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Registration Statement Nos.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
....
Post-Effective Amendment No. 19 [X]
....
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 21 [X]
....
(Check appropriate box or boxes.)
...........................................................................
(Exact Name of Registrant as Specified in Charter)
RESERVE PRIVATE EQUITY SERIES
...........................................................................
(Address of Principal Executive Offices) 1250 BROADWAY, NEW YORK, NY 10001-3701
(Zip Code)
Registrant's Telephone Number, including Area Code (212) 401-5500
..........................
.............................................................................
MaryKathleen F. Gaza, Esq.
The Reserve Funds
1250 Broadway
New York, NY 10001-3701
(Name and Address of Agent for Service)
Approximate date of Proposed Public Offering ................................
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on July 3, 2000 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective data for a
previously filed post-effective amendment.
The Commission is requested to send copies of all communications to:
MaryKathleen F. Gaza, Esq.
The Reserve Funds
1250 Broadway
New York, NY 10001-3701
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Title of Securities Being Registered:
Reserve International Small-Cap Fund - Class R
Reserve International Small-Cap Fund - Class I
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RESERVE FUNDS LOGO
Founders of
"America's First Money Fund"
Est. 1970
Reserve Private Equity Series - Reserve International Small-Cap Fund
Prospectus
July 3, 2000
The Reserve International Small-Cap Fund (the "Fund") is a series of the Reserve
Private Equity Series ("Trust") which is a no-load, open-end investment company
offering two classes of shares, Class R and Class I.
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These securities have not been approved or disapproved by the Securities and
Exchange Commission nor has the Commission passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
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TABLE OF CONTENTS
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Page
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Investment Objectives & Principal Strategies................................. 2
Performance History.......................................................... 4
Fees & Expenses of the Fund.................................................. 4
Management................................................................... 5
How to Buy Shares............................................................ 6
Selling Fund Shares.......................................................... 7
Tax Consequences............................................................. 8
General Information.......................................................... 9
Financial Highlights......................................................... 10
Glossary..................................................................... 11
</TABLE>
INVESTMENT OBJECTIVES & PRINCIPAL STRATEGIES
The investment objective of the Fund is not fundamental and may be changed
without the approval of shareholders. The Fund is classified as a
non-diversified mutual fund.
The Reserve International Small-Cap Fund's objective is to seek capital
appreciation through investment in rapidly growing small capitalization
companies resident in non-U.S. countries. 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 investing in unique companies that
have an innovative product or service and are operating in a fast growing
market. These companies often carve out their own niches or create entirely new
markets. Generally, the Fund seeks to invest in foreign equity securities that
are listed on foreign exchanges and issued by companies exhibiting fundamental
characteristics such as high earnings growth, financial strength, and projected
positive cash flow all of which are significant factors in assessing value. When
the Sub-Adviser deems it advisable due to unusual economic, political or market
conditions, the Fund may reduce or eliminate positions in one country and switch
to other countries. The Fund generally focuses on high-quality companies with
high visibility in future sales and earnings growth. Companies in the Fund are
frequently market leaders dominant within their industry and many have a near
monopoly position within their country. Every stock in the Fund's portfolio has
been carefully selected after extensive research and analysis, which often
includes direct contact with company management.
The Fund typically favors companies where management has a significant ownership
stake. The Fund usually avoids conglomerates, cyclicals, and companies that are
affected by commodity prices. In efforts to control risk, the Fund normally
spreads its assets among 40 to 60 companies in 15 to 23 foreign markets with an
initial position in any single issue between 1% and 3% of assets. The Fund will
restrict investment in the combination of warrants and stock options to 5% of
total assets at the time of purchase. Securities are selected for their
long-term investment attractiveness. A three-to-five-year time horizon will be
utilized for a holding period. Since investments are in companies that have
strong earnings growth, the Fund intends to remain as fully invested as is
prudently possible. Therefore, under normal market conditions, the Fund's
investments in cash equivalents will usually not exceed 10% of assets. The Fund
will invest at least 65% of its total assets at the time of purchase in equity
securities of smaller-sized companies whose outstanding shares have an aggregate
market value of $1 billion or less at the time of purchase and spread across at
least three different countries, excluding the U.S., unless the Fund has taken a
temporary defensive position. Short-term profits are not pursued as an
objective, and there is no trading-type activity in stocks.
In the event of a temporary defensive position, the Fund might not be able to
attain its objective.
Principal Investment Strategies. The strategies discussed below are subject to
the specific limitations discussed above.
Cash Equivalents. The Fund may invest in cash equivalents, which are short-term
obligations issued or whose interest and principal are guaranteed by the U.S.
government, or any instrumentalities (including repurchase agreements
collateralized by such securities) and deposit-type obligations of domestic and
foreign banks or their equivalent, and money-market funds. Instruments which are
not rated may also be purchased by the Fund provided the Sub-Adviser, under the
supervision of the Adviser and the Board of Trustees, determines them to be of
comparable quality to those instruments in which the Fund may invest.
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Foreign Securities. The Fund may purchase foreign equity and debt securities,
including foreign government securities and Depository Receipts (including
American Depository Receipts), to an aggregate of not more than 30% of its total
assets at the time of purchase in the securities of issuers of any single
foreign country. Foreign securities markets generally are not as developed or
efficient as those in the U.S. and securities traded there are less liquid and
more volatile than those traded in the U.S.
In making the allocation of assets in foreign markets, the Sub-Adviser 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
these Funds may invest will be traded on foreign stock exchanges or issued by
foreign governments.
The Fund may invest in developing countries, which are in the initial stages of
their conversion from agrarian insular societies to international manufacturing
participants.
Foreign Currency Transactions. The Reserve International Small-Cap Fund may
engage in foreign-currency transactions in connection with its investment in
foreign securities but will not speculate in foreign-currency exchange.. The
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.
Investment Company. The Fund is allowed to invest substantially all of its
assets in other open-end investment management companies with substantially the
same investment objective.
Principal Risks of Investing in the Fund. Investors in the Fund should recognize
that the inherent risks of investing cannot be totally avoided and that there is
no assurance that the investment objective of the Fund will be achieved. While
stocks have historically been a leading choice of long-term investors, they do
fluctuate in price. The risks that the Fund is subject to include those risks
associated with the market in general, as well as the types of securities held.
o As with any mutual fund, the value of the Fund's investments and,
therefore, the value of the Fund's shares, may go up or down, which
means that you could lose money. These changes may occur because the
stock or bond markets are rising or falling, or in response to interest
rate changes. When interest rates go up, the price of debt securities
goes down, and increase in value as interest rates decline. Prices of
longer-term debt securities generally fluctuate more in response to
interest rate changes than do shorter-term securities. This risk is
commonly referred to as "market risk". Consequently, the value of the
Fund's shares will fluctuate with the value of its investments.
o As with any mutual fund, the Fund is not FDIC-insured, does not have
bank guarantees and may lose value.
o As a non-diversified mutual fund, the Fund is permitted to have all its
assets invested in a limited number of issuers. As a result, an
investment in the Fund could entail greater risk than a mutual fund
with a policy of diversification.
o Foreign investing involves special risks, including foreign currency
risk and the possibility of substantial volatility due to adverse
political, economic or other developments. Foreign securities may also
be less liquid and harder to value than U.S. securities. In addition,
investment in developing countries involves exposure to economic
structures that are typically less diverse and mature than in the U.S.,
and to political systems which are less stable The value of the assets
of the 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 the Fund may incur costs in
connection with
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conversions between various currencies. Further, a portion of a Fund's
revenues could be received in foreign currencies and, 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.
o Investing in small 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 price fluctuation than shares of a fund which invests in larger
capitalization companies.
o On January 1, 1999, France, Austria, Germany, Italy, Belgium, Finland,
Ireland, Portugal, Spain, Luxembourg and the Netherlands (eleven
countries in the European Monetary Union) adopted the "euro" as their
official currency. However, their current currencies will continue in
use for cash transactions until January 1, 2002. The euro is expected
to confer some benefits in those markets, such as consolidating the
government debt market for those countries and reducing some currency
risks and costs. But, the conversion to the new currency does pose some
special risks. The Funds will monitor the effects of the conversion on
the value of the Funds' securities. There can be no assurance that
these steps will be sufficient to avoid any adverse impact on the
Funds.
PERFORMANCE HISTORY
Reserve International Small-Cap Fund's registration statement became effective
on July 3, 2000. Therefore, performance information (including annual total
returns and average annual total returns) for a full calendar year is not
available.
For the Fund's current yield, call toll-free 800 637-1700 or visit our web
site at www.reservefunds.com.
FEES & EXPENSES OF THE FUND
As an investor, you pay certain fees and expenses which are described in the
table below in connection with the Fund if you buy and hold shares of the Fund.
This a no-load fund; there are no sales charges (loads) or exchange fees
associated with an investment in the Fund. Annual Fund Operating Expenses are
paid out of the assets of the Fund, so their effect is included in the Fund's
share price.
Shareholder Fees for the Fund*
(Fees paid directly from your investment)
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Sales Load Imposed on Purchases............................................. None
Sales Load Imposed on Reinvested Dividends.................................. None
</TABLE>
Annual Fund Operating Expenses
(Expenses are deducted from Fund assets)
<TABLE>
<CAPTION>
Class R Class I
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<S> <C> <C>
Comprehensive Management Fee 1.55% 1.25%
Distribution (12b-1) Fee 0.25 0.00
Total Annual Fund Operating Expenses 1.80% 1.25%
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</TABLE>
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* The Fund will without prior notice choose to either levy a monthly "small
balance fee" (currently $5) or redeem the account and remit the proceeds on
those Class R shareholder accounts with a monthly average account balance
of less than $2,500 for the past 12 consecutive months with no activity
other than distributions or dividends. Further, A $2 fee will be charged on
Class R redemption checks issued by the Fund of less than $100 and a $100
fee for Class I redemption checks of less than $100,000. A $10 fee will be
charged for Class R wire redemptions of less than $10,000 and a $100 fee
will be charged for Class I wire redemptions of less than $100,000. The
Fund assumes no responsibility for delays in the receipt of wired or mailed
funds.
Example: This example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example should
not be considered indicative of future investment returns and operating expenses
which may be more or less than those shown. This example is based on the annual
fund operating expenses described in the table for the Fund.
This example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
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One Year Three Years
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<S> <C> <C>
Reserve International Equity Fund
Class R....................................... $183 $566
Class I....................................... $127 $397
</TABLE>
Please note that the above example is an estimate of the expenses to be incurred
by shareholders of the Fund. Actual expenses may be higher or lower than those
reflected above. You would pay the same if you did not redeem your shares.
MANAGEMENT
Investment Adviser. Since November 15, 1971, Reserve Management Company, Inc.
("RMCI") 1250 Broadway, New York, NY 10001-3701, a registered investment
adviser, and its affiliates have provided investment advice to The Reserve
Funds. RMCI serves as the investment adviser to the Funds under an Investment
Management Agreement (the "Agreement") with Reserve Private Equity Series (the
"Trust"). The Agreement provides that RMCI will furnish continuous investment
advisory and management services to the Fund. In addition to the Fund, RMCI
provides investment management services to other mutual funds within The Reserve
family of funds and, as of May 31, 2000, had approximately $ 7 billion under
management.
RMCI manages the investment portfolios of the Fund, subject to policies adopted
by the Trustees. For its services, RMCI receives a comprehensive management fee
per year based on the average daily net assets of the Fund. RMCI pays all
employee and customary operating expenses of the Fund. Excluded from the
definition of customary operating expenses are interest, taxes, brokerage fees,
extraordinary legal and accounting fees and expenses, and the fees of the
disinterested Trustees, for which the Fund pays its direct or allocated share.
Sub-Adviser. The Investment Management Agreement and Sub-Investment Management
Agreement ("Sub-Advisory Agreement") provide that the Adviser and the
Sub-Adviser respectively, shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the 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.
Section 15(a) of the 1940 Act requires that all contracts pursuant to which
persons serve as investment advisers to investment companies be approved by
shareholders. As interpreted, this requirement also applies to the appointment
of a Sub-Adviser to the Fund. The SEC, however, has granted conditional
exemptions for the shareholder approval requirements for situations where a fund
utilizes a multi-manager approach to portfolio investing. The Adviser and the
Trust have obtained such an exemption. The Board of Trustees can, without
further shareholder approval, appoint additional or replacement Sub-Advisers,
terminate Sub-Advisers, rehire existing Sub-Advisers whose agreements have been
assigned (and, thus, automatically terminated) and enter into or modify
Sub-Advisory Agreements.
