<PAGE> 1
(The Reserve Funds logo) General Information, Purchases and
Redemptions
-------------------------------------
Call 800-637-1700 Fax 212-977-9897
THE RESERVE PRIVATE EQUITY SERIES
Each "Fund" or "Portfolio" (is a series of shares issued by THE RESERVE
PRIVATE EQUITY SERIES ("RPES" or "Trust"), an open-end mutual fund. This
Prospectus, dated July 31, 1996, as amended September 1, 1996, sets forth
concisely the information which a prospective investor should know about each
Fund before investing. A Statement of Additional Information, dated July 31,
1996, as amended September 1, 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 July 31, 1996, as amended September 1, 1996.
Investors are advised to read this Prospectus carefully and to retain it for
future reference.
<PAGE> 2
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 A CLASS 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 1.00% (2)
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."
(2) A deferred sales charge of 1.00% is assessed on redemptions of Class
D shares made within the first year of investing, except for retail
clients and certain brokerage related clients for whom this sales
charge is waived. See "How to Buy Shares," "Contingent Deferred
Sales Charge--Class D 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 Convertible Securities................... 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 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%
</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 14) 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.
<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 Convertible Securities........................ $62 $ 98 $136 $242 $25 $78 $133 $284
Reserve Emerging Growth............................... $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
</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.
2
<PAGE> 3
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"), Reserve International Equity Fund ("International"), Reserve
Informed Investors Growth Fund ("Informed"), Reserve Large-Cap Value Fund
("Large-Cap") and Reserve Mid-Cap Growth Fund (formerly "North American")
outstanding throughout each 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>
CLASS D
CLASS A ----------------
-------------------------------- FEBRUARY 13,
OCTOBER 28, 1994 1996
(COMMENCEMENT OF (COMMENCEMENT OF
YEAR ENDED OPERATIONS) TO OPERATIONS) TO
RESERVE BLUE CHIP GROWTH FUND MAY 31, 1996 MAY 31, 1995 MAY 31, 1996
- -------------------------------------------------------------- ------------- ---------------- ----------------
<S> <C> <C> <C>
Net asset value, beginning of period.......................... $ 12.03 $10.00 $13.49
Income from investment operations.............................
Net investment loss....................................... (.10) (.03) (.04)
Net realized and unrealized gain.......................... 3.62 2.06 1.43
------------- ------- -------
Total from investment operations.............................. 3.52 2.03 1.39
Less distribution from net realized gain...................... (.64) 0 0
------------- ------- -------
Net asset value, end of period................................ $ 14.91 $12.03 $14.88
============ ================= =================
Total Return.................................................. 30.10% 20.30%(2) 10.30%(2)
RATIOS/SUPPLEMENTAL DATA
Net assets in thousands, end of period........................ $ 5,130 $1,993 $ 43
Ratio of expenses to average net assets before waiver......... 1.75% 1.75%(1) 2.50%(1)
Ratio of expenses to average net assets, net of waiver........ 1.75% 1.73%(1) 2.50%(1)
Ratio of net investment loss to average net assets, before
waivers..................................................... -.94% -.72%(1) -1.70%(1)
Ratio of net investment loss to average net assets, net of
waiver...................................................... -.94% -.70%(1) -1.70%(1)
Portfolio turnover rate....................................... 72% 68% 72%
Average commission per share on portfolio transactions........ $ .06 N/A $ .06
</TABLE>
<TABLE>
<CAPTION>
CLASS A CLASS D
-------------------------------- ----------------
NOVEMBER 14, FEBRUARY 26,
1994 1996
(COMMENCEMENT OF (COMMENCEMENT OF
YEAR ENDED OPERATIONS) TO OPERATIONS) TO
RESERVE EMERGING GROWTH FUND MAY 31, 1996 MAY 31, 1995 MAY 31, 1996
- -------------------------------------------------------------- ------------- ---------------- ----------------
<S> <C> <C> <C>
Net asset value, beginning of period.......................... $ 12.21 $10.00 $16.88
Income from investment operations.............................
