportionate interest in the
Fund.
Investment securities are valued at the last sale price on the securities
exchange or national securities market on which such securities are primarily
traded. Securities not listed on an exchange or national securities market, or
securities in which there were no transactions, are valued at the average of the
last bid and asked prices, except in the case of open short positions where the
asked price is used for valuation purposes. Bid price is used when no asked
price is available. Market quotations for foreign securities in foreign
currencies are translated into United States dollars at the prevailing rates of
exchange. Any securities or other assets for which recent market quotations are
not readily available are valued at fair value as determined in good faith by
the Board of Trustees.
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<PAGE> 92
REDUCED SALES CHARGE. Officers, directors, full time employees and
Trustees, and any trust, pension, profit sharing or qualified retirement plan of
the Adviser, Sub-Adviser, the distributor, the Trust and any affiliate thereof
may purchase shares of the Fund at the net asset value per share. Spouses and
minor children of the foregoing may also purchase shares at net asset value. In
addition, Sub-Adviser advisory clients and related persons of such may purchase
shares at net asset value.
DISTRIBUTIONS AND TAXES
The following is a general description of certain tax rules relating to
the Fund. It is not exhaustive and prospective investors may wish to consult
their tax advisers.
The Fund intends to qualify as a regulated investment company under the
Internal Revenue Code of 1986 ("Code") so long as such qualification is in the
best interests of shareholders. If it so qualifies, in any fiscal year in which
it distributes at least 90 percent of its taxable net income, the Fund generally
will not be subjected to federal income tax on such distributed amounts.
Shareholders of the Fund, however, will be subject to federal income tax on any
ordinary net income and net capital gains realized by the Fund and distributed
to shareholders as regular or capital gains dividends, whether distributed in
cash or in the form of additional shares. Net long term capital gains
distributions will be taxable to shareholders as long term capital gains,
regardless of the length of time the corresponding shares have been held.
Upon the taxable disposition (including a sale or redemption) of shares of
the Fund, a shareholder may realize a gain or loss depending upon his basis in
his shares. Such gain or loss generally will be treated as capital gain or loss
(if the shares are capital assets in the shareholder's hands) and will be
long-term or short-term, generally depending upon the shareholder's holding
period for the shares. However, a loss realized by a shareholder on the
disposition of Fund shares with respect to which capital gain dividends have
been paid will, to the extent of such capital gain dividends, be treated as
long-term capital loss if such shares have been held by the shareholder for six
months or less. Further, a loss realized on disposition will be disallowed to
the extent the shares disposed of are replaced (whether by reinvestment of
distributions or otherwise) within a period of 61 days beginning 30 days before
and ending 30 days after the shares are disposed of. In such a case, the basis
of the shares acquired will be adjusted to reflect the disallowed loss.
Shareholders receiving distributions in the form of additional shares will have
a cost basis for Federal income tax purposes in each share received equal to the
net asset value of a share of the Funds on the reinvestment date.
In order to qualify as a "regulated investment company" under the Code,
the Fund must, among other things, on each taxable year distribute at least 90
percent of its taxable income to shareholders, derive at least 90 percent of its
gross income from dividends, interest and gains from the sale or disposition of
securities and derive less than 30 percent of its gross income from the sale or
disposition of securities held for less than three months. Accordingly, the Fund
will be subject to certain restrictions including restrictions in the writing of
options on securities which have been held for less than three months,
purchasing and selling futures contracts held for less than three months, in the
writing of options which expire in less than three months, and in effecting
closing purchase transactions, with respect to options which have been written
less than three months prior to such transactions.
The Code imposes a non-deductible, 4% excise tax on regulated investment
companies that do not distribute to their shareholders in each calendar year an
amount equal to (i) 98% of their calendar year ordinary income; plus 98% of
their capital gain net income (the excess of short and long term capital losses)
for the one year period ending October 31. Dividends declared in December of any
year to shareholders of record on any date in December will be deemed to have
been received by the shareholders and paid by the Fund on the record date,
provided such dividends are paid by February 1 as of the following year.
Dividends and distributions declared payable to shareholders of record
after September 30 of any year and paid before February 1 of the following year,
are considered taxable income to shareholders on December 31 in the year
declared even though paid in the next year.
Dividends to shareholders who are non-resident aliens may be subject to a
United States withholding tax at a rate of up to 30% under existing provisions
of the code applicable to foreign individuals and entities unless a reduced rate
of withholding or a withholding exemption is provided under applicable treaty
laws. Non-resident aliens are urged to consult their own tax adviser concerning
the applicability of the United States withholding tax.
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<PAGE> 93
Generally, the hedging transactions undertaken by the Fund may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may affect
the character of gains (or losses) realized by the Fund. In addition, losses
realized by the Fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which the losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences to the Fund of engaging in hedging
transactions are not entirely clear. Hedging transactions may increase the
amount of short-term capital gain realized by the Fund which is taxed as
ordinary income when distributed to Shareholders.
The Fund may make one or more of the elections available under the Code
which are applicable to straddles. If the Fund makes any of the elections, this
amount, character and timing of gains or losses form the affected straddle
positions will be determined under rules that vary according to the election(s)
made. The rules applicable under certain of the elections may operate to
accelerate the recognition of gains or losses from the affected straddle
positions.
Because the straddle rules may affect the character of gains or losses,
defer losses and/or accelerate the recognition of gains or losses from the
affected straddle position, the amount which may be distributed to Shareholder,
and which, will be taxed to them as ordinary income or long-term capital gain,
may be increased or decreased as compared to a fund that did not engage in such
hedging transactions.
Dividends paid by the Fund are generally expected to be subject to any
state or local taxes on income. Shareholders should consult their own attorneys
or tax advisers about the tax consequences related to investing in the Fund.
The foregoing is a general summary of certain provisions of the Code and
Treasury Regulations in effect. For the complete provisions, reference should be
made to the pertinent Code sections and Treasury Regulations promulgated
thereunder. The Code and the Treasury Regulations thereunder are subject to
change by legislative or administrative action either prospectively or
retroactively.
PERFORMANCE INFORMATION
The Fund may from time to time advertise its total return. Total return is
computed by finding the average annual compounded rates of return over the 1,5
and 10 year periods or up to the life of the Fund that would equate the initial
amount invested to the ending redeemable value, according to the following
formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the 1,5
or 10 year periods at the end of the 1,5 or 10
year periods (or fractional portion thereof)
In advertising and sales literature, the Fund may compare its performance
to: (i) the Standard & Poor's 500 Stock Index ("S&P 500"), Dow Jones Industrial
Average ("DJIA"), the Russell 2000, or other unmanaged indices so that investors
may compare the Fund's results with those of a group of unmanaged securities
widely regarded by investors as representative of the securities markets in
general; (ii) other groups of mutual funds tracked by Lipper Analytical
Services, Inc., a widely used independent research firm which ranks mutual funds
by overall performance, investment objectives, and assets, or tracked by other
services, companies, publications, or persons who rank mutual funds on overall
performance or other criteria; and (iii) the Consumer Price Index (measure for
inflation) to assess the real rate of return from an investment in the Fund.
Unmanaged indices may assume the reinvestment of dividends but generally do not
reflect deductions for administrative and management costs and expenses.
The Fund may also compute aggregate total return for specified periods
based on a hypothetical Fund account with an assumed initial investment of
$10,000. The aggregate total return is determined by dividing the net asset
value of the account at the end of the specified period by the value of the
initial investment and is expressed as a percentage. Calculation of aggregate
total return reflects payment of the maximum sales charge and assumes
reinvestment of all income dividends and capital gain distributions during the
period.
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<PAGE> 94
The Fund may also quote annual, average annual and annualized total return
and aggregate total performance data both as percentage and as a dollar amount
based on a hypothetical $10,000 investment for various periods. Such data will
be computed as described above, except that (1) the rates of return calculated
will not be average annual rates, but rather, actual annual, annualized or
aggregate rates of return and (2) the maximum sales charge will not be included
with respect to annual, annualized or aggregate rates of return calculations.
87
<PAGE> 95
REPORT OF INDEPENDENT ACCOUNTANTS
To The Shareholders and Board of Trustees of The Reserve Private Equity Series:
We have audited the accompanying statement of assets and liabilities,
including the schedule of portfolio investments, of the Informed Investors Fund
(one of the Funds of the Reserve Private Equity Series) as of May 31, 1995, and
the related statement of operations, the statement of changes in net assets and
the financial highlights for the period December 28, 1994 (commencement of
operations) through May 31, 1995. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1995 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of the Informed Investors Fund of the Reserve Private Equity Series as
of May 31, 1995, the results of its operations, the changes in its net assets,
and its financial highlights for the period referred to above, in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
New York, New York
June 23, 1995
88
<PAGE> 96
RESERVE INFORMED INVESTORS GROWTH FUND (THE "FUND")
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reserve Informed Investors Growth Fund is a separate series of shares
issued by The Reserve Private Equity Series (the "Trust"). The Trust was
formed under Delaware law as a Delaware business trust. The Trust is
registered under the Investment Company Act of 1940, as amended, as a
non-diversified open-end management investment company. There are an
unlimited number of shares of beneficial interest of $.001 par value
authorized in each series. The accounting policies summarized below are
consistently followed in the preparation of the financial statements in
conformity with generally accepted accounting principles.
SECURITY VALUATION
Portfolio securities are stated at value. A security listed or traded on an
exchange is valued at its last sale price on the exchange where the
security is principally traded or, lacking any sales on a particular day,
the security is valued at the mean between the closing bid and asked prices
on that day. Each security traded in the over-the-counter market is valued
at the mean between its quoted bid and asked prices.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded on the trade date. Dividend income and
distributions to shareholders are recorded on the ex-dividend dates.
Interest income is accrued daily. Realized gains and losses from securities
transactions and unrealized appreciation or depreciation of securities are
reported on the identified cost basis for both financial statement and
Federal income tax purposes.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for net operating losses. The effect of these
differences for the year ended May 31, 1995 decreased undistributed net
investment loss by $38,948 and decreased aggregate paid in capital by
$38,948.
EXPENSES
Each series charged only for its direct or allocated (in proportion to net
assets) share of expenses.
FEDERAL INCOME TAXES
It is the Trust's policy to comply with Subchapter M of the Internal
Revenue Code and to distribute substantially all of its taxable income to
its shareholders. Accordingly, no Federal income tax provision is required.
2. INVESTMENT ACTIVITY
Purchases and sales of securities for the period December 28, 1994
(Commencement of Operations) through May 31, 1995, other than short-term
securities, aggregated $8,905,639 and $3,189,520 respectively.
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<PAGE> 97
RESERVE INFORMED INVESTORS GROWTH FUND (THE "FUND")
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1995 - (CONTINUED)
3. INVESTMENT MANAGEMENT AGREEMENT
Reserve Management Company, Inc. (RMCI), serves as the Fund's investment
adviser and pays substantially all ordinary operating expenses of the Fund
for which it receives a comprehensive fee at an annual rate of 1.50% of the
average daily net assets of the Fund. RMCI is a shareholder of the Fund.
4. DISTRIBUTION ASSISTANCE
Pursuant to a Distribution Plan, the Fund will make payments of .25% per
annum of the average daily net assets of shareholder accounts as to which
the payee has rendered distribution assistance. During the period, the Fund
paid $6,015 in distribution expenses to RMCI.
5. CAPITAL SHARE TRANSACTIONS
Transactions in capital stock for the period December 28, 1994
(commencement of operations) through May 31, 1995 were as follows:
<TABLE>
<CAPTION>
Shares Amount
------ ------
<S> <C> <C>
Share sold 634,326 $ 6,422,521
Redeemed (64,254) (656,742)
----------- -----------
Net Increase 570,072 $ 5,765,779
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
90
<PAGE> 98
RESERVE INFORMED INVESTORS GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1995
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value
(cost $5,495,629) $ 6,826,488
Cash 184,181
Receivable for investment securities sold 110,002
Dividends receivable 875
-----------
Total Assets 7,121,546
-----------
LIABILITIES
Payable for fund shares redeemed 12,000
Payable for investment securities purchased 272,346
-----------
Total Liabilities 284,346
-----------
NET ASSETS $ 6,837,200
===========
NET ASSETS CONSIST OF (Note 1)
Capital Stock (Par Value $.001 per share) $ 570
Additional paid in capital 5,726,261
Accumulated net realized loss on investments (220,490)
Net unrealized appreciation on investments (Note 1) 1,330,859
-----------
NET ASSETS, at value, applicable to 570,072 outstanding shares
of Beneficial Interest (Note 5) $ 6,837,200
===========
NET ASSET VALUE, and redemption price per share ($6,837,200 / 570,072) $ 11.99
===========
Maximum offering price per share (100/95.5 of $11.99) $ 12.55
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
91
<PAGE> 99
RESERVE INFORMED INVESTORS GROWTH FUND
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 28, 1994
(COMMENCEMENT OF
OPERATIONS) THROUGH
MAY 31, 1995
-------------------
<S> <C> <C>
INVESTMENT INCOME
Dividends $ 3,154
EXPENSES
Comprehensive fee (Note 3) $ 36,087
12b-1 Fee (Note 4) 6,015
-----------
Total Expenses 42,102
-----------
NET INVESTMENT LOSS (38,948)
-----------
Realized and Unrealized Gain on Investments
Net realized loss on investment securities: (Note 1)
Proceeds from sales of securities 3,189,520
Cost of securities sold (3,410,010) (220,490)
-----------
Net unrealized appreciation on investments 1,330,859
-----------
Net realized and unrealized gain on investments 1,110,369
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,071,421
===========
</TABLE>
RESERVE INFORMED INVESTORS GROWTH FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
DECEMBER 28, 1994
(COMMENCEMENT OF
OPERATIONS) THROUGH
MAY 31, 1995
-------------------
<S> <C>
INCREASE IN NET ASSETS
FROM INVESTMENT OPERATIONS:
Net investment loss $ (38,948)
Net realized loss from investments (220,490)
Net unrealized appreciation 1,330,859
-----------
Net increase in net assets resulting from
operations 1,071,421
FROM CAPITAL SHARE TRANSACTIONS (Note 5)
Net proceeds from sales of shares 6,422,521
Cost of shares redeemed (656,742)
-----------
Net increase in net assets resulting from
share transactions 5,765,779
-----------
NET INCREASE IN NET ASSETS 6,837,200
NET ASSETS:
Beginning of period 0
-----------
End of period $ 6,837,200
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
92
<PAGE> 100
RESERVE INFORMED INVESTORS GROWTH FUND (THE "FUND")
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1995 - (CONTINUED)
6. FINANCIAL HIGHLIGHTS (FOR ONE SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
DECEMBER 28, 1994
(COMMENCEMENT OF
OPERATIONS) THROUGH
MAY 31, 1995
-------------------
<S> <C>
Net asset value, beginning of period $10.00
Income from investment operations
Net investment loss (.07)
Net realized and unrealized gain 2.06
-----
Total from investment operations 1.99
-----
Net asset value, end of period $11.99
=====
Total Return (2) 19.90%(2)
RATIOS/SUPPLEMENTAL DATA
Net assets in thousands, end of period $6,837
Ratio of expenses to average net assets 1.75%(1)
Ratio of net investment loss to average
net assets (1.62)%(1)
Portfolio turnover rate 59%
</TABLE>
- ------------
(1) Annualized.
(2) Total return is not annualized, and does not reflect impact
of sales load.
93
<PAGE> 101
SEE NOTES TO FINANCIAL STATEMENTS.
RESERVE INFORMED INVESTORS GROWTH FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
MAY 31, 1995
<TABLE>
<CAPTION>
COMMON STOCKS VALUE
SHARES (NOTE 1)
------ --------
<S> <C> <C>
COMPUTER COMMUNICATIONS EQUIPMENT (7.5%)
* Adaptec Inc. 7,200 $ 216,900
* 3 Com Corp. 4,600 294,400
-----------
511,300
-----------
ELECTRIC MEASUREMENT & TESTING INSTRUMENTS (9.7%)
* Tencor Instruments 4,400 295,900
* Teradyne Inc. 6,800 368,050
-----------
663,950
-----------
GENERAL INDUSTRIAL MACHINERY & EQUIPMENT (1.6%)
Helix Technology Corp. 3,000 114,000
-----------
OPTICAL INSTRUMENTS AND LENSES (4.1%)
* KLA Instruments Corp. 4,000 279,000
-----------
PACKAGED SOFTWARE (9.6%)
* Broderbund Software Inc. 3,100 139,500
* Cadence Design Systems 9,400 279,650
Computer Associates International Inc. 3,600 235,800
-----------
654,950
-----------
RADIO, TV AND BROADCAST COMMUNICATION EQUIPMENT (8.0%)
* Andrew Corp. 11,250 548,438
-----------
SEMICONDUCTOR, RELATED DEVICE (34.9%)
* Altera Corp. 4,000 311,500
* Atmel Corp. 7,200 316,800
* Cypress Semiconductor Corp. 5,100 165,112
* Integrated Device Technology Inc. 4,400 191,400
Intel Corp. 2,000 224,500
Linear Technology Corp. 3,800 232,750
Micron Technology Inc. 17,500 780,938
* Xilinx Inc. 1,900 160,075
-----------
2,383,075
-----------
SPECIAL INDUSTRIAL MACHINERY (12.7%)
* Applied Materials Inc. 2,800 215,600
* Kulicke & Soffa Industries Inc. 3,300 140,250
* Lam Research Corp. 6,300 360,675
* Novellus Systems Inc. 2,500 155,000
-----------
871,525
-----------
TELEPHONE & TELGRAPH APPARATUS (11.7%)
* Tellabs Inc. 15,900 524,700
* U.S. Robotics Corp. 3,300 275,550
-----------
800,250
-----------
TOTAL COMMON STOCKS (Cost $5,495,629) (99.8%) 6,826,488
Other assets, less liabilities (.2%) 10,712
-----------
NET ASSETS (100%) $ 6,837,200
===========
</TABLE>
Value of investments are shown as a percentage of Net Assets.
* Non-income producing security.
For Federal income tax purposes the tax basis of investments owned at May 31,
1995 was $5,495,629, the aggregated gross unrealized appreciation for all
investments was $1,418,732 and aggregate gross unrealized depreciation for
all investments was $87,873.
SEE NOTES TO FINANCIAL STATEMENTS.
94
<PAGE> 102
RESERVE PRIVATE EQUITY SERIES
RESERVE NORTH AMERICAN GROWTH FUND
810 SEVENTH AVENUE, NEW YORK, N.Y. 10019
(800) 637-1700
---------------
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information describes Reserve Private Equity
Series ("Trust") and the Reserve North American Growth Fund ("North American
Growth Fund" or "Fund"). This Statement is not a Prospectus, but provides
detailed information to supplement the Prospectus and should be read in
conjunction with the Prospectus. A copy of the Prospectus may be obtained
(without charge) from Reserve Private Equity Series. This Statement is dated
1996.
TABLE OF CONTENTS
Page
----
Investment Policies
Other Policies
Trustees and Officers of the Trust
Investment Management and Other Agreements
Portfolio Turnover, Transaction Charges and
Allocation
Shares of Beneficial Interest
Purchase, Redemption and Pricing of Shares
Distributions and Taxes
Performance Information
Additional Information
Report of Independent Accountants
Financial Statements
95
<PAGE> 103
INVESTMENT POLICIES
The Fund has adopted as fundamental policies the following limitations on
its investment activities. These fundamental policies may not be changed without
a majority vote of the Fund shareholders, as defined in the Investment Company
Act of 1940. The North American Growth Fund may not:
(1) borrow money except as a temporary measure for extraordinary or emergency
purposes and then only in an amount not to exceed 33 1/3% of the market value of
its assets; (2) issue senior securities as defined in the Investment Company Act
of 1940 except that the Fund may borrow money in accordance with limitation (1);
(3) act as an underwriter with respect to the securities of others except to the
extent that, in connection with the disposition of portfolio securities, it may
be deemed to be an underwriter under certain federal securities laws; (4) invest
25% or more of the value of its total assets in the securities of issuers in any
particular industry; (5) purchase, sell or otherwise invest in real estate or
commodities or commodity contracts except the Fund may purchase readily
marketable securities of companies holding real estate or interests therein and
interest rate futures contracts, stock index futures contracts, and put and call
options on interest rate futures contracts; (6) invest in voting securities or
in companies for the purpose of exercising control; and (7) purchase securities
on margin, except to obtain such short-term credits as may be necessary for the
clearance of transactions.
The Fund has reserved the right to purchase and write interest rate
futures contracts, and put and call options on interest rate futures
contracts. The Fund does not intend to use these techniques for the
foreseeable future and that shareholders will be given notice should the Fund
determine that they will be used.
In addition to the fundamental investment policies listed above, the Fund
has voluntarily adopted certain policies that may be changed or amended by
action of the Trustees without requiring prior notice to or approval of
shareholders. In accordance with such policies and restrictions the Fund cannot:
(1) purchase from or sell investment securities to any of the officers or
Trustees of the Trust, its investment Adviser, its investment Sub-Adviser, its
principal underwriter or the officers, principals or directors of its investment
Adviser, investment Sub-Adviser or principal underwriter; and (2) purchase or
retain securities of an issuer any of whose officers, directors, trustees or
securityholders is an officer or Trustee of the Trust or a member, officer,
director or trustee of the investment Adviser or Sub-Adviser of the Fund if one
or more of such individuals owns beneficially more than one-half of one percent
(1/2 of 1%) of the securities (taken at market value) of such issuer and such
individuals owning more than one-half of one percent (1/2 of 1%) of such
securities together beneficially own more than 5% of such securities or both.