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The Adviser and Trust have retained Pinnacle International Management, LLC.,
which is a registered investment adviser, to sub-advise the Fund.
Pinnacle International Management, LLC, 666 Fifth Avenue, New York, NY 10103,
was established in 1998 and is a subsidiary of Pinnacle Associates, Ltd., which
is the current sub-adviser for the Reserve International Equity Fund. Pinnacle
International currently manages over $600 million for foundations, endowments,
pension funds, family trusts, and religious groups. Mr. Andrew Reitenbach will
serve as the primary portfolio manager of the Reserve International Small-Cap
Fund. Andrew Reitenbach is a Portfolio Manager at Pinnacle International and has
worked as a Securities Analyst since May 1997 with Pinnacle Associates, Ltd. In
addition, Mr. Reitenbach is a member of Pinnacle International's Investment
Committee, which is headed by his father, Nicholas Reitenbach, President and
Chief Investment Officer of Pinnacle International and Senior Vice President of
Pinnacle Associates. Prior to joining Pinnacle International, Mr. Andrew
Reitenbach was a Securities Analyst and Mutual Fund Analyst from January 1995
until May 1997 at Value Line, Inc. As portfolio manager, Mr. Andrew Reitenbach
will be responsible for the day-to-day investment decisions of the Reserve
International Small-Cap Fund.
For their services, PinnacleInternational will receive an annual fee of up to
one-half of the Adviser's net profit for the year before taxes of the Fund. Net
profit is deemed to be the management fee less direct and allocated fund
expenses and all applicable sales and marketing costs. The Adviser may also pay
a Sub-Adviser for marketing assistance.
HOW TO BUY SHARES
You will need to choose a share class before making your initial investment.
Before you choose, you should weigh the impact of all potential costs over the
life of your investment.
Share Price: Net Asset Value. Investors pay no sales charges to invest in the
Fund. The price you pay for a share of the Fund, and the price you receive upon
selling or redeeming a share of the Fund, is called the Fund's net asset value
("NAV") per share. The NAV is calculated by taking the total value of a Fund's
assets, subtracting its liabilities, and then dividing by the number of shares
that have already been issued. The NAV is generally calculated as of the close
of trading on the New York Stock Exchange (usually 4:00 PM Eastern time) every
day the Exchange is open. Your order will be priced at the next NAV calculated
after your order is accepted by the Funds. The Fund's investments are valued
based on market value, or where market quotations are not readily available,
based on fair value as determined in good faith by the Fund's Board of Trustees.
The Fund may use pricing services to determine market value.
Purchase of Shares. For Class R shares, the minimum initial investment is $1,000
(IRA minimum $250) and the minimum subsequent investment is $100. For Class I
Shares, the minimum initial investment is $250,000 and the minimum subsequent
investment is $10,000. The Fund reserves the right, with respect to any person
or class of persons, under certain circumstances to waive or lower investment
minimums. All investments must be in U.S. dollars. Third-party, foreign and
travelers checks, as well as cash investments will not be accepted. An initial
purchase must be accompanied by an Account Application. If no dealer or broker
is named in the Account Application, the Fund's distributor, Resrv Partners,
Inc. ("Resrv"), will act as dealer. Shares of the Fund may be purchased each
business day at NAV determined after receipt of payment and a your properly
completed request, which complies with requirements set forth in "Written and
telephone requests" below, by the Fund or by an investment dealer who has a
sales agreement with Resrv. NAV is not calculated and purchase orders are not
accepted on days the Exchange is closed for holidays (New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day).
o By check--(drawn on a U.S. bank) payable to Reserve Private Equity
Series, 1250 Broadway, New York, NY 10001-3701. You must include your
account number (or Taxpayer Identification Number) on the "pay to the
order of" line for each check. A fee (currently $15) will be imposed if
any check used for investment does not clear and the investor will be
liable for any loss the Fund incurs due to the returned check.
o By wire--Prior to calling your bank, call The Reserve Funds at
800-637-1700 for specific instructions or the Firm from which you
received this Prospectus.
Purchase orders will be confirmed at the NAV calculated after receipt by the
Fund or Firms (who promptly transmit orders to the Fund) of payment. Checks and
wires which do not correctly identify the account to be credited may be returned
or delay the purchase of shares. Only federal funds wires and checks are
eligible for entry as of the business day received. For federal funds wires to
be eligible for same-day order entry, the Fund must be notified of the amount to
be transmitted and the account must be credited before
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4:00 PM (Eastern time). Orders received by the Fund or the Firms after 4:00 PM
(Eastern time) will be priced at the NAV in effect at 4:00 PM (Eastern time) on
the next business day.
Reserve Private Equity Series Automatic Asset-Builder Plan. (Class R shares
only). If you have an account balance of $5,000 or more, you may purchase shares
of a Fund ($25 suggested minimum) from a checking, NOW, or bank money-market
deposit account or from a U.S. government distribution ($25 suggested minimum)
such as social security, federal salary, or certain veterans' benefits, or other
payment from the federal government. You may also purchase shares automatically
by arranging to have your payroll deposited directly into your Reserve account.
Please call the Fund at 800-637-1700 for an application.
Individual Retirement Accounts. (Class R only). Investors may use the Fund as an
investment for Individual Retirement Accounts ("IRAs"). A master IRA plan with
information regarding administration fees and other details is available from
the Funds.
Third-party Investments. Investments made through a third party (rather than
directly with Reserve) such as a broker-dealer or financial institution may be
subject to policies and fees different than those described here. Banks,
brokers, 401(k) plans, financial advisers and financial supermarkets may charge
transaction fees and may set different minimum investments or limitations on
buying or selling shares. Investors should consult a representative of the plan
or financial institution if in doubt.
Distributor. The Fund's distributor is Resrv Partners, Inc., 1250 Broadway, New
York, NY 10001-3701.
Distribution Arrangements. The Fund has adopted a Rule 12b-1 plan which allows
the Fund to pay distribution fees for the sale and distribution of its shares.
The maximum level of distribution expenses is 0.25% per year of the Fund's
average net assets. As these fees are paid out of the Fund's assets on an
on-going basis, over time these fees will increase the cost of your investment
and may cost you more than paying other types of sales charges. Due to these
distribution expenses, long-term shareholders may pay more than the economic
equivalent of the maximum front-end sales charge permitted by the National
Association of Securities Dealers, Inc.
Small Balances. (Class R only). Because of the expense of maintaining accounts
with small balances, the Funds will without prior notice choose to either levy a
monthly charge (currently $5) or redeem the account and remit the proceeds
on those accounts with a monthly average account balance of less than $2,500 for
the past 12 consecutive months with no activity other than distributions or
dividends. The minimum balance requirement will be waived if the account balance
drops below $2,500 due to market depreciation. Some brokers, financial
institutions and financial intermediaries ("Firms") may establish variations of
minimum balances and fee amounts, if those variations are approved by the Fund.
SELLING FUND SHARES
You may sell shares at any time. Shares will be sold at NAV determined after the
redemption request is received by the Fund. Redemptions may be effected during
regular business days from 9:00 AM to 4:00 PM (Eastern time). Redemption
requests received after the close of business will be effected at the next
calculated NAV. Orders will be processed promptly and investors will generally
receive the proceeds within a week after receiving your properly completed
request. A shareholder can receive a redemption by check or bank wire. A $2 fee
will be charged on Class R redemption checks issued by the Fund of less than
$100 and a $100 fee for Class I redemption checks of less than $100,000. A $10
fee will be charged for Class R wire redemptions of less than $10,000 and a $100
fee will be charged for Class I wire redemptions of less than $100,000. The Fund
assumes no responsibility for delays in the receipt of wired or mailed funds.
When selling recently purchased shares, please be aware that if the Fund has not
yet collected payment for the shares you are selling, it may delay sending the
proceeds for up to eight business days or until it has collected payment (but
not more than 15 business days).
Written and telephone requests. Redemption instructions and options should be
specified when your account is opened. Subsequent elections and changes must be
in writing with the signature(s) guaranteed. Changes in registration or
authorized signatories may require additional documentation. One way to redeem
shares is to write a letter of instruction which states: the name(s) and
signature(s) of all accountholders (signature(s) guaranteed, if necessary),
account number, Fund name, the dollar amount you want to sell, and how and where
to send the proceeds. If you are redeeming your IRA, please note the applicable
withholding requirements.
Certain situations require written instructions along with signature guarantees.
These include:
(1) redemptions for more than $5,000, if redemption proceeds are not
being sent to the shareholder's designated bank or brokerage
account; or
(2) redemptions on accounts whose address has been changed within the
past 30 days; or
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(3) redemptions to be sent to someone other than the account owner or
the address of record for the past 30 days; or
(4) redemptions to be sent to an alternate address.
You may redeem by calling the Fund at 800-637-1700. Unless you decline telephone
privileges on your application and the Fund fails to take reasonable measures to
verify the request, the Fund will not be liable for any unauthorized telephone
redemption, or for any loss, cost or expense for acting upon an investor's
telephone instructions. You are only allowed to make one telephone redemption in
a 30-day period. Telephone redemptions may be sent to the bank or brokerage
account designated by the shareholder on the application or in a letter with
signature guarantee. 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 Fund, it is necessary to send a written
request to the Funds with signature(s) guaranteed. The Fund reserves the right
to refuse a telephone redemption if it reasonably believes that the instructions
are not genuine and/or it is advisable to do so.
Signature guarantees are designed to protect both you and the Fund from fraud.
Signature guarantees can be obtained from most banks, credit unions or savings
associations, or from broker/dealers, national securities exchanges or clearing
agencies deemed eligible by the Securities and Exchange Commission. Notaries
public cannot provide signature guarantees.
Exchange Privilege. Investors can exchange all or some of their shares for
shares in other Reserve equity or money-market funds. Investors can request an
exchange in writing or by telephone. Be sure to read the current Prospectus for
any Fund into which you are exchanging. Any new account established through an
exchange will have the same privileges as the original account (as long as such
privileges are available).
Other Automatic Services. (Class R only). Certain other services and
restrictions for selling shares automatically are offered by the Funds.
Redemptions through Brokers and Financial Institutions. Redemptions through
brokers and financial institutions may involve such Firms' own redemption
minimums, services fees, and other redemption requirements.
Other. The Fund also reserves the right to make a "redemption in kind" (payment
in portfolio securities rather than cash), without notice, if the amount the
investor is redeeming is large enough to affect a Fund's operations (for
example, if it equals more than 1% of the Fund's assets). Further, the Fund
reserves the right to:
o refuse any purchase or exchange request,
o change or discontinue its exchange privilege,
o change its minimum investment amounts, and
o delay sending out redemption proceeds for up to seven days
(generally applies only in cases of very large redemptions,
excessive trading or during unusual market conditions).
TAX CONSEQUENCES
The following discussion is intended as general information only and does not
apply to tax-deferred accounts, nor is it a complete analysis of the federal tax
implications of investing in the Funds. Because everyone's tax situation is
unique, you should consult your own tax advisor(s) with regard to the
application of state and local tax laws with regard to the federal tax
consequences of the purchase, ownership, or disposition of Fund shares. Further,
the applicable tax laws which affect the Funds and their shareholders are
subject to change, which may be retroactive.
The 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 taxable income and net capital gains are distributed. However, it
is possible that events could occur which could cause the Fund to incur some
U.S. taxes. Each Fund will distribute most of its net investment income and net
capital gains to is shareholders each year. A particular distribution generally
will be taxable as ordinary income or long-term capital gains. It does not
matter how long you have held your Fund shares or whether you choose to receive
your distributions in cash or reinvest them in additional Fund shares. All
dividends and capital gains distributions, if any, are paid in the form of
additional shares credited to an investor's account at NAV unless the
shareholder has requested on the Account Application or in writing to the Fund
one of the following three options:
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(1) Distribute capital gains in cash and reinvest income dividends.
(2) Distribute income dividends in cash and reinvest capital gains.
(3) Distribute both income dividends and capital gains in cash.
Dividends declared by the Fund in October, November or December and paid during
the following January may be treated as having been received by the shareholders
in the year the distributions were declared.