Net investment loss....................................... (.17) (.09) (.04)
Net realized and unrealized gain.......................... 8.05 2.30 2.68
------------- ------- -------
Total from investment operations.............................. 7.88 2.21 2.64
Less distribution from net realized gain...................... (.53) 0 0
------------- ------- -------
Net asset value, end of period................................ $ 19.56 $12.21 $19.52
============ ================= =================
Total Return.................................................. 65.55% 22.10%(2) 15.64%(2)
RATIOS/SUPPLEMENTAL DATA
Net assets in thousands, end of period........................ $ 6,657 $1,241 $ 243
Ratio of expenses to average net assets....................... 1.75% 1.75%(1) 2.50%(1)
Ratio of net investment loss to average net assets............ -1.70% -1.62%(1) -2.48%(1)
Portfolio turnover rate....................................... 38% 43% 38%
Average commission per share on portfolio transactions........ $ .01 N/A $ .01
</TABLE>
3
<PAGE> 4
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
CLASS A CLASS D
---------------- ----------------
JULY 13, 1995 MARCH 11, 1996
(COMMENCEMENT OF (COMMENCEMENT OF
OPERATIONS) TO OPERATIONS) TO
RESERVE INTERNATIONAL EQUITY FUND MAY 31, 1996 MAY 31, 1996
- -------------------------------------------------------------------------- ---------------- ----------------
<S> <C> <C>
Net asset value, beginning of period...................................... $10.00 $10.79
Income from investment operations.........................................
Net investment loss................................................... (.05) (.01)
Net realized and unrealized gain...................................... 1.31 .47
------- -------
Total from investment operations.......................................... 1.26 .46
------- -------
Net asset value, end of period............................................ $11.26 $11.25
================= =================
Total Return.............................................................. 12.60%(2) 4.26%(2)
RATIOS/SUPPLEMENTAL DATA
Net assets in thousands, end of period.................................... $3,578 $ 6
Ratio of expenses to average net assets before waiver..................... 2.00%(1) 2.75%(1)
Ratio of expenses to average net assets, net of waiver.................... 1.99%(1) 2.75%(1)
Ratio of net investment loss to average net assets, before waiver......... -.92%(1) -.70%(1)
Ratio of net investment loss to average net assets, net of waiver......... -.91%(1) -.70%(1)
Portfolio turnover rate................................................... 70% 70%
Average commission per share on portfolio transactions.................... $ .02 $ .02
</TABLE>
4
<PAGE> 5
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
CLASS A
-------------------------------- CLASS D
DECEMBER 28, ----------------
1994 MARCH 22, 1996
(COMMENCEMENT OF (COMMENCEMENT OF
YEAR ENDED OPERATIONS) TO OPERATIONS) TO
RESERVE INFORMED INVESTORS GROWTH FUND MAY 31, 1996 MAY 31, 1996 MAY 31, 1996
- -------------------------------------------------------------- ------------- ---------------- ----------------
<S> <C> <C> <C>
Net asset value, beginning of period.......................... $ 11.99 $10.00 $12.29
Income from investment operations.............................
Net investment loss....................................... (.33) (.07) (.06)
Net realized and unrealized gain.......................... 3.87 2.06 2.10
------------- ------- -------
Total from investment operations.............................. 3.54 1.99 2.04
Less distribution from net realized gain...................... (1.17) 0 0
------------- ------- -------
Net asset value, end of period................................ $ 14.36 $11.99 $14.33
============ ================= =================
Total Return.................................................. 29.75% 19.90%(2) 16.60%(2)
RATIOS/SUPPLEMENTAL DATA
Net assets in thousands, end of period........................ $ 6,393 $6,837 $ 15
Ratio of expenses to average net assets....................... 1.75% 1.75%(1) 2.50%(1)
Ratio of net investment loss to average net assets............ -1.57% -1.62%(1) -2.32%(1)
Portfolio turnover rate....................................... 132% 59% 132%
Average commission per share on portfolio transactions........ $ .05 N/A $ .05
</TABLE>
<TABLE>
<CAPTION>
CLASS A
----------------
JANUARY 2, 1996
(COMMENCEMENT OF
OPERATIONS) TO
RESERVE LARGE-CAP VALUE FUND MAY 31, 1996
- ------------------------------------------------------------------------------------------- ----------------
<S> <C>
Net asset value, beginning of period....................................................... $10.00
Income from investment operations..........................................................
