<PAGE>
This is filed pursuant to Rule 497(c).
File Nos. 33-34001 and 811-06068.
<PAGE>
--------------------------------------------------------------------------------
Alliance
Institutional
Reserves
--------------------------------------------------------------------------------
o California Tax-Free Portfolio
Prospectus
Class A Shares
November 22, 2000
The Securities and Exchange Commission has not approved or disapproved
these securities or passed upon the adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
--------------------------------------------------------------------------------
<PAGE>
Alliance Institutional Reserves, Inc. consists of six distinct portfolios.
This prospectus describes the Class A shares of the California Tax-Free
Portfolio. The Portfolio's investment adviser is Alliance Capital Management
L.P., a global investment manager providing diversified services to institutions
and individuals through a broad line of investments including more than 100
mutual funds.
--------------------------------------------------------------------------------
RISK/RETURN SUMMARY
--------------------------------------------------------------------------------
The following is a summary of certain key information about the Portfolio.
You will find additional information about the Portfolio, including a detailed
description of the risks of an investment in the Portfolio, after this summary.
Objectives: The investment objectives of the Portfolio are - in the
following order of priority - safety of principal, excellent liquidity and
maximum current income (exempt from Federal and California state personal income
taxes to the extent described below) to the extent consistent with the first two
objectives.
Principal Investment Strategy: The Portfolio is a "money market fund" that
seeks to maintain a stable net asset value of $1.00 per share. The Portfolio
invests primarily in high-quality municipal securities issued by the State of
California or its political subdivisions. The Portfolio is non-diversified and
only offered to residents of California.
Principal Risks: The principal risks of investing in the Portfolio are:
o Interest Rate Risk This is the risk that changes in interest rates will
adversely affect the yield or value of the Portfolio's investments in debt
securities.
o Credit Risk This is the risk that the issuer or guarantor of a debt
security will be unable or unwilling to make timely interest or principal
payments, or to otherwise honor its obligations. The degree of risk for a
particular security may be reflected in its credit rating. Credit risk includes
the possibility that any of the Portfolio's investments will have its credit
ratings downgraded.
o Municipal Market Risk This is the risk that special factors, such as
political and legislative changes and local business and economic developments,
may adversely affect the yield or value of the Portfolio's investments. Because
the Portfolio invests primarily in municipal securities of California issuers,
it is vulnerable to events adversely affecting California, including economic,
political or regulatory occurrences.
o Diversification Risk The Portfolio is not diversified and can invest
more of its assets in a relatively small number of issuers with a greater
concentration of risk. Factors affecting these issuers can have a more
significant effect on the Portfolio.
Another important thing for you to note:
An investment in the Portfolio is not a deposit in a bank and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. Although the Portfolio seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in the
Portfolio.
PERFORMANCE AND BAR CHART INFORMATION
There is no performance table or bar chart for the Portfolio because it
has not completed a full calendar year of operations.
You may obtain current seven-day yield information for the Portfolio by
calling (800) 237-5822.
2
<PAGE>
--------------------------------------------------------------------------------
FEES AND EXPENSES OF THE PORTFOLIO
--------------------------------------------------------------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Portfolio.
Shareholder Fees (fees paid directly from your investment)
None
Annual Portfolio Operating Expenses (expenses that are deducted from Portfolio
assets)
Management Fees................................................ .20%
Other Expenses*................................................ .17%
Total Portfolio Operating Expenses............................. .37%
-----
Expense Reimbursement**........................................ (.17)%
-----
Net Expenses................................................... .20%
----------
* "Other Expenses" are based on estimated amounts for the current fiscal
year.
** Reflects Alliance's contractual reimbursement of a portion of the
Portfolio's operating expenses so that the Portfolio's expense ratio does
not exceed .20%. This reimbursement extends through the end of the
Portfolio's current fiscal year and may be extended by Alliance for
additional one year terms.