You will receive an annual account statement documenting your dividend and
capital gains distributions. If you invest through a tax-deferred account, such
as a retirement plan, you generally will not pay tax on dividends until they are
distributed from the account. These accounts are subject to complex tax rules,
and you should consult your tax advisor.
As with any investment, you should consider the tax consequences of investing in
the Fund. Any time you sell or exchange shares of a fund in a taxable account,
it is considered a taxable event. Depending on the purchase price and the sale
price, you may have a gain or loss on the transaction. Any tax liabilities
generated by your transactions are your responsibility.
Further, investments in stock or securities of foreign corporations may incur
foreign income taxes, including foreign taxes withheld at the source. If certain
statutory requirements are met, the Fund which incurs foreign income taxes may
make an election which has the effect of causing a U.S. shareholder to include
in income and treat as if paid by such shareholder his or her pro rata share of
such foreign income taxes, for which the U.S. shareholder may be able to claim a
tax deduction or tax credit. There can be no assurance that the Fund will meet
the requirements or elect to pass through its foreign income taxes to its
shareholders. Prospective investors should consult their own tax advisors with
regard to the federal tax consequences of the purchase, ownership, or
disposition of Fund shares.
Backup Withholding. As with all mutual funds, the Fund may be required to
withhold U.S. federal income tax at the rate of 31% of all taxable distributions
payable to certain shareholders who fail to provide the Fund with their correct
taxpayer identification number ("TIN") or to make required certifications, or
who have been notified by the Internal Revenue Service that they are subject to
backup withholding. However, special rules apply for certain accounts. Backup
withholding is not an additional tax. Any amounts withheld may be credited
against the shareholder's U.S. federal income tax liability. Shareholders should
be aware that the Fund may be fined $50 annually by the IRS for each account for
which a certified TIN is not provided or is incorrect. In the event that such a
fine is imposed with respect to an account in any year, a corresponding charge
will be made against the account. The Funds will not accept purchase orders for
accounts for which a correct and certified TIN is not provided or which is
otherwise subject to backup withholding, except in the case of certain
non-resident alien account holders.
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 Fund assumes no responsibility to either owner for
actions taken by the other with respect to an account so registered. The
Application provides that persons who register their account indemnify and hold
the Fund harmless for actions taken by either party.
Reserve Easy Access and On-line Access. Easy Access is The Reserve Funds'
24-hour toll-free telephone service that lets customers use a touch-tone phone
for a variety of options, which include NAV, account balances and other options.
To use it, call 800-637-1700 and follow the instructions. Clients may also
access current price information on the Internet through On-line Access at
www.reservefunds.com.
Inquiries. Shareholders should direct their inquiries to The Reserve Funds or
the Firm from which they received this Prospectus.
Special Shareholder Services. The Fund reserves the right to charge shareholder
accounts for specific costs incurred in processing unusual transactions. Such
transactions include, but are not limited to, copies of redemption checks,
copies of account statements and special research services.
Account Statements. Shareholders are advised to retain all account statements.
An account statement is sent to each shareholder at least quarterly.
Shareholders have a duty to examine their account statements and report any
discrepancies to The Reserve Funds
9
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immediately. Failure to do so could result in the shareholder suffering a loss.
Shareholder Communications. The Fund may choose not to send duplicate
shareholder communications, such as the Prospectus and Annual Report, to related
accounts at a common address, unless instructed to the contrary by you.
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FINANCIAL HIGHLIGHTS
The Reserve International Small-Cap Fund's registration statement did not become
effective until July 3, 2000.
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GLOSSARY
The following terms might be helpful in understanding certain concepts in making
an investment decision about the Fund:
Equity Securities (sometimes referred to as "equities") are ownership interests
possessed by the holders and include (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.
American Depository Receipt ("ADR") is a receipt for the shares of a foreign
corporation held in the vault of a U.S. bank which entitles the holder to all
dividends and capital gains. What this means is Americans can buy shares of a
foreign corporation normally traded in an overseas market in the U.S.
Debt Securities are securities representing money borrowed that must be repaid
having a fixed amount, a specific maturity or maturities, and usually a specific
rate of interest or an original purchase price. These include such things as:
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
which includes floating rate and variable rate instruments.
U.S. Government Securities are securities issued or guaranteed by the U.S.
government, its agencies or its instrumentalities.
Foreign Government Securities are securities issued or guaranteed by
governments, quasi-governmental entities, governmental agencies or other
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.
1940 Act is the Investment Company Act of 1940 which sets the standards that all
mutual funds must follow.
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This Prospectus contains the information about the Fund, which a prospective
investor should know before investing.
The Statement of Additional Information ("SAI") contains additional and more
detailed information about the Fund, and is considered part of this Prospectus.
Our Annual and Semi-Annual Reports list the holdings in the Fund, describe Fund
performance, include financial statements for the Funds, and discuss market
conditions and strategies that significantly affected the Fund's performance.
These documents may be obtained without charge by writing to the address below
or calling The Reserve Funds at 800-637-1700. You can download the documents
from the EDGAR database of the SEC's web site (http://www.sec.gov) or, you can
obtain copies by visiting the SEC's Public Reference Room in Washington, DC
(1-202-942-8090) or, by electronic mail request sent to [email protected] or,
by sending your request and duplicating fee to the SEC's Public Reference
Section, Washington, DC 20549-6009.
Investors are advised to read and retain this
Prospectus for future reference
[THE RESERVE FUNDS LOGO]
Founders of "America's First
Money Fund"
1250 Broadway, New York, NY 10001-3701
212-401-5500
General Information and 24-Hour Price and
Performance Information
800-637-1700 - www.reservefunds.com
Distributor - Resrv Partners, Inc.
RPES/INT_SC - 07/00
SEC File Number
Reserve Private Equity Series
811-7734
Reserve Private
Equity Series
Prospectus
July 3, 2000
13
<PAGE>
RESERVE PRIVATE EQUITY SERIES
1250 BROADWAY, NEW YORK, N.Y. 10001-3701
212-401-5500 or 800-637-1700
24-Hour Yield and Balance Information
Nationwide 800-637-1700 - www.reservefunds.com
Reserve Private Equity Series - Reserve International Small-Cap Fund
Statement of Additional Information
This Statement of Additional Information ("SAI") describes the Reserve
Private Equity Series ("Trust" or "RPES") - Reserve International Small-Cap
Fund. The Trust was organized as a Delaware business trust under the laws of the
State of Delaware on April 22, 1993. The Trust is an open-end management
investment company registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), and is authorized to issue multiple classes of shares
and series. At the date of the Prospectus and SAI, the Trust consists of seven
Funds: Reserve Blue Chip Growth Fund; Reserve Informed Investors Growth Fund;
Reserve International Equity Fund; Reserve International Small-Cap Fund, Reserve
Large-Cap Growth Fund, Reserve Small-Cap Growth Fund and Reserve Strategic
Growth Fund (each a "Fund" and collectively, the "Funds"). Each Fund issues two
classes of shares designated as Class R and Class I. Class R shares are designed
for purchase by retail investors and Class I shares are designed to meet the
specific and unique needs of institutional investors. Each Fund is a separate
investment portfolio or series and is classified as a non-diversified series of
the Trust. This SAI is not a Prospectus, but provides detailed information to
supplement the Prospectus, dated July 3, 2000 and should be read in conjunction
with it and its supplements, if any. A copy of the Prospectus may be obtained
without charge by writing or calling the Trust at the address or telephone
number shown above. The Securities and Exchange Commission ("SEC") maintains a
web site (http://www.sec.gov) that contains the SAI, Prospectus, material
incorporated by reference, and other information regarding the Funds
electronically filed with the SEC. This SAI is dated July 3, 2000.
TABLE OF CONTENTS PAGE
----
Investment Objectives, Strategies and Risks.... 2
Management of the Trust........................ 7
Investment Management Distribution and
Custodian Agreements.......................... 10
Information About the Trust.................... 11
How to Buy and Sell Shares..................... 12
Dividends, Distributions and Taxes............. 15
Performance Information........................ 18
General Information............................ 18
Financial Statements........................... 18
---------
Shares of the Fund 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.
---------
<PAGE>
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
The Reserve International Small-Cap Fund's objective is to seek capital
appreciation through investment in rapidly growing small capitalization
companies resident in non-US countries. Any production of income is secondary to
this objective. However in seeking to achieve the investment objective of the
Fund, the strategies employed, while consistent with the Fund's investment
program, may subject the Fund to certain risks. The following discussion of
investment strategies and risks supplements and should be read in conjunction
with the investment information set forth in the Fund's Prospectus. The
investment objectives are not fundamental and may be changed by the Board of
Trustees ("Trustees") without the approval of shareholders.
Non-Diversified Mutual Fund. The Fund is classified as a non-diversified mutual
fund; the Fund is permitted to have all its assets invested in a limited number
of issuers. Market conditions, interest rates, economic or regulatory
developments could significantly affect a single industry, a group or related
industries or a specific issuer more adversely than other securities in the
market as a whole. As a result, an investment in the Fund could entail greater
risks than a mutual fund with more diversified holdings.
Securities of U.S. Government Agencies and Instrumentalities. The 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 U.S. government. In the case of securities not backed by the full
faith and credit of the U.S. government, the Fund 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.
The Fund may also invest in component parts of these securities or
instruments collateralized thereby, namely either the principal of such
obligations (principal only or "PO" class) or one of the interest payments
scheduled to be paid on such obligations (interest only or "IO" class). These
obligations may take the form of (i) obligations from which the interest coupons
have been stripped; (ii) the interest coupons that are stripped; (iii) book
entries at a Federal Reserve member bank representing ownership of obligation
components; or (iv) receipts evidencing the component parts (principal or
interest) of U.S. government obligations that have not actually been stripped.
Such receipts evidence ownership of component parts of U.S. government
obligations purchased by a third party (typically an investment-banking firm)
and held on its behalf by a major commercial bank or trust company pursuant to a
custody agreement. A "stripped security" issued by an investment-banking firm or
other private organization is not considered to be a U.S. government security.
Cash Equivalents. The Fund may invest in cash equivalents, which are short-term
obligations issued or whose interest and principal are guaranteed by the U.S.
government or any instrumentalities (including repurchase agreements
collateralized by such securities) and deposit-type obligations of domestic and
foreign banks or their equivalent, and money-market funds. Instruments which are
not rated may also be purchased by the Fund provided the Sub-Adviser, under the
supervision of the Adviser and the Board of Trustees, determines them to be of
comparable quality to those instruments in which the Fund may invest. Further,
the Fund at any time may temporarily invest monies awaiting reinvestment or held
as reserve for dividends and other distributions to shareholders in U.S. dollar
denominated money-market funds.
Depository Receipts. Reserve International Small-Cap Fund may make investments
through the purchase and sale of American Depository Receipts ("ADRs"), Global
Depository Receipts ("GDRs") and other types of depository receipts
(collectively, "DRs"). 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. 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 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 supranational entities
such as the World Bank or the European Investment Bank.
The Fund may purchase DRs whether they are "sponsored" or "unsponsored."
"Sponsored" DRs are issued jointly by the issuer of the underlying security and
a depository, whereas "unsponsored" DRs are issued without participation of the
issuer of the deposited security. Generally, holders of unsponsored DRs bear all
the costs of such facilities and the depository of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer or pass through voting rights to the holders of such
receipts in respect of the deposited securities. Therefore, there may not be a
correlation between information concerning the issuer of the security and the
market value of an unsponsored DR.
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<PAGE>
It should be further noted that DRs may result in a withholding tax by the
foreign country of source, which will have the effect of reducing the income
distributable to shareholders. The Fund may invest in DRs that may not
necessarily be denominated in the same currency as the underlying securities
into which they may be converted.
Repurchase Agreements. When the Fund enters into a repurchase agreement, it
purchases securities from a bank or broker-dealer which simultaneously agrees to
repurchase the securities at a mutually agreed upon time and price, thereby
determining the yield during the term of the agreement. As a result, a
repurchase agreement provides a fixed rate of return insulated from market
fluctuation during the term of the agreement. The term of a repurchase agreement
generally is short, possibly overnight or for a few days, although it may extend
over a number of months (up to one year) from the date of delivery. Repurchase
agreements will be fully collateralized and the collateral will be
marked-to-market daily. Although the Fund will limit repurchase agreements to
those securities dealers who are deemed credit worthy pursuant to guidelines
adopted by the Trustees and Sub-Advisers will follow procedures to assure that
all repurchase agreements are always fully collateralized as to principal and
interest, a bankruptcy or default of a counter party may occur. In the event of
bankruptcy or other default by the seller of the security under a repurchase
agreement, the Fund may suffer time delays and incur costs or possible losses in
connections with the disposition of collateral. In such event, instead of the
contractual fixed rate of return, the rate of return to the Fund would be
dependent upon intervening fluctuations of the market value of the underlying
security and the accrued interest on the security. Although the Fund would have
rights against the seller for breach of contract with respect to any losses
arising from market fluctuations following the failure of the seller to perform,
the ability of the Funds to recover damages from a seller in bankruptcy or
otherwise in default would be reduced.