As a non-diversified company, the Fund is permitted to invest all of its
assets in a limited number of issuers. However, it intends to comply with
Subchapter M of the Internal Revenue Code in order to qualify as a regulated
investment company for federal income tax purposes. To so qualify, the Fund must
diversify its holdings so that, at the close of each quarter of its taxable
year, (a) at least 50% of the value of its total assets is represented by cash,
cash items, securities issued by the U.S. Government or its agencies or
instrumentalities, securities of other regulated investment companies, and other
securities limited generally with respect to any one issuer to an amount not
more than 5% of the total assets of the Fund and not more than 10% of the
outstanding voting securities of such issuer, and (b) not more than 25% of the
value of its total assets is invested in the securities of any one issuer (other
than the U.S. Government or its agencies or instrumentalities or regulated
investment companies), or in two or more issuers that the Fund controls and that
are engaged in the same or similar trades or businesses. In the event of a
decline in the market value of the securities of one or more such issuers
exceeding 5%, an investment in the Fund could entail greater risk than in a fund
which has a policy of diversification.
OTHER POLICIES
LENDING OF SECURITIES. The Fund may, to increase its income, lend its 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 and must
consist of cash, bank letters of credit or securities of the United States
Government (or its agencies or
96
<PAGE> 104
instrumentalities). To be acceptable as collateral, letters of credit must
obligate a bank to pay amounts demanded by the Fund if the demand meets the
terms of the letter. Such terms and the issuing bank would have to be
satisfactory to the Fund. Any loan might be secured by any one or more of the
three types of collateral. The Fund receives amounts equal to the dividends or
interest on loaned securities and also receives one or more 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, which require the borrower, after notice, to redeliver the
securities within the normal settlement time of five business days. While voting
rights may pass with the loaned securities, if a material event will occur
affecting an investment on loan, the loan must be called and the securities
voted.
SECURITIES OF FOREIGN COMPANIES. Investing in foreign securities may
result in greater risk than that incurred by investing in domestic securities.
There is generally less publicly available information about foreign companies
comparable to reports and ratings that are published about companies in the
United States.
It is comtemplated that most foreign securities will be purchased in
over-the-counter markets or on stock exchanges located in the countries in which
the respective principal offices of the issuers of the various securities are
located, if that is the best available market. Foreign stock markets are
generally not as developed or efficient as those in the United States. While
growing in volume, they usually have substantially less volume than the New York
Stock Exchange, and securities of some foreign companies are less liquid and
more volatile than securities of comparable United States companies. Similarly,
volume and liquidity in most foreign bond markets is less than in the United
States and at times volatility of price can be greater than in the United
States. Commissions on foreign stock exchanges are generally higher than
commissions on United States exchanges, although the Fund will endeavor to
achieve the most favorable net results on its portfolio transactions. There is
generally less government supervision and regulation of foreign stock exchanges,
brokers and listed companies than in the United States.
With respect to certain foreign countries, there is the possibility of
adverse changes in investments or exchange control regulations, expropriation or
confiscatory taxation, limitations on the removal of funds or other assets of
the Fund, political or social instability, or diplomatic development which could
affect United States investments in those countries. Moreover, individual
foreign economies may differ favorably or unfavorably from the United States'
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position.
The dividends and interest payable on certain of the Fund's foreign
portfolio securities may be subject to foreign withholding taxes thus reducng
the net amount of income available for distribution to the Fund's shareholders.
Shareholders otherwise subject to United States federal income taxes may,
subject to certain limitations, be entitled to claim a credit or deduction for
U.S. federal income tax purposes for his or her proportionate share of such
foreign taxes paid by the Fund.
TRUSTEES AND OFFICERS OF THE TRUST
*BRUCE R. BENT, President, Treasurer and Trustee, 810 Seventh Avenue, New
York, New York 10019.
Mr. Bent is President, Treasurer, and Trustee of The Reserve Fund ("RF"),
Reserve Institutional Trust ("RIT"), Reserve Tax-Exempt Trust ("RTET") and
Reserve New York Tax-Exempt Trust ("RNYTET") and Reserve Private Equity Series
("RPES"), Director, Vice President and Secretary of Reserve Management Company,
Inc. ("RMCI") and Reserve Management Corporation, and Chairman and Director of
Resrv Partners, Inc. Before 1968, he was associated with Stone & Webster
Securities Corp., and previously, Teachers Insurance and Annuity Association.
EDWIN EHLERT, JR., Trustee, 125 Elm Street, Westfield, New Jersey 07091.
Mr. Ehlert is President and Director of Ehlert Travel Associates, Inc.
(travel agency formerly called Travelong of Westfield, Inc.) and Ehlert Travel
Associates of Florida, Inc. (travel agency), and Trustee of RF, RIT, RNYTET,
RTET and RPES.
HENRI W. EMMET, Trustee, 176 East 71st Street, New York, New York 10021.
97
<PAGE> 105
Mr. Emmet is the Managing Director of Servus Associates, Inc, and U.S.A.
Representative of the First National Bank of Southern Africa and Trustee of RF,
RET, RNYTET, RTET, and RPES. Until 1989, he was Senior Vice President of the
New York branch of Banque Nationale de Paris.
BURTT R. EHRLICH, Trustee, 667 Madison Avenue, New York, New York 10021.
Mr. Ehrlich is a Director of Benson Eye Care Corp and a private investor.
Until 1992, he was President and Chairman of Ehrlich Bober Financial Corp., a
municipal securities investment firm.
*DONALD J. HARRINGTON, C.M, Trustee, St. John's University, Jamaica, New
York 11439.
The Reverend Harrington is President of St. John's University (NY) and a
Trustee of RF, RIT, RNYTET, RTET and RPES. The Reverend Harrington served as
President of Niagara University from 1984 to 1989 and was Executive Vice
President of Niagara University from 1981 to 1984. The Reverend Harrington also
served as Director of the Bear Stearns Companies Inc. since 1993.
NIELS W. JOHNSEN, Trustee, 1 Whitehall Street, New York, New York 10004.
Mr. Johnsen is Chairman of the Board of International Shipholding Corp.
and Central Gulf Lines, Inc. (ship cargo carrier), Director of Centennial
Insurance Co. and Trustee of The Atlantic companies (insurance), RF, RIT,
RNYTET, RTET and RPES.
THOMAS L. RHODES, Trustee, 150 East 35th Street, New York, New York 10016
Mr. Rhodes is President and a member of the Board of Directors of the
National Review. From 1976 to 1992 Mr. Rhodes was a partner with Goldman, Sachs
& Co., an investment banking firm.
MARC C. COZZOLINO, Counsel and Secretary, 810 Seventh Avenue, New York,
NY 10019.
Mr. Cozzolino is Counsel and Secretary of RF, RIT, RTET, RNYTET and RPES.
Before joining The Reserve Funds in 1994, Mr. Cozzolino was a staff attorney at
the New Jersey Bureau of Securities.
PAT A. COLLETTI, Controller, 810 Seventh Avenue, New York, New York 10019.
Mr. Colletti is Controller of RF, RIT, RTET, RNYTET and RPES. Prior to
joining The Reserve Funds in 1985, Mr. Colletti was Supervisor of Accounting
of Money Market Funds for the Dreyfus Corporation.
- ---------------
* Interested Trustee within the meaning of the Investment Company Act of 1940.
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 or 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 regard of the duties involved in the conduct
of their office.
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM FUND AND FUND COMPLEX
NAME OF TRUSTEE FROM FUND* (4 ADDITIONAL TRUSTS) PAID TO TRUSTEE*
------------------------------------------------------------------------------
<S> <C> <C>
Edwin Ehlert, Jr. $0 $16,500
Henri W. Emmet $0 $16,600
Rev. Donald J. Harrington $0 $16,500
Niels W. Johnsen $0 $16,500
Burtt R. Ehrlich $0 $0
Thomas L. Rhodes $0 $0
</TABLE>
Amount shown are for the Fund's fiscal year ending May 31, 1995.
INVESTMENT MANAGEMENT AND OTHER AGREEMENTS
The Adviser. Reserve Management Company, Inc. ("Adviser"),14 Locust Place,
Manhasset, New York, NY 11030, a registered investment Adviser, manages the
Trust and provides it with investment advice pursuant to an Investment
Management Agreement. Under the Investment Management Agreement, the Adviser
manages the Fund, is responsible for the day-to-day oversight of the Trust's
operations and otherwise administers the affairs of the Trust as it deems
advisable subject to the overall control and direction of the Trustees and the
investment policies and limitations of the Trust described in the Prospectus and
Statement of Additional Information. RMCI pays all employee costs and other
ordinary operating costs of the Fund pursuant to the Investment Management
Agreement which include: registration fees paid to the commission and state
regulators, costs associated with the annual update of each Fund's registration
statement, auditing annual financial statements, and printing and mailing
costs (exclusive of those associated with the Rule 12b-1 Plans).
Excluded
98
<PAGE> 106
from ordinary operating costs are interest charges, taxes, brokerage fees,
extraordinary legal and accounting fees and expenses, payments made pursuant to
the Trust's Distribution Plan and the fees of the disinterested Trustees, for
which the Fund pays its direct or allocated share.
For its management services, and for paying all of the employee costs,
costs of the Sub-Adviser and other ordinary operating expenses of the Trust,
RMCI is periodically paid a comprehensive fee, at the annual rate of 1.50% per
annum of the average daily net assets of the Fund.
The Investment Management Agreement is subject to annual review by and
must be approved at least annually by a vote of a majority of the Board of
Trustees, including a majority of those who are not "interested persons" as
defined in the Investment Company Act of 1940, cast in person at a meeting
called for the purpose of voting on such renewal. The Agreement terminates
automatically upon its assignment and may be terminated without penalty upon 60
days' written notice by vote of the Trustees, by vote of a majority of
outstanding voting shares of the Fund or by the Adviser.
THE SUB-ADVISER. Southern Capital Advisors ("Sub-Adviser"), a division of
Morgan Asset Management, Inc., 50 Front Street, Memphis, Tennessee 38103, a
registered investment Adviser, acts as Sub-Adviser to the Fund. The Adviser and
Trust have entered into a Sub-Advisory Agreement with the Sub-Adviser pursuant
to which the Adviser will pay any fees of the Sub-Adviser. The Sub-Advisory
Agreement is subject to annual review by and must be approved annually by the
Trustees, including a majority of those who are not "interested persons" as
defined in the Investment Company Act of 1940, cast in person at a meeting
called for purpose of voting on such renewal. The agreement automatically
terminates upon its assignment and may be terminated without penalty upon 60
days' written notice by vote of the Trustees, by vote of a majority of
outstanding voting shares of the Fund or by the Sub-Adviser.
CUSTODIAN. Chemical Bank, 4 New York Plaza, New York, New York 10004 is
Custodian for the cash and securities of the Trust. The Custodian maintains
custody of the Trust's cash and securities, handles its securities settlements
and performs transaction processing for receipts and disbursements in connection
with the purchase and sale of the Trust's shares.
DISTRIBUTION AGREEMENT. Resrv Partners, Inc. ("RESRV"), 810 Seventh
Avenue, New York, New York 10019, is a distributor of the shares of the Trust.
RESRV is a "principal underwriter" for the Trust within the meaning of the
Investment Company Act of 1940, and as such acts as agent in arranging for the
continuous offering of Trust shares. RESRV has the right to enter into dealer
agreements with brokers or other persons of its choice for the sale of Trust
shares. RESRV's principal business is the distribution of shares of mutual funds
and it has retained no underwriting commissions during the last three fiscal
years.
The Distribution Agreement must be approved annually by the Trustees,
including a majority of those who are not "interested persons," as defined in
the Investment Company Act of 1940.
DISTRIBUTION PLAN. The Trust maintains a Distribution Plan ("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 Board and approved by
its shareholders. Pursuant to the Plan, the Distributor or its affiliates may
make payments ("assistance payments") to brokers, financial institutions and
financial intermediaries ("payees") in respect of Trust shareholder accounts
("qualified accounts") as to which the payee has rendered distribution
assistance or other services. The Distributor may also retain amounts to pay for
advertising and marketing expenses. Assistance payments by the Distributor are
made to payees at an annual rate of .25% of the average net asset
value for Class A shares and 1.00% of the average net asset value
for Class D shares. The Trustees have determined that there is a reasonable
likelihood that the Plan will benefit the Trust and its shareholders and that
its costs are primarily intended to result in the sale of the Trust's shares.
Under the Plan, the Trust's officers report quarterly the amounts and
purposes of assistance payments to the Trustees. During the continuance of the
Plan the selection and nomination of the disinterested Trustees of the Trust are
at the discretion of the disinterested Trustees currently in office.
The Plan and related agreements may be terminated at any time by a vote of
a majority of the outstanding voting securities of the Fund. The Plan and
related agreements may be renewed from year to year if approved by a vote of a
majority of the Board of Trustees, including a majority of those who are not
"interested persons," as
99
<PAGE> 107
defined in the Investment Company Act of 1940. 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 majority
vote of the Board of Trustees, including a majority of the disinterested
Trustees, cast in person at a meeting called for the purpose of such vote.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand L.L.P., 1301 Avenue of
Americas, New York, New York 10019 is the Trust's independent accountants.
PORTFOLIO TURNOVER, TRANSACTION CHARGES AND ALLOCATION
Subject to the overall supervision of the officers of the Trust, its Board
of Trustees, and the Adviser, the Sub-Adviser places all orders for the purchase
and sale of the Fund's investment securities. In general, in the purchase and
sale of investment securities the Sub-Adviser will seek to obtain prompt and
reliable execution of orders at the most favorable prices or yields. In
determining best price and execution, the Sub-Adviser may take into account a
dealer's operational and financial capabilities, the type of transaction
involved, the dealer's general relationship with the Fund's Sub-Adviser, and any
statistical, research, or other services provided by the dealer. 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 in good faith by the Fund's Sub-Adviser.
Brokers or dealers who execute investment securities transactions for the Fund
may also sell its shares; however, any such sales will not be either a
qualifying or disqualifying factor in the selection of brokers or dealers.
Subject to procedures adopted by, and the supervision of, the Board of Trustees,
the Sub-Adviser is authorized to place portfolio transactions with brokers or
dealers affiliated with it provided the commission or fee charged is comparable
to that charged by non-affiliated brokers or dealers on comparable transactions
involving similar securities being purchased or sold during a comparable period
of time on a securities exchange. Any such transactions will be in accordance
with Rule 17e-1 under the Investment Company Act of 1940.
When transactions are made in the over-the-counter market, the Fund deals
with the primary market makers unless more favorable prices are otherwise
obtainable.
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 Trust. Each share represents an
interest in the respective series of the Trust proportionately equal to the
interest of each other share. If they deem it advisable in the best interests of
shareholders, the Trustees of the Trust may classify or reclassify any unissued
shares of the Trust by setting or changing the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or 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 series be preferred over all other
series in respect of assets specifically allocated to such class. It is
anticipated that under most circumstances, the rights of any additional series
would be comparable unless otherwise required to respond to the particular
situation. Upon liquidation of the Trust, shareholders are entitled to share pro
rata in the net assets of their respective series of the Trust available for
distribution to such shareholders. No changes can be made to the Trust's issued
shares without shareholder approval.
Each Fund share when issued is fully paid, nonassessable and fully
transferable or redeemable at the shareholder's option. Each share has an equal
interest in the net assets of its series, equal rights to all dividends and
other distributions from its series, and one vote for all purposes. Shares of
separate series 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.
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.
100
<PAGE> 108
Regulations of the Securities and Exchange Commission provide that if a
series is separately affected by a matter requiring a vote (election of
Trustees, ratification of independent accountant selection, and approval of an
underwriting agreement are not considered to have such separate effect and may
be voted upon by the Trust as a whole), each such series votes separately. Each
series votes separately on such matters as approval of the Investment Management
Agreement and material amendments to the Plan, which require approval by a
majority of the effected 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 a 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 are normally made by check or wire transfer, but the
Trust may be authorized to make payment of redemptions partly or wholly in kind
(that is, by delivery of portfolio instruments valued at the same time as the
redemption net asset value is determined). The Trust has made an election
committing it to pay in cash all requests for redemption from the series
involved, by any shareholder or record, limited during any 90-day period to the
lesser of $250,000 or 1% of the net assets of the series at the beginning of the
period. The election is irrevocable pursuant to rules and regulations under the
Investment Company Act or 1940 unless withdrawal is permitted by order of the
Securities and Exchange Commission. 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.
DETERMINATION OF NET ASSET VALUE. Shares are offered at net asset value
plus a sales charge (if applicable). The net asset value of the Fund is
calculated at the end of each business day (currently 4:00 PM New York time)
that the New York Stock Exchange is open for trading and on other days there is
a sufficient degree of trading to materially affect the Fund's net asset value.
The net asset value is not calculated on New Year's Day, Presidents' Day, Good
Friday, Memorial Day (observed), Independence Day, Labor Day, Thanksgiving Day,
Christmas Day and on other days the New York Stock Exchange is closed for
trading. The net asset value per share of the Fund is determined by adding the
value of all its securities and other assets, subtracting its liabilities and
dividing the result by the total number of the class' outstanding shares that
represent each class' proportionate interest in the Fund.
Investment securities are valued at the last sale price on the securities
exchange or national securities market on which such securities are primarily
traded. Securities not listed on an exchange or national securities market, or
securities in which there were no transactions, are valued at the average of the
last bid and asked prices, except in the case of open short positions where the
asked price is used for valuation purposes. Bid price is used when no asked
price is available. Market quotations for foreign securities in foreign
currencies are translated into United States dollars at the prevailing rates of
exchange. Any securities or other assets for which recent market quotations are
not readily available are valued at fair value as determined in good faith by
the Board of Trustees.
REDUCED SALES CHARGE. Officers, directors, full time employees and
Trustees, and any trust, pension, profit sharing or qualified retirement plan of
the Adviser, Sub-Adviser, the distributor, the Trust and any affiliate thereof
may purchase shares of the Fund at the net asset value per share. Spouses and
minor children of the foregoing may also purchase shares at net asset value. In
addition, Sub-Adviser advisory clients and related persons of such may purchase
shares at net asset value.
DISTRIBUTIONS AND TAXES
The following is a general description of certain tax rules relating to
the Fund. It is not exhaustive and prospective investors may wish to consult
their tax advisers.
The Fund intends to qualify as a regulated investment company under the
Internal Revenue Code of 1986 ("Code") so long as such qualification is in the
best interests of shareholders. If it so qualifies, in any fiscal year in which
it distributes at least 90 percent of its taxable net income, the Fund generally
will not be subjected to federal income tax on such distributed amounts.
Shareholders of the Fund, however, will be subject to federal income tax on any
ordinary net income and net capital gains realized by the Fund and distributed
to shareholders as regular or capital gains dividends, whether distributed in
cash or in the form of additional shares. Net long term capital gains
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<PAGE> 109
distributions will be taxable to shareholders as long term capital gains,
regardless of the length of time the corresponding shares have been held.
Upon the taxable disposition (including a sale or redemption) of shares of
the Fund, a shareholder may realize a gain or loss depending upon his basis in
his shares. Such gain or loss generally will be treated as capital gain or loss
(if the shares are capital assets in the shareholder's hands) and will be
long-term or short-term, generally depending upon the shareholder's holding
period for the shares. However, a loss realized by a shareholder on the
disposition of Fund shares with respect to which capital gain dividends have
been paid will, to the extent of such capital gain dividends, be treated as
long-term capital loss if such shares have been held by the shareholder for six
months or less. Further, a loss realized on disposition will be disallowed to
the extent the shares disposed of are replaced (whether by reinvestment of
distributions or otherwise) within a period of 61 days beginning 30 days before
and ending 30 days after the shares are disposed of. In such a case, the basis
of the shares acquired will be adjusted to reflect the disallowed loss.
Shareholders receiving distributions in the form of additional shares will have
a cost basis for Federal income tax purposes in each share received equal to the
net asset value of a share of the Funds on the reinvestment date.
In order to qualify as a "regulated investment company" under the Code,
the Fund must, among other things, in each taxable year distribute at least 90
percent of its taxable income to shareholders, derive at least 90 percent of its
gross income from dividends, interest and gains from the sale or disposition of
securities and derive less than 30 percent of its gross income from the sale or
disposition of securities held for less than three months. Accordingly, the Fund
will be subject to certain restrictions including restrictions in the writing of
options on securities which have been held for less than three months,
purchasing and selling futures contracts held for less than three months, in the
writing of options which expire in less than three months, and in effecting
closing purchase transactions, with respect to options which have been written
less than three months prior to such transactions.
The Code imposes a non-deductible, 4% excise tax on regulated investment
companies that do not distribute to their shareholders in each calendar year an
amount equal to (i) 98% of their calendar year ordinary income; plus 98% of
their capital gain net income (the excess of short and long term capital losses)
for the one year period ending October 31. Dividends declared in December of any
year to shareholders of record on any date in December will be deemed to have
been received by the shareholders and paid by the Fund on the record date,
provided such dividends are paid by February 1 as of the following year.
Dividends and distributions declared payable to shareholders of record
after September 30 of any year and paid before February 1 of the following year,
are considered taxable income to shareholders on December 31 in the year
declared even though paid in the next year.