EXAMPLES***
The examples are to help you compare the cost of investing in the
Portfolio with the cost of investing in other funds. They assume that you invest
$10,000 in the Portfolio for the time periods indicated and then redeem all of
your shares at the end of those periods. They also assume that your investment
has a 5% return each year, the Portfolio's operating expenses stay the same, and
all dividends and distributions are reinvested. Your actual costs may be higher
or lower.
Examples
--------
1 Year........................................................ $ 20
3 Years....................................................... $101
----------
*** These examples assume that Alliance's agreement to reimburse a portion of
the Portfolio's operating expenses is not extended beyond its initial
term.
--------------------------------------------------------------------------------
OTHER INFORMATION ABOUT THE PORTFOLIO'S OBJECTIVES, STRATEGIES, AND RISKS
--------------------------------------------------------------------------------
This section of the prospectus provides a more complete description of the
investment objectives and principal strategies and risks of the Portfolio.
Please note:
o Additional descriptions of the Portfolio's strategies and investments,
as well as other strategies and investments not described below, may be found in
the Portfolio's Statement of Additional Information or SAI.
o There can be no assurance that the Portfolio will achieve its investment
objectives.
o Except as noted, the Portfolio's investment objectives and strategies
are not fundamental and thus can be changed without a shareholder vote.
Investment Objectives and Strategies
As a money market fund, the Portfolio must meet the requirements of
Securities and Exchange Commission Rule 2a-7. The Rule imposes strict
requirements on the investment quality, maturity and diversification of the
Portfolio's investments. Under that Rule, the Portfolio's investments must have
a remaining maturity of no more than 397 days and the Portfolio must maintain an
average weighted maturity that does not exceed 90 days.
The Portfolio pursues its objectives by investing in high-quality
municipal securities and, as a matter of fundamental policy, normally will
invest at least 80% of its total assets in these securities. Although the
Portfolio may invest up to 20% of its total assets in taxable money market
securities, substantially all of the Portfolio's income
3
<PAGE>
normally will be tax-exempt. The Portfolio may purchase municipal securities
issued by other states if Alliance believes that suitable municipal securities
of California are not available for investment. To the extent of its investments
in other states' municipal securities, the Portfolio's income will be exempt
only from Federal income tax, not state personal income or other state tax.
The Portfolio seeks maximum current income that is exempt from Federal and
California state personal income taxes by investing not less than 65% of its
total assets in a portfolio of high-quality municipal securities issued by the
State of California or its political subdivisions. The Portfolio also may invest
in restricted securities (i.e., securities subject to legal or contractual
restrictions on resale).
The Portfolio will limit its investments so that no more than 20% of its
total income is derived from municipal securities that bear interest subject to
the Federal alternative minimum tax (the "AMT").
Municipal Securities. The Portfolio's investments in municipal securities
include municipal notes and short-term municipal bonds. Municipal notes are
generally used to provide for short-term capital needs and generally have
maturities of 397 days or less. Examples include tax anticipation and revenue
anticipation notes, which are generally issued in anticipation of various
seasonal revenues, bond anticipation notes, and tax-exempt commercial paper.
Short-term municipal bonds may include general obligation bonds, which are
secured by the issuer's pledge of its faith, credit, and taxing power for
payment of principal and interest, and revenue bonds, which are generally paid
from the revenues of a particular facility or a specific excise or other source.
The Portfolio may invest in adjustable rate obligations whose interest
rates are adjusted either at predesignated periodic intervals or whenever there
is a change in the market rate to which the security's interest rate is tied.
These adjustments tend to minimize changes in the market value of the obligation
and, accordingly, enhance the ability of the Portfolio to maintain a stable net
asset value. Adjustable rate securities purchased may include participation
interests in private activity bonds backed by letters of credit of Federal
Deposit Insurance Corporation member banks.