Convertible Securities. The Reserve International Small-Cap Fund may invest in
convertible securities. Convertible securities have speculative
characteristics and share some of the same characteristics of lower-rated
securities. For example, sustained periods of deteriorating economic conditions
or 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. Convertibles are generally debt securities or preferred
stocks that may be converted into common stocks. 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.
Rights And Warrants. Reserve International Small-Cap Fund may 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. A warrant
gives the Fund the right to buy a quantity of stock. The warrant specifies the
amount of underlying stock, the purchase (or "exercise") price, and the date the
warrant expires. The Fund has no obligation to exercise the warrant and buy the
stock. A warrant has value only if the Fund exercises or sells it before it
expires; however, some warrants are traded on national exchanges. If the price
of the underlying stock does not rise above the exercise price before the
warrant expires (or is sold), the warrant generally expires without any value
and the Fund loses any amount it paid for the warrant. 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
the passage of time or due to a change in the perception as to the potential of
the underlying security. Further, a warrant may become worthless if the value of
the underlying market price of the underlying security falls below the exercise
price set forth in the warrant on the expiration date.
Securities Of Foreign Companies. Reserve International Small-Cap Fund may invest
in foreign securities which may result in greater risk than that incurred by
investing in domestic securities. There is generally less publicly available
information about foreign companies compared to reports and ratings that are
published about companies in the U.S.
It is contemplated that most foreign securities will be purchased in
over-the-counter markets or on stock exchanges located in the countries in which
the respective principal offices of the issuers of the various securities are
located, if that is the best available market. Foreign stock and bond markets
are generally not as developed or efficient as those in the U.S. While growing
in volume, the markets usually have substantially less volume than the U.S.
markets and the securities are less liquid and more volatile than securities of
comparable U.S. companies. Commissions on foreign securities are generally
higher than commissions on U.S. markets; nevertheless the Fund will endeavor to
achieve the most favorable net results on its portfolio transactions. In
addition, there is generally less government supervision and regulation of
foreign stock exchanges, brokers and listed companies than in the U.S.
With respect to certain foreign countries, there is the possibility of
adverse changes in investments or exchange control regulations, expropriation or
confiscatory taxation, limitations on the removal of funds or other assets of
the Fund, political or social instability, or diplomatic developments, which
could affect U.S. investments in those countries. Moreover, individual foreign
economies may differ favorably or unfavorably from the U.S. economy in such
respects as growth of gross national product, rate of inflation, capital
3
<PAGE>
reinvestment, resource self-sufficiency and balance of payments.
The dividends and interest payable on certain of the Fund's foreign
securities may be subject to foreign withholding taxes, thus reducing the net
amount of income available for distribution to the Fund's shareholders.
Shareholders otherwise subject to U.S. federal income taxes may, subject to
certain limitations, be entitled to claim a credit or deduction for U.S. federal
income tax purposes for their proportionate share of such foreign taxes paid by
the Fund.
Foreign Currency Transactions. 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.
Options Transactions. An exchange-traded option position may be closed out only
on a national securities exchange ("Exchange") which provides a secondary market
for an option of the same series. Although the Fund will generally purchase or
write only those options for which there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an Exchange will
exist for any particular option at any particular time, and for some
exchange-traded options, no secondary market on an Exchange may exist. In that
event, it might not be possible to effect closing transactions in particular
options with the result that a Fund would have to exercise its exchange-traded
options in order to realize any profit and may incur transaction costs as a
result. If a Fund, as a covered call option writer, is unable to effect a
closing purchase transaction in a secondary market, it will not be able sell the
underlying security until the option expires or it delivers the underlying
security upon exercise.
Reasons for the absence of a liquid secondary market on an Exchange include
the following: (a) insufficient trading interest in certain options; (b)
restrictions on transactions imposed by an Exchange; (c) trading halts,
suspension or other restrictions imposed with respect to particular classes or
series of options or underlying securities; (d) interruption of the normal
operations on an Exchange; (e) inadequacy of the facilities of an Exchange or
the Options Clearing Corporation ("OCC") to handle current trading volume; or
(f) a decision by one or more Exchanges to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on the Exchange (or in the class or series of options) would cease to
exist, although outstanding options on that Exchange that had been issued by the
OCC as a result of trades on that Exchange would generally continue to be
exercisable in accordance with their terms.
In the event of the bankruptcy of a broker through which the Fund engages in
options transactions, the Fund could experience delays and/or losses in
liquidating open positions purchased or sold through the broker and/or incur a
loss of all or part of its margin
4
<PAGE>
deposits with the broker. Similarly, in the event of the bankruptcy of the
writer of an over-the-counter option with a recognized U.S. securities dealer
("OTC option") purchased by the Fund, the Fund could experience a loss of all or
part of the value of the option. Transactions are entered into by the Fund only
with brokers or financial institutions deemed creditworthy by the Adviser and/or
Sub-Adviser.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the option markets
close before the market for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be reflected
in the option markets.
Put and Call Options on Specific Securities. The Fund may write and sell covered
put option contracts to the extent of 25% of the value of their total assets at
the time such option contracts are written. However, the Reserve International
Small-Cap Fund may invest only 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.
There is no limitation on the amount of call options the 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. 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 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 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 underlying security at
the exercise price. If a call written by the Fund is exercised, the Fund forgoes
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 Fund may be required to take delivery of
the underlying security or other asset at a disadvantageous price. Also, an
option purchased by the Fund may expire worthless, in which case the Fund would
lose the premium they paid.
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 Fund 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 Fund will only write covered options. An option is covered so long as the
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.
Lending Of Securities. The Fund may, to increase its income, lend its securities
to brokers, dealers and institutional investors if the loan is collateralized in
accordance with applicable regulatory requirements (the "Guidelines") and if,
after any loan, the value of the securities loaned does not exceed 25% of the
value of its assets. Under the present Guidelines, the loan collateral must, on
each business day, at least equal the value of the loaned securities and must
consist of cash, bank letters of credit or securities of the U.S. government or
its agencies or instrumentalities. To be acceptable as collateral, letters of
credit must obligate a bank to pay amounts demanded by a 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. A Fund may also pay reasonable finders, custodian
and administrative fees. Loan arrangements made by a Fund will comply with all
other applicable regulatory requirements including the rules of the New York
Stock Exchange ("NYSE"), which require the borrower, after notice, to redeliver
the securities within the normal settlement time of three (3) business days.
While voting rights may pass with the loaned securities, if a material event
will occur affecting an investment on loan, the loan must be called and the
securities voted. In connection with a loan of securities, the 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.
Illiquid Securities. The Fund may hold up to 15% of its net assets in securities
for which a liquid trading market does not exist and, therefore, may not be able
to readily sell such securities. This includes securities that are not readily
marketable, such as securities that are subject to legal or contractual
restrictions on resales, repurchase agreements providing for maturity in more
than seven (7) days, 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 ("SEC") 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 Trustees
5
<PAGE>
Purchased over-the-counter ("OTC") options and the assets used as cover for
written OTC options will be treated as illiquid securities so long as the staff
of the Securities and Exchange Commission maintains its position that such
securities are illiquid. However, the Fund may treat a certain portion of the
securities it uses as cover for written OTC options as liquid provided it
follows a specified procedure. The Fund may sell OTC options only to qualified
dealers who agree that the Fund may repurchase any options it writes for a
maximum price to be calculated by a predetermined formula. In such cases, OTC
options would be considered liquid only to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the option.
The Sub-Advisers will monitor the liquidity of such restricted securities under
the supervision of the Adviser and Trustees.
Generally, mutual funds do not typically hold a significant amount of
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. The Fund might be unable to dispose
of such illiquid securities promptly or at reasonable prices and might thereby
experience difficulty satisfying redemptions within seven (7) days.
Many of the foreign countries in which the Fund invests do not have a
Securities Act similar to the U.S. 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.
Rule 144A Securities. Rule 144A Securities are securities that may be sold only
in broker transaction without registration pursuant to Rule 144A under
Securities Act of 1933, as amended. The Fund may invest in securities that are
restricted as to resale, but which are regularly traded among qualified
institutional buyers because they are exempt under Rule 144A from the
registration requirements of the 1933 Act. The Trustees of the Trust has
instructed the Adviser to consider the following factors in determining the
liquidity of security purchased under Rule 144A: (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). Although having
delegated the day-to-day functions, the Trustees will continue to monitor and
periodically review the Adviser's selection of Rule 144A securities, as well as
the Adviser's determination as to their liquidity. Investing in securities under
Rule 144A could affect the Fund's liquidity to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
securities.
Fundamental Policies. The Fund has adopted as fundamental policies the following
limitations on its investment activities. These fundamental policies may not be
changed without the affirmative vote of a majority of the outstanding shares of
a Fund, as defined in the Investment Company Act of 1940 ("1940 Act"). A
majority of the outstanding shares of a Fund means the vote of the lesser of (i)
67% or more of the shares of a Fund present at a meeting, if the holders of more
than 50% of the outstanding shares of the Fund are present or represented by
proxy, or (ii) more than 50% of the outstanding shares of the Fund. The Fund may
not:
(1) borrow money except as a temporary measure for extraordinary or emergency
purposes and then only in an amount not to exceed 33 1/3% of the market
value of its assets;
(2) issue senior securities as defined in the 1940 Act except that each Fund may
borrow money in accordance with limitation (1);
(3) act as an underwriter with respect to the securities of others except to the
extent that, in connection with the disposition of portfolio securities, it
may be deemed to be an underwriter under certain federal securities laws;
(4) invest 25% or more of the value of its total assets in the securities of
issuers in any particular industry;
(5) purchase, sell or otherwise invest in real estate or commodities or
commodity contracts except each 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; and
(6) purchase securities on margin, except to obtain such short-term credits as
may be necessary for the clearance of transactions;
<PAGE>
however, each Fund may make margin deposits in connection with options and
financial futures transactions.
Notwithstanding the foregoing investment restrictions, the Fund may invest
substantially all of its assets in another open-end investment company with
substantially the same investment objective as the Fund. As a matter of
operating policy with respect to investing for control of portfolio companies,
the Fund may not invest for the purpose of exercising control. While the Fund
has no current intention of investing in companies for the purposes of obtaining
or exercising control, the Fund may do so upon the approval of the Trustees.
The Fund has reserved the right to purchase and write interest rate futures
contracts and put and call options on interest rate futures contracts. The Fund
does not intend to use these techniques for the foreseeable future and
shareholders will be given notice should the Fund determine that they will be
used.
As non-diversified companies, the Fund is permitted to invest all of its
assets in a limited number of issuers. However, the Fund intends to comply with
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), in
order to qualify as a regulated investment company for federal income tax
purposes. To 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.
Borrowing may subject a Fund to interest costs, which may exceed the interest
received on the securities purchased with the borrowed funds. A Fund normally
may borrow at times to meet redemption requests rather than sell portfolio
securities to raise the necessary cash. Borrowing can involve leveraging when
securities are purchased with the borrowed money. To avoid this, each Fund will
not purchase securities while borrowings are outstanding.
Temporary 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 could increase its position in debt securities, which
may include U.S. government securities, qualifying bank deposits, money-market
instruments and other types of short-term debt securities including notes and
bonds including, but not limited to, 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 ("S&P"), or Aa or better by Moody's Investor Service, Inc.
("Moody's"); or if not so rated, of equivalent investment quality as determined
by the Adviser.
Portfolio Turnover, Transaction Charges and Allocation. The annual portfolio
turnover rate of the Fund is not expected to exceed 100% under normal market
conditions. Turnover rate is the lesser of purchases or sales of portfolio
securities for a year (excluding all securities with maturities of one year or
less) divided by the monthly average of the market value of such securities.