Dividends to shareholders who are non-resident aliens may be subject to a
United States withholding tax at a rate of up to 30% under existing provisions
of the code applicable to foreign individuals and entities unless a reduced rate
of withholding or a withholding exemption is provided under applicable treaty
laws. Non-resident aliens are urged to consult their own tax adviser concerning
the applicability of the United States withholding tax.
The Code includes rules applicable to certain listed options, futures
contracts, and options on futures contracts which the Fund may write, purchase
or sell. Such options and contracts are classified as Section 1256 contracts
under the Code. The character of gain or loss resulting from the sale,
disposition, closing out, expiration or other termination of Section 1256
contracts is generally treated as long-term capital gain or loss to the extent
of 60% thereof and short-term capital gain or loss to the extent of 40% thereof
("60/40 gain or loss"). Such contracts, generally are required to be treated as
sold at market value on the last day of such fiscal year and on certain other
dates for federal income tax purposes ("marked-to-market"). Generally,
over-the-counter options are not classified as Section 1256 contracts and are
not subject to the mark-to market rule or to 60/40 gain or loss treatment. Any
gains or losses recognized by the Fund from transactions in over-the-counter
options generally constitute short-term capital gains or losses. If
over-the-counter call options written, or over-the-counter put options
purchased, by the Fund are exercised, the gain or loss realized on the sale of
the underlying securities may be either short-term or long-term, depending on
the holding period of the securities. In determining the amount of gain or loss,
the sales proceeds are reduced by the premium paid for over-the-counter puts or
increased by the premium received for over-the counter calls.
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<PAGE> 110
The Code and the Treasury Regulations thereunder are subject to change by
legislative or administrative action either prospectively or retroactively.
Dividends paid by the Fund are generally expected to be subject to any
state or local taxes on income. Shareholders should consult their own attorneys
or tax advisers about the tax consequences related to investing in the Fund.
PERFORMANCE INFORMATION
The Fund may from time to time advertise its total return. Total return is
computed by finding the average annual compounded rates of return over the 1,5
and 10 year periods or up to the life of the Fund that would equate the initial
amount invested to the ending redeemable value, according to the following
formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the 1,5
or 10 year periods at the end of the 1,5 or 10
year periods (or fractional portion thereof)
In advertising and sales literature, the Fund may compare its performance
to (i) the Standard & Poor's 500 Stock Index ("S&P 500"), Dow Jones Industrial
Average ("DJIA"), the Russell 2000, or other unmanaged indices so that investors
may compare the Fund's results with those of a group of unmanaged securities
widely regarded by investors as representative of the securities markets in
general; (ii) other groups of mutual funds tracked by Lipper Analytical
Services, Inc. a widely used independent research firm which ranks mutual funds
by overall performance, investment objectives and assets, or tracked by other
services, companies, publications, or persons who rank mutual funds on overall
performance or other criteria; and (iii) the Consumer Price Index (measure for
inflation) to assess the real rate of return from an investment in the Fund.
Unmanaged indices may assume the reinvestment of dividends but generally do not
reflect deductions for administrative and management costs and expenses.
The Fund may also compute aggregate total return for specified periods
based on a hypothetical Fund account with an assumed initial investment of
$10,000. The aggregate total return is determined by dividing the net asset
value of the account at the end of the specified period by the value of the
initial investment and is expressed as a percentage. Calculation of aggregate
total return reflects payment of the maximum sales charge and assumes
reinvestment of all income dividends and capital gain distributions during the
period.
The Fund may also quote annual, average annual and annualized total return
and aggregate total performance data both as a percentage and as a dollar amount
based on a hypothetical $10,000 investment for various periods. Such data will
be computed as described above, except that (1) the rates of return calculated
will not be average annual rates, but rather, actual annual, annualized or
aggregate rates of return and (2) the maximum sales charge will not be included
with respect to annual, annualized or aggregate rates of return calculations.
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<PAGE> 111
ADDITIONAL INFORMATION ABOUT CANADA
The information in this section is based on material obtained by the Fund
from various Canadian governmental and other economic sources believed to be
accurate, but has not been independently verified by the Fund or the Adviser. It
is not intended to be a complete description of Canada, its economy, or the
consequences of investing in Canadian Government Securities.
TERRITORY AND POPULATION
Canada is the second largest country in the world in terms of land mass
with an area of 9.97 million square kilometers (3.85 million square miles). It
is located north of the continental United States of America and east of Alaska.
Canada comprises ten provinces (Alberta, British Columbia, Manitoba, New
Brunswick, Newfoundland, Nova Scotia, Ontario, Prince Edward Island, Quebec, and
Saskatchewan) and two territories (the Northwest Territories and the Yukon
Territory). Its population is approximately 29 million.
GOVERNMENT
Canada is a constitutional monarchy with Queen Elizabeth II of the United
Kingdom its nominal head of state. The Queen is represented by the Canadian
governor-general, appointed on the recommendation of the Canadian prime
minister. Canada's government has a federal structure, with a federal government
and ten provincial governments. Its Parliament consists of a House of Commons
and a Senate. Members of the House of Commons are elected by Canadian citizens
over 18 years of age. Senators are appointed on a regional basis by the prime
minister. The federal government is headed by the prime minister, who is chosen
from the party that has won the majority of seats in the House of Commons. The
provincial governments each have a legislative assembly and a premier.
Legislative authority resides in the federal parliament and the ten
provincial legislative assemblies. Provinces have extensive power with specific
areas of jurisdiction. The federal government has defined areas of jurisdiction
and the power to act in areas declared by Parliament to be for the general
advantage of Canada. This general power has been used to justify federal action
in certain areas of provincial jurisdiction. Concurrent federal and provincial
jurisdiction exists in certain matters, including agriculture, immigration, and
pensions. The power-sharing issue between the federal government and provincial
governments has been contentious and has proven to be a central issue in the
process of constitutional reform.
POLITICS
Since World War II, the federal government has been formed by either the
Liberal Party or the Progressive Conservative Party. In October 1993, the
Liberal Party, under the leadership of Mr. Jean Chretien, won 178 of the 295
seats in the Canadian House of Commons ending nine years of rule by the
Progressive Conservative Party. He remains popular, and unless the Liberal Party
calls for an earlier election, the next general election will take place in
October 1998.
Canada has had three major developments regarding unity and constitutional
reform in four years. The first two major developments were the rejection of the
Meech Lake Amendment in 1990 and the Charlottetown Accord in 1992. Those reforms
would have given Quebec constitutional recognition as a distinct society,
transferred powers from the federal to the provincial governments and reformed
the Senate by providing for more equal representation among the provinces.
The third major development is the possibility of Quebec's independence.
On September 12, 1994, the Quebec separatist party, Parti Quebecois, under the
leadership of Jacques Parizeau, won 77 seats in the provincial election with
44.7% of the vote. The Liberal Party won 47 seats with 44.3% of the vote. The
Parti Quebecois's agenda includes a call for a referendum sometime in 1995,
supporting independence. On February 6, 1995, the first of 15 regional
commissions started a month of consultations with regard to a draft law
regarding independence. The commissions are expected to produce a joint report
which will provide the basis for amendments to the draft law. This would be
followed by the referendum campaign and vote. In 1980, Quebec voted against
independence by a margin of 60% to 40%. Polls indicate that there is not enough
support to pass a referendum for independence. Furthermore, on February 13,
1995, in what had been seen as a preview to the referendum, Liberal Party
candidates defeated Parti Quebecois candidates in two parliamentary by-elections
in Quebec.
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<PAGE> 112
Mr. Parizeau has also suggested that he might introduce a series of
referendums until separatism wins, instead of one all-encompassing referendum.
The Quebec government's proposals suggest that Quebec would be able to keep the
Canadian dollar as its currency, share its armed forces with Canada and be a
partner of Canada with regard to international agreements and alliances. The
actual mechanics of separatoin, if it were to occur, and the possible effects on
Canada's economy are still not clear. Prime Minister Chretien has stated that
the national government would prevail in a vote on separatism. Still, until the
vote on the referendum, and for the foreseeable future, Quebec's position within
Canada will continue to dominate political debate.
MONETARY AND BANKING SYSTEM
The central bank of Canada is the Bank of Canada. Its main functions are
to advise on the formulation and execution of monetary policy and supervise
commercial banks acting as a fiscal agent to the federal government, managing
the foreign-exchange fund. The currency unit of Canada is the Canadian dollar.
Canada does not impose foreign exchange controls on capital receipts or payments
by residents or non-residents.
NORTH AMERICAN FREE TRADE AGREEMENT
Canada and the United States are each other's largest trading partners and
as a result, there is a significant linkage between the two economies. Bilateral
trade between Canada and the United States in 1993 was larger than it had been
between any other two countries in the world. On January 2, 1988, Canada and the
United States signed the Free Trade Agreement (the "FTA"), which was ratified by
the Canadian Parliament and the United States Senate. In the summer of 1991, the
United States, Canada, and Mexico began negotiating the North American Free
Trade Agreement ("NAFTA"). NAFTA was signed on December 17, 1992 at separate
ceremonies in Washington, D.C., Mexico City, and Ottowa. On December 30, 1993,
after the legislatures in the United States and Mexico had ratified NAFTA, the
Canadian government announced that it had proclaimed NAFTA into law and had
exchanged the written notifications with the United States and Mexico needed to
bring NAFTA into force. As a result, NAFTA effectively replaced the FTA. When
fully implemented, NAFTA is designed to create a North America Free Trade Area,
expand the flow of goods, services, and investments, and eventually eliminate
tariff barriers, import quotas, and technical barriers among Canada, the United
States, and Mexico.
ECONOMIC INFORMATION REGARDING CANADA
Canada experienced rapid economic expansion during most of the 1980s. Its
economy, like many other industrialized nations, fell into a recession from late
1990 through 1992. The 1990-1992 recession partly created and partly highlighted
some difficulties which the present government is attempting to resolve. The
relatively low level of economic activity during this period reduced the growth
of tax receipts with the result that the already high levels of government debt
increased.
RECENT DEVELOPMENTS. In its first budget, presented in February 1994, the
Liberal Party introduced new spending cuts to reduce Canada's budget deficit.
Canada's budget deficit is one of the largest for any of the OECD members. For
the fiscal year 1994-95, its budget deficit is estimated to be 5.5% of GDP
compared to 2.5% for the United States. The government has stated its commitment
to reduce the deficit to approximately 4.2% of GDP in the 1995-1996 fiscal year,
and to 3% of GDP in the 1996-1997 fiscal year. While the government's budget
deficit objectives can be achieved with continued economic growth and lower
interest rates, they also indicate a further rise in the debt-to-GDP ratio which
would continue to grow until the 1996-1997 fiscal year.
In addition to the growth of the federal government deficit, provincial
government debt has risen rapidly. Developments, including increased spending on
social services at the provincial level, were responsible for a significant
amount of the growth of public debt from 1990-1992. In response to the increase
in provincial debt, a number of rating agencies downgraded some provincial debt
ratings. All provinces now have plans to balance their respective budgets. This
may prove to be difficult, considering the increase in interest rates and the
federal government's plan to reduce certain transfers to the provinces.
During 1994, despite growing output and low inflation, concern over the
country's deficit and the uncertainty associated with Quebec's status within
Canada has led to a weakening of its currency and higher interest rates. These
higher interest rates have threatened the federal deficit reduction target. In
December 1994, the Canadian Parliament proposed legislation increasing taxes by
C$1.1 billion and reducing spending by C$8.7 billion over the next two years. It
is still not clear whether these measures, if enacted, will have the effect of
meeting the federal deficit-
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<PAGE> 113
reduction targets. Through January 31, 1995, the Canadian dollar decreased in
value compared to the U.S. dollar by approximately 21% from October 1991, and
approximately 5% from September 1994. On January 20, 1995, the Canadian dollar
fell to September 1994. On January 20, 1995, the Canadian dollar fell to 70.2,
its lowest rate in almost nine years, and close to its record low of 69.2. The
Bank of Canada responded by increasing rates on Treasury bills and selling U.S.
dollars. The Canadian dollar has increased in value against the U.S. dollar from
70.2 on January 20, 1995 to 70.8 on February 16, 1995.
The following provides certain statistical and related information
regarding historical rates of exchange between the U.S. dollar and the Canadian
dollar, information concerning inflation rates, historical information regarding
the Canadian gross domestic product, and information concerning yields on
certain Canadian government securities. Historical figures are not necessarily
indicative of future fluctuations.
CURRENCY EXCHANGE RATES. The exchange rate between the U.S. dollar and the
Canadian dollar is at any moment related to the supply of and demand for the two
currencies, and changes in the rate result over time from the interaction of
many factors directly or indirectly affecting economic conditions in the United
States and Canada, including economic and political developments in other
countries, and government policy and intervention in the money markets.
Despite the recent drop in value of the Canadian dollar, the range of
fluctuation in the U.S. dollar/Canadian dollar exchange rate has been narrower
than the range of fluctuation between the U.S. dollar and most other major
currencies. However, the range that occurred in the past is not necessarily
indicative of fluctuations in that rate that may occur over time, which may be
wider or more confined than the range that occurred over a historic period of
comparable length. Future rates of exchange cannot be predicted, particularly
over extended periods of time.
The following table sets forth, for each year indicated, the annual
average of the daily noon buying rates in New York for cable transfers in U.S.
dollars for one Canadian dollar as certified by the Federal Reserve Bank of New
York:
<TABLE>
<CAPTION>
U.S. Dollars
------------
<S> <C>
1981 . . . . . . . . . . . . . . . . . . . . 0.83
1982 . . . . . . . . . . . . . . . . . . . . 0.81
1983 . . . . . . . . . . . . . . . . . . . . 0.81
1984 . . . . . . . . . . . . . . . . . . . . 0.77
1985 . . . . . . . . . . . . . . . . . . . . 0.73
1986 . . . . . . . . . . . . . . . . . . . . 0.72
1987 . . . . . . . . . . . . . . . . . . . . 0.75
1988 . . . . . . . . . . . . . . . . . . . . 0.81
1989 . . . . . . . . . . . . . . . . . . . . 0.84
1990 . . . . . . . . . . . . . . . . . . . . 0.86
1991 . . . . . . . . . . . . . . . . . . . . 0.87
1992 . . . . . . . . . . . . . . . . . . . . 0.83
1993 . . . . . . . . . . . . . . . . . . . . 0.78
1994 . . . . . . . . . . . . . . . . . . . . 0.73
</TABLE>
Source: FEDERAL RESERVE BULLETIN
INFLATION RATE OF THE CANADIAN CONSUMER PRICE INDEX.
Inflation has remained below 2% since 1991 and the government and the Bank of
Canada have reaffirmed the target of holding inflation inside a band of 1-3% for
1995.
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<PAGE> 114
The following table sets forth for each year indicated the average
change in the Canadian consumer price index for the twelve months ended
December 31 of such year (1986 = 100).
<TABLE>
<CAPTION>
National Consumer
Price Index
-----------
<S> <C>
1981 . . . . . . . . . . . . . . . . . . . . 12.4%
1982 . . . . . . . . . . . . . . . . . . . . 10.9
1983 . . . . . . . . . . . . . . . . . . . . . 5.7
1984 . . . . . . . . . . . . . . . . . . . . . 4.4
1985 . . . . . . . . . . . . . . . . . . . . . 3.9
1986 . . . . . . . . . . . . . . . . . . . . . 4.2
1987 . . . . . . . . . . . . . . . . . . . . . 4.4
1988 . . . . . . . . . . . . . . . . . . . . . 4.0
1989 . . . . . . . . . . . . . . . . . . . . . 5.0
1990 . . . . . . . . . . . . . . . . . . . . . 4.8
1991 . . . . . . . . . . . . . . . . . . . . . 5.6
1992 . . . . . . . . . . . . . . . . . . . . . 1.5
1993 . . . . . . . . . . . . . . . . . . . . . 1.8
</TABLE>
Source: BANK OF CANADA REVIEW, WINTER 1994-1995; Statistics Canada.
CANADIAN GROSS DOMESTIC PRODUCT. The following table sets forth
Canada's gross domestic product ("GDP") for the years 1981 through 1993 at
historical and constant prices.
<TABLE>
<CAPTION>
Gross Domestic Change From
Gross Domestic Product at 1986 Prior Year at
Product Prices Constant Prices
-------------- --------------- ---------------
(millions of Canadian dollars)
(%)
<S> <C> <C> <C>
1981 355,994 440,127 3.7%
1982 374,442 425,970 (3.2)
1983 405,717 439,448 3.2
1984 444,735 467,167 6.3
1985 477,988 489,437 4.8
1986 505,666 505,666 3.3
1987 551,597 526,730 4.2
1988 605,906 552,958 5.0
1989 650,748 566,486 2.4
1990 669,467 565,155 (0.2)
1991 674,766 554,735 (1.8)
1992 688,391 558,165 0.6
1993 711,658 570,541 2.2
</TABLE>
Source: BANK OF CANADA REVIEW, WINTER 1994-1995; Statistics Canada.
YIELDS ON CANADIAN GOVERNMENT TREASURY BILLS AND BONDS. The following table sets
forth the average monthly yield on 3-month and 6-month Government of Canada
Treasury Bills and 5-year and 10-year Canadian Benchmark Bonds for 1994.
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<PAGE> 115
<TABLE>
<CAPTION>
Treasury Bills Benchmark Bonds
1994 3 Months 6 Months 5 Years 10 years
- ---- ------------------------ -------------------------
<S> <C> <C> <C> <C>
January 3.63% 3.71% 5.40% 6.39%
February 3.84 4.17 6.12 6.94
March 5.47 6.04 7.47 7.95
April 5.86 6.28 7.44 7.95
May 6.14 6.55 8.01 8.41
June 6.38 7.29 8.82 9.11
July 5.76 6.64 8.96 9.36
August 5.52 5.79 8.32 8.74
September 5.20 5.69 8.36 8.88
October 5.39 6.04 8.55 9.14
November 5.86 6.52 8.81 9.16
December 7.14 8.12 8.99 9.07
</TABLE>
Source: BANK OF CANADA REVIEW, WINTER 1994-1995; Statistics Canada.
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<PAGE> 116
RESERVE PRIVATE EQUITY SERIES
RESERVE INTERNATIONAL EQUITY FUND
810 SEVENTH AVENUE, NEW YORK, N.Y. 10019
(800) 637-1700
---------------
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information describes Reserve Private Equity
Series ("Trust") and the Reserve International Equity Fund ("International
Equity Fund" or "Fund"). This Statement is not a Prospectus, but provides
detailed information to supplement the Prospectus and should be read in
conjunction with the Prospectus. A copy of the Prospectus may be obtained
(without charge) from Reserve Private Equity Series. This Statement is dated
1996.
TABLE OF CONTENTS
Page
----
Investment Policies
Other Policies
Trustees and Officers of the Trust
Investment Management and Other Agreements
Portfolio Turnover, Transaction Charges and
Allocation
Shares of Beneficial Interest
Purchase, Redemption and Pricing of Shares
Distributions and Taxes
Performance Information
Report of Independent Accountants
Financial Information
109
<PAGE> 117
INVESTMENT POLICIES
The Fund has adopted as fundamental policies the following limitations on
its investment activities. These fundamental policies may not be changed without
a majority vote of the Fund shareholders, as defined in the Investment Company
Act of 1940. The International Equity Fund may not:
(1) borrow money except as a temporary measure for extraordinary or emergency
purposes and then only in an amount not to exceed 33 1/3% of the market value of
its assets; (2) issue senior securities as defined in the Investment Company Act
of 1940 except that the Fund may borrow money in accordance with limitation (1);
(3) act as an underwriter with respect to the securities of others except to the
extent that, in connection with the disposition of portfolio securities, it may
be deemed to be an underwriter under certain federal securities laws; (4) invest
25% or more of the value of its total assets in the securities of issues in any
particular industry; (5) purchase, sell or otherwise invest in real estate or
commodities or commodity contracts except the Fund may purchase readily
marketable securities of companies holding real estate or interests therein and
interest rate futures contracts, stock index futures contracts, and put and call
options on interest rate futures contracts; (6) invest in voting securities or
in companies for the purpose of exercising control; and (7) purchase securities
on margin, except to obtain such short-term credits as may be necessary for the
clearance of transactions; however, the Fund may make margin deposits in
connection with options and financial futures transactions.
The Fund has reserved the right to purchase and write interest rate
futures contracts, and put and call options on interest rate futures
contracts. The Fund does not intend to use these techniques for the
foreseeable future and that shareholders will be given notice should the Fund
determine that they will be used.
In addition to the fundamental investment policies listed above, the Fund
has voluntarily adopted certain policies that may be changed or amended by
action of the Trustees without requiring prior notice to or approval of
shareholders. In accordance with such policies and restrictions the Fund cannot:
(1) purchase from or sell investment securities to any of the officers or
Trustees of the Trust, its investment Adviser its investment Sub-Adviser, its
principal underwriter or the officers, principals or directors of its investment
Adviser, investment Sub-Adviser or principal underwriter; and (2) purchase or
retain securities of an issuer any of whose officers, directors, trustees or
securityholders is an officer or Trustee of the Trust or a member, officer,
director or trustee of the investment Adviser or Sub-Adviser of the Fund if one
or more of such individuals owns beneficially more than one-half of one percent
(1/2 of 1%) of the securities (taken at market value) of such issuer and such
individuals owning more than one-half of one percent (1/2 of 1%) of such
securities together beneficially own more than 5% of such securities or both.