Net investment loss.................................................................... (.01)
Net realized and unrealized gain....................................................... .96
-------
Total from investment operations........................................................... .95
-------
Net asset value, end of period............................................................. $10.95
=================
Total Return............................................................................... 9.50%(2)
RATIOS/SUPPLEMENTAL DATA
Net assets in thousands, end of period..................................................... $1,231
Ratio of expenses to average net assets.................................................... 1.75%(1)
Ratio of net investment loss to average net assets......................................... -.32%(1)
Portfolio turnover rate.................................................................... 0%
Average commission per share on portfolio transactions..................................... $ .08
</TABLE>
5
<PAGE> 6
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
CLASS A
----------------
MARCH 13, 1996 CLASS D
(COMMENCEMENT OF -------------
OPERATIONS) TO YEAR ENDED
RESERVE MID-CAP GROWTH FUND* MAY 31, 1996 MAY 31, 1996
- ------------------------------------------------------------------------------ ---------------- -------------
<S> <C> <C>
Net asset value, beginning of period.......................................... $10.94 $ 10.00
Income from investment operations.............................................
Net investment loss....................................................... (.01) (.17)
Net realized and unrealized gain.......................................... 1.36 2.44
------- -------------
Total from investment operations.............................................. 1.35 2.27
------- -------------
Net asset value, end of period................................................ $12.29 $ 12.27
================= ============
Total Return.................................................................. 12.34%(2) 22.70%
RATIOS/SUPPLEMENTAL DATA
Net assets in thousands, end of period........................................ $ 131 $ 2,408
Ratio of expenses to average net assets....................................... 1.74%(1) 2.49%(1)
Ratio of net investment loss to average net assets............................ -.97%(1) -2.00%(1)
Portfolio turnover rate....................................................... 85% 85%
Average commission per share on portfolio transactions........................ $ .04 $ .04
</TABLE>
- ---------------
(1) Annualized
(2) Total return is not annualized, and does not reflect impact of sales load.
* Formerly, Reserve North American Growth Fund.
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.
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 31 NEW VERNON SIPHRON S&P 500
---------------------------------------------------------------------- ---------- ------- -------
<S> <C> <C> <C>
1991.................................................................. 22.3% 25.6% 30.5%
1992.................................................................. 16.8 10.2 7.7
1993.................................................................. 21.0 19.0 10.0
1994.................................................................. (4.7) 7.4 1.3
Annualized Return for the period
1/1/91 to 12/31/94.................................................. 13.3% 15.3% 11.9%
</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.
6
<PAGE> 7
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 seven separate series.
Additional series may be added in the future by the Board of Trustees. The
Reserve Blue Chip Growth Fund, Reserve Convertible Securities Fund, Reserve
Emerging Growth Fund, Reserve Informed Investors Growth Fund, Reserve
International Equity Fund, Reserve Large-Cap Value Fund, and Reserve Mid-Cap
Growth Fund (formerly, 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; New Vernon Advisers, Inc.
("New Vernon"), 310 South Street, P.O. Box 1913, Morristown, NJ 07962, for
Reserve Convertible Securities Fund; Roanoke Asset Management ("Roanoke"), 529
Fifth Avenue, New York, NY 10017, for Reserve Emerging Growth 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 Fund; and Southern Capital Advisors ("SCA"),
50 Front Street, Memphis, TN 38103, for Reserve Mid-Cap Growth Fund (formerly,
Reserve North American Growth Fund). See "Management of the Funds."
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 CONVERTIBLE SECURITIES FUND. The Reserve Convertible Securities Fund's
investment objective is to seek returns which are derived from capital
appreciation and current income. There can be no assurance that the Fund will
achieve its investment objective.