Subject to the overall supervision of the officers of the Trust, its
Trustees, and the Adviser, the Sub-Adviser places all orders for the purchase
and sale of their respective 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 a 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 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 1940 Act.
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.
7
<PAGE>
MANAGEMENT OF THE TRUST
The Trustees are responsible for the management and supervision of the Trust.
The Trustees approve all significant agreements between the Trust and those
companies that furnish services to the Trust.
Trustees and executive officers of the Trust, together with information as to
their principal business occupations during at least the last five years, are
shown below:
*++BRUCE R. BENT, 63, Chairman/Chief Executive Officer and Trustee, 1250
Broadway, New York, NY 10001-3701.
Mr. Bent is Chairman/Chief Executive Officer 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 and Chairman/Chief Executive Officer of Reserve Management
Company, Inc. ("RMCI") and Reserve Management Corporation ("RMC"); and Chairman
and Director of Resrv Partners, Inc. ("RESRV").
Mr. Bent co-founded The Reserve Funds in 1970 and has been an executive
officer since then.
*++BRUCE R. BENT II, 34, President, Assistant Treasurer and Trustee, 1250
Broadway, New York, NY 10001-3701.
Mr. Bent II joined The Reserve Funds in 1992 and is President and Assistant
Secretary and Trustee of RF, RIT, RTET, RNYTET and RPES. Mr. Bent II is also
President, Secretary and Assistant Treasurer of RMCI; Senior Vice President,
Secretary and Assistant Treasurer of RMC; and, Secretary and Director of RESRV.
+EDWIN EHLERT, JR., 69, Trustee, 125 Elm Street, Westfield, NJ 07091.
Mr. Ehlert is President and Director of Ehlert Travel Associates, Inc.
(travel agency) and Ehlert Travel Associates of Florida, Inc. (travel agency),
and Trustee of RF, RIT, RTET, RNYTET and RPES.
+HENRI W. EMMET, 74, Trustee, 1535 Presidential Drive, Apt. 4A, Columbus, OH
43212.
Mr. Emmet retired as the Managing Director of Servus Associates, Inc. in 1994
and U.S.A. Representative of the First National Bank of Southern Africa in 1996.
Since 1995, Mr. Emmet has served as a Principal of Global Interaction, which
provides consulting services to international banking interests. He is currently
Trustee of RF, RIT, RTET, RNYTET and RPES.
+PATRICK J. FOYE, 43, Trustee, c/o AIMCO, 2000 S. Colorado Blvd., Tower Two,
Suite 2-1000, Denver, CO 80222. From 1995 to present, Mr. Foye has been the
Deputy Chairman of Long Island Power Authority. In addition, Mr. Foye is
Executive Vice President of Apartment Investment and Management Company
("AIMCO"), a real estate investment trust and the nation's largest owner and
manager of multi-family apartment properties. He was a partner from 1989 through
1998 in the law firm of Skadden, Arps, Slate, Meagher & Folm LLP, as well as a
managing partner in the firm's offices in Moscow, Budapest, and Brussels from
1992 through 1994. Mr. Foye is a member of Governor Pataki's New York State
Privatization Research Council. He is currently a Trustee of RF, RIT, RTET,
RNYTET and RPES.
+DONALD J. HARRINGTON, C.M., 55, Trustee, St. John's University, Grand Central &
Utopia Parkways, Jamaica, NY 11439.
The Reverend Harrington is President of St. John's University, NY, and a
Director of the Bear Stearns Companies, Inc. (financial institution) since 1993.
He is currently a Trustee of RF, RIT, RTET, RNYTET and RPES.
+WILLIAM J. MONTGORIS, 53, Trustee, 286 Gregory Road, Franklin Lakes, NJ 07417.
Mr. Montgoris is formerly Chief Operating Officer of the Bear Stearns
Companies, Inc. (1979-1999). He is currently Trustee of RF, RIT, RTET, RNYTET
and RPES.
+WILLIAM E. VIKLUND, 60, Trustee, 110 Grist Mill Lane, Plandome Manor, NY
11030-1110.
Mr. Viklund is formerly President and COO of Long Island Bankcorp and
President and CEO of Long Island Savings Bank (1980-1996). He is currently
Trustee of RF, RIT, RTET, RNYTET and RPES.
*ARTHUR T. BENT III, 32, Chief Operating Officer/Treasurer, Senior Vice
President and Assistant Secretary, 1250 Broadway, New York, NY 10001-3701.
8
<PAGE>
Mr. Bent III joined The Reserve Funds in 1997 and is Chief Operating
Officer/Treasurer, Senior Vice President and Assistant Secretary of RF, RIT,
RTET, RNYTET and RPES. Mr. Bent III is also Chief Operating Officer/Treasurer,
Senior Vice President and Assistant Secretary of RMCI; President, Treasurer and
Assistant Secretary of RMC; and, Treasurer and Director of Resrv Partners, Inc.
("RESRV"). Before joining Reserve, he was a private investor.
MARYKATHLEEN FOYNES GAZA, 30, Director of Compliance and Legal Affairs (Counsel)
and Secretary, 1250 Broadway, New York, NY 10001-3701.
Ms. Gaza is Director of Compliance and Legal Affairs (Counsel) and Secretary
of RF, RIT, RNYTET, RTET and RPES, as well as Director of Compliance and Legal
Affairs for RMCI and RMC and Counsel to RESRV. Before joining The Reserve Funds
in 1998, Ms. Gaza was a staff attorney at PaineWebber, Inc. (1997-1998). Prior
to that, Ms. Gaza worked for the U.S. House of Representatives as a District
Manager for a Member of Congress (1995-1997).
JAMES M. FREISEN, 42, Controller, 1250 Broadway, New York, NY 10001-3701.
Mr. Freisen is Controller. Before joining The Reserve Funds in 1999, Mr.
Freisen was an Assistant Vice President at Paine Webber, Inc. (1998-1999). Prior
to that, he was Assistant Vice President, Bank of New York (1997-1998);
Assistant Vice President, Fifth Third Bank (1995-1997); and Vice President,
Smith Barney (1991-1995).
------------
*Mr. Bent is the father of Mr. Bent II and Mr. Bent III.
+ Messrs. Ehlert, Emmet, Foye, Harrington, Montgoris, and Viklund are members of
a Review Committee which performs the functions of an Audit Committee and
reviews compliance procedures and practices. The Audit Committee members receive
an annual committee fee of $3,000.
++ Interested Trustee within the meaning of the 1940 Act.
As of June 1, 2000, the members of the Board of Trustees who are not
"Interested Trustees" will be paid a stipend of $3,500 for each joint Board
meeting they attend in person, a stipend of $1,500 for each joint telephonic
meeting they participate in, and an annual fee of $24,000 for service to all of
the trusts in the complex.
Under the Declaration of Trust, the Trustees and officers are entitled to be
indemnified by the Trust to the fullest extent permitted by law against all
liabilities and expenses reasonably incurred by them in connection with any
claim, suit or judgment or other liability 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 disregard of the duties involved in the
conduct of their office.
The Trust does not pay any pension or retirement benefits.
Compensation Table
for Fiscal Year Ended May 31, 2000
<TABLE>
<CAPTION>
Aggregate Total Compensation
Compensation From Trust and Trust Complex
Name of Trustee, Position From Trust (4 Additional Trusts) Paid to Trustee
--------------------------------- -------------- -----------------------------------------
<S> <C> <C>
Bruce R. Bent, Chairman/CEO and $ 0 0
Trustee
Bruce R. Bent II, President and 0 0
Trustee
Edwin Ehlert, Jr., Trustee 375 30,500
Patrick J. Foye, Trustee 38 3068.49
Henri W. Emmet, Trustee 375 30,500
Rev. Donald J. Harrington, 332 27,000
Trustee
William J. Montgoris, Trustee 316 25,667
William E. Viklund, Trustee 375 30,500
</TABLE>
9
<PAGE>
The Fund, its Adviser and RESRV have adopted Code of Ethics, respectively,
conforming to the requirements of Rule 17j-1 under the Investment Company Act of
1940. The purpose of the Code is to establish guidelines and procedures to
identify and prevent persons who may have knowledge of Reserve's investments and
investment intentions from breaching their fiduciary duties and to deal with
other situations that may pose a conflict of interest or a potential conflict of
interest. Additionally, federal securities laws require money managers and
others to adopt policies and procedures to identify and prevent the misuse of
material, non-public information. Therefore, Reserve has developed and adopted
an Insider Trading Policy that applies to all employees, affiliates and
subsidiaries. As per the Codes, an Access person may only engage in Personal
Securities Transactions in accordance with the procedures and guidelines
established.
INVESTMENT MANAGEMENT, DISTRIBUTION AND CUSTODIAN AGREEMENTS
Investment Management Agreement. Reserve Management Company, Inc. ("RMCI" or
"Adviser") 1250 Broadway, New York, NY 10001-3701, a registered investment
adviser, manages the Trust and provides it with investment advice. Under an
Investment Management Agreement, the Adviser manages the Fund and 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 this SAI. RMCI pays all employee costs and
other customary operating expenses of each Fund pursuant to the Investment
Management Agreement. Excluded from customary operating expenses are interest
charges, taxes, brokerage fees, extraordinary legal and accounting fees and
expenses, and the fees of the disinterested Trustees, for which each Fund pays
its direct or allocated share.
For its management services, RMCI is periodically paid a Comprehensive
Management Fee at the following rate:
<TABLE>
<CAPTION>
Comprehensive Management Fee*
Class R Shares Class I Shares
<S> <C> <C>
Reserve International Small-Cap 1.55% 1.25%
</TABLE>
------------
* As a percentage of the average daily net assets attributable to each Class.
Expenses are deducted from Fund assets.
The Investment Management Agreement is subject to annual review and must be
approved at least annually by a vote of a majority of the Trustees, including a
majority of those who are not "interested persons" as defined in the 1940 Act,
cast in person at a meeting called for the purpose of voting on such renewal.
The Agreement terminates automatically upon its assignment and may be terminated
without penalty upon 60 days' written notice by vote of the Trustees, by vote of
a majority of outstanding voting shares of the Fund or by the Adviser.
Sub-Investment Management Agreements. The Adviser and the Trust have entered
into Sub-Investment Management Agreement ("Sub-Advisory Agreements") with
Pinnacle International Management, LLC. ("Sub-Adviser"). The Sub-Adviser is a
registered investment adviser. Pursuant to the Sub-Advisory Agreement, the
Adviser will pay the Sub-Adviser at the end of each fiscal quarter a fee equal
to up to one-half of the Fund's net profit for the year before taxes on the
Fund. Net profit is deemed to be the Management Fee less Fund expenses and all
applicable sales and marketing costs.
The following chart shows the amounts paid by the Adviser to the Sub-Adviser of
the Fund and its affiliate, Pinnacle Associates, Ltd., pursuant to the
Sub-Advisory Agreements during the last three fiscal years.
<TABLE>
<CAPTION>
FUND SUB-ADVISER 2000 1999 1998
---- ----------- ------ ------ ------
<S> <C> <C> <C> <C>
Reserve International Equity Fund Pinnacle Associates, Ltd. $30,027 $46,000 $29,000
666 Fifth Avenue
New York, NY 10103
Reserve International Pinnacle International N/A N/A N/A
Small-Cap Fund* Management, LLC
666 Fifth Avenue
New York, NY 10103
</TABLE>
----
* The Trust began offering shares of the Reserve International Small-Cap Fund on
July 3, 2000.
The Sub-Advisory Agreement is subject to annual review and approval by the
Trustees, including a majority of those who are not
10
<PAGE>
"interested persons" as defined in the 1940 Act, 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.
Distribution Agreement. Resrv Partners, Inc. ("RESRV"), 1250 Broadway, New York,
NY 10001-3701, is a distributor of the shares of the Trust. RESRV is a
"principal underwriter" for the Trust within the meaning of the 1940 Act, 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 1940 Act.
Plan of Distribution. The Trust maintains a Plan of Distribution ("Plan") and
related agreements, as amended, under Rule 12b-1 of the 1940 Act, which provides
that investment companies may pay distribution expenses, directly or indirectly,
pursuant to a plan adopted by the 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 ("Firms") in respect of each Fund's Class R shareholder accounts
("qualified accounts") to which the Firms have 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 Firms at an annual rate of 0.25% of the average daily net asset value
("NAV") of all Firms' 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. The Class I shares of each
Fund do not participate in the Plan.