As a non-diversified company, the Fund is permitted to invest all of its
assets in a limited number of issuers. However, it intends to comply with
Subchapter M of the Internal Revenue Code in order to qualify as a regulated
investment company for federal income tax purposes. To so qualify, the Fund must
diversify its holdings so that, at the close of each quarter of its taxable
year, (a) at least 50% of the value of its total assets is represented by cash,
cash items, securities issued by the U.S. Government or its agencies or
instrumentalities, securities of other regulated investment companies, and other
securities limited generally with respect to any one issuer to an amount not
more than 5% of the total assets of the Fund and not more than 10% of the
outstanding voting securities of such issuer, and (b) not more than 25% of the
value of its total assets is invested in the securities of any one issuer (other
than the U.S. Government or its agencies or instrumentalities or regulated
investment companies), or in two or more issuers that the Fund controls and that
are engaged in the same or similar trades or businesses. In the event of a
decline in the market value of the securities of one or more such issuers
exceeding 5%, an investment in the Fund could entail greater risk than in a fund
which has a policy of diversification.
OTHER POLICIES
WARRANTS. The Fund also may invest up to 5% of its net assets in warrants.
Included within this amount, may be warrants which are not listed on the New
York or American Stock Exchanges. A reason for investing in warrants is to
permit the Fund to participate in an anticipated increase in the market value
of a security without having to purchase the security to which the warrants
relate. Warrants convey no rights to dividends or voting rights, but only an
option to purchase equity securities of the issuer at a fixed price. If such
securities appreciate, the warrants may be exercised and sold at a gain, but a
loss will be incurred if such securities decrease in value or the term of the
warrant expires before it is exercised. The 5% limitation does not include
warrants acquired by the Fund in units or attached to other securities.
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SECURITIES OF FOREIGN COMPANIES. Investing in foreign securities may result in
greater risk than that incurred by investing in domestic securities. There is
generally less publicly available information about foreign companies comparable
to reports and ratings that are published about companies in the United States.
It is contemplated that most foreign securities will be purchased in
over-the-counter markets or on stock exchanges located in the countries in which
the respective principal offices of the issuers of the various securities are
located, if that is the best available market. Foreign stock markets are
generally not as developed or efficient as those in the United States. While
growing in volume, they usually have substantially less volume than the New York
Stock Exchange, and securities of some foreign companies are less liquid and
more volatile than securities of comparable United States companies. Similarly,
volume and liquidity in most foreign bond markets is less than in the United
States and at times volatility of price can be greater than in the United
States. Commissions on foreign stock exchanges are generally higher than
commissions on United States exchanges, although the Fund will endeavor to
achieve the most favorable net results on its portfolio transactions. There is
generally less government supervision and regulation of foreign stock exchanges,
brokers and listed companies than in the United States.
With respect to certain foreign countries, there is the possibility of
adverse changes in investments or exchange control regulations, expropriation or
confiscatory taxation, limitations on the removal of funds or other assets of
the Fund, political or social instability, or diplomatic developments which
could affect United States investments in those countries. Moreover, individual
foreign economies may differ favorably or unfavorably from the United States'
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position.
The dividends and interest payable on certain of the Fund's foreign
portfolio securities may be subject to foreign withholding taxes, thus reducing
the net amount of income available for distribution to the Fund's shareholders.
Shareholders otherwise subject to United States federal income taxes may,
subject to certain limitations, be entitled to claim a credit or deduction for
U.S. federal income tax purposes for his or her proportionate share of such
foreign taxes paid by the Fund.
TRUSTEES AND OFFICERS OF THE TRUST
*BRUCE R. BENT, President, Treasurer and Trustee, 810 Seventh Avenue, New
York, NY 10019.
Mr. Bent is President, Treasurer, and Trustee of The Reserve Fund ("RF"),
Reserve Institutional Trust ("RIT"), Reserve Tax-Exempt Trust ("RTET"),
Reserve New York Tax-Exempt Trust ("RNYTET") and Reserve Private Equity Series
("RPES"), Director, Vice President and Secretary of Reserve Management Company,
Inc. ("RMCI") and Reserve Management Corporation, and Chairman and Director of
Resrv Partners, Inc. Before 1968, he was associated with Stone & Webster
Securities Corp., and previously, Teachers Insurance and Annuity Association.
EDWIN EHLERT, JR., Trustee, 125 Elm Street, Westfield, New Jersey 07091.
Mr. Ehlert is President and Director of Ehlert Travel Associates, Inc.
(travel agency formerly called Travelong of Westfield, Inc.) and Ehlert Travel
Associates of Florida, Inc. (travel agency), and Trustee of RF, RIT, RNYTET,
RTET and RPES.
HENRI W. EMMET, Trustee, 176 East 71st Street, New York, New York 10021.
Mr. Emmet is the Managing Director of Servus Associates, Inc. and U.S.A.
Representative of the First National Bank of Southern Africa and Trustee of RF,
RET, RNYTET, RTET and RPES. Until 1989, he was Senior Vice President of the New
York branch of Banque Nationale de Paris.
BURTT R. EHRLICH, Trustee, 667 Madison Avenue, New York, New York 10021.
Mr. Ehrlich is a Director of Benson Eye Care Corp and a private investor.
Until 1992, he was President and Chairman of Ehrlich Bober Financial Corp., a
municipal securities investment firm.
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<PAGE> 119
*DONALD J. HARRINGTON, C.M, Trustee, St. John's University, Jamaica, New
York 11439.
The Reverend Harrington is President of St. John's University (NY) and
a Trustee of RF, RIT, RNYTET, RTET and RPES. The Reverend Harrington served as
President of Niagara University from 1984 to 1989 and was Executive Vice
President of Niagara University from 1981 to 1984.
NIELS W. JOHNSEN, Trustee, 1 Whitehall Street, New York, New York 10004.
Mr. Johnsen is Chairman of the Board of International Shipholding Corp.
and Central Gulf Lines, Inc. (ship cargo carrier), Director of Centennial
Insurance Co. and Trustee of The Atlantic companies (insurance), RF, RIT,
RNYTET, RTET and RPES.
THOMAS L. RHODES, Trustee, 150 East 35th Street, New York, New York 10016
Mr. Rhodes is President and a member of the Board of Directors of the
National Review. From 1976 to 1992 Mr. Rhodes was a partner with Goldman,
Sachs & Co., an investment banking firm.
MARC C. COZZOLINO, Counsel and Secretary and Trustee, 810 Seventh Avenue,
New York, NY 10019.
Mr. Cozzolino is Counsel and Secretary of RF, RIT, RTET, RNYTET and
RPES. Before joining The Reserve Funds in 1994, Mr. Cozzolino was a staff
attorney at the New Jersey Bureau of Securities.
PAT A. COLLETTI, Controller, 810 Seventh Avenue, New York, New York 10019.
Mr. Colletti is Controller of RF, RIT, RTET, RNYTET and RPES. Prior to
joining the Reserve funds in 1985, Mr. Colletti was Supervisor of Accounting
of Money Market Funds for the Dreyfus Corporation.
- ---------------
* Interested Trustee within the meaning of the Investment Company Act of 1940.
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 or 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 regard of the duties involved in the conduct
of their office.
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM FUND AND FUND COMPLEX
NAME OF TRUSTEE FROM FUND* (4 ADDITIONAL TRUSTS) PAID TO TRUSTEE*
------------------------------------------------------------------------------
<S> <C> <C>
Edwin Ehlert, Jr. $0 $16,500
Henri W. Emmet $0 $16,600
Rev. Donald J. Harrington $0 $16,500
Niels W. Johnsen $0 $16,500
Burtt R. Ehrlich $0 $0
Thomas L. Rhodes $0 $0
</TABLE>
Amount shown are for the Fund's fiscal year ending May 31, 1995.
INVESTMENT MANAGEMENT AND OTHER AGREEMENTS
THE ADVISER. Reserve Management Company, Inc. ("Adviser"), 14 Locust
Place, Manhasset, New York, 11030, a registered investment Adviser, manages
the Trust and provides it with investment advice pursuant to an Investment
Management Agreement. Under the Investment Management Agreement, the Adviser
manages the Fund, including effecting purchases and sales of investment
securities, is responsible for the day-to-day oversight of the Trust's
operations and to otherwise administer the affairs of the Trust as it deems
advisable subject to the overall control and direction of the Trustees and the
investment policies and limitations of the Trust described in the Prospectus
and Statement of Additional Information. RMCI pays all employee costs
and other ordinary operating costs of each Fund pursuant to the Investment
Management brokerage Agreement which include: registration fees paid to the
commission and state regulators, costs associated with the annual update of
each Fund's registration statement, auditing annual financial statements, and
printing and mailing costs (exclusive of those associated with the Rule 12b-1
Plans). Excluded from ordinary operating costs are interest charges, taxes,
fees, extraordinary legal and accounting fees and expenses, payments made
pursuant to the Trust's Distribution Plan and the fees of the disinterested
Trustees, for which the Fund pays its direct or allocated share.
For its management services, and for paying all of the employee costs,
costs of the Sub-Adviser and other ordinary operating expenses of the Trust,
RMCI is periodically paid a comprehensive fee, at the annual rate of 1.50%
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<PAGE> 120
per annum of the average daily net assets of the Fund. The Fund's comprehensive
fee is higher than the advisory fee of most other funds; however, this
comprehensive fee covers most operating expenses.
The Investment Management Agreement is subject to annual review by and
must be approved at least annually by a vote of a majority of the Board of
Trustees, including a majority of those who are not "interested persons" as
defined in the Investment Company Act of 1940, cast in person at a meeting
called for the purpose of voting on such renewal. The Agreement terminates
automatically upon its assignment and may be terminated without penalty upon 60
days' written notice by vote of the Trustees, by vote of a majority of
outstanding voting shares of the Fund or by the Adviser.
THE SUB-ADVISER. Pinnacle Associates Ltd., ("Sub-Adviser"), 666 Fifth
Avenue, New York, New York 10103, a registered investment Adviser, acts as
Sub-Adviser to the Fund. The Adviser and Trust have entered into a Sub-Advisory
Agreement with the Sub- Adviser pursuant to which the Adviser will pay any fees
of the Sub-Adviser. The Sub-Advisory Agreement is subject to annual review by
and must be approved annually by the Trustees, including a majority of those who
are not "interested persons" as defined in the Investment Company Act of 1940,
cast in person at a meeting called for purpose of voting on such renewal. The
agreement automatically terminates upon its assignment and may be terminated
without penalty upon 60 days' written notice by vote of the Trustees, by vote of
a majority of outstanding voting shares of the Fund or by the Sub-Adviser.
CUSTODIAN. Chemical Bank, 4 New York Plaza, New York, New York 10004 is
Custodian for the cash and securities of the Trust. The Custodian maintains
custody of the Trust's cash and securities, handles its securities settlements
and performs transaction processing for receipts and disbursements in connection
with the purchase and sale of the Trust's shares.
DISTRIBUTION AGREEMENT. Resrv Partners, Inc. ("RESRV"), 810 Seventh
Avenue, New York, New York 10019, is a distributor of the shares of the Trust.
RESRV is a "principal underwriter" for the Trust within the meaning of the
Investment Company Act of 1940, and as such acts as agent in arranging for the
continuous offering of Trust shares. RESRV has the right to enter into dealer
agreements with brokers or other persons of its choice for the sale of Trust
shares. RESRV's principal business is the distribution of shares of mutual funds
and it has retained no underwriting commissions during the last three fiscal
years.
The Distribution Agreement must be approved annually by the Trustees,
including a majority of those who are not "interested persons," as defined in
the Investment Company Act of 1940.
DISTRIBUTION PLAN. The Trust maintains a Distribution Plan ("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 Board and
approved by its shareholders. Pursuant to the Plan, the Distributor or its
affiliates may make payments ("assistance payments") to brokers, financial
institutions and financial intermediaries ("payees") in respect of Trust
shareholder accounts ("qualified accounts") as to which the payee has rendered
distribution assistance or other services. The Distributor may also retain
amounts to pay for advertising and marketing expenses. Assistance payments by
the Distributor are made to payees at an annual rate of .25% of the average net
asset value for Class A shares and 1.00% of the average net asset value for
Class D shares. The Trustees have determined that there is a reasonable
likelihood that the Plan will benefit the Trust and its shareholders and that
its costs are primarily intended to result in the sale of the Trust's shares.
Under the Plan, the Trust's officers report quarterly the amounts and
purposes of assistance payments to the Trustees. During the continuance of the
Plan the selection and nomination of the disinterested Trustees of the Trust are
at the discretion of the disinterested Trustees currently in office.
The Plan and related agreements may be terminated at any time by a vote of
a majority of the outstanding voting securities of the Fund. The Plan and
related agreements may be renewed from year to year if approved by a vote of a
majority of the Board of Trustees, including a majority of those who are not
"interested persons", as defined in the Investment Company Act of 1940. 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 majority vote of the Board of Trustees, including a
majority of the disinterested Trustees, cast in person at a meeting called for
the purpose of such vote.
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<PAGE> 121
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand L.L.P., 1301 Avenue of
Americas, New York, New York 10019 is the Trust's independent accountants.
PORTFOLIO TURNOVER, TRANSACTION CHARGES AND ALLOCATION
Subject to the overall supervision of the officers of the Trust its Board
of Trustees, and the Adviser, the Sub-Adviser places all orders for the purchase
and sale of the Trust's investment securities. In general, in the purchase and
sale of investment securities the investment Adviser will seek to obtain prompt
and reliable execution of orders at the most favorable prices or yields. In
determining best price and execution, the investment Adviser may take into
account a dealer's operational and financial capabilities, the type of
transaction involved, the dealer's general relationship with the Trust's
investment Adviser, and any statistical, research, or other services provided by
the dealer. 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 Trust as determined in good faith by
the Trust's investment Adviser. Brokers or dealers who execute investment
securities transactions for the Trust may also sell its shares; however, any
such sales will not be either a qualifying or disqualifying factor in the
selection of brokers or dealers.
When transactions are made in the over-the-counter market, the Trust deals
with the primary market makers unless more favorable prices are otherwise
obtainable.
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 Trust. Each share represents an
interest in the respective series of the Trust proportionately equal to the
interest of each other share. If they deem it advisable in the best interests of
shareholders, the Trustees of the Trust may classify or reclassify any unissued
shares of the Trust by setting or changing the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or 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 series be preferred over all other
series in respect of assets specifically allocated to such class. It is
anticipated that under most circumstances, the rights of any additional series
would be comparable unless otherwise required to respond to the particular
situation. Upon liquidation of the Trust, shareholders are entitled to share pro
rata in the net assets of their respective series of the Trust available for
distribution to such shareholders. No changes can be made to the Trust's issued
shares without shareholder approval.
Each Fund share when issued is fully paid, nonassessable and fully
transferable or redeemable at the shareholder's option. Each share has an equal
interest in the net assets of its series, equal rights to all dividends and
other distributions from its series, and one vote for all purposes. Shares of
separate series 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.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration protects a Trustee against any liability to which he would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his office.
Regulations of the Securities and Exchange Commission provide that if a
series is separately affected by a matter requiring a vote (election of
Trustees, ratification of independent accountant selection, and approval of an
underwriting agreement are not considered to have such separate effect and may
be voted upon by the Trust as a whole), each such series votes separately. Each
series votes separately on such matters as approval of the Investment Management
Agreement, material amendments to the Service Plan, and majority of the effected
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.
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<PAGE> 122
PURCHASE, REDEMPTION AND PRICING OF SHARES
Redemption payments are normally made by check or wire transfer, but the
Trust may be authorized to make payment of redemptions partly or wholly in kind
(that is, by delivery of portfolio instruments valued at the same time as the
redemption net asset value is determined). The Trust has made an election
committing it to pay in cash all requests for redemption from the series
involved, by any shareholder or record, limited during any 90-day period to the
lesser of $250,000 or 1% of the net assets of the series at the beginning of the
period. The election is irrevocable pursuant to rules and regulations under the
Investment Company Act or 1940 unless withdrawal is permitted by order of
Securities and Exchange Commission. 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.
DETERMINATION OF NET ASSET VALUE. Shares are offered at net asset value
plus a sales charge (if applicable). The net asset value of the Fund is
calculated at the end of each business day (currently 4:00 PM New York
time) that the New York Stock Exchange is open for trading and on other days
there is a sufficient degree of trading to materially affect the Fund's net
asset value. The net asset value is not calculated on New Year's Day,
Presidents' Day, Good Friday, Memorial Day (observed), Independence Day, Labor
Day, Thanksgiving Day, Christmas Day and on other days the New York Stock
Exchange is closed for trading. The net asset value per share of each class of
the Fund is determined by adding the value of all its securities and other
assets, subtracting its liabilities and dividing the result by the total number
of the class' outstanding shares that represent the class' proportionate
interest in the Fund.
Investment securities are valued at the last sale price on the securities
exchange or national securities market on which such securities are primarily
traded. Securities not listed on an exchange or national securities market, or
securities in which there were no transactions, are valued at the average of the
last bid and asked prices, except in the case of open short positions where the
asked price is used for valuation purposes. Bid price is used when no asked
price is available. Market quotations for foreign securities in foreign
currencies are translated into United States dollars at the prevailing rates of
exchange. Any securities or other assets for which recent market quotations are
not readily available are valued at fair value as determined in good faith by
the Board of Trustees.
REDUCED SALES CHARGE. Officers, directors, full time employees and
Trustees, and any trust, pension, profit sharing or qualified retirement plan of
the Adviser, Sub-Adviser, the distributor, the Trust and any affiliate thereof
may purchase shares of the Fund at the net asset value per share. Spouses and
minor children of the foregoing may also purchase shares at net asset value. In
addition, Sub-Adviser advisory clients and related persons of such may purchase
shares at net asset value.
DISTRIBUTIONS AND TAXES
The Fund intends to qualify as a regulated investment company under the
Internal Revenue Code of 1986 ("Code") so long as such qualification is in the
best interests of shareholders. If it so qualifies, in any fiscal year in which
it distributes at least 90 percent of its taxable net income, the Fund generally
will not be subjected to federal income tax on such distributed amounts.
Shareholders of the Fund, however, will be subject to federal income tax on any
ordinary net income and net capital gains realized by the Fund and distributed
to shareholders as regular or capital gains dividends, whether distributed in
cash or in the form of additional shares. Net long term capital gains
distributions will be taxable to shareholders as long term capital gains,
regardless of the length of time the corresponding shares have been held.
In order to qualify as a "regulated investment company" under the Code,
the Fund must, among other things, in each taxable year distribute at least 90
percent of its taxable income to shareholders, derive at least 90 percent of its
gross income from dividends, interest and gains from the sale or disposition of
securities and derive less than 30 percent of its gross income from the sale or
disposition of securities held for less than three months. Accordingly, the Fund
will be subject to certain restrictions including restrictions in the writing of
options on securities which have been held for less than three months,
purchasing and selling futures contracts held for less than three months, in the
writing of options which expire in less than three months, and in effecting
closing purchase transactions, with respect to options which have been written
less than three months prior to such transactions.
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The Code imposes a non-deductible, 4% excise tax on regulated investment
companies that do not distribute to their shareholders in each calendar year an
amount equal to (i) 98% of their calendar year ordinary income; plus 98% of
their capital gain net income (the excess of short and long term capital losses)
for the one year period ending October 31. Dividends declared in December of any
year to shareholders of record on any date in December will be deemed to have
been received by the shareholders and paid by the Fund on the record date,
provided such dividends are paid by February 1 as of the following year.
Dividends and distributions declared payable to shareholders of record
after September 30 of any year and paid before February 1 of the following year,
are considered taxable income to shareholders December 31 in the year declared
even though paid in the next year.
Dividends to shareholders who are non-resident aliens may be subject to a
United States withholding tax at a rate of up to 30% under existing provisions
of the code applicable to foreign individuals and entities unless a reduced rate
of withholding or a withholding exemption is provided under applicable treaty
laws. Non-resident aliens are urged to consult their own tax adviser concerning
the applicability of the United States withholding tax.
The Code includes rules applicable to certain listed options, futures
contracts, and options on futures contracts which the Fund may write, purchase
or sell. Such options and contracts are classified as Section 1256 contracts
under the Code. The character of gain or loss resulting from the sale,
disposition, closing out, expiration or other termination of Section 1256
contracts is generally treated as long-term capital gain or loss to the extent
of 60% thereof and short-term capital gain or loss to the extent of 40% thereof
("60/40 gain or loss"). Such contracts, generally are required to be treated as
sold at market value on the last day of such fiscal year and on certain other
dates for federal income tax purposes ("marked-to-market"). Generally,
over-the-counter options are not classified as Section 1256 contracts and are
not subject to the mark-to-market rule or to 60/40 gain or loss treatment. Any
gains or losses recognized by the Fund from transactions in over-the-counter
options generally constitute short-term capital gains or losses. If
over-the-counter call options written, or over-the-counter put options
purchased, by the Fund are exercised, the gain or loss realized on the sale of
the underlying securities may be either short-term or long-term, depending on
the holding period of the securities. In determining the amount of gain or loss,
the sales proceeds are reduced by the premium paid for over-the-counter puts or
increased by the premium received for over-the-counter calls.
Generally, the hedging transactions undertaken by the Fund may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may affect
the character of gains (or losses) realized by the Fund. In addition, losses
realized by the Fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which the losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences to the Fund of engaging in hedging
transactions are not entirely clear. Hedging transactions may increase the
amount of short-term capital gain realized by the Fund which is taxed as
ordinary income when distributed to Shareholders.