Generally, the Fund will pursue its objective, by investing primarily in
securities which are convertible into, or which derive their returns from, price
changes in the common stock of an underlying corporate issuer. These include,
but are not limited to, convertible debentures, convertible preferred stocks,
and "derivative" convertible securities such as "DECS" (Dividend Enhanced
Convertible Stock), "ACES" (Automatically Convertible Equity Securities),
"PRIDES" (Preferred Redeemable Increased Dividend Equity Securities) and "PERCS"
(Preferred Equity Redemption Convertible Stock). The Fund will invest at least
65% of its total assets in convertible securities, unless the Fund has adopted a
temporary defensive position.
As a means of protecting principal value, the Sub-Adviser invests in
securities, possessing certain defensive characteristics, such as those whose
underlying common stocks are undervalued in terms of earnings relative to price,
earnings growth rate relative to price/ earnings multiple, and price relative to
book value. Other defensive characteristics sought are high current yields,
short-to-intermediate maturities, and low-price volatility relative to price
volatility of the underlying common shares.
The Fund will invest in both rated, and unrated securities of similar
quality when it is believed that their yields or growth potential adequately
compensate it for the risk assumed. The Fund will not invest in securities whose
creditworthiness the Adviser and/or the Sub-Adviser perceive to be
deteriorating.
The Sub-Adviser will also invest in "busted" convertible debt securities.
These securities trade like straight corporate debt having similar coupons,
ratings, and maturities, and to which the market accords little value for their
convertibility features.
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.
7
<PAGE> 8
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.
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 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 undervalued
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 ADRs 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 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. A three-to-five-year time horizon
will be utilized for a holding period; therefore, portfolio
8
<PAGE> 9
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 macroeconomic 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 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 FUND. The Reserve Large-Cap Value 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 (formerly,
Reserve North American Growth Fund) investment objective is to seek capital
appreciation through investment in a portfolio of medium-sized companies. It is
the Sub-Adviser's view that midsize companies in the United States are generally
expected to show growth over time that is above the growth rate of the overall
U.S. economy and that of larger companies. The Fund will invest at least 65% of
its total assets in securities of companies considered to be "mid-cap" or
medium-sized companies, 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,
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in all but the most dire of political or economic 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's underestimating future earnings, changes in management or other
similar opportunities.
A result of the Fund's stock selection criteria is likely to be that the
median market capitalization for its portfolio companies will be about $1
billion and such companies would be considered to 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 intends to be fully invested in U.S. based companies
unless it has adopted a temporary defensive position.
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.
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, and
Bonds, all of which are backed by the full faith and credit of the United States
Government.
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 Government, 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
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(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 Convertible Securities 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 or unrated securities of equivalent quality. 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 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 supernatural entities such as the
World Bank or the European Investment Bank.
ILLIQUID SECURITIES. The Funds may hold up to 15% of 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
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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.
PUT AND CALL OPTIONS ON SPECIFIC SECURITIES. The Reserve Emerging Growth and
Reserve Informed Investors 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 each Fund 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 nonperformance 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 so long as a
Fund which 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.
INVESTMENT IN FOREIGN SECURITIES. The Reserve International Equity Fund may
purchase foreign equity and debt securities, including foreign government
securities. 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.
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FOREIGN CURRENCY TRANSACTIONS. The Reserve International Equity Fund 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 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
Fund 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
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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."
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 Reserve International Equity Fund, 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 United States.
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.
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, NY 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.
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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; New Vernon Advisors, Inc., 310 South Street, P.O. Box 1913,
Morristown, NJ 07962 for Reserve Convertible Securities Fund; Roanoke Asset
Management, 529 Fifth Avenue, New York, NY 10017, for Reserve Emerging Growth
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 Fund; and Southern Capital Advisors, 50 Front Street, Memphis,
TN 38103, for Reserve Mid-Cap Growth Fund (formerly, Reserve North American
Growth Fund). None of these organizations have previously served as either
Adviser or Sub-Adviser to a registered investment company.
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.