Custodian and Independent Accountant. The Chase Manhattan Bank, 270 Park Avenue,
New York, NY 10017 is Custodian of the Fund's securities and cash pursuant to a
Custodian Agreement. The Custodian has no part in determining the investment
policies of the Fund or which securities are to be purchased or sold by the
Fund. PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, NY
10036 is the Fund's independent accountant.
INFORMATION ABOUT THE TRUST
The Declaration of Trust permits the Trust to issue an unlimited number of
full and fractional shares of beneficial interest without a stated par value,
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. 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 and class be preferred over all other series in respect of
assets specifically allocated to such series and classes. It is anticipated that
under most circumstances, the rights of any additional series or class would be
comparable unless otherwise required to respond to the particular situation.
Upon liquidation of the Trust, shareholders are entitled to share
proportionately in the net assets of their respective series and class of the
Trust available for distribution to such shareholders. No changes can be made to
the Trust's issued shares without shareholder approval.
A Fund share when issued is fully paid, non-assessable and fully transferable
or redeemable at the shareholder's option. Each share has an equal interest in
the net assets of its class, equal rights to all dividends and other
distributions from its class. As approved by the shareholders, a shareholder of
the Fund shall be entitled to one vote for each dollar of net asset value
(number of shares owned times net asset value per share) per share of the Fund
[or class thereof], on any matter on which such shareholder is entitled to vote
and each fractional dollar amount shall be entitled to a proportionate
fractional vote. This means that the voting power of shareholders is allocated
in proportion to the value of each shareholder's investment rather than with the
number of shares held. Shares of separate classes vote together for the election
of Trustees and have noncumulative voting rights, meaning that the holders of
more than 50% of the shares voting for the election of Trustees could elect all
Trustees if they so choose, and in such event the holders of the remaining
shares could not elect any person to the 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.
SEC regulations 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
class votes separately. Each class 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
11
<PAGE>
shareholders. For this purpose a "majority" is constituted by either 50% of all
shares voting as a group or 67% of the shares voted as a group at a meeting of
shareholders at which at least 50% of the shares of each group are represented.
HOW TO BUY AND SELL SHARES
Purchase of Shares. The Fund's Distributor, RESRV, serves as the national
distributor for the Fund's shares and has agreed to use best efforts to sell
shares of the Fund. Shares of the Fund are offered on a continuous basis and may
be purchased by contacting the Fund, RESRV or dealers who have selling
agreements with Resrv.
The minimum initial investment for Class R shares is $1,000 and $250 for IRA
accounts. The minimum subsequent investment is $100. Class R shareholders
(except IRAs) must achieve a balance of $2,500 within twelve (12) months, or the
Fund will to impose a fee (See "Small Balances" in the Prospectus). The minimum
initial investment for Class I shares is $250,000 and the minimum subsequent
investment is $10,000. The Fund reserves the right, with respect to any person
or class of persons, under certain circumstances to waive or lower investment
minimums. Additionally, the Fund reserves the right to reject any purchase order
and to suspend the offering of shares of the Fund.
Shares of the Fund may be purchased each business day at the public offering
price determined after receipt of payment and a request in proper form by the
Fund or by authorized dealers. All initial purchases must be accompanied by an
account application and if no dealer or broker is named in the account
application RESRV shall act as dealer. For clients of certain Firms, shares may
be purchased directly through such Firms. However, purchases may be subject to
the Firms' own minimums and purchase requirements.
Purchases may be made by check or by wire as specified in the Prospectus..
However, purchase orders are not accepted on days that the NYSE is closed for
trading (New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day (observed), Independence Day, Labor Day, Columbus Day,
Veterans Day, Thanksgiving Day, Christmas Day).
All investments must be in U.S. dollars. Third-party, foreign, and travelers
checks as well as, cash investments will not be accepted. Purchase orders will
be confirmed at the public offering price calculated after receipt by the Fund
or Firms (who promptly transmit order to the Fund) of payment. It will be the
responsibility of authorized dealers to properly and promptly transmit orders to
the Fund. Orders received by the Fund or the Firms after 4:00 PM (Eastern Time)
will be priced at the public offering price in effect at 4:00 PM (Eastern Time)
on the next business day.
Share Price: Net Asset Value. Investors pay no sales charges to invest in the
Fund. The price you pay for a share of the Fund, and the price you receive upon
selling or redeeming a share of the Fund, is called the Fund's net asset value
("NAV") per share. The NAV is calculated by taking the total value of a Fund's
assets, subtracting its liabilities, and then dividing by the number of shares
that have already been issued. The NAV is generally calculated as of the close
of trading on the NYSE (usually 4:00 PM Eastern time) every day the Exchange is
open. NAV is not calculated on days the Exchange is closed and regional bank
holidays. Your order will be priced at the next NAV calculated after your order
is accepted (i.e., converted to federal funds) by the Fund.
Valuation of Portfolio Securities. 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; bid price is used
when no asked price is available. However, , in the case of open short
positions, the asked price is used for valuation purposes. .Market quotations
for foreign securities in foreign currencies are translated into U.S. 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 Trustees. The Fund may use pricing services to
determine market value.
Share Certificates. Share certificates are not issued. However, you will have
the same rights of ownership with respect to such shares as if certificates had
been issued.
Redemptions - General. Redemption payments are normally made by check or wire
transfer, but the Trust is 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 NAV is determined). The Trust has elected to permit any
shareholder of record to make redemptions wholly in cash to the extent the
shareholder's redemptions in any 90-day period do not exceed the lesser of
$250,000 or 1% of the net assets of the Fund. The election is irrevocable
pursuant to rules and regulations under the 1940 Act unless withdrawal is
permitted by order of the SEC. In disposing of such securities, an investor
might incur transaction costs and on the date of disposition might receive an
amount less than the NAV of the redemption.
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<PAGE>
Written and telephone requests. Redemption instructions and options should be
specified 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. One
way to redeem shares is to write a letter of instruction which states: the
name(s) and signature(s) of all accountholders (signature(s) guaranteed, if
necessary), account number, Fund name, the dollar amount you want to sell, and
how and where to send the proceeds. If you are redeeming your IRA, please note
the applicable withholding requirements.
To reduce the risk of loss, certain situations require written
instructions along with signature guarantees. These include:
(1) redemptions for more than $5,000, if redemption proceeds are not
being sent to the shareholder's designated bank or brokerage account;
or
(2) redemptions on accounts whose address has been changed within the
past 30 days; or
(3) redemptions to be sent to someone other than the account owner or
the address of record for the past 30 days; or
(4) redemptions to be sent to an alternate address.
You may redeem by calling the Fund at 800-637-1700. Unless you decline
telephone privileges on your application and the Fund fails to take reasonable
measures to verify the request, the Fund will not be liable for any unauthorized
telephone redemption, or for any loss, cost or expense for acting upon an
investor's telephone instructions. Telephone redemptions may be sent to the bank
or brokerage account designated by the shareholder on the application or in a
letter with signature guarantee. 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 Fund, it is necessary to send
a written request to the Fund with signature(s) guaranteed. The Fund reserves
the right to refuse a telephone redemption if it reasonably believes that the
instructions are not genuine and/or it is advisable to do so.
Signature guarantees can be obtained from most banks, credit unions or
savings associations, or from broker/dealers, national securities exchanges or
clearing agencies deemed eligible by the SEC. Guarantees must be signed by an
authorized signatory of the guarantor and "Signature Guaranteed" must appear
with the signature. Notaries public cannot provide signature guarantees. The
Fund may request additional documentation from corporations, executors,
administrators, trustees or guardians, and may accept other suitable
verification arrangements from foreign investors, such as consular verification.
For more information with respect to signature guarantees, please call
800-637-1700.
The Fund reserves the right to refuse a telephone redemption if they believe
it is advisable to do so. Procedures for telephone redemptions may be modified
or terminated by the Fund at any time without notice to shareholders. During
times of drastic economic or market conditions, shareholders may experience
difficulty in contacting the Fund by telephone to request a redemption or
exchange of the Fund's shares. In such cases shareholders should consider using
another method of redemption, such as a written request.
Automatic Withdrawal Plans. (Class R Shares only). If you have an account with a
balance of at least $5,000, you may elect in writing to participate in either of
the following: (i) an Income Distribution Plan providing for 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 the 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 Fund. The amount, frequency and recipient of the
payments may be changed by giving proper written notice to the Fund. The Fund
may impose a charge, modify or terminate any Automatic Withdrawal Plan at any
time after the participant has been notified. This privilege may not be
available to clients of some Firms or may be available subject to conditions or
limitations.
Automatic Transfer Plans (ACH). (Class R shares only). You may redeem shares of
the Fund (minimum $100) without charge by telephone if you have filed a separate
Reserve Automatic Transfer application with the Fund. The proceeds will be
transferred between your Fund account and the checking, NOW or bank money-market
deposit account (must be an Automated Clearing House member bank) designated in
your application. 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 request. The Fund may impose a charge, modify or terminate this
privilege at any time after the participant has been duly notified. This
privilege may not be available to clients of some Firms or may be available
subject to conditions or limitations.
Exchange Privilege. Shares of the Fund may be exchanged for shares in any other
Fund in the Trust or the Reserve money-market funds at NAV. This exchange
privilege may not be available to clients of certain Firms. A sales load will be
charged on exchanges, if applicable.Shares to be acquired in an exchange must be
registered for sale in the investor's state. The Fund reserves the right to
record all exchange requests.
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<PAGE>
The exchange privilege is not available for shares that 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 this
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 Fund and its 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.
Exchanges of shares of one fund for another is a taxable event and may result
in a gain or loss for federal income tax purposes. The exchange privilege
described under this heading may not be available to clients of some Firms and
some Firms may impose conditions on their clients that are different from those
described in this Prospectus or SAI.
The exchange privilege may be modified or terminated at any time, or from
time to time, upon 60 days' notice to shareholders if such notice is required by
the 1940 Act. 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 Fund does 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 Fund by 4:00 PM
(Eastern Time) on a regular business day to take effect that day. Exchange
requests received after 4:00 PM (Eastern time) will be effected at the next
calculated NAV.
Suspension of Redemptions. The right of redemption may be suspended or the date
of payment postponed for more than seven (7) days only (a) when the Exchange is
closed (other than for customary closings), (b) when, as determined by the SEC,
trading on the Exchange is restricted or an emergency exists making it not
reasonably practicable to dispose of securities owned by a Fund or for it to
determine fairly the value of its net assets, or (c) for such periods as the SEC
may permit. If shares of a Fund are purchased by check or Reserve Automatic
Transfer, the Fund may delay transmittal of redemption proceeds until such time
as it has assured itself that good payment has been collected for the purchase
of such shares, which may generally take up to ten (10) business days.
Shareholder checks written against funds, which are not yet considered
collected, will be returned and a fee charged against the account. When a
purchase is made by wire and subsequently redeemed, the proceeds from such
redemptions normally will not be transmitted until two (2) business days after
the purchase.
Shareholder Service Policies. The Fund's policies concerning the shareholder
services are subject to change from time to time. The Fund reserves the right to
change the minimum account size subject to the $5 monthly service charge or
involuntary redemption. The Fund further reserves the right to impose special
service charges for services provided to individual shareholders generally
including, but not limited to, fees for returned checks, stop payment orders on
official checks and shareholder checks, and special research services. The
Fund's standard service charges as described in the Prospectus are also subject
to adjustment from time to time. In addition, the Fund reserves the right to
increase its minimum initial and subsequent investment amounts at any time.
If shares purchased are to be paid for by wire and the wire is not received
by the Fund or if shares are purchased by check, which, after deposit, is
returned unpaid or proves uncollectible, the purchase may be canceled or
redeemed immediately. The investor who gave notice of the intended wire or
submitted the check will be held fully responsible for any losses incurred by
the Fund, the Investment Adviser or the Distributor. The Fund may redeem shares
from any account registered in that purchaser's name and apply the proceeds
therefrom to the payment of any amounts due the Fund, the Investment Adviser or
the Distributor.