The Fund may make one or more of the elections available under the Code
which are applicable to straddles. If the Fund makes any of the elections, this
amount, character and timing of gains or losses form the affected straddle
positions will be determined under rules that vary according to the election(s)
made. The rules applicable under certain of the elections may operate to
accelerate the recognition of gains or losses from the affected straddle
positions.
Because the straddle rules may affect the character of gains or losses,
defer losses and/or accelerate the recognition of gains or losses from the
affected straddle position, the amount which may be distributed to Shareholder,
and which, will be taxed to them as ordinary income or long-term capital gain,
may be increased or decreased as compared to a fund that did not engage in such
hedging transactions.
The Fund may be subject to non-U.S. tax on income and gains received from
securities of non-U.S. issuers which generally is withheld by a foreign country
at the source. The United States has entered into tax treaties with many foreign
countries which may entitle the Fund to a reduced rate of tax or exemption from
tax on income. It is impossible to determine the effective rate of foreign tax
in advance since the amount of the Fund's assets to be invested within various
countries is not known. The Fund intends to operate so as to qualify for tax
treaty benefits where applicable. To the extent that the Fund is liable for
foreign income taxes withheld at the source, the Fund may operate so as to meet
the requirements of the Code to "pass through" to its shareholders tax benefits
attributable to foreign income taxes paid by the Fund. If more than 50% of the
value of the Fund's total assets at the close of its
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<PAGE> 124
taxable year is comprised of securities issued by foreign corporations, the Fund
may elect to "pass through" to its shareholders the amount of foreign taxes paid
by the Fund. Pursuant to this election shareholders will be required to (i)
include in gross income, even though not actually received, their respective pro
rata share of foreign taxes paid by the Fund; (ii) treat their pro rata share of
foreign taxes as paid by them; and (iii) subject to certain limitations, either
deduct their pro rata share of foreign taxes in computing their taxable income,
or use such share as foreign tax credit against U.S. income tax (but not both).
No deduction for foreign taxes may be claimed by a non-corporate shareholder who
does not itemize deductions. The Fund may meet the requirements to "pass
through" to its shareholders foreign income taxes paid, but there can be no
assurance that the Fund will be able to do so. Each shareholder will be notified
within 60 days after the close of the taxable year of the Fund if the foreign
taxes paid by the Fund will "pass through" for that year , and, if so, the
amount of each shareholder's pro rata share (by country) of (i) the foreign
taxes paid and (ii) the Fund's gross income from foreign sources.
Generally, a credit for foreign taxes paid or accrued is subject to the
limitation that it may not exceed the shareholder's U.S. tax attributable to his
or her total foreign source taxable income. For this purpose, the source of the
Fund's income flows through to its shareholders. Gains from the sale of
securities by the Fund will be treated as derived from U.S. sources and Section
988 gains will be treated as derived from U.S. sources. The limitation on the
foreign tax credit is applied separately to foreign source passive income,
including foreign source passive income received from the Fund. Shareholders may
be unable to claim a credit for the full amount of their proportionate share of
the foreign taxes paid by the Fund. The foreign tax credit can be applied to
offset no more than 90% of the alternative minimum tax imposed on corporations
and individuals. The foregoing is only a general description of the foreign tax
credit. Because application of a credit depends on the particular circumstances
of each shareholder, shareholders are advised to consult their own tax advisers.
The Fund may invest in shares of foreign corporations which may be
classified under the Code as passive foreign investment companies ("PFICs"). In
general, a foreign corporation is classified as a PFIC if at least one-half of
its assets constitute investment-type assets, or 75% or more of its gross income
is investment-type income. If the Fund receives a so-called "excess
distribution" with respect to PFIC stock, the Fund itself may be subject to a
tax on a portion of the excess distribution, whether or not the corresponding
income is distributed by the Fund to shareholders. In general, under the PFIC
rules, an excess distribution is treated as having been realized ratably over
the period during which the Fund held the PFIC shares. The Fund itself will be
subject to tax on the portion, if any, of an excess distribution that is so
allocated to prior Fund taxable years and an interest factor will be added to
the tax, as if the tax had been payable in such prior taxable years. Certain
distributions from a PFIC as well as gain from the sale of PFIC shares are
treated as excess distributions. Excess distributions are characterized as
ordinary income even though, absent application of the PFIC rules, certain
excess distributions might have been classified as capital gain.
The Fund may be eligible to elect alternative tax treatment with respect
to PFIC shares. Under an election that currently is available in some
circumstances, the Fund generally would be required to include in its gross
income its share of the earnings of a PFIC on a current basis, regardless of
whether distributions are received from the PFIC in a given year. If this
election were made, the special rules, discussed above, relating to the taxation
of excess distributions, would not apply. In addition, another election may be
available that would involve marking to market the Fund's PFIC shares at the end
of each taxable year ( and on certain other dates prescribed in the Code), with
the result that unrealized gains are treated as though they were realized. If
this election were made, tax at the Fund level under the PFIC rules would
generally be eliminated, but the Fund could, in limited circumstances, incur
nondeductible interest charges. The Fund's intention to qualify annually as a
regulated investment company may limit its elections with respect to PFIC
shares.
Because the application of the PFIC rules may affect, among other things,
the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC shares, as well as subject the Fund
itself to tax on certain income from PFIC shares, the amount that must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not invest in PFIC shares.
The Code and the Treasury Regulations thereunder are subject to change by
legislative or administrative action either prospectively or retroactively.
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<PAGE> 125
Dividends paid by the Fund are generally expected to be subject to any
state or local taxes on income. Shareholders should consult their own attorneys
or tax advisers about the status of distributions from the Fund in their own tax
jurisdictions.
PERFORMANCE INFORMATION
The Fund may from time to time advertise its total return. Total return is
computed by finding the average annual compounded rates of return over the 1,5
and 10 year periods or up to the life of the Fund that would equate the initial
amount invested to the ending redeemable value, according to the following
formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the 1,5
or 10 year periods at the end of the 1,5 or 10
year periods (or fractional portion thereof)
In advertising and sales literature, the Fund may compare its performance
to (i) the Standard & Poor's 500 Stock Index ("S&P 500"), Dow Jones Industrial
Average ("DJIA"), the Russell 2000, or other unmanaged indices so that investors
may compare the Fund's results with those of a group of unmanaged securities
widely regarded by investors as representative of the securities markets in
general; (ii) other groups of mutual funds tracked by Lipper Analytical
Services, Inc. a widely used independent research firm which ranks mutual funds
by overall performance, investment objectives and assets, or tracked by other
services, companies, publications, or persons who rank mutual funds on overall
performance or other criteria; and (iii) the Consumer Price Index (measure for
inflation) to assess the real rate of return from an investment in the Fund.
Unmanaged indices may assume the reinvestment of dividends but generally do not
reflect deductions for administrative and management costs and expenses.
The Fund may also compute aggregate total return for specified periods
based on a hypothetical Fund account with an assumed initial investment of
$10,000. The aggregate total return is determined by dividing the net asset
value of the account at the end of the specified period by the value of the
initial investment and is expressed as a percentage. Calculation of aggregate
total return reflects payment of the maximum sales charge and assumes
reinvestment of all income dividends and capital gain distributions during the
period.
The Fund may also quote annual, average annual and annualized total return
and aggregate total performance data both as a percentage and as a dollar amount
based on a hypothetical $10,000 investment for various periods. Such data will
be computed as described above, except that (1) the rates of return calculated
will not be average annual rates, but rather, actual annual, annualized or
aggregate rates of return and (2) the maximum sales charge will not be included
with respect to annual, annualized or aggregate rates of return calculations.
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<PAGE> 126
RESERVE PRIVATE EQUITY SERIES
RESERVE LARGE-CAP VALUE EQUITY FUND
810 SEVENTH AVENUE, NEW YORK, N.Y. 10019
(800) 637-1700
-----------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information describes Reserve Private
Equity Series ("Trust") and the Reserve Large-Cap Value Equity Fund ("Large-Cap
Fund" or "Fund"). This Statement is not a Prospectus, but provides detailed
information to supplement the Prospectus and should be read in conjunction with
the Prospectus. A copy of the Prospectus may be obtained (without charge) from
Reserve Private Equity Series. This Statement is dated
1996.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Policies
Other Policies
Trustees and Officers of the Trust
Investment Management and Other Agreements
Portfolio Turnover, Transaction Charges and
Allocation
Shares of Beneficial Interest
Purchase, Redemption and Pricing of Shares
Distributions and Taxes
Performance Information
</TABLE>
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INVESTMENT POLICIES
The Fund has adopted as fundamental policies the following limitations
on its investment activities. These fundamental policies may not be changed
without a majority vote of the Fund shareholders, as defined in the Investment
Company Act of 1940. The Large-Cap Value Equity Fund may not:
(1) borrow money except as a temporary measure for extraordinary or emergency
proposes and then only in an amount not to exceed 33 1/3% of the market value
of its assets; (2) issue senior securities as defined in the Investment
Company Act of 1940 except that the Fund may borrow money in accordance with
limitation (1); (3) act as an underwriter with respect to the securities of
others except to the extent that, in connection with the disposition of
portfolio securities, it may be deemed to be an underwriter under certain
federal securities laws; (4) invest 25% or more of the value of its total
assets in the securities of issues in any particular industry; (5) purchase,
sell or otherwise invest in real estate or commodities or commodity contracts
except the Fund may purchase readily marketable securities of companies holding
real estate or interests therein and interest rate futures contracts, stock
index futures contracts, and put and call options on interest rate futures
contracts; (6) invest in voting securities or in companies for the purpose of
exercising control; and (7) purchase securities on margin, except to obtain
such short-term credits as may be necessary for the clearance of transactions;
however, the Fund may make margin deposits in connection with options and
financial futures transactions.
In addition to the fundamental investment policies listed above, the
Fund has voluntarily adopted certain policies that may be changed or amended by
action of the Trustees without requiring prior notice to or approval of
shareholders. In accordance with such policies and restrictions the Fund
cannot:
(1) purchase from or sell investment securities to any of the officers
or Trustees of the Trust, its investment adviser, its investment sub-adviser,
its principal underwriter or the officers, principals or directors of its
investment adviser, investment sub-adviser or principal underwriter; and (2)
purchase or retain securities of an issuer any of whose officers, directors,
trustees or securityholders is an officer or Trustee of the Trust or a member,
officer, director or trustee of the investment adviser or sub-adviser of the
Fund if one or more of such individuals owns beneficially more than one-half of
one percent (1/2 of 1%) of the securities (taken at market value) of such
issuer and such individuals owning more than one-half of one percent (1/2 of
1%) of such securities together beneficially own more than 5% of such
securities or both.
As a non-diversified company, the Fund is permitted to invest all of
its assets in a limited number of issuers. However, it intends to comply with
Subchapter M of the Internal Revenue Code in order to qualify as a regulated
investment company for federal income tax purposes. To so qualify, the Fund
must diversify its holdings so that, at the close of each quarter of its
taxable year, (a) at least 50% of the value of its total assets is represented
by cash, cash items, securities issued by the U.S. Government or its agencies
or instrumentalities, securities of other regulated investment companies, and
other securities limited generally with respect to any one issuer to an amount
not more than 5% of the total assets of the Fund and not more than 10% of the
outstanding voting securities of such issuer, and (b) not more than 25% of the
value of its total assets is invested in the securities of any one issuer
(other than the U.S. Government or its agencies or instrumentalities or
regulated investment companies), or in two or more issuers that the Fund
controls and that are engaged in the same or similar trades or businesses. In
the event of a decline in the market value of the securities of one or more
such issuers exceeding 5%, an investment in the Fund could entail greater risk
than in a fund which has a policy of diversification.
OTHER POLICIES
WARRANTS. The Fund also may invest up to 5% of its net assets in warrants.
Included within this amount, may be warrants which are not listed on the New
York or American Stock Exchanges. A reason for investing in warrants is to
permit the Fund to participate in an anticipated increase in the market value
of a security without having to purchase the security to which the warrants
relate.
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<PAGE> 128
Warrants convey no rights to dividends or voting rights, but only an option to
purchase equity securities of the issuer at a fixed price. If such securities
appreciate, the warrants may be exercised and sold at a gain, but a loss will
be incurred if such securities decrease in value or the term of the warrant
expires before it is exercised. The 5% limitation does not include warrants
acquired by the Fund in units or attached to other securities.
TRUSTEES AND OFFICERS OF THE TRUST
*BRUCE R. BENT, President, Treasurer and Trustee, 810 Seventh Avenue,
New York, New York 10019.
Mr. Bent is President, Treasurer, and Trustee of The Reserve Fund
("RF"), Reserve Institutional Trust ("RIT"), Reserve Tax-Exempt Trust ("RTET")
and Reserve New York Tax-Exempt Trust ("RNYTET"), Director, Vice President and
Secretary of Reserve Management Company, Inc. ("RMCI") and Reserve Management
Corporation, and Chairman and Director of Resrv Partners, Inc. Before 1968, he
was associated with Stone & Webster Securities Corp., and previously, Teachers
Insurance and Annuity Association.
EDWIN EHLERT, JR., Trustee, 125 Elm Street, Westfield, New Jersey
07091.
Mr. Ehlert is President and Director of Ehlert Travel Associates, Inc.
(travel agency formerly called Travelong of Westfield, Inc.) and Ehlert Travel
Associates of Florida, Inc. (travel agency), and Trustee of RF, RIT, RNYTET and
RTET.
HENRI W. EMMET, Trustee, 176 East 71st Street, New York, New York
10021.
Mr. Emmet is the Managing Director of Servus Associates, Inc, and
U.S.A. Representative of the First National Bank of Southern Africa and Trustee
of RF, RET, RNYTET and RTET. Until 1989, he was Senior Vice President of the
New York branch of Banque Nationale de Paris.
BURTT R. EHRLICH, Trustee, 667 Madison Avenue, New York, New York
10021.
Mr. Ehrlich is a Director of Benson Eye Care Corp and a private
investor. Until 1992, he was President and Chairman of Ehrlich Bober Financial
Corp., a municipal securities investment firm.
*DONALD J. HARRINGTON, C.M, Trustee, St. John's University, Jamaica,
New York 11439.
The Reverend Harrington is President of St. John's University (NY) and
a Trustee of RF, RIT, RNYTET and RTET. The Reverend Harrington served as
President of Niagara University from 1984 to 1989 and was Executive Vice
President of Niagara University from 1981 to 1984.
NIELS W. JOHNSEN, Trustee, 1 Whitehall Street, New York, New York
10004.
Mr. Johnsen is Chairman of the Board of International Shipholding
Corp. and Central Gulf Lines, Inc. (ship cargo carrier), Director of Centennial
Insurance Co. and Trustee of The Atlantic companies (insurance), RF, RIT,
RNYTET and RTET.
THOMAS L. RHODES, Trustee, 150 East 35th Street, New York, New York
10016
Mr. Rhodes is President and a member of the Board of Directors of the
National Review. From 1976 to 1992 Mr. Rhodes was a partner with Goldman,
Sachs & Co., an investment banking firm.
MARC C. COZZOLINO, Counsel and Secretary, 810 Seventh Avenue, New
York, NY 10019.
Mr. Cozzolino is Counsel and Secretary of RF, RIT, RTET, and RNYTET.
Before joining The Reserve Funds in 1994, Mr. Cozzolino was a staff attorney
at the New Jersey Bureau of Securities.
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<PAGE> 129
PAT A. COLLETTI, Controller, 810 Seventh Avenue, New York, New York
10019.
Mr. Colletti is Controller of RF, RIT, RTET and RNYTET. Prior to
joining The Reserve Funds in 1985, Mr. Colletti was Supervisor of Accounting of
Money Market Funds for the Dreyfus Corporation.
- ------------------------------------------
* Interested Trustee within the meaning of the Investment Company Act of 1940.
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 or 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 regard of the duties involved in the
conduct of their office.
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM FUND AND FUND COMPLEX
NAME OF TRUSTEE FROM FUND* (4 ADDITIONAL TRUSTS) PAID TO TRUSTEE*
------------------------------------------------------------------------------
<S> <C> <C>
Edwin Ehlert, Jr. $0 $16,500
Henri W. Emmet $0 $16,600
Rev. Donald J. Harrington $0 $16,500
Niels W. Johnsen $0 $16,500
Burtt R. Ehrlich $0 $0
Thomas L. Rhodes $0 $0
</TABLE>
Amount shown are for the Fund's fiscal year ending May 31, 1995.
INVESTMENT MANAGEMENT AND OTHER AGREEMENTS
THE ADVISER. Reserve Management Company, Inc. ("Adviser"),14 Locust
Place, Manhasset, New York, NY 11030, a registered investment adviser, manages
the Trust and provides it with investment advice pursuant to an Investment
Management Agreement. Under the Investment Management Agreement, the Adviser
manages the Fund, is responsible for the day-to-day oversight of the Trust's
operations and otherwise administers the affairs of the Trust as it deems
advisable subject to the overall control and direction of the Trustees and the
investment policies and limitations of the Trust described in the Prospectus
and Statement of Additional Information. RMCI pays all employee costs and other
ordinary operating costs of the Fund pursuant to the Investment Management
Agreement. Excluded from ordinary operating costs are interest charges, taxes,
brokerage fees, extraordinary legal and accounting fees and expenses, payments
made pursuant to the Trust's Distribution Plan and the fees of the
disinterested Trustees, for which the Fund pays its direct or allocated share.
For its management services, and for paying all of the employee costs,
costs of the Sub-Adviser and other ordinary operating expenses of the Trust,
RMCI is periodically paid a comprehensive fee, at the annual rate of 1.50% per
annum of the average daily net assets of the Fund.
The Investment Management Agreement is subject to annual review by and
must be approved at least annually by a vote of a majority of the Board of
Trustees, including a majority of those who are not "interested persons" as
defined in the Investment Company Act of 1940, cast in person at a meeting
called for the purpose of voting on such renewal. The Agreement terminates
automatically upon its assignment and may be terminated without penalty upon 60
days' written notice by vote of the Trustees, by vote of a majority of
outstanding voting shares of the Fund or by the Adviser.
THE SUB-ADVISER. Siphron Capital Management ("Sub-Adviser"), 280 S.
Beverly Drive, Beverly Hills, California 90212, a registered investment Adviser,
acts as Sub-Adviser to the Fund. The Adviser and Trust have entered into a
Sub-Advisory Agreement with the Sub-Adviser pursuant to which the Adviser will
pay any fees of the Sub-Adviser. The Sub-Advisory Agreement is subject to
annual review by and must be approved annually by the Trustees, including a
majority of those who are not "interested persons" as defined in the Investment
Company Act of 1940, cast in person at a meeting called for purpose of voting
on such renewal. The agreement automatically terminates upon its assignment
and may be terminated without penalty upon 60 days' written notice by vote of
the Trustees, by vote of a majority of outstanding voting shares of the Fund or
by the Sub-Adviser.
CUSTODIAN. Chemical Bank, 4 New York Plaza, New York, New York 10004
is Custodian for the cash and securities of the Trust. The Custodian maintains
custody of the Trust's cash and securities, handles its securities settlements
and performs transaction processing for receipts and disbursements in
connection with the purchase and sale of the Trust's shares.
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<PAGE> 130
DISTRIBUTION AGREEMENT. Resrv Partners, Inc. ("RESRV"), 810 Seventh
Avenue, New York, New York 10019, is a distributor of the shares of the Trust.
RESRV is a "principal underwriter" for the Trust within the meaning of the
Investment Company Act of 1940, and as such acts as agent in arranging for the
continuous offering of Trust shares. RESRV has the right to enter into dealer
agreements with brokers or other persons of its choice for the sale of Trust
shares. RESRV's principal business is the distribution of shares of mutual
funds and it has retained no underwriting commissions during the last three
fiscal years.
The Distribution Agreement must be approved annually by the Trustees,
including a majority of those who are not "interested persons," as defined in
the Investment Company Act of 1940.
DISTRIBUTION PLAN. The Trust maintains a Distribution Plan ("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 Board and
approved by its shareholders. Pursuant to the Plan, the Distributor or its
affiliates may make payments ("assistance payments") to brokers, financial
institutions and financial intermediaries ("payees") in respect of Trust
shareholder accounts ("qualified accounts") as to which the payee has rendered
distribution assistance or other services. The Distributor may also retain
amounts to pay for advertising and marketing expenses. Assistance payments by
the Distributor are made to payees at an annual rate not to exceed .25% of the
average net asset value of all payees' qualified accounts. The Trustees have
determined that there is a reasonable likelihood that the Plan will benefit the
Trust and its shareholders and that its costs are primarily intended to result
in the sale of the Trust's shares.
Under the Plan, the Trust's officers report quarterly the amounts and
purposes of assistance payments to the Trustees. During the continuance of the
Plan the selection and nomination of the disinterested Trustees of the Trust
are at the discretion of the disinterested Trustees currently in office.
The Plan and related agreements may be terminated at any time by a
vote of a majority of the outstanding voting securities of the Fund. The Plan
and related agreements may be renewed from year to year if approved by a vote
of a majority of the Board of Trustees, including a majority of those who are
not "interested persons", as defined in the Investment Company Act of 1940.
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 majority vote of the Board of Trustees, including a
majority of the disinterested Trustees, cast in person at a meeting called for
the purpose of such vote.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand, L.L.P. 1301 Avenue of
Americas, New York, New York 10019 is the Trust's independent accountants.