NEW VERNON ADVISORS, INC., an affiliate of William E. Simon & Sons, L.L.C.,
was formed in 1990 and currently manages or advises $700 million for private
investment funds, high-net-worth individuals, charitable organizations and
educational institutions. J. Peter Simon, an Executive Director and a founder of
William E. Simon & Sons, is senior vice-president of New Vernon Advisors, Inc.,
and serves as the firm's convertible securities manager.
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.
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 and 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.
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%.
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<PAGE> 16
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
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.
- By wire--Prior to calling your bank, call the Funds 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 PM (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 PM (New York time). Orders received by a Fund or an
Authorized Dealer after 4:00 PM (New York time) will be priced at the public
offering price in effect at 4:00 PM (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
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<PAGE> 17
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.
The Distributor, at its expense, will also provide additional compensation
to broker-dealers, financial consultants and financial institutions in
connection with actual or anticipated sales of Shares of a Fund, but only to the
extent permitted by law or regulation.
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.
The load for Class A shares will be waived on all assets transferred
directly to The Reserve Private Equity Series from funds outside of Reserve on
which a similar sales charge has already been paid.
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 % AS A % REALLOWANCE
OF OFFERING OF NET ASSET AS A % OF
AMOUNT OF TRANSACTION PRICE PER SHARE VALUE PER SHARE OFFERING 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.
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 plus a maximum sales charge of 1% as long as they are
qualified shareholders of Reserve money funds.
CLASS D SHARES. 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. A deferred sales charge of 1% is
assessed on redemptions made within the first year of investing, with the
exception of retail clients and certain brokerage-related clients for whom this
sales charge is waived.
CONTINGENT DEFERRED SALES CHARGE--CLASS D SHARES. Fund shares which are
redeemed within one year of purchase will be subject to a contingent deferred
sales charge equal to 1% of the dollar amount subject thereto. The charge will
be assessed on an amount equal to the lesser of the current market value or the
cost of the shares being redeemed. Accordingly, no sales charge will be imposed
on increases in net asset value above the initial purchase price. In addition,
no charge will be assessed on shares derived from reinvestment of dividends or
capital gains distributions.
Solely for purposes of determining whether one year has elapsed from the
time of any payment for the purchases of shares, all payments during a month
will be aggregated and deemed to have been made on the last day of the month.
In determining whether a contingent deferred sales charge is applicable to a
redemption, the calculation will be determined in the manner that results in the
lowest possible rate being charged. Therefore, it will be assumed that the
redemption is of shares held for
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<PAGE> 18
over one year or shares acquired pursuant to reinvestment of dividends or
distributions. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase.
To provide an example, assume an investor purchased 1,000 shares at $10.00
per share (at a cost of $10,000) and in the eleventh month after purchase, the
net asset value per share is $12.00, and during such time, the investor has
acquired 100 additional shares upon dividend reinvestment. If, at such time, the
investor makes his or her first redemption of 500 shares (proceeds of $6,000),
100 shares will not be subject to charge because of dividend reinvestment. With
respect to the remaining 400 shares, the charge is applied only to the original
cost of $10.00 per share and not to the increase in net asset value of $2.00 per
share. Therefore, $4,000 of the $6,000 redemption proceeds will be charged at
the 1% rate.
The contingent deferred sales charge is waived on redemptions of shares
redeemed by a shareholder (i) who did not acquire his or her shares through a
broker-dealer (or other financial intermediary), or (ii) who acquired his or her
shares through a broker-dealer (or other financial intermediary) that has
elected to receive 12b-1 payments, as a trail and not up front, beginning the
day the shares are issued.
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's 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 ($25 minimum) such as Social Security, federal
salary, or certain veterans' 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.
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."
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<PAGE> 19
PRIVATE EQUITY CASH ACCOUNT. The Private Equity Cash Account acts as an omnibus
account of The Reserve 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 PM (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 nor 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, Presidents' 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 RPES 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 RPES 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.
In addition, exchanges between classes within the Reserve Private Equity Series
are permissible; however, such class exchanges may be subject to the applicable
sales charge as described in this Prospectus. Shares of any of the money-market
funds or any RPES 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.