Purchases and Redemptions through Others. Share purchases and redemptions may
also be made through Firms, which may involve such Firms' own redemption
minimums, services fees, and other redemption requirements. Firms may provide
varying arrangements for their clients with respect to the purchase and
redemption of Fund shares and may arrange with their clients for other
investment or administrative services. Firms are responsible for the prompt
transmission of purchase and redemption orders. Some Firms may establish higher
minimum investment requirements than set forth above. Some Firms may
independently establish and charge additional fees for their services, which
would reduce their clients' yield or return. Firms may also hold shares in
nominee or street name on behalf of their clients. In such instances, the Fund's
transfer agents will have no information about their accounts, which will be
available only from their Firm. Some of these firms participate in the Fund's
Plan of Distribution ("Plan"). Under the Plan, Firms may receive compensation
for recordkeeping and other services and assistance in distributing Fund shares.
In addition, certain privileges with respect to the purchase and redemption of
shares or the reinvestment of dividends may not be available through such Firms
or may only be available subject to certain conditions or limitations. Some
Firms may participate in a
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<PAGE>
program allowing them access to their clients' accounts for servicing including,
without limitation, changes of registration and dividend-payees and may perform
functions such as generation of confirmations and periodic statements and
disbursement of cash dividends. The Prospectus should be read in connection with
such Firm's material regarding its fees and services.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Set forth below is a discussion of certain U.S. federal income tax issues
concerning the Fund and the purchase, ownership and disposition of Fund shares.
This discussion does not purport to be complete or to deal with all aspects of
federal income taxation that may be relevant to shareholders in light of their
particular circumstances, nor to certain types of shareholders subject to
special treatment under the federal income tax laws. This discussion is based
upon present provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), the regulations promulgated thereunder and judicial and administrative
rulings, all of which are subject to change which may be retroactive.
Prospective investors should consult their own tax advisers with regard to the
federal tax consequences of the purchase, ownership, or disposition of Fund
shares, as well as the tax consequences arising under the laws of any state,
foreign country, or other taxing jurisdiction.
The Fund intends to qualify as a regulated investment company under
Subchapter M of the Code so long as such qualification is in the best interests
of shareholders. If it so qualifies, the Fund generally will not be subjected to
federal income tax on distributed amounts. Shareholders of the Fund, however,
will be subject to federal income tax on any ordinary income and net capital
gains realized by the Fund and distributed to shareholders, whether distributed
in cash or in the form of additional shares. Distributions of net capital gains
(the excess of net long-term capital gains over net short-term capital losses),
if any, designated as capital gain dividends may be taxable to individuals and
certain other shareholders at the maximum federal 20% capital gains rates,
depending upon the Fund's holding period for the assets giving rise to the
capital gains, regardless of how long the shareholder has held the Fund's
shares. The maximum 20% capital gains rate generally applies to gains from the
sale of assets held for more than 12 months. Capital gain from the sale of
assets held for one year or less will generally be taxed as ordinary income.
Upon the taxable disposition (including a sale or redemption) of shares of
the Fund, a shareholder may realize a gain or loss depending upon his basis in
his shares. Such gain or loss generally will be treated as capital gain or loss
if the shares are capital assets in the shareholder's hands. Capital gains may
be taxable to individuals and certain other shareholders at the maximum federal
20% capital gains rate, 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 of the
Fund will have a cost basis for federal income tax purposes in each share
received equal to the NAV of a share of that Fund on the reinvestment date. An
exchange of shares in the Fund for shares of another RPES Fund will be treated
as a taxable sale of the exchanged Fund shares. Accordingly, a shareholder may
recognize a gain or loss for federal income tax purposes depending upon his or
her basis in the Fund shares exchanged. A gain or loss will be treated as a
capital gain or loss if the shares are capital assets in the shareholder's
hands. The shareholder will have a tax basis in the newly acquired Fund shares
equal to the amount invested and will begin a new holding period for federal
income tax purposes.
In order to qualify as a "regulated investment company" under the Code, the
Fund must, among other things, (i) derive in each taxable year at least 90% of
its gross income from dividends, interest, payments from certain securities
loans, and gains from the sale of stock, securities or foreign currencies or
other income (such as gains from options, futures or forward contracts) from
investing in stock, securities or currencies; and (ii) hold as of the close of
each quarter at least 50% of its assets in certain investments assets, such as
cash, U.S. government securities, securities of other regulated investment
companies and other securities, with such other securities limited from any
issuer to not more than 5% of the value of the Fund's total assets and 10% of
the outstanding voting securities of such issuer, and hold not more than 25% of
the value of the Fund's assets in the securities of any one issuer (other than
U.S. government securities or securities of other regulated investment
companies).
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
October, November or December of any year to shareholders of record on any date
in such a month will be deemed to have been received by the shareholders and
paid by the Fund on December 31 of that year, provided such dividends are paid
during January of the following year.
Dividends to shareholders who are non-resident aliens may be subject to a
U.S. 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
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<PAGE>
applicability of the U.S. withholding tax.
Investment by the Fund in zero coupon or other discount debt securities will
result in income to the Fund equal to a portion of the excess of the face value
of the debt securities over their issue price (the "original issue discount")
each year that the securities are held, even though the Fund receives no cash
interest payments. This income is included in determining the amount of income
which a Fund must distribute to maintain its status as a regulated investment
company and to avoid the payment of federal income tax and the 4% excise tax. In
addition, if the Fund invests in certain high-yield original issue discount
securities issued by corporations, a portion of the original issue discount
accruing on any such obligation may be eligible for the deduction for dividends
received by corporations. In such event, dividends of investment company taxable
income received from a Fund by its corporate shareholders to the extent
attributable to such portion of accrued original issue discount, may be eligible
for this deduction for dividends received by corporations if so designated by
the Fund in a written notice to shareholders. Gains derived by a Fund from the
disposition of any market discount bonds (i.e., bonds purchased other than at
original issue, where the face value of the bonds exceeds their purchase price)
held by a Fund will be taxed as ordinary income to the extent of the accrued
market discount of the bonds, unless the Fund elects to include the market
discount in income as it accrues.
The Code includes rules applicable to certain non-equity 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, equity
options (options to buy or sell stocks) are not classified as Section 1256
contracts and are not subject to the marked-to-market rule or to 60/40 gain or
loss treatment. Any gains or losses recognized by a Fund from transactions in
equity options generally constitute short-term capital gains or losses. If
equity call options written, or equity put options purchased, by a 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 equity puts or increased by the premium received
for equity 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 a Fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which the losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences to the Fund of engaging in hedging
transactions are not entirely clear. Hedging transactions may increase the
amount of short-term capital gain realized by the Fund which is taxed as
ordinary income when distributed to shareholders. In addition, certain carrying
charges (including interest expense) associated with positions in a straddle may
be required to be capitalized rather than deducted currently.
The Fund may make one or more of the elections available under the Code which
are applicable to straddles. If the Fund makes any of the elections, this
amount, character and timing of gains or losses from the affected straddle
positions will be determined under rules that vary according to the election(s)
made. The rules applicable under certain of the elections may operate to
accelerate the recognition of gains or losses from the affected straddle
positions.
Because the straddle rules may affect the character of gains or losses, defer
losses and/or accelerate the recognition of gains or losses from the affected
straddle position, the amount which may be distributed to shareholders, and
which will be taxed as ordinary income or capital gain, may be increased or
decreased as compared to a fund that did not engage in such hedging
transactions. Recently enacted rules may affect the timing and character of gain
if the Fund engages in transactions that reduce or eliminate its risk of loss
with respect to appreciated financial positions. If the Fund enters into certain
transactions in property while holding substantially identical property, the
Fund would be treated as if it had sold and immediately repurchased the property
and would be taxed on any gain (but not loss) from the constructive sale. The
character of gain from a constructive sale would depend upon the Fund's holding
period of the property. Loss from a constructive sale would be recognized when
the property was subsequently disposed of, and its character would depend on the
Fund's holding period and the application of various loss deferral provisions of
the Code.
Gains or losses attributable to fluctuations in exchange rates which occur
between the time the Fund accrues income or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time the
Fund actually collects such receivables or pays such liabilities generally are
treated as ordinary income or ordinary loss. Similarly, on disposition of some
investments, including debt securities and certain forward contracts denominated
in a foreign currency, gains or losses attributable to fluctuations in the value
of the foreign currency between the acquisition and disposition of the position
also are treated as ordinary gain or loss. These gains and losses, referred to
under the Code as "Section 988" gains or losses, increase or decrease the amount
of a Fund's investment company taxable income available to be distributed to its
shareholders as ordinary income.
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<PAGE>
The Fund may be subject to non-U.S. tax on income and gains received from
securities of non-U.S. issuers which generally is withheld by a foreign country
at the source. The U.S. has entered into tax treaties with many foreign
countries which may entitle a Fund to a reduced rate of tax or exemption from
tax on income. It is impossible to determine the effective rate of foreign tax
in advance since the amount of a Fund's assets to be invested within various
countries is not known. The Fund intends to operate so as to qualify for tax
treaty benefits where applicable. To the extent that a Fund is liable for
foreign income taxes withheld at the source, the Fund may operate so as to meet
the requirements of the Code to "pass through" to its shareholders tax benefits
attributable to foreign income taxes paid by the Fund. If more than 50% of the
value of the Fund's total assets at the close of its taxable year is comprised
of securities issued by foreign corporations, the Fund may elect to "pass
through" to its shareholders the amount of foreign taxes paid by the Fund.
Pursuant to this election shareholders will be required to (i) include in gross
income, even though not actually received, their respective proportional share
of foreign taxes paid by the Fund; (ii) treat their proportional share of
foreign taxes as paid by them; and (iii) subject to certain limitations, either
deduct their proportional share of foreign taxes in computing their taxable
income, or use such share as foreign tax credit against U.S. income tax (but not
both). No deduction for foreign taxes may be claimed by a non-corporate
shareholder who does not itemize deductions. The Fund may meet the requirements
to "pass through" to its shareholders foreign income taxes paid, but there can
be no assurance that any Fund will do so. Each shareholder will be notified
within 60 days after the close of the taxable year of the Fund if the foreign
taxes paid by the Fund will "pass through" for that year, and, if so, the amount
of each shareholder's proportional share (by country) of (i) the foreign taxes
paid and (ii) the Fund's gross income from foreign sources. The notice shall
also include the amount of foreign taxes not allowable for "pass through"
treatment because of a failure to satisfy certain requirements imposed under the
Code.
The Fund may invest in shares of foreign corporations which may be classified
under the Code as Passive Foreign Investment Companies ("PFICs"). In general, a
foreign corporation is classified as a PFIC if at least one-half of its assets
constitute investment-type assets, or 75% or more of its gross income is
investment-type income. If the Fund receives a so-called "excess distribution"
with respect to PFIC stock, the Fund itself may be subject to a tax on a portion
of the excess distribution, whether or not the corresponding income is
distributed by the Fund to shareholders. In general, under the PFIC rules, an
excess distribution is treated as having been realized ratably over the period
during which the Fund held the PFIC shares. The Fund itself will be subject to
tax on the portion, if any, of an excess distribution that is so allocated to
prior Fund taxable years and an interest factor will be added to the tax, as if
the tax had been payable in such prior taxable years. Certain distributions from
a PFIC as well as gain from the sale of PFIC shares are treated as excess
distributions. Excess distributions are characterized as ordinary income even
though, absent application of the PFIC rules, certain excess distributions might
have been classified as capital gain.
The Fund may be eligible to elect alternative tax treatment with respect to
PFIC shares. Under an election that currently is available in some
circumstances, the Fund generally would be required to include in its gross
income its share of the earnings of a PFIC on a current basis, regardless of
whether distributions are received from the PFIC in a given year. If this
election were made, the special rules, discussed above, relating to the taxation
of excess distributions, would not apply. In addition, another election may be
available that would involve marking to market the Fund's PFIC shares at the end
of each taxable year (and on certain other dates prescribed in the Code), with
the result that unrealized gains are treated as though they were realized. If
this election were made, tax at the Fund level under the PFIC rules would
generally be eliminated, but the Fund could, in limited circumstances, incur
nondeductible interest charges.
Because the application of the PFIC rules may affect, among other things, the
character of gains, the amount of gain or loss and the timing of the recognition
of income with respect to PFIC shares, as well as subject a Fund to tax on
certain income from PFIC shares, the amount that must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
capital gain, may be increased or decreased as compared to a fund that did not
invest in PFIC shares.