PORTFOLIO TURNOVER, TRANSACTION CHARGES AND ALLOCATION
Subject to the overall supervision of the officers of the Trust, its
Board of Trustees, and the Adviser, the Sub-Adviser places all orders for the
purchase and sale of the Fund's investment securities. In general, in the
purchase and sale of investment securities the Sub-Adviser will seek to obtain
prompt and reliable execution of orders at the most favorable prices or yields.
In determining best price and execution, the Sub-Adviser may take into account
a dealer's operational and financial capabilities, the type of transaction
involved, the dealer's general relationship with the Fund's Sub-Adviser, and
any statistical, research, or other services provided by the dealer. 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 in good faith by the Fund's
Sub-Adviser. Brokers or dealers who execute investment securities transactions
for the Fund may also sell its shares; however, any such sales will not be
either a qualifying or disqualifying factor in the selection of brokers or
dealers. Subject to procedures adopted by, and the supervision of, the Board
of Trustees, the Sub-Adviser is authorized to place portfolio transactions
with brokers or dealers affiliated with it provided the commission or fee
charged is comparable to that charged by non-affiliated brokers or dealers on
comparable transactions involving similar securities being purchased or sold
during a comparable period of time on a securities exchange. Any such
transactions will be in accordance with Rule 17e-1 under the Investment Company
Act of 1940.
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<PAGE> 131
When transactions are made in the over-the-counter market, the Fund
deals with the primary market makers unless more favorable prices are otherwise
obtainable.
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 Trust. Each share
represents an interest in the respective series of the Trust proportionately
equal to the interest of each other share. If they deem it advisable in the
best interests of shareholders, the Trustees of the Trust may classify or
reclassify any unissued shares of the Trust by setting or changing the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or 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 series be preferred over all other series in respect of assets
specifically allocated to such class. It is anticipated that under most
circumstances, the rights of any additional series would be comparable unless
otherwise required to respond to the particular situation. Upon liquidation of
the Trust, shareholders are entitled to share pro rata in the net assets of
their respective series of the Trust available for distribution to such
shareholders. No changes can be made to the Trust's issued shares without
shareholder approval.
Each Fund share when issued is fully paid, nonassessable and fully
transferable or redeemable at the shareholder's option. Each share has an
equal interest in the net assets of its series, equal rights to all dividends
and other distributions from its series, and one vote for all purposes. Shares
of separate series 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.
The Declaration of Trust further provides that the Trustees will not
be liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
Regulations of the Securities and Exchange Commission provide that if
a series is separately affected by a matter requiring a vote (election of
Trustees, ratification of independent accountant selection, and approval of an
underwriting agreement are not considered to have such separate effect and may
be voted upon by the Trust as a whole), each such series votes separately. Each
series votes separately on such matters as approval of the Investment
Management Agreement and material amendments to the Plan, which require
approval by a majority of the effected 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 a 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 are normally made by check or wire transfer, but
the Trust may be authorized to make payment of redemptions partly or wholly in
kind (that is, by delivery of portfolio instruments valued at the same time as
the redemption net asset value is determined). The Trust has made an election
committing it to pay in cash all requests for redemption from the series
involved, by any shareholder or record, limited during any 90-day period to the
lesser of $250,000 or 1% of the net assets of the series at the beginning of
the period. The election is irrevocable pursuant to rules and regulations
under the Investment Company Act or 1940 unless withdrawal is permitted by
order of the Securities and Exchange Commission. 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.
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<PAGE> 132
DETERMINATION OF NET ASSET VALUE. Shares are offered at net asset
value plus a sales charge. The net asset value of the Fund is calculated at
the end of each business day (currently 4:00 PM New York time) that the New
York Stock Exchange is open for trading and on other days there is a sufficient
degree of trading to materially affect the Fund's net asset value. The net
asset value is not calculated on New Year's Day, Presidents' Day, Good Friday,
Memorial Day (observed), Independence Day, Labor Day, Thanksgiving Day,
Christmas Day and on other days the New York Stock Exchange is closed for
trading. The net asset value per share of the Fund is determined by adding the
value of all its securities and other assets, subtracting its liabilities and
dividing the result by the total number of outstanding shares that represent an
interest in the Fund.
Investment securities are valued at the last sale price on the
securities exchange or national securities market on which such securities are
primarily traded. Securities not listed on an exchange or national securities
market, or securities in which there were no transactions, are valued at the
average of the last bid and asked prices, except in the case of open short
positions where the asked price is used for valuation purposes. Bid price is
used when no asked price is available. Market quotations for foreign
securities in foreign currencies are translated into United States dollars at
the prevailing rates of exchange. Any securities or other assets for which
recent market quotations are not readily available are valued at fair value as
determined in good faith by the Board of Trustees.
REDUCED SALES CHARGE. Officers, directors, full time employees and
Trustees, and any trust, pension, profit sharing or qualified retirement plan
of the Adviser, Sub-Adviser, the distributor, the Trust and any affiliate
thereof may purchase shares of the Fund at the net asset value per share.
Spouses and minor children of the foregoing may also purchase shares at net
asset value. In addition, Sub-Adviser advisory clients and related persons of
such may purchase shares at net asset value.
DISTRIBUTIONS AND TAXES
The following is a general description of certain tax rules relating
to the Fund. It is not exhaustive and prospective investors may wish to
consult their tax advisers.
The Fund intends to qualify as a regulated investment company under
the Internal Revenue Code of 1986 ("Code") so long as such qualification is in
the best interests of shareholders. If it so qualifies, in any fiscal year in
which it distributes at least 90 percent of its taxable net income, the Fund
generally will not be subjected to federal income tax on such distributed
amounts. Shareholders of the Fund, however, will be subject to federal income
tax on any ordinary net income and net capital gains realized by the Fund and
distributed to shareholders as regular or capital gains dividends, whether
distributed in cash or in the form of additional shares. Net long term capital
gains distributions will be taxable to shareholders as long term capital gains,
regardless of the length of time the corresponding shares have been held.
Upon the taxable disposition (including a sale or redemption) of
shares of the Fund, a shareholder may realize a gain or loss depending upon his
basis in his shares. Such gain or loss generally will be treated as capital
gain or loss (if the shares are capital assets in the shareholder's hands) and
will be long-term or short-term, generally depending upon the shareholder's
holding period for the shares. However, a loss realized by a shareholder on
the disposition of Fund shares with respect to which capital gain dividends
have been paid will, to the extent of such capital gain dividends, be treated
as long-term capital loss if such shares have been held by the shareholder for
six months or less. Further, a loss realized on disposition will be disallowed
to the extent the shares disposed of are replaced (whether by reinvestment of
distributions or otherwise) within a period of 61 days beginning 30 days before
and ending 30 days after the shares are disposed of. In such a case, the basis
of the shares acquired will be adjusted to reflect the disallowed loss.
Shareholders receiving distributions in the form of additional shares will have
a cost basis for Federal income tax purposes in each share received equal to
the net asset value of a share of the Funds on the reinvestment date.
In order to qualify as a "regulated investment company" under the
Code, the Fund must, among other things, in each taxable year distribute at
least 90 percent of its taxable income to shareholders, derive at least 90
percent of its gross income from dividends, interest and gains from the sale or
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<PAGE> 133
disposition of securities and derive less than 30 percent of its gross income
from the sale or disposition of securities held for less than three months.
Accordingly, the Fund will be subject to certain restrictions including
restrictions in the writing of options on securities which have been held for
less than three months, purchasing and selling futures contracts held for less
than three months, in the writing of options which expire in less than three
months, and in effecting closing purchase transactions, with respect to options
which have been written less than three months prior to such transactions.
The Code imposes a non-deductible, 4% excise tax on regulated
investment companies that do not distribute to their shareholders in each
calendar year an amount equal to (i) 98% of their calendar year ordinary
income; plus 98% of their capital gain net income (the excess of short and long
term capital losses) for the one year period ending October 31. Dividends
declared in December of any year to shareholders of record on any date in
December will be deemed to have been received by the shareholders and paid by
the Fund on the record date, provided such dividends are paid by February 1 as
of the following year.
Dividends and distributions declared payable to shareholders of record
after September 30 of any year and paid before February 1 of the following
year, are considered taxable income to shareholders on December 31 in the year
declared even though paid in the next year.
Dividends to shareholders who are non-resident aliens may be subject
to a United States withholding tax at a rate of up to 30% under existing
provisions of the code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty laws. Non-resident aliens are urged to consult their own tax
adviser concerning the applicability of the United States withholding tax.
The Code includes rules applicable to certain listed options, futures
contracts, and options on futures contracts which the Fund may write, purchase
or sell. Such options and contracts are classified as Section 1256 contracts
under the Code. The character of gain or loss resulting from the sale,
disposition, closing out, expiration or other termination of Section 1256
contracts is generally treated as long-term capital gain or loss to the extent
of 60% thereof and short-term capital gain or loss to the extent of 40% thereof
("60/40 gain or loss"). Such contracts, generally are required to be treated
as sold at market value on the last day of such fiscal year and on certain
other dates for federal income tax purposes ("marked-to-market"). Generally,
over-the-counter options are not classified as Section 1256 contracts and are
not subject to the mark-to market rule or to 60/40 gain or loss treatment. Any
gains or losses recognized by the Fund from transactions in over-the-counter
options generally constitute short-term capital gains or losses. If
over-the-counter call options written, or over-the-counter put options
purchased, by the Fund are exercised, the gain or loss realized on the sale of
the underlying securities may be either short-term or long-term, depending on
the holding period of the securities. In determining the amount of gain or
loss, the sales proceeds are reduced by the premium paid for over-the-counter
puts or increased by the premium received for over-the counter calls.
Generally, the hedging transactions undertaken by the Fund may result
in "straddles" for U.S. federal income tax purposes. The straddle rules may
affect the character of gains (or losses) realized by the Fund. In addition,
losses realized by the Fund on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which the losses are
realized. Because only a few regulations implementing the straddle rules have
been promulgated, the tax consequences to the Fund of engaging in hedging
transactions are not entirely clear. Hedging transactions may increase the
amount of short-term capital gain realized by the Fund which is taxed as
ordinary income when distributed to Shareholders.
The Fund may make one or more of the elections available under the
Code which are applicable to straddles. If the Fund makes any of the
elections, this amount, character and timing of gains or losses form the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections
may operate to accelerate the recognition of gains or losses from the affected
straddle positions.
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Because the straddle rules may affect the character of gains or
losses, defer losses and/or accelerate the recognition of gains or losses from
the affected straddle position, the amount which may be distributed to
Shareholder, and which, will be taxed to them as ordinary income or long-term
capital gain, may be increased or decreased as compared to a fund that did not
engage in such hedging transactions.
The Code and the Treasury Regulations thereunder are subject to change
by legislative or administrative action either prospectively or retroactively.
Dividends paid by the Fund are generally expected to be subject to any
state or local taxes on income. Shareholders should consult their own
attorneys or tax advisers about the tax consequences related to investing in
the Fund.
PERFORMANCE INFORMATION
The Fund may from time to time advertise its total return. Total
return is computed by finding the average annual compounded rates of return
over the 1,5 and 10 year periods or up to the life of the Fund that would
equate the initial amount invested to the ending redeemable value, according to
the following formula:
P (1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1,5 or 10 year
periods at the end of the 1,5 or 10 year periods
(or fractional portion thereof)
In advertising and sales literature, the Fund may compare its
performance to (i) the Standard & Poor's 500 Stock Index ("S&P 500"), Dow Jones
Industrial Average ("DJIA"), the Russell 2000, or other unmanaged indices so
that investors may compare the Fund's results with those of a group of
unmanaged securities widely regarded by investors as representative of the
securities markets in general; (ii) other groups of mutual funds tracked by
Lipper Analytical Services, Inc. a widely used independent research firm which
ranks mutual funds by overall performance, investment objectives and assets, or
tracked by other services, companies, publications, or persons who rank mutual
funds on overall performance or other criteria; and (iii) the Consumer Price
Index (measure for inflation) to assess the real rate of return from an
investment in the Fund. Unmanaged indices may assume the reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs and expenses.
The Fund may also compute aggregate total return for specified periods
based on a hypothetical Fund account with an assumed initial investment of
$10,000. The aggregate total return is determined by dividing the net asset
value of the account at the end of the specified period by the value of the
initial investment and is expressed as a percentage. Calculation of aggregate
total return reflects payment of the maximum sales charge and assumes
reinvestment of all income dividends and capital gain distributions during the
period.
The Fund may also quote annual, average annual and annualized total
return and aggregate total performance data both as a percentage and as a
dollar amount based on a hypothetical $10,000 investment for various periods.
Such data will be computed as described above, except that (1) the rates of
return calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return and (2) the maximum sales charge will
not be included with respect to annual, annualized or aggregate rates of return
calculations.
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<PAGE> 135
RESERVE PRIVATE EQUITY SERIES
RESERVE GROWTH AND INCOME FUND
810 SEVENTH AVENUE, NEW YORK, N.Y. 10019
(800) 637-1700
----------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information describes Reserve Private
Equity Series ("Trust") and the Reserve Growth and Income Fund ("Growth and
Income Fund" or "Fund"). This Statement is not a Prospectus, but provides
detailed information to supplement the Prospectus and should be read in
conjunction with the Prospectus. A copy of the Prospectus may be obtained
(without charge) from Reserve Private Equity Series. This Statement is dated
__________________, 1996.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Investment Policies . . . . . . . . . . . . . . . . . . . . . . . .
Other Policies . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trustees and Officers of the Trust . . . . . . . . . . . . . . . . .
Investment Management and Other Agreements . . . . . . . . . . . . .
Portfolio Turnover, Transaction Charges and . . . . . . . . . . . .
Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares of Beneficial Interest . . . . . . . . . . . . . . . . . . .
Purchase, Redemption and Pricing of Shares . . . . . . . . . . . . .
Distributions and Taxes . . . . . . . . . . . . . . . . . . . . . .
Performance Information . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
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INVESTMENT POLICIES
The Fund has adopted as fundamental policies the following limitations
on its investment activities. These fundamental policies may not be changed
without a majority vote of the Fund shareholders, as defined in the Investment
Company Act of 1940. The Growth and Income Fund may not:
(1) borrow money except as a temporary measure for extraordinary or emergency
proposes and then only in an amount not to exceed 33 1/3% of the market value
of its assets; (2) issue senior securities as defined in the Investment
Company Act of 1940 except that the Fund may borrow money in accordance with
limitation (1); (3) act as an underwriter with respect to the securities of
others except to the extent that, in connection with the disposition of
portfolio securities, it may be deemed to be an underwriter under certain
federal securities laws; (4) invest 25% or more of the value of its total
assets in the securities of issuers in any particular industry; (5) purchase,
sell or otherwise invest in real estate or commodities or commodity contracts
except the Fund may purchase readily marketable securities of companies holding
real estate or interests therein and interest rate futures contracts, stock
index futures contracts, and put and call options on interest rate futures
contracts; (6) invest in voting securities or in companies for the purpose of
exercising control; and (7) purchase securities on margin, except to obtain
such short-term credits as may be necessary for the clearance of transactions;
however, the Fund may make margin deposits in connection with options and
financial futures transactions.
In addition to the fundamental investment policies listed above, the
Fund has voluntarily adopted certain policies that may be changed or amended by
action of the Trustees without requiring prior notice to or approval of
shareholders. In accordance with such policies and restrictions the Fund
cannot:
(1) purchase from or sell investment securities to any of the officers
or Trustees of the Trust, its investment adviser, its investment sub-adviser,
its principal underwriter or the officers, principals or directors of its
investment adviser, investment sub-adviser or principal underwriter; and (2)
purchase or retain securities of an issuer any of whose officers, directors,
trustees or securityholders is an officer or Trustee of the Trust or a member,
officer, director or trustee of the investment adviser or sub-adviser of the
Fund if one or more of such individuals owns beneficially more than one-half of
one percent (1/2 of 1%) of the securities (taken at market value) of such
issuer and such individuals owning more than one-half of one percent (1/2 of
1%) of such securities together beneficially own more than 5% of such
securities or both.
As a non-diversified company, the Fund is permitted to invest all of
its assets in a limited number of issuers. However, it intends to comply with
Subchapter M of the Internal Revenue Code in order to qualify as a regulated
investment company for federal income tax purposes. To so qualify, the Fund
must diversify its holdings so that, at the close of each quarter of its
taxable year, (a) at least 50% of the value of its total assets is represented
by cash, cash items, securities issued by the U.S. Government or its agencies
or instrumentalities, securities of other regulated investment companies, and
other securities limited generally with respect to any one issuer to an amount
not more than 5% of the total assets of the Fund and not more than 10% of the
outstanding voting securities of such issuer, and (b) not more than 25% of the
value of its total assets is invested in the securities of any one issuer
(other than the U.S. Government or its agencies or instrumentalities or
regulated investment companies), or in two or more issuers that the Fund
controls and that are engaged in the same or similar trades or businesses. In
the event of a decline in the market value of the securities of one or more
such issuers exceeding 5%, an investment in the Fund could entail greater risk
than in a fund which has a policy of diversification.
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OTHER POLICIES
LENDING OF SECURITIES. The Fund may, to increase its income, lend its
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 and must consist of cash, bank letters of credit or
securities of the United States Government (or its agencies or
instrumentalities). To be acceptable as collateral, letters of credit must
obligate a bank to pay amounts demanded by the Fund if the demand meets the
terms of the letter. Such terms and the issuing bank would have to be
satisfactory to the Fund. Any loan might be secured by any one or more of the
three types of collateral. The Fund receives amounts equal to the dividends or
interest on loaned securities and also receives one or more 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, which require the borrower, after notice, to
redeliver the securities within the normal settlement time of three 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.
WARRANTS. The Fund also may invest up to 5% of its net assets in warrants.
Included within this amount, may be warrants which are not listed on the New
York or American Stock Exchanges. A reason for investing in warrants is to
permit the Fund to participate in an anticipated increase in the market value
of a security without having to purchase the security to which the warrants
relate. Warrants convey no rights to dividends or voting rights, but only an
option to purchase equity securities of the issuer at a fixed price. If such
securities appreciate, the warrants may be exercised and sold at a gain, but a
loss will be incurred if such securities decrease in value or the term of the
warrant expires before it is exercised. The 5% limitation does not include
warrants acquired by the Fund in units or attached to other securities.
ILLIQUID SECURITIES. The Fund may not invest more than 15% of its net assets
in repurchase agreements which have a maturity of longer than seven days or in
other illiquid securities, including securities that are illiquid by virtue of
the absence of a readily available market or legal or contractual restriction
on resale. Historically, illiquid securities have included securities subject
to contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended ("Securities Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have
an adverse effect on the marketability of portfolio securities and a mutual
fund might be unable to dispose of restricted or other illiquid securities
promptly or at reasonable prices and might thereby experience difficulty
satisfying redemptions within seven days. A mutual fund might also have to
register such restricted securities in order to dispose of them resulting in
additional expense and delay. Adverse market conditions could impede such a
public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities,
municipal securities and corporate bonds and notes. Institutional investors
depend on an efficient institutional market in which the unregistered security
can be readily resold or on an issuer's ability to honor
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a demand for repayment. The fact that there are contractual or legal
restrictions on resale to the general public or to certain institutions may
not be indicative of the liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The Sub Adviser anticipates that the market
for certain restricted securities such as institutional commercial paper will
expand further as a result of this new regulation and the development of
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the NASD.
Restricted securities eligible for resale pursuant to Rule 144A under
the Securities Act of 1933 for which there is a readily available market will
not be deemed to be illiquid if they meet guidelines established by the Board
of the Trustees. The Adviser will monitor the liquidity of such restricted
securities subject to the supervision of the Board of Trustees. In reaching
liquidity decisions, the Adviser will consider, inter alia, the following
factors: (1) the frequency of trades and quotes for the security; (2) the
number of dealers wishing to purchase or sell the security and the number of
potential purchasers; (3) dealer undertakings to make a market in the security
and (4) the nature of the security and the nature of the marketplace trades
(e.g. the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer). Repurchase agreements subject to
demand are deemed to have a maturity equal to the notice period.
RISKS OF OPTIONS TRANSACTIONS. An exchange-traded option position may be
closed out only on a national securities exchange ("Exchange") which provides a
secondary market for an option of the same series. Although the Fund will
generally purchase or write only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market
on an Exchange will exist for any particular option at any particular time, and
for some exchange-traded options, no secondary market on an Exchange may exist.
In such event, it might not be possible to effect closing transactions in
particular options with the result that the Fund would have to exercise its
exchange-traded options in order to realize any profit and may incur
transaction costs in connection therewith. If the Fund as a covered call
option writer is unable to effect a closing purchase transaction in a secondary
market, it will not be able to sell the underlying security until the option
expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an Exchange
include the following (a) insufficient trading interest in certain options; (b)
restrictions or transactions imposed by an Exchange; (c) trading halts,
suspension or other restrictions imposed with respect to particular classes or
series of options or underlying securities; (d) interruption of the normal
operations on an Exchange; (e) inadequacy of the facilities of an Exchange or
the Options Clearing Corporation ("OCC") to handle current trading volume; or
(f) a decision by one or more Exchanges to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on the Exchange (or in the class or series of options) would cease to
exist, although outstanding options on that Exchange that had been issued by
the OCC as a result of trades on that Exchange would generally continue to be
exercisable in accordance with their terms.