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 PM (New York time) on a
regular business day to take effect that day. Exchange requests received after
4:00 PM (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
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<PAGE> 20
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
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 nondeductible, 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.
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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.
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 nonresident 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 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 AM to 4:00 PM
(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 by your brokerage firm or bank, telephone requests by
any person for redemptions are accepted for payment to such account by calling
(800) 637-1700.
WRITTEN AND TELEPHONE REDEMPTION REQUESTS. The Funds strongly suggest (but do
not require) that each written redemption be at least $1,000 and requires that
each telephone redemption be at least $1,000, except for redemptions which are
intended to liquidate your account. A shareholder will be charged $2 for
redemption checks issued by the Funds of less than $100. Payments of $10,000 or
more will be wired upon request without charge. A shareholder will be charged
$10 for wires of less than $10,000. The Funds assume no responsibility for
delays in the receipt of wired or mailed funds. The use of a predesignated
financial institution, such as a savings bank, credit union or savings and loan
association, which is not a member of the Federal Reserve wire system to receive
your wire could cause such a delay. If a Fund has previously been advised in
writing of your brokerage or bank account, telephone requests by any person are
accepted for payment to such account by calling 800-637-1700. The Funds may be
liable for any losses caused by its failure to employ reasonable procedures. To
reduce the risk of loss, proceeds of telephone redemptions may be sent only (1)
to the bank or brokerage account designated by the shareholder, in writing, on
the investment application or in a letter with the signature(s) guaranteed; or
(2) to the address of record if all the conditions listed below are met. To
change the designated brokerage or bank account it is necessary to contact the
firm through which shares of the Fund were purchased or if purchased directly
from the Funds, it is necessary to send a
21
<PAGE> 22
written request to the Funds with signature(s) guaranteed as described below.
Other redemption orders must be in writing with the necessary signature(s)
guaranteed by a domestic commercial bank; a domestic trust company; a domestic
savings bank, credit union or savings association; or a member firm of a
national securities exchange. Guarantees from notaries public are unacceptable.
The Funds will waive the signature guarantee requirement on a redemption request
once every thirty (30) days if all of the following conditions apply: (1) the
redemption is for $5,000 or less; (2) the redemption check is payable to the
shareholder(s) of record; and (3) the redemption check is mailed to the
shareholder(s) at the address of record. The requirement of a guaranteed
signature protects against an unauthorized person redeeming shares and obtaining
the redemption proceeds. Redemption instructions and election of the plans
described below may be made when your account is opened. Subsequent elections
and changes in instructions must be in writing with the signature(s) guaranteed.
Changes in registration or authorized signatories may require additional
documentation.
The Funds reserve the right to refuse a telephone redemption if it believes
it is advisable to do so. Procedures for telephone redemptions may be modified
or terminated by the Funds at any time. During times of drastic economic or
market conditions shareholders may experience difficulty in contacting the Funds
by telephone to request a redemption or exchange of a Fund's shares. In such
cases shareholders should consider using another method of redemption, such as a
written request.
AUTOMATIC WITHDRAWAL PLANS. If you have an account with a balance of at least
$5,000, you may make a written election to participate in either of the
following: (i) an Income-Distribution Plan providing for monthly, quarterly or
annual payments by redemption of shares from reinvested dividends or
distributions paid to your account during the preceding period; or (ii) a
Fixed-Amount Withdrawal Plan providing for the automatic redemption of a
sufficient number of shares of your account to make a specified monthly,
quarterly or annual payment of a fixed amount. Changes to instructions must be
in writing with signature(s) guaranteed. In order for such payments to continue
under either Plan, there must be a minimum of $25 available from reinvested
dividends or distributions. Payments can be made to you or your designee. An
application for the Automatic Withdrawal Plans can be obtained from the Funds.
The amount, frequency and recipient of the payments may be changed by giving
proper written notice to the Funds. The Funds may impose a charge or modify or
terminate any Automatic Withdrawal Plan at any time after the participant has
been duly notified. This privilege may not be available to clients of certain
firms or may be available subject to conditions or limitations.