The Portfolio also may invest in stand-by commitments, which may involve
certain expenses and risks, but the Portfolio does not expect its investment in
stand-by commitments to comprise a significant portion of its investments. In
addition, the Portfolio may purchase when-issued securities.
Taxable Investments. The Portfolio may invest up to 20% of its total
assets in taxable money market securities, which may include obligations of the
U.S. Government and its agencies, high-quality certificates of deposit and
bankers' acceptances, prime commercial paper, and repurchase agreements.
Temporary Defensive Position. For temporary defensive purposes when
financial, economic, or market conditions warrant, the Portfolio may invest any
amount of its assets in taxable money market securities. When the Portfolio is
investing for temporary defensive purposes, it may not achieve its investment
objectives.
Risk Considerations
The Portfolio's principal risks are interest rate risk, credit risk and
municipal market risk. Because the Portfolio invests in short-term securities, a
decline in interest rates will affect the Portfolio's yields as these securities
mature or are sold and the Portfolio purchases new short-term securities with
lower yields. Generally, an increase in interest rates causes the value of a
debt instrument to decrease. The change in value for shorter-term securities is
usually smaller than for securities with longer maturities. Because the
Portfolio invests in securities with short maturities and seeks to maintain a
stable net asset value of $1.00 per share, it is possible, though unlikely, that
an increase in interest rates would change the value of your investment.
Credit risk is the possibility that a security's credit rating will be
downgraded or that the issuer of the security will default (fail to make
scheduled interest and principal payments). The Portfolio invests in
highly-rated securities to minimize credit risk.
The quality and liquidity of certain of the Portfolio's investments in
municipal securities are supported by credit and liquidity enhancements, such as
letters of credit, from third-party financial institutions. The Portfolio
continuously monitors the credit quality of third parties; however, changes in
the credit quality of these financial institutions could cause the Portfolio's
investments backed by that institution to lose value and affect the Portfolio's
share price.
4
<PAGE>
The Portfolio faces municipal market risk. This is the risk that special
factors may adversely affect the value of municipal securities and have a
significant effect on the yield or value of the Portfolio's investments. These
factors include political or legislative changes, uncertainties related to the
tax status of municipal securities, or the rights of investors in these
securities. Because the Portfolio invests primarily in municipal securities
issued by California or its political subdivisions, it is vulnerable to events
adversely affecting California's economy, including economic, political or
regulatory occurrences. The Portfolio's investments in certain municipal
securities with principal and interest payments that are made from the revenues
of a specific project or facility, and not general tax revenues, may have
increased risks. Factors affecting the project or facility, such as local
business or economic conditions, could have a significant effect on the
project's ability to make payments of principal and interest on these
securities.
The Portfolio may invest up to 10% of its net assets in illiquid
securities, including illiquid restricted securities. Investments in illiquid
securities may be subject to liquidity risk, which is the risk that, under
certain circumstances, particular investments may be difficult to sell at an
advantageous price. Illiquid restricted securities also are subject to the risk
that the Portfolio may be unable to sell the security due to legal or
contractual restrictions on resale.
The Portfolio also is subject to management risk because it is an actively
managed portfolio. Alliance will apply its investment techniques and risk
analyses in making investment decisions for the Portfolio, but there is no
guarantee that its techniques will produce the intended result.
--------------------------------------------------------------------------------
MANAGEMENT OF THE PORTFOLIO
--------------------------------------------------------------------------------
The Portfolio's investment adviser is Alliance Capital Management L.P.,
1345 Avenue of the Americas, New York, New York 10105. Alliance is a leading
international investment adviser managing client accounts with assets as of
October 2, 2000 totaling more than $474 billion (of which more than $187 billion
represented assets of investment companies). As of October 2, 2000, Alliance
managed retirement assets for many of the largest public and private employee
benefit plans (including 38 of the nation's FORTUNE 100 companies), for public
employee retirement funds in 35 states, for investment companies, and for
foundations, endowments, banks and insurance companies worldwide. The 53
registered investment companies, managed by Alliance, comprising 136 separate
investment portfolios, currently have more than 6.3 million shareholder
accounts.