In the event of the bankruptcy of a broker through which the Fund
engages in options transactions, the Fund could experience delays and/or losses
in liquidating open positions purchased or sold through the broker and/or incur
a loss of all or part of its margin deposits with the broker. Similarly, in
the event of the bankruptcy of the writer of an over-the-counter option with a
recognized United States securities dealer ("OTC option") purchased by the
Fund, the Fund could experience a loss of all or part of the value of the
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option. Transactions are entered into by the Fund only with brokers or
financial institutions deemed creditworthy by the Sub-Adviser.
The hours of trading for options may not conform to the hours during
which the underlying securities are traded. To the extent that the option
markets close before the market for the underlying securities, significant
price and rate movements can take place in the underlying markets that cannot
be reflected in the option markets.
FINANCIAL FUTURES CONTRACTS, INCLUDING STOCK INDEX FUTURES, AND OPTIONS ON
FUTURES CONTRACTS. The Fund may enter into financial futures contracts,
including contracts for the purchase or sale for future delivery of foreign
currencies and futures contracts based on stock indices and may purchase and
write put and call options to buy or sell futures contracts ("options on
futures contracts"). A sale of a futures contract entails the acquisition of a
contractual obligation to deliver the foreign currency or other commodity
called for by the contract at a specified price on a specified date. A
purchase of a futures contract entails the incurring of a contractual
obligation to acquire the commodity called for by the contract at a specified
price on a specified date. The Fund's Custodian will place cash not available
for investment or U.S. Government Securities or other liquid high-quality debt
securities in a separate account of the Fund having a value equal to the
aggregate amount of the Fund's commitments in futures contracts. The purchaser
of a futures contract on an index agrees to take or make delivery of an amount
of cash equal to the difference between a specified dollar multiple of the
value of the index on the expiration date of the contract and the price at
which the contract was originally struck. No physical delivery of the
securities underlying the index is made. In connection with its purchase of
stock index futures contracts, the Fund will deposit in a segregated account
with the Fund's Custodian an amount of cash or U.S. Government Securities (as
defined below) or other liquid high-quality debt securities equal to the market
value of the futures contracts less any amounts maintained in a margin account
with the Fund's broker. Options on futures contracts to be written or
purchased by the Fund will be traded on U.S. or foreign exchanges or over the
counter.
With respect to futures contracts and options on futures contracts
that are purchased for purposes other than for "bona fide hedging purposes" (as
defined in Commodity Futures Trading Regulations promulgated under the
Commodity Exchange Act), the aggregate initial margin and premiums required to
be paid by the Fund to establish such positions will not exceed on all
outstanding futures contracts of the Fund and premiums paid on outstanding
options on futures contracts 5% of the liquidation value of the total assets of
the Fund, after taking into account unrealized profits and unrealized losses on
any such contracts the Fund has entered into.
GENERAL. The successful use of the foregoing derivative investment products
draws upon the Adviser's special skills and substantial experience with respect
to such products and depends on the Adviser's ability to forecast currency
exchange rate movements correctly. Should exchange rates move in an unexpected
manner, the Fund may not necessarily achieve the anticipated benefits of
futures contracts, options, or forward contracts, or may realize losses and
thus be in a worse position than if such products had not been used. Unlike
many exchange-traded futures contracts and options on futures contracts, there
are no daily price fluctuation limits with respect to options on currencies and
forward contracts, and adverse market movements could therefore continue to an
unlimited extent over a period of time. In addition, the correlation between
movements in the price of securities and currencies hedged or used for cover
will not be perfect and could produce unanticipated losses.
The Fund's ability to dispose of its positions in futures contracts,
options, and forward contracts will depend on the availability of liquid
markets in such instruments. Markets in options and futures with respect to a
number of securities and currencies are relatively new and still developing.
It is impossible to
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predict the amount of trading interest that may exist in various types of
futures contracts, option and forward contracts. If a secondary market does
not exist with respect to an over-the-counter option purchased or written by
the Fund, it might not be possible to effect closing transactions in the option
(i.e., dispose of the option), with the result that Ii) an option purchased by
the Fund to realize any profit and (ii) the Fund may not be able to sell
currencies or portfolio securities covering an option written by the Fund until
the option expires or it delivers the underlying futures contract or currency
upon exercise. Therefore, no assurance can be given that the Fund will be able
to utilize these instruments effectively for the purposes set forth above.
Furthermore, the Fund's ability to engage in options and futures transactions
may be limited by tax considerations. See "Dividends, Distributions and
Taxes-U.S. Federal Income Taxes."
TRUSTEES AND OFFICERS OF THE TRUST
BRUCE R. BENT, President, Treasurer and Trustee, 810 Seventh Avenue, New York,
New York 10019.
Mr. Bent is President, Treasurer, and Trustee of The Reserve Fund
("RF"), Reserve Institutional Trust ("RIT"), Reserve Tax-Exempt Trust ("RTET")
and Reserve New York Tax-Exempt Trust ("RNYTET"), Director, Vice President and
Secretary of Reserve Management Company, Inc. ("RMCI") and Reserve Management
Corporation, and Chairman and Director of Resrv Partners, Inc. Before 1968, he
was associated with Stone & Webster Securities Corp., and previously, Teachers
Insurance and Annuity Association.
EDWIN EHLERT, JR., Trustee, 125 Elm Street, Westfield, New Jersey
07091.
Mr. Ehlert is President and Director of Ehlert Travel Associates, Inc.
(travel agency formerly called Travelong of Westfield, Inc.) and Ehlert Travel
Associates of Florida, Inc. (travel agency), and Trustee of RF, RIT, RNYTET and
RTET.
HENRI W. EMMET, Trustee, 176 East 71st Street, New York, New York
10021.
Mr. Emmet is the Managing Director of Servus Associates, Inc, and
U.S.A. Representative of the First National Bank of Southern Africa and Trustee
of RF, RET, RNYTET and RTET. Until 1989, he was Senior Vice President of the
New York branch of Banque Nationale de Paris.
BURTT R. EHRLICH, Trustee, 667 Madison Avenue, New York, New York
10021.
Mr. Ehrlich is a Director of Benson Eye Care Corp and a private
investor. Until 1992, he was President and Chairman of Ehrlich Bober Financial
Corp., a municipal securities investment firm.
DONALD J. HARRINGTON*, C.M, Trustee, St. John's University, Jamaica,
New York 11439.
The Reverend Harrington is President of St. John's University (NY) and
a Trustee of RF, RIT, RNYTET and RTET. The Reverend Harrington served as
President of Niagara University from 1984 to 1989 and was Executive Vice
President of Niagara University from 1981 to 1984.
NIELS W. JOHNSEN, Trustee, 1 Whitehall Street, New York, New York
10004.
Mr. Johnsen is Chairman of the Board of International Shipholding
Corp. and Central Gulf Lines, Inc. (ship cargo carrier), Director of Centennial
Insurance Co. and Trustee of The Atlantic companies (insurance), RF, RIT,
RNYTET and RTET.
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THOMAS L. RHODES, Trustee, 150 East 35th Street, New York, New York 10016
Mr. Rhodes is President and a member of the Board of Directors of the
National Review. From 1976 to 1992 Mr. Rhodes was a partner with Goldman,
Sachs & Co., an investment banking firm.
MARC C. COZZOLINO, Counsel and Secretary, 810 Seventh Avenue, New
York, NY 10019.
Mr. Cozzolino is Counsel and Secretary of RF, RIT, RTET, and RNYTET.
Before joining The Reserve Funds in 1994, Mr. Cozzolino was a staff attorney
at the New Jersey Bureau of Securities.
PAT A. COLLETTI, Controller, 810 Seventh Avenue, New York, New York
10019.
Mr. Colletti is Controller of RF, RIT, RTET and RNYTET. Prior to
joining The Reserve Funds in 1985, Mr. Colletti was Supervisor of Accounting of
Money Market Funds for the Dreyfus Corporation.
- ------------------------------
* Interested Trustee within the meaning of the Investment Company Act of 1940.
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 or 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 regard of the duties involved in the
conduct of their office.
<TABLE>
<CAPTION>
COMPENSATION TABLE
------------------
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. $0 $16,500
Henri W. Emmet $0 $16,500
Rev. Donald J. Harrington $0 $16,500
Niels W. Johnsen $0 $16,500
Burtt R. Ehrlich $0 $0
Thomas L. Rhodes $0 $0
</TABLE>
**Amount shown are for the Fund's fiscal year ending May 31, 1995.
INVESTMENT MANAGEMENT AND OTHER AGREEMENTS
THE ADVISER. Reserve Management Company, Inc. ("Adviser"),14 Locust Place,
Manhasset, New York, NY 11030, a registered investment adviser, manages the
Trust and provides it with investment advice pursuant to an Investment
Management Agreement. Under the Investment Management Agreement, the Adviser
manages the Fund, is responsible for the day-to-day oversight of the Trust's
operations and
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otherwise administers the affairs of the Trust as it deems advisable subject to
the overall control and direction of the Trustees and the investment policies
and limitations of the Trust described in the Prospectus and Statement of
Additional Information. RMCI pays all employee costs and other ordinary
operating costs of the Fund pursuant to the Investment Management Agreement.
Excluded from ordinary operating costs are interest charges, taxes, brokerage
fees, extraordinary legal and accounting fees and expenses, payments made
pursuant to the Trust's Distribution Plan and the fees of the disinterested
Trustees, for which the Fund pays its direct or allocated share.
For its management services, and for paying all of the employee costs,
costs of the Sub-Adviser and other ordinary operating expenses of the Trust,
RMCI is periodically paid a comprehensive fee, at the annual rate of 1.50% per
annum of the average daily net assets of the Fund.
The Investment Management Agreement is subject to annual review by and
must be approved at least annually by a vote of a majority of the Board of
Trustees, including a majority of those who are not "interested persons" as
defined in the Investment Company Act of 1940, cast in person at a meeting
called for the purpose of voting on such renewal. The Agreement terminates
automatically upon its assignment and may be terminated without penalty upon 60
days' written notice by vote of the Trustees, by vote of a majority of
outstanding voting shares of the Fund or by the Adviser.
THE SUB-ADVISER. Kenneth J. Gerbino & Company ("Sub-Adviser"), 9595 Wilshire
Boulevard, Suite 200, Beverly Hills, California 90212, a registered investment
Adviser, acts as Sub-Adviser to the Fund. The Adviser and Trust have entered
into a Sub-Advisory Agreement with the Sub-Adviser pursuant to which the
Adviser will pay any fees of the Sub-Adviser. The Sub-Advisory Agreement is
subject to annual review by and must be approved annually by the Trustees,
including a majority of those who are not "interested persons" as defined in
the Investment Company Act of 1940, cast in person at a meeting called for
purpose of voting on such renewal. The agreement automatically terminates upon
its assignment and may be terminated without penalty upon 60 days' written
notice by vote of the Trustees, by vote of a majority of outstanding voting
shares of the Fund or by the Sub-Adviser.
CUSTODIAN. Chemical Bank, 4 New York Plaza, New York, New York 10004 is
Custodian for the cash and securities of the Trust. The Custodian maintains
custody of the Trust's cash and securities, handles its securities settlements
and performs transaction processing for receipts and disbursements in
connection with the purchase and sale of the Trust's shares.
DISTRIBUTION AGREEMENT. Resrv Partners, Inc. ("RESRV"), 810 Seventh Avenue, New
York, New York 10019, is a distributor of the shares of the Trust. RESRV is a
"principal underwriter" for the Trust within the meaning of the Investment
Company Act of 1940, and as such acts as agent in arranging for the continuous
offering of Trust shares. RESRV has the right to enter into dealer agreements
with brokers or other persons of its choice for the sale of Trust shares.
RESRV's principal business is the distribution of shares of mutual funds and it
has retained no underwriting commissions during the last three fiscal years.
The Distribution Agreement must be approved annually by the Trustees,
including a majority of those who are not "interested persons," as defined in
the Investment Company Act of 1940.
DISTRIBUTION PLAN. The Trust maintains a Distribution Plan ("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 Board and
approved by its shareholders. Pursuant to the Plan, the Distributor or its
affiliates may make payments ("assistance payments") to brokers, financial
institutions and financial intermediaries ("payees") in respect of Trust
135
<PAGE> 143
shareholder accounts ("qualified accounts") as to which the payee has rendered
distribution assistance or other services. The Distributor may also retain
amounts to pay for advertising and marketing expenses. Assistance payments by
the Distributor are made to payees at an annual rate not to exceed .25% of the
average net asset value of all payees' qualified accounts. The Trustees have
determined that there is a reasonable likelihood that the Plan will benefit the
Trust and its shareholders and that its costs are primarily intended to result
in the sale of the Trust's shares.
Under the Plan, the Trust's officers report quarterly the amounts and
purposes of assistance payments to the Trustees. During the continuance of the
Plan the selection and nomination of the disinterested Trustees of the Trust
are at the discretion of the disinterested Trustees currently in office.
The Plan and related agreements may be terminated at any time by a
vote of a majority of the outstanding voting securities of the Fund. The Plan
and related agreements may be renewed from year to year if approved by a vote
of a majority of the Board of Trustees, including a majority of those who are
not "interested persons", as defined in the Investment Company Act of 1940.
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 majority vote of the Board of Trustees, including a
majority of the disinterested Trustees, cast in person at a meeting called for
the purpose of such vote.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand L.L.P., 1301 Avenue of the
Americas, New York, New York 10019 is the Trust's independent accountants.
PORTFOLIO TURNOVER, TRANSACTION CHARGES AND ALLOCATION
Subject to the overall supervision of the officers of the Trust, its
Board of Trustees, and the Adviser, the Sub-Adviser places all orders for the
purchase and sale of the Fund's investment securities. In general, in the
purchase and sale of investment securities the Sub-Adviser will seek to obtain
prompt and reliable execution of orders at the most favorable prices or yields.
In determining best price and execution, the Sub-Adviser may take into account
a dealer's operational and financial capabilities, the type of transaction
involved, the dealer's general relationship with the Fund's Sub-Adviser, and
any statistical, research, or other services provided by the dealer. 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 in good faith by the Fund's
Sub-Adviser. Brokers or dealers who execute investment securities transactions
for the Fund may also sell its shares; however, any such sales will not be
either a qualifying or disqualifying factor in the selection of brokers or
dealers. Subject to procedures adopted by, and the supervision of, the Board
of Trustees, the Sub-Adviser is authorized to place portfolio transactions
with brokers or dealers affiliated with it provided the commission or fee
charged is comparable to that charged by non-affiliated brokers or dealers on
comparable transactions involving similar securities being purchased or sold
during a comparable period of time on a securities exchange. Any such
transactions will be in accordance with Rule 17e-1 under the Investment Company
Act of 1940.
When transactions are made in the over-the-counter market, the Fund
deals with the primary market makers unless more favorable prices are otherwise
obtainable.
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
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<PAGE> 144
without thereby changing the proportionate beneficial interests in the Trust.
Each share represents an interest in the respective series of the Trust
proportionately equal to the interest of each other share. If they deem it
advisable in the best interests of shareholders, the Trustees of the Trust may
classify or reclassify any unissued shares of the Trust by setting or changing
the preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or 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 series be preferred over all other series in respect of assets
specifically allocated to such class. It is anticipated that under most
circumstances, the rights of any additional series would be comparable unless
otherwise required to respond to the particular situation. Upon liquidation of
the Trust, shareholders are entitled to share pro rata in the net assets of
their respective series of the Trust available for distribution to such
shareholders. No changes can be made to the Trust's issued shares without
shareholder approval.
Each Fund share when issued is fully paid, nonassessable and fully
transferable or redeemable at the shareholder's option. Each share has an
equal interest in the net assets of its series, equal rights to all dividends
and other distributions from its series, and one vote for all purposes. Shares
of separate series 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.
The Declaration of Trust further provides that the Trustees will not
be liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
Regulations of the Securities and Exchange Commission provide that if
a series is separately affected by a matter requiring a vote (election of
Trustees, ratification of independent accountant selection, and approval of an
underwriting agreement are not considered to have such separate effect and may
be voted upon by the Trust as a whole), each such series votes separately. Each
series votes separately on such matters as approval of the Investment
Management Agreement and material amendments to the Plan, which require
approval by a majority of the effected 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 a 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 are normally made by check or wire transfer, but
the Trust may be authorized to make payment of redemptions partly or wholly in
kind (that is, by delivery of portfolio instruments valued at the same time as
the redemption net asset value is determined). The Trust has made an election
committing it to pay in cash all requests for redemption from the series
involved, by any shareholder or record, limited during any 90-day period to the
lesser of $250,000 or 1% of the net assets of the series at the beginning of
the period. The election is irrevocable pursuant to rules and regulations
under the Investment Company Act or 1940 unless withdrawal is permitted by
order of the Securities and Exchange Commission. 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.
DETERMINATION OF NET ASSET VALUE. Shares are offered at net asset value plus a
sales charge. The net asset value of the Fund is calculated at the end of each
business day (currently 4:00 PM New York time)
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<PAGE> 145
that the New York Stock Exchange is open for trading and on other days there is
a sufficient degree of trading to materially affect the Fund's net asset value.
The net asset value is not calculated on New Year's Day, Presidents' Day, Good
Friday, Memorial Day (observed), Independence Day, Labor Day, Thanksgiving Day,
Christmas Day and on other days the New York Stock Exchange is closed for
trading. The net asset value per share of the Fund is determined by adding the
value of all its securities and other assets, subtracting its liabilities and
dividing the result by the total number of outstanding shares that represent an
interest in the Fund.
Investment securities are valued at the last sale price on the
securities exchange or national securities market on which such securities are
primarily traded. Securities not listed on an exchange or national securities
market, or securities in which there were no transactions, are valued at the
average of the last bid and asked prices, except in the case of open short
positions where the asked price is used for valuation purposes. Bid price is
used when no asked price is available. Market quotations for foreign
securities in foreign currencies are translated into United States dollars at
the prevailing rates of exchange. Any securities or other assets for which
recent market quotations are not readily available are valued at fair value as
determined in good faith by the Board of Trustees.
REDUCED SALES CHARGE. Officers, directors, full time employees and Trustees,
and any trust, pension, profit sharing or qualified retirement plan of the
Adviser, Sub-Adviser, the distributor, the Trust and any affiliate thereof may
purchase shares of the Fund at the net asset value per share. Spouses and
minor children of the foregoing may also purchase shares at net asset value.
In addition, Sub-Adviser advisory clients and related persons of such may
purchase shares at net asset value.
DISTRIBUTIONS AND TAXES
The following is a general description of certain tax rules relating
to the Fund. It is not exhaustive and prospective investors may wish to
consult their tax advisers.
The Fund intends to qualify as a regulated investment company under
the Internal Revenue Code of 1986 ("Code") so long as such qualification is in
the best interests of shareholders. If it so qualifies, in any fiscal year in
which it distributes at least 90 percent of its taxable net income, the Fund
generally will not be subjected to federal income tax on such distributed
amounts. Shareholders of the Fund, however, will be subject to federal income
tax on any ordinary net income and net capital gains realized by the Fund and
distributed to shareholders as regular or capital gains dividends, whether
distributed in cash or in the form of additional shares. Net long term capital
gains distributions will be taxable to shareholders as long term capital gains,
regardless of the length of time the corresponding shares have been held.
Upon the taxable disposition (including a sale or redemption) of
shares of the Fund, a shareholder may realize a gain or loss depending upon his
basis in his shares. Such gain or loss generally will be treated as capital
gain or loss (if the shares are capital assets in the shareholder's hands) and
will be long-term or short-term, generally depending upon the shareholder's
holding period for the shares. However, a loss realized by a shareholder on
the disposition of Fund shares with respect to which capital gain dividends
have been paid will, to the extent of such capital gain dividends, be treated
as long-term capital loss if such shares have been held by the shareholder for
six months or less. Further, a loss realized on disposition will be disallowed
to the extent the shares disposed of are replaced (whether by reinvestment of
distributions or otherwise) within a period of 61 days beginning 30 days before
and ending 30 days after the shares are disposed of. In such a case, the basis
of the shares acquired will be adjusted to reflect the disallowed loss.
Shareholders receiving distributions in the form of additional shares will have
a cost basis for Federal
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<PAGE> 146
income tax purposes in each share received equal to the net asset value of a
share of the Funds on the reinvestment date.
In order to qualify as a "regulated investment company" under the
Code, the Fund must, among other things, in each taxable year distribute at
least 90 percent of its taxable income to shareholders, derive at least 90
percent of its gross income from dividends, interest and gains from the sale or
disposition of securities and derive less than 30 percent of its gross income
from the sale or disposition of securities held for less than three months.
Accordingly, the Fund will be subject to certain restrictions including
restrictions in the writing of options on securities which have been held for
less than three months, purchasing and selling futures contracts held for less
than three months, in the writing of options which expire in less than three
months, and in effecting closing purchase transactions, with respect to options
which have been written less than three months prior to such transactions.
The Code imposes a non-deductible, 4% excise tax on regulated
investment companies that do not distribute to their shareholders in each
calendar year an amount equal to (i) 98% of their calendar year ordinary
income; plus 98% of their capital gain net income (the excess of short and long
term capital losses) for the one year period ending October 31. Dividends
declared in December of any year to shareholders of record on any date in
December will be deemed to have been received by the shareholders and paid by
the Fund on the record date, provided such dividends are paid by February 1 as
of the following year.
Dividends and distributions declared payable to shareholders of record
after September 30 of any year and paid before February 1 of the following
year, are considered taxable income to shareholders on December 31 in the year
declared even though paid in the next year.