RESERVE AUTOMATIC TRANSFER PLAN. You may redeem shares of a Fund (minimum $100)
without charge by telephone if you have filed a separate Reserve Automatic
Transfer Plan application with the Fund. The proceeds will be transferred
between your Fund account and the checking, NOW or bank money-market deposit
account (as permitted) designated in the application. Only such an account
maintained in a domestic financial institution which is an Automated Clearing
House member may be so designated. Redemption proceeds will be on deposit in
your account at the Automated Clearing House member bank ordinarily two (2)
business days after receipt of the redemption request. The Funds may impose a
charge or modify or terminate this privilege at any time after the participant
has been duly notified. This privilege may not be available to clients of
certain firms or may be available subject to conditions or limitations.
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 the Fund or for it to determine fairly the value
of its net assets, or (c) for such periods as the SEC may by order permit. If
shares of a Fund are purchased by check or Reserve Automatic Transfer Plan, the
Fund may delay transmittal of redemption proceeds until such time as it has
assured itself that good payment has been collected for the purchase of such
shares, which will generally be up to ten (10) business days. Shareholder checks
written against Funds which are not yet considered collected will be returned
and a fee charged against the account. When a purchase is made by wire and
subsequently redeemed, the proceeds from such redemptions normally will not be
transmitted until two business days after the purchase by wire.
GENERAL INFORMATION
JOINT OWNERSHIP. When an account is registered in the name of one person or
another, for example a husband or wife, either person is entitled to redeem
shares in the account. The Funds assume no responsibility to either person for
actions taken by the other person with respect to an account so registered. The
investment application provides that persons so registering their account
indemnify and hold the Fund harmless for actions taken by either party.
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<PAGE> 23
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 semiannual report. A statement is
mailed to each shareholder at least quarterly.
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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<PAGE> 27
[CAPTION]
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
PAGE
----
<S> <C>
Annual Fund Expense Information.......... 2
Financial Highlights..................... 3
The Trust................................ 7
Investment Objectives and Policies....... 7
Investment Techniques and Investments.... 10
Risk Considerations...................... 13
Management of the Funds.................. 14
How to Buy Shares........................ 16
Shares of Beneficial Interest............ 20
Taxes.................................... 20
Foreign Income Taxes..................... 21
Dividends and Distributions.............. 21
Redemptions.............................. 21
General Information...................... 22
Glossary................................. 24
Investors are advised to read and retain
this Prospectus for future reference.
</TABLE>
(The Reserve Funds logo)
Founders of
"America's First
Money Fund"
810 Seventh Avenue, New York, NY 10019-5868
GENERAL INFORMATION, PURCHASES AND REDEMPTIONS
Call 800-637-1700. Fax 212-977-9897
Distributor -- Resrv Partners, Inc.
RPES 7/96; 9/96
(The Reserve Funds logo)
Founders of
"America's First
Money Fund"
-------------------------------------------------------------------------
----------
-------------------------------------------------------------------------
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RESERVE BLUE CHIP GROWTH FUND
RESERVE CONVERTIBLE SECURITIES FUND
RESERVE EMERGING GROWTH FUND
RESERVE INFORMED INVESTORS
GROWTH FUND
RESERVE INTERNATIONAL EQUITY FUND
RESERVE LARGE-CAP VALUE FUND
RESERVE MID-CAP GROWTH FUND
<PAGE> 28
RESERVE PRIVATE EQUITY SERIES
RESERVE CONVERTIBLE SECURITIES 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 Convertible Securities Fund
("Convertible Securities 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 _________________________________.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Other Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Trustees and Officers of the Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Investment Management and Other Agreements . . . . . . . . . . . . . . . . . . . . . . . . . 5
Portfolio Turnover, Transaction Charges and Allocation . . . . . . . . . . . . . . . . . . . 7
Shares of Beneficial Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Purchase, Redemption and Pricing of Shares . . . . . . . . . . . . . . . . . . . . . . . . . 8
Distributions and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Performance Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
</TABLE>
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<PAGE> 29
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 Convertible Securities 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
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
2
<PAGE> 30
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.
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
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.