The Fund generally will be required to withhold federal income tax at a rate
of 31% ("backup withholding") from dividends paid, capital gain distributions,
and redemption proceeds to shareholders if (i) the shareholder fails to furnish
the Fund with the shareholder's correct taxpayer identification number or social
security number, (ii) the IRS notifies the shareholder or the Fund that the
shareholder has failed to report properly certain interest and dividend income
to the IRS and to respond to notices to that effect, or (iii) when required to
do so, the shareholder fails to certify that he or she is not subject to backup
withholding. Any amounts withheld may be credited against the shareholder's
federal income tax liability.
The foregoing is a general summary of certain provisions of the Code and
Treasury Regulations in effect. For the complete provisions, reference should be
made to the pertinent Code sections and Treasury Regulations promulgated
thereunder. The Code and the Treasury Regulations thereunder are subject to
change by legislative or administrative action either prospectively or
retroactively.
Dividends paid by the Fund are generally expected to be subject to any state
or local taxes on income. Shareholders should consult their own attorneys or tax
advisors about the tax consequences related to investing in the Fund.
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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 Morgan Stanley Capital International Europe, Australia, Far East Index
("EAFE"), which is a stock index designed to measure the investment returns of
the developed countries outside North America, 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 independent
research firms which rank mutual funds by overall performance, investment
objectives and assets, or tracked by other services, companies, publications, or
persons; 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 NAV 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 assumes
reinvestment of all income dividends and capital gain distributions during the
period.
The Fund may also quote annual, average annual and annualized total return
and aggregate total performance data both as a percentage and as a dollar amount
based on a hypothetical $10,000 investment for various periods. Such data will
be computed as described above, except that the rates of return calculated will
not be average annual rates, but rather actual annual, annualized or aggregate
rates of return.
GENERAL INFORMATION
Reports and Statements. Shareholders receive an Annual Report containing audited
financial statements and an unaudited Semi-Annual Report. An account statement
is sent to each shareholder at least quarterly. Shareholders who are clients of
some Firms will receive an account statement combining transactions in Fund
shares with account statements covering other brokerage or mutual fund accounts.
Shareholders have a duty to examine their account statement(s) and report any
discrepancies to The Reserve Funds immediately. Failure to do so could result in
the shareholder suffering a loss. Further, shareholders are advised to retain
account statements.
Reserve Easy Access and On-line Access. Easy Access is The Reserve Funds'
24-hour toll-free telephone service that lets customers use a touch-tone phone
for a variety of options, which include NAV, account balances and other options.
To use it, call 800-637-1700 and follow the instructions. Clients may also
access current price information on the Internet through On-line Access at
www.reservefunds.com.
Inquiries. Shareholders should direct their inquiries to the firm from which
they received this Prospectus or to The Reserve Funds, 1250 Broadway, New York,
NY 10001-3701 or call 800-637-1700.
FINANCIAL STATEMENTS
The Reserve International Small-Cap Fund's registration statement did not
become effective until July 3, 2000. However, generally, financial statements
(audited) for the Fund including notes thereto, would be incorporated by
reference in the SAI from the Trust's Annual Report to Shareholders and will be
available upon request.
18
<PAGE>
PART C
Item 23. Exhibits
(a) Declaration of Trust filed as an exhibit to Registrant's Post
Effective Amendment No. 17, dated September 30, 1999
(b) Bylaws filed as an exhibit to Registrant's Post Effective Amendment
No. 17, dated September 30, 1999
(c) Declaration of Trust filed as an exhibit to Registrant's
Post-Effective Amendment No. 17, dated September 30, 1999
(d) Form of Investment Management Agreement for the Funds and form of
Sub-Investment Management Agreement filed as an exhibit to Registrant's
Post-Effective Amendment No. 17, dated September 30, 1999
(e) Form of Distribution Agreement and Plan of Distribution filed as an
exhibit to The Reserve Fund's Post-Effective Amendment No. 42 dated
November 24, 1986.
(f) Pension Plan of Reserve Management Corporation was filed as an
exhibit to The Reserve Fund's Effective Amendment No. 32; Amendments to
Pension Plan filed as an exhibit to Post-Effective Amendment No. 45 dated
July 31, 1989.
(g) Custodian Agreement with Chase Manhattan Bank filed as an exhibit to
Registrant's Post-Effective Amendment No. 17, dated September 30, 1999.
(h) Not applicable
(i) Opinion of Counsel
(j) Not applicable
(k) Not applicable
(l) Not applicable
(m) Form of Registered Dealer Agreement filed as an exhibit to
Registrant's Post-Effective Amendment No. 17, dated September 30, 1999.
(n) Rule 18f-3 plan
(o) Not applicable
(p) Code of Ethics
<PAGE>
Item 24. Persons Controlled by or Under Common Control with Registrant
Not Applicable
Item 25. Indemnification
Reference is made to Section 10.02 of the Registrant's Declaration of Trust. No
indemnification shall be provided hereunder to a Covered person:
Section 10.02 provides that
(a) Subject to the expectations and limitations contained in Subsection
10.02(b):
(i) every person who is, or has been, a Trustee or officer of the
trust (hereinafter referred to as a "Covered Person") shall be indemnified by
the Trust to the fullest extent permitted by law against liability and against
all expenses reasonably incurred or paid by him in connection with any claim,
action, suit or proceeding in which he becomes involved as a party or otherwise
by virtue of his being or having been a Trustee or officer and against amounts
paid or incurred by him in the settlement or defense thereof;
(ii) the words "claim", "suit", or "proceeding" shall apply to all
claims, actions, suits or proceedings (civil, criminal or other, including
appeals), actual or threatened while in office or thereafter, and the words
"liability" and "expenses" shall include, without limitation, attorneys' fees,
costs, judgments, amounts paid in settlement, fines, penalties and other
liabilities.
(b) No indemnification shall be provided hereunder to a Covered person:
(i) who shall have been adjudicated by a court or other body
including, without limitation, arbitration panels or self-regulatory
organizations before which the proceeding was brought (A) to be liable to the
trust or its Shareholders by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office or (B) not to have acted in good faith in the reasonable belief that his
action was in the best interest of the trust; or
(ii) in the event of a settlement, unless there has been a
determination that such Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office, (A) by the court or other body approving
the settlement; (B) by at least a majority of those Trustees who are neither
Interested Persons of the Trust nor are parties to the matter based upon a
review of readily available facts (as opposed to a full trial-type inquiry); or
(c) by written opinion of independent legal counsel based upon a review of
readily available facts (as opposed to a full trial-type inquiry); provided,
however, that any Shareholder may, by appropriate legal proceedings, challenge
any such determination by the Trustees or by independent counsel.
(c) The rights of indemnification herein provided may be insured against
by policies maintained by the Trust, shall be severable, shall not be exclusive
of or affect any other rights to which any Covered Person may now or hereafter
be entitled, shall continue as to a person who has ceased to be a Covered
Person and shall inure to the benefit of the heirs, executors and
administrators of such a person. Nothing contained herein shall affect any
rights to indemnification to which Trust personnel, other than Covered Persons,
and other persons may be entitled by contract or otherwise under law.
(d) Expenses in connection with the preparation and presentation of a defense to
any claim, action, suit or proceeding of the character described in Subsection
10.02(a) of this Section 10.02 may be paid by the Trust or Series from time to
time prior to final disposition thereof upon receipt of an undertaking by or on
behalf of such Covered Person that such amount will be paid over by him to the
Trust or Series if it is ultimately determined that he is not entitled to
indemnification under this Section 10.02; provided, however, that either (i)
such Covered Person shall have provided appropriate security for such
undertaking, (ii) the Trust is insured against losses arising out of any such
advance payments or (iii) either a majority of the Trustees who are neither
Interested Persons of the Trust nor parties to the matter, or independent legal
counsel in a written opinion, shall have determined, based upon a review of
readily available facts (as opposed to a trial-type inquiry or full
investigation), that there is reason to believe that such Covered Person will be
found entitled to indemnification under Section 10.02.
Each Trustee, officer, employee or agent of the registrant, and any person who
has served at it request as Director, Trustee, officer or employee of another
business entity, shall be entitled to be indemnified by the Registrant to the
<PAGE>
fullest extent permitted by the laws of the State of Delaware, subject to the
provisions of the Investment Company Act of 1940 and the rules and regulations
thereunder. Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to Trustees, officer and controlling
persons of the Registrant pursuant to the Declaration to Trust or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
commission such indemnification against such liabilities (other than the payment
by the Registrant of any expenses incurred or paid by a Trustee, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate public policy
as express in the Act and will governed the final adjudication of such issue.
Item 26. Business and Other Connections of Investment Adviser
<TABLE>
<CAPTION>
Name Position with the Adviser Other Businesses
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Bruce R. Bent Chairman & CEO Chairman and CEO and Director of Reserve
Management Corporation and Chairman
and Director and of Resrv Partners, Inc.
both of the same address as the Trust.
------------------------------------------------------------------------------------------------------------------
Bruce R. Bent II President and Senior Vice President, Secretary and
Secretary Director of Reserve Management
Corporation and Secretary and
Director of Resrv Partners, Inc.
both of the same address as the
Trust.
------------------------------------------------------------------------------------------------------------------
Arthur T. Bent III Senior Vice President and President, Treasurer and
CEO/Treasurer Director of Reserve Management
Corporation and Assistant Treasurer
and Director of Resrv Partners, Inc.
both of the same address as the
Trust.
------------------------------------------------------------------------------------------------------------------
</TABLE>
Item 27. Principal Underwriters
(a) Resrv Partners, Inc., a principal underwriter of the Registrant, also acts
as principal underwriter to The Reserve Fund Reserve Tax-Exempt Trust, Reserve
Institutional Trust, and Reserve New York Tax-Exempt Trust.
Name and Principal Positions and Offices Positions and Offices Business
Address with Resrv Partners, Inc. with Registrant
<TABLE>
----------------------------------------------------------------------------------
<S> <C>
Bruce R. Bent Chairman and Director
1250 Broadway
New York, New York 10001-3701
----------------------------------------------------------------------------------
Mary A. Belmonte President
1250 Broadway
New York, New York 10001-3701
----------------------------------------------------------------------------------
Bruce R. Bent II Secretary and Director
1250 Broadway
New York, New York 10001-3701
----------------------------------------------------------------------------------
Arthur Bent III Treasurer and Director
1250 Broadway
New York, New York 10001-3701
----------------------------------------------------------------------------------
MaryKathleen Gaza Counsel & Assistant Secretary
1250 Broadway
New York, New York 10001-3701
----------------------------------------------------------------------------------
James Freisen Controller
1250 Broadway
New York, New York 10001-3701
----------------------------------------------------------------------------------
</TABLE>
<PAGE>
Item 28. Location of Accounts and Records All records required to be maintained
by Section 31(a) of the 1940 Act and the Rules promulgated thereunder are
maintained at 1250 Broadway, New York, NY 10001-3701 except those relating to
receipts and deliveries of securities, which are maintained by the Registrant's
Custodian.
Item 29. Management Services
See "Investment Management, Distribution, Service and Custodian
Agreements" in Part B.
Item 32. Undertakings
Not Applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that this
Post-Effective Amendment to its Registration Statement meets all of the
requirements for effectiveness pursuant to Rule 485 (b) under the Securities
Act of 1933 and Registrant has duly caused this Post-Effective Amendment No. 19
to its Registration Statement to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of New York, and State of New York, on the
28th day of June, 2000.
THE RESERVE FUND
By: /s/ Bruce R. Bent
------------------------------------
Bruce R. Bent, Chairman/CEO
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 19 to Registrant's Registration Statement has been
signed below by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Bruce R. Bent Chairman/CEO and June 28, 2000
--------------------------- Trustee (principal
Bruce R. Bent executive officer)
/s/ Bruce R. Bent II President and Trustee June 28, 2000
--------------------------
Bruce R. Bent II
/s/ Arthur T. Bent III COO/Treasurer and Senior June 28, 2000
-------------------------- Vice President
Arthur T. Bent III
* Trustee June 28, 2000
---------------------------
Edwin Ehlert Jr.
* Trustee June 28, 2000
---------------------------
Henri W. Emmet
* Trustee June 28, 2000
---------------------------
Donald J. Harrington
* Trustee June 28, 2000
---------------------------
William E. Viklund
* Trustee June 28, 2000
---------------------------
Patrick J. Foye
* Trustee June 28, 2000
---------------------------
William Montgoris
/s/ MaryKathleen F. Gaza Secretary June 28, 2000
---------------------------
MaryKathleen F. Gaza
*Attorney-in-Fact
</TABLE>