Dividends to shareholders who are non-resident aliens may be subject
to a United States withholding tax at a rate of up to 30% under existing
provisions of the code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty laws. Non-resident aliens are urged to consult their own tax
adviser concerning the applicability of the United States withholding tax.
The Code includes rules applicable to certain listed options, futures
contracts, and options on futures contracts which the Fund may write, purchase
or sell. Such options and contracts are classified as Section 1256 contracts
under the Code. The character of gain or loss resulting from the sale,
disposition, closing out, expiration or other termination of Section 1256
contracts is generally treated as long-term capital gain or loss to the extent
of 60% thereof and short-term capital gain or loss to the extent of 40% thereof
("60/40 gain or loss"). Such contracts, generally are required to be treated
as sold at market value on the last day of such fiscal year and on certain
other dates for federal income tax purposes ("marked-to-market"). Generally,
over-the-counter options are not classified as Section 1256 contracts and are
not subject to the mark-to market rule or to 60/40 gain or loss treatment. Any
gains or losses recognized by the Fund from transactions in over-the-counter
options generally constitute short-term capital gains or losses. If
over-the-counter call options written, or over-the-counter put options
purchased, by the Fund are exercised, the gain or loss realized on the sale of
the underlying securities may be either short-term or long-term, depending on
the holding period of the securities. In determining the amount of gain or
loss, the sales proceeds are reduced by the premium paid for over-the-counter
puts or increased by the premium received for over-the counter calls.
Generally, the hedging transactions undertaken by the Fund may result
in "straddles" for U.S. federal income tax purposes. The straddle rules may
affect the character of gains (or losses) realized by the Fund. In addition,
losses realized by the Fund on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year
139
<PAGE> 147
in which the losses are realized. Because only a few regulations implementing
the straddle rules have been promulgated, the tax consequences to the Fund of
engaging in hedging transactions are not entirely clear. Hedging transactions
may increase the amount of short-term capital gain realized by the Fund which
is taxed as ordinary income when distributed to Shareholders.
The Fund may make one or more of the elections available under the
Code which are applicable to straddles. If the Fund makes any of the
elections, this amount, character and timing of gains or losses form the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections
may operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because the straddle rules may affect the character of gains or
losses, defer losses and/or accelerate the recognition of gains or losses from
the affected straddle position, the amount which may be distributed to
Shareholder, and which, will be taxed to them as ordinary income or long-term
capital gain, may be increased or decreased as compared to a fund that did not
engage in such hedging transactions.
The Code and the Treasury Regulations thereunder are subject to change
by legislative or administrative action either prospectively or retroactively.
Dividends paid by the Fund are generally expected to be subject to any
state or local taxes on income. Shareholders should consult their own
attorneys or tax advisers about the tax consequences related to investing in
the Fund.
PERFORMANCE INFORMATION
The Fund may from time to time advertise its total return. Total
return is computed by finding the average annual compounded rates of return
over the 1,5 and 10 year periods or up to the life of the Fund that would
equate the initial amount invested to the ending redeemable value, according to
the following formula:
<TABLE>
<S> <C>
P (1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1,5 or 10 year
periods at the end of the 1,5 or 10 year periods
(or fractional portion thereof)
</TABLE>
In advertising and sales literature, the Fund may compare its
performance to (i) the Standard & Poor's 500 Stock Index ("S&P 500"), Dow Jones
Industrial Average ("DJIA"), the Russell 2000, or other unmanaged indices so
that investors may compare the Fund's results with those of a group of
unmanaged securities widely regarded by investors as representative of the
securities markets in general; (ii) other groups of mutual funds tracked by
Lipper Analytical Services, Inc. a widely used independent research firm which
ranks mutual funds by overall performance, investment objectives and assets, or
tracked by other services, companies, publications, or persons who rank mutual
funds on overall performance or other criteria; and (iii) the Consumer Price
Index (measure for inflation) to assess the real rate of return from an
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<PAGE> 148
investment in the Fund. Unmanaged indices may assume the reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs and expenses.
The Fund may also compute aggregate total return for specified periods
based on a hypothetical Fund account with an assumed initial investment of
$10,000. The aggregate total return is determined by dividing the net asset
value of the account at the end of the specified period by the value of the
initial investment and is expressed as a percentage. Calculation of aggregate
total return reflects payment of the maximum sales charge and assumes
reinvestment of all income dividends and capital gain distributions during the
period.
The Fund may also quote annual, average annual and annualized total
return and aggregate total performance data both as a percentage and as a
dollar amount based on a hypothetical $10,000 investment for various periods.
Such data will be computed as described above, except that (1) the rates of
return calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return and (2) the maximum sales charge will
not be included with respect to annual, annualized or aggregate rates of return
calculations.
141
<PAGE> 149
Part C
Item 24. Financial Statements and Exhibits
(a) Financial Statements Included in Part A:
(1) Financial Highlights
Financial Statements Included in Part B:
(1) Report of Independent Accountants
(2) Notes to Financial Statements
(3) Statements of Net Assets of May 31, 1995
(4) Statements of Operations for year ended May 31, 1995
(5) Statements of Changes in Net Assets for the year ended May
31, 1995
(6) Schedule of Portfolio Investments at May 31, 1995
(b) Exhibits
(1) Amended Declaration of Trust was filed as an Exhibit to
Registrant's Pre-effective Amendment No. 1 filed September 3,
1993 and is herewith incorporated by reference.
(2) Amended Bylaws of the Registrant were filed as an Exhibit to
Registrant's Pre-effective Amendment No. 1 filed September 3,
1993 and is herewith incorporated by reference.
(3) Not Applicable.
(4) Not Applicable.
(5) (a) Form of Investment Management Agreement between the
Registrant and Reserve Management Company, Inc. was filed as
an Exhibit to the Registrant's Registration Statement filed
May 25, 1993 and is herewith incorporated by reference. (b)
Form of Sub-Investment Management Agreements between the
Registrant, Reserve Management Company, Inc. and Sub-Adviser,
is herewith incorporated by reference.
(6) (a) Form of Distribution Agreement between the Registrant and
Resrv Partners, Inc. was filed as an Exhibit to the
Registrant's Registration Statement filed May 25, 1993 and is
herewith incorporated by reference. (b)Form of Dealer
Agreement. was filed as an Exhibit to the Registrant's
Registration Statement filed May 25, 1993 and is herewith
incorporated by reference.
(7) Pension Plan of Reserve Management corporation was filed as an
exhibit to Post-Effective Amendment No. 32 of The Reserve
Fund, File No. 2-36429; amendments to Pension Plan filed as an
exhibit to Post-Effective No. 45 of The Reserve Fund (File
No. 2-36429) dated July 31, 1989 and is herewith incorporated
by reference.
(8) Form of Custodian Agreement between Registrant and Custodial
Trust Company was filed as an Exhibit to Pre-effective
Amendment No.1 filed September 3, 1993 and is herewith
incorporated by reference.
(9) Not Applicable.
(10) Opinion of counsel.*
(11) Consent of Independent Accountants*
(12) Not Applicable.
(13) Form of Subscription Agreement was filed as an Exhibit to the
Registrant's Registration Statement filed May 25, 1993 and is
herewith incorporated by reference.
*Filed herewith
**To be filed by amendment
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<PAGE> 150
(14) Not Applicable.
(15) Form of Service Plan was filed as an Exhibit to the
Registrant's Registration Statement filed May 25, 1993 and is
herewith incorporated by reference.
(16) Schedule for computation of each performance quotation
provided in Registration Statement.
(17) Powers of Attorney*
(18) Rule 18f-3 Plan
*Filed herewith
**To be filed by amendment
99
<PAGE> 151
Item 25. Persons Controlled by or Under Common Control with Registrant
As of January 1, 1995, Reserve Management Company, Inc., a
New Jersey corporation, was a shareholder of Registrant.
Item 26. Number of Holders of Securities
As of July 31, 1995 there were 269 recordholders of the Registrant.
Item 27. Indemnification
Reference is made to Section 10.02 of the Registrant's Declaration of
Trust. No indemnification shall be provided hereunder to a Covered
person:
Section 10.02 provides that
(i) who shall have been adjudicated by a court or other
body including, without limitation, arbitration panels or self-
regulatory organizations before which the proceeding was broght (A)
to be liable to the trust or its Shareholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his office or (B) not to have
acted in good faith in the reasonable belief that his action was in
the best interest of the trust; or
(ii) in the event of a settlement, unless there has been
a determination that such Trustee or officer did not engage in
willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office, (A) by
the court or other body approving the settlement; (B) by at least a
majority of those Trustees who are neither Interested Persons of the
Trust nor are parties to the matter based upon a review of readily
available facts (as opposed to a full trial-type inquiry); or (c) by
written opinion of independent legal counsel based upon a review of
readily available facts (as opposed to a full trial-type inquiry);
provided, however, that any Shareholder may, by appropriate legal
proceedings, challenge any such determination by the Trustees or by
independent counsel.
(c) The rights of indemnification herein provided may be
insured against by policies maintained by the Trust, shall be
severable, shall not be exclusive of or affect any other rights to
which any Covered Person may now or hereafter be entitled, shall
continue as to a person who has ceased to be a Covered Person and
shall inure to the benefit of the heirs, executors and administrators
of such a person. Nothing contained herein shall affect any rights to
indemnification to which Trust personnel, other than Covered Persons,
and other persons may be entitled by contract or otherwise under law.
(d) Expenses in connection with the preparation and presentation
of a defense to any claim, action, suit or proceeding of the
character described in Subsection 10.02(a) of this Section 10.02 may
be paid by the Trust or Series from time to time prior to final
disposition thereof upon receipt of an undertaking by or on behalf of
such Covered Person that such amount will be paid over by him to the
Trust or Series if it is ultimately determined that he is not
entitled to indemnification under this Section 10.02; provided,
however, that either (i) such Covered Person shall have provided
appropriate security for such undertaking, (ii) the Trust is insured
against losses arising out of any such advance payments or (iii)
either a majority of the Trustees who are neither Interested Persons
of the Trust nor parties to the matter, or independent legal counsel
in a written opinion, shall have determined, based upon a review of
readily available facts (as opposed to a trial-type inquiry or full
investigation), that there is reason to believe that such Covered
Person will be found entitled to indemnification under Section 10.02.
Each Trustee, officer, employee or agent of the registrant, and any
person who has served at it request as Director, Trustee, officer or
employee of another business entity, shall be entitled to be
indemnified by the Registrant to the fullest extent permitted by the
laws of the State of Delaware, subject to the provisions of the
Investment Company Act of 1940 and the rules and regulations
thereunder.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to Trustees, officer and
controlling persons of the Registrant pursuant to the Declaration to
Trust or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange commission such
indemnification against such liabilities (other than the payment by
the Registrant of any expenses incurred or paid by a Trustee,
officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit
to a court of appropriate public policy as express in the Act and
will governed the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser
<TABLE>
<CAPTION>
Position with
Name the Adviser Other Business
- ---------------- ----------------- -----------------------------------------
<S> <C> <C>
Henry B.R. Brown President, Treasurer and President, Treasurer and Director of Reserve
Director Management Corporation of the same address as
the Trust; Director and Treasurer of Transfer
Agent Inc., 14 Locust Place, Manhasset, NY
11030
Bruce R. Bent Vice President, Secretary and Vice President, Secretary and Director of
Director Director Reserve Management Corporation
and Director of Resrv Partners, Inc. both of
the same address as the Trust.
Marc C. Cozzolino Counsel Counsel of Reserve Management Corporation and
Counsel and Secretary of Resrv Partners,
Inc. both of the same address as the Trust.
</TABLE>
Item 29. Principal Underwriters
(a) Resrv Partners, Inc., the principal underwriter of the
Registrant, also acts as principal underwriter to The Reserve
Fund, Reserve Institutional Trust, Reserve Tax-Exempt Trust, and
Reserve New York Tax-Exempt Trust.
100
<PAGE> 152
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Position and Offices
Business Address With Resrv Partners, Inc. With Registrant
---------------- ------------------------- ---------------
<S> <C> <C>
Bruce R. Bent Chairman and Director President, Treasurer & Trustee
Marc C. Cozzolino Counsel & Secretary Counsel & Secretary
</TABLE>
Item 30. Location of Accounts and Records
All records required to maintained by Section 31(a) of the 1940 Act
and the Rules promulgated thereunder are maintained at 810 Seventh
Avenue, New York NY 10019 except those relating to receipts and
deliveries of securities, which are maintained by the Registrant's
Custodians and certain records regarding portfolio transactions which
are maintained at the offices of the Sub-Advisers: T.H. Fitzgerald &
Co., Research Center, 305 Center Rd., Easton, CT 00612; Trainer,
Wortham & Company, Inc., 845 Third Avenue, New York, NY 10022;
Roanoke Asset Management, 529 Fifth Avenue, New York, NY 10017.
Cambridge Equity Advisors, 5214 Mayland Way, Suite 309, Brentwood, TN
37027. Southern Capital Advisors, 50 Front Street, Morgan Keegan
Tower, Memphis, TN 38103. Pinnacle Associates Ltd., 666 Fifth Avenue,
14th Floor, New York, NY 10103; Siphron Capital Management, 280 S.
Beverly Drive, Beverly Hills, CA 90212; and Gerbino & Company,
9595 Wilshire Boulevard, Suite 200, Beverly Hills, CA 90212.
Item 31. Management Services
See "Investment Management and Other Agreements" in Part B.
Item 32. Undertakings
Registrant makes the following undertakings:
(a) to file a post effective amendment, using financial statements
which may not be certified, with four to six months from the
effective date of this Registration Statement.
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<PAGE> 153
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that this Post-
Effective Amendment to its Registration Statement meets all of the requirements
for effectiveness pursuant to Rule 485(a) under the Securities Act of 1933 and
Registrant has duly caused this Post-Effective Amendment No. 8 to its
Registration Statement to be signed on its behalf by the undersigned thereunto
duly authorized, in the City of New York and State of New York, on the 5th day
of January, 1996.
/s/ Bruce R. Bent
------------------------
Bruce R. Bent, President
Attest:
/s/ Marc C. Cozzolino
------------------------------------
Marc C. Cozzolino, Secretary
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment No. 8 to its Registration Statement has been below signed by
the following persons in the capacities and on the dates indicated.
/s/ Bruce R. Bent Date 1/5/96
- ------------------------------------------ ----------------
Bruce R. Bent, President, Treasurer
and Board Member (principal executive,
operating and financial officer)
* /s/ Date
- ------------------------------------------ ----------------
Edwin Ehlert Jr., Board Member
* /s/ Date
- ------------------------------------------ ----------------
Henri W. Emmet, Board Member
* /s/ Date
- ------------------------------------------ ----------------
Donald J. Harrington, Board Member
* /s/ Date
- ------------------------------------------ ----------------
Niels W. Johnsen, Board Member
* /s/ Date
- ------------------------------------------ ----------------
Burtt R. Ehrlich, Board Member
* /s/ Date
- ------------------------------------------ ----------------
Thomas L. Rhodes, Board Member
/s/ Marc C. Cozzolino Date 1/5/96
- ------------------------------------------ ----------------
Marc C. Cozzolino, *Attorney-in-Fact
Counsel and Secretary
102
<PAGE> 154
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibit No. Description
----------- -----------
<S> <C>
1. Declaration of Trust of Registrant.**
2. Bylaws of Registrant.**
3. Not Applicable.
4. Not Applicable.
5. (a) Form of Investment Management Agreement between the
Registrant and Reserve Management Company Inc. **
(b) Form of Sub-Investment Management Agreement between
Registrant, Reserve Management Company, Inc. and Various Sub-Advisors.**
6. (a) Form of Distribution Agreement between the Registrant
and Resrv Partners, Inc. **
(b) Form of Selected Dealer Agreement. **
7. Pension Plan of Reserve Management Corp. filed
as an exhibit to Post-Effective Amendment No., 32
of The Reserve Fund (File No. 2-36429);
amendments thereto filed as an exhibit to
Post-Effective Amendment No. 45 and all are
incorporated by reference.
8. Form of Custodian Agreements between Registrant and
Custodial Trust Company.**
9. Not Applicable.
10. Opinion of Counsel.
11. Consent of Independent Accountants
12. Not Applicable
13. Form of Subscription Agreement between the Registrant
and Reserve Management Company, Inc. **
14. Not Applicable
15. Form of Service Plan **
16. Schedule for computation of each performance quotation
provided in Registration Statement.*
17. Powers of Attorney
18. Rule 18f-3 Plan**
</TABLE>
* To be filed by amendment
**Previously filed
<PAGE> 1
Exhibit 10
January 5, 1996
Board of Trustees
Reserve Private Equity Series
810 Seventh Avenue
New York, New York 10019
Gentlemen:
I have acted as counsel to the Reserve Private Equity Series, a Delaware
business trust (the "Fund"), in connection with the registration of shares of
the Blue Chip Growth, Emerging Growth, Informed Investors Growth Fund, Mid-Cap
Growth Fund, North American Growth Fund, International Equity Fund, Large-Cap
Value Equity Fund and Growth and Income Fund ("Funds") with the Securities
and Exchange Commission.
As counsel to the Fund, I have made such investigations and have examined
and relied upon the originals or copies, certified or otherwise identified to my
satisfaction, of such records, instruments, certificates, memoranda and other
documents as I have deemed necessary or advisable for the purposes of this
opinion.
1. The Fund has been duly incorporated and is validly existing
under the laws of Delaware.
2. To the best of my knowledge, no further approval, consent or
other order of the Board of Trustees is legally required in
connection with the organization of the Portfolios and the
registration of their shares.
3. To the best of my knowledge, the shares of the Portfolios,
when issued, will be legally issued, non-assessable and, when
subscribed to, fully paid.
I consent to the filing of this opinion as an exhibit to the Fund's
registration statement under the Securities Act of 1933.
Very truly yours,
/s/ Marc C. Cozzolino
---------------------
Marc C. Cozzolino
Counsel
103
<PAGE> 1
EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion of our reports dated June 23, 1995, appearing in
the Post-Effective Amendment to Registration Statement (Form N-1A) of Reserve
Private Equity Series, on the financial statements and financial highlights of
the Reserve Blue Chip Growth Fund, Reserve Emerging Growth Fund and Reserve
Informed Investors Growth Fund (three of the Funds constituting the Reserve
Private Equity Series) to be filed with the Securities and Exchange Commission
under the provisions of the Securities Act of 1933 and the Investment Company
Act of 1940, as amended.
We also consent to the reference to our Firm under the caption "Custodial
Services and Independent Accountants" in the Statement of Additional
Information.
COOPERS & LYBRAND L.L.P.
New York, New York
September 25, 1995
104
<PAGE> 1
Exhibit 17
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of THE
RESERVE PRIVATE EQUITY SERIES, a Delaware business trust, does hereby constitute
and appoint Marc C. Cozzolino and William Goodwin, and each of them, his true
and lawful attorney and agent to do any and all acts and things and to execute
any and all instruments which said attorney and agent may deem necessary or
advisable; (i) to enable the said Trust to comply with the Securities Act of
1933, as amended, and any rules, regulations and requirements of the Securities
and Exchange Commission in respect thereof, in connection with the registration
under said Securities Act of the shares of beneficial interest of said Trust
(the "Securities"), including specifically, but without limiting the generality
of the foregoing, the power and authority to sign for and on behalf of the
undersigned the name of the undersigned as trustee of said Trust to a
Registration Statement or to any amendment thereto filed with the Securities and
Exchange Commission in respect of said Securities and to any instrument or
document filed as part of, as an exhibit to or in connection with said
Registration Statement or amendment; (ii) to enable said Trust to comply with
the Investment Company act of 1940, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the registration under said Investment Company Act of the Trust,
including specifically, but without limiting the generality of the foregoing,
the power and authority to sign for and on behalf of the undersigned the name of
the undersigned as trustee of said Trust to a Registration Statement or to any
amendment thereto filed with the Securities and Exchange Commission in respect
of said Trust and to any instrument or document filed as part of, as an exhibit
to or in connection with said Registration Statement or amendment; and (iii) to
register or qualify said Securities for sale and to register or license said
Trust as a broker or dealer in said Securities under the securities or Blue Sky
laws of all such states as may be necessary or appropriate to permit therein the
offering and sale of said Securities as contemplated by said Registration
Statement, including specifically, but without limiting the generality of the
foregoing, the power and authority to sign for and on behalf of the undersigned
the name of the undersigned as trustee of said Trust to any application,
statement, petition, prospectus, notice or other instrument or document, or to
any amendment thereto, or to any exhibit filed as a part thereof or in
connection therewith, which is required to be signed by the undersigned and to
be filed with the public authority or authorities administering said securities
or Blue Sky laws for the purpose of so registering or qualifying said Securities
or registering or licensing said Trust, and the undersigned does hereby ratify
and confirm as his own act and deed all that said attorney and agent shall do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this
21st day of June 1995.
/s/ Edwin Ehlert, Jr.
----------------------------------
Edwin Ehlert, Jr., Board Member
/s/ Henri W. Emmet
----------------------------------
Henri W. Emmet, Board Member
/s/ Donald J. Harrington
----------------------------------
Donald J. Harrington, Board Member
/s/ Niels W. Johnsen
----------------------------------
Niels W. Johnsen, Board Member
/s/ Burtt R. Ehrlich
----------------------------------
Burtt R. Ehrlich, Board Member
/s/ Thomas L. Rhodes
----------------------------------
Thomas L. Rhodes, Board Member