3
<PAGE> 31
DEFENSIVE POSITION. For temporary defensive purposes, the Fund may vary from
its investment policy during periods in which conditions in securities markets
or other economic or political conditions warrant. In such circumstances, the
Fund will increase its position in debt securities, which may include
short-term U.S. Government securities and U.S. dollar- or foreign
currency-denominated short-term indebtedness, cash equivalents and fixed-income
securities issued or guaranteed by governmental entities, or by companies or
supranational organizations (e.g., International Bank for Reconstruction and
Development and the European community) rated AA or better by Standard & Poor's
Corporation, or Aa or better by Moody's Investor Service, Inc.; or if not so
rated, of equivalent investment quality as determined by the Adviser. Apart
from periods of defensive investment, the Fund may also at any time temporarily
invest funds awaiting reinvestment or held as reserves for dividends and other
distributions to shareholders in U.S. dollar-denominated money-market
instruments.
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 Global Interaction, Inc., and formerly
served as the Managing Director of Servus Associates, Inc.; 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.
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<PAGE> 32
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.
**Father Harrington is a member of the Board of Directors of Bear, Stearns &
Co.
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.
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<PAGE> 33
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. New Vernon Advisors, Inc., ("Sub-Advisor"), 310 South Street,
P.O. Box 1913, Morristown, NJ 07962, 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 not to exceed .25% of the
average net asset value for Class A shares and 1.00% of the average net asset
value for Class D shares, 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 accountant.
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<PAGE> 34
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.
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
7
<PAGE> 35
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) 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
8
<PAGE> 36
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.
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
9
<PAGE> 37
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:
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
10
<PAGE> 38
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.
Bond Ratings
Moody's Investors Service, Inc.: Aaa -- judged to be the best quality,
carry the smallest degree of investment risk; Aa -- judged to be of high
quality by all standards; A -- possess many favorable investment attributes and
are to be considered as higher medium grade obligations; Baa -- considered as
medium grade obligations which are neither highly protected nor poorly secured.
Moody's Investors Service, Inc. also applies numerical indicators, 1, 2 and 3,
to rating categories Aa through Baa. The modifier 1 indicates that the
security is in the higher end of its rating category; the modifier 2 indicates
a mid-range ranking; and 3 indicates a ranking toward the lower end of the
category.
Standard & Poor's Corporation: AAA -- highest grade obligations,
possess the ultimate degree of protection as to principal and interest; AA --
also qualify as high grade obligations, and in the majority of instances differ
from AAA issues only in small degree; A -- regarded as upper medium grade, have
considerable investment strength but are not entirely free from adverse effects
of changes in economic and trade conditions, interest and principal are
regarded as safe; BBB -regarded as having adequate capacity to pay interest and
repay principal but are more susceptible than higher rated obligations to the
adverse effects of changes in economic and trade conditions. Standard & Poor's
Corporation applies indicators "+", no character, and "-" to the above rating
categories AA through BBB. The indicators show relative standing within the
major rating categories.
Fitch Investors Services, Inc.: AAA -- Securities of this rating are
regarded as strictly high-grade, broadly marketable, suitable for investment by
trustees and fiduciary institutions, and liable to but slight market
fluctuation other than through changes in the money rate; AA -- Securities in
this group are of safety virtually beyond question, and as a class are readily
salable while many are highly active; their merits are not greatly unlike those
of the AAA class, but a security so rated may be of junior though strong lien
- -- in many cases directly following an AAA security -- or the margin of safety
is less strikingly broad; A -- A securities are strong investments and in many
cases of highly active market, but are not so heavily protected as the two
upper classes or possibly are of similar security but less quickly salable; as
a class they are more sensitive in standing and market to material changes in
current earnings of the company.
Commercial Paper Ratings
Moody's Investors Service, Inc.: Commercial paper rated "Prime" carries the
smallest degree of investment risk. The modifiers 1, 2 and 3 are used to
denote relative strength within this highest classification.
Standard & Poor's Corporation: "A" is the highest commercial paper rating
category utilized by S&P which uses the numbers 1+, 1, 2 and 3 to denote
relative strength within its "A" classification.
11