Alliance provides investment advisory services and order placement
facilities for the Portfolio. For these advisory services, the Portfolio pays
Alliance, for each fiscal year, a fee at an annualized rate of .20% as a
percentage of the average daily value of its net assets.
Alliance may make significant payments from its own resources, which may
include the management fees paid by the Portfolio, to compensate your
broker-dealer, depository institutions, or other persons for providing
distribution assistance and administrative services and to otherwise promote the
sale of Class A shares of the Portfolio, including paying for the preparation,
printing, and distribution of prospectuses and sales literature or other
promotional activities. Financial intermediaries may receive different
compensation for selling the Portfolio's Class A shares and Class B and Class C
shares, which are not offered in this prospectus.
5
<PAGE>
--------------------------------------------------------------------------------
PURCHASE AND SALE OF SHARES
--------------------------------------------------------------------------------
How The Portfolio Values Its Shares
The Portfolio's net asset value, or NAV, which is the price at which
shares of the Portfolio are sold and redeemed, is expected to be constant at
$1.00 per share, although this price is not guaranteed. The NAV is calculated at
12:00 Noon, Eastern time, on each Portfolio business day (i.e., each weekday
exclusive of days the New York Stock Exchange or the banks in Massachusetts are
closed).
To calculate NAV, the Portfolio's assets are valued and totaled,
liabilities subtracted and the balance, called net assets, is divided by the
number of shares outstanding. The Portfolio values its securities at their
amortized cost. This method involves valuing an instrument at its cost and
thereafter applying a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the investment.
How To Buy Shares
o Initial Investment
You may purchase the Portfolio's shares directly from Alliance Fund
Services, Inc., ("AFS"), by calling (800) 237-5822 and following the procedures
below.
-- After you give AFS the following information, AFS will provide you
with an account number:
a) the name of the account;
b) the address of the account; and
c) the taxpayer identification number.
-- After you receive an account number you may purchase the Portfolio's
shares by instructing your bank to wire Federal funds to AFS exactly
as follows:
ABA 0110 0002 8
State Street Bank and Trust Company
Boston, MA 02101
Alliance Institutional Reserves, Inc.--
California Tax-Free Portfolio
DDA 9903-279-9
Your account name
Your account number
-- Mail a completed Application Form to:
Alliance Fund Services, Inc.
P.O. Box 1520
Secaucus, New Jersey 07096-1520
The minimum investment amount is $1,000,000 in the aggregate among all of
the Portfolios of Alliance Institutional Reserves, Inc. There is no minimum for
subsequent investments. The Portfolio reserves the right to vary the minimum
investment amounts.
o Application Form
-- To obtain an Application Form, please telephone AFS toll-free at
(800) 237-5822. You also may obtain information about the
Application Form, purchasing shares, or other Fund procedures by
calling this number.
-- If you decide to change instructions or any other information
already given on your Application Form, send a written notice to AFS
at the address above with your signature guaranteed. Signatures must
be guaranteed by an institution that is an "eligible guarantor" as
defined in Rule 17Ad-15 of the Securities Exchange Act of 1934. This
would include such institutions as banks and brokerage firms.
o Subsequent Investments
You may purchase additional shares in the Portfolio by calling AFS at the
number set forth above and:
-- Instructing your bank to wire Federal funds to AFS under the same
procedures as described above for initial purchases; or
-- Mailing your check or negotiable bank draft payable to Alliance
Institutional Reserves, Inc.--California Tax-Free Portfolio at the
address set forth above.
If you invest by a check drawn on a member of the Federal Reserve System,
the check will be converted to Federal funds in one business day following
receipt and then invested in the Portfolio. If you invest by a check drawn on a
bank that is not a member of the Federal Reserve System, the check may take
longer to be converted and invested. All payments must be in U.S. dollars.
6
<PAGE>
How To Sell Shares
You may "redeem" your shares (i.e., sell your shares) on any Portfolio
business day by contacting your financial intermediary. If your redemption
request is received by Alliance Fund Services, Inc. ("AFS") by 12:00 Noon,
Eastern time, your proceeds normally will be wired the same business day. If you
recently purchased shares by check, you cannot redeem your investment until AFS
is reasonably satisfied the check has cleared (which may take up to 15 days).
Other
The Portfolio has one transaction time each Portfolio business day, 12:00
Noon, Eastern time. Investments receive the full dividend for a day if the
investor's telephone order is received by AFS by 12:00 Noon, Eastern time, and
Federal funds or bank wire monies are received by State Street Bank before 12:00
Noon on that day.
Redemption proceeds are normally wired the same business day if a
redemption request is received by AFS prior to 12:00 Noon, Eastern time, but in
no event later than seven days, unless redemptions have been suspended or
postponed due to the determination of an "emergency" by the Securities and
Exchange Commission or to certain other unusual conditions. Shares do not earn
dividends on the day a redemption is effected.
A transaction, service, administrative or other similar fee may be charged
by your broker-dealer, agent, financial representative or other financial
intermediary with respect to the purchase, sale or exchange of shares made
through these financial intermediaries. These financial intermediaries may also
impose requirements with respect to the purchase, sale or exchange of shares
that are different from, or in addition to, those imposed by the Portfolio.
--------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
--------------------------------------------------------------------------------
The Portfolio's net income is calculated and paid daily as dividends to
shareholders. The dividends are automatically invested in additional shares in
your account. These additional shares are entitled to dividends on following
days resulting in compounding growth of income. The Portfolio expects that its
distributions will primarily consist of net income, or, if any, short-term
capital gains as opposed to long-term capital gains. For Federal income tax
purposes, the Portfolio's dividend distributions of net income (or short-term
capital gains) that are not tax-exempt will be taxable to you as ordinary
income.
Distributions of tax-exempt interest income earned by the Portfolio are
not subject to Federal income tax (other than the AMT). Any exempt-interest
dividends derived from interest on municipal securities subject to the AMT will
be a tax preference item for purposes of the Federal individual and corporate
AMT.
Distributions to residents of California out of income earned by the
Portfolio from California municipal securities or U.S. Government securities are
exempt from California personal income taxes.
Each year shortly after December 31, the Portfolio will send you tax
information stating the amount and type of all of its distributions for the
year. Each investor should consult his or her own tax advisor to determine the
tax status, with regard to his or her tax situation, of distributions from the
Portfolio.
7
<PAGE>
--------------------------------------------------------------------------------
GENERAL INFORMATION
--------------------------------------------------------------------------------
The Portfolio reserves the right to close an account that through
redemption is, in the aggregate among all Portfolios of Alliance Institutional
Reserves, Inc., less than $500,000. The Portfolio will send shareholders 60
days' written notice to increase the account value before the Portfolio closes
the account.
During drastic economic or market developments, you might have difficulty
in reaching AFS by telephone, in which event you should issue written
instructions to AFS. AFS is not responsible for the authenticity of telephone
requests to purchase or sell shares. AFS will employ reasonable procedures to
verify that telephone requests are genuine and could be liable for losses
resulting from unauthorized transactions if it failed to do so. Dealers and
agents may charge a commission for handling telephone requests. The telephone
service may be suspended or terminated at any time without notice.
8
<PAGE>
For more information about the Portfolio, the following document is available
upon request:
o Statement of Additional Information (SAI)
The Portfolio has an SAI, which contains more detailed information about the
Portfolio, including its operations and investment policies. The Portfolio's SAI
is incorporated by reference into (and is legally part of) this prospectus.
You may request a free copy of the SAI, or make inquires concerning the
Portfolio, by contacting your broker or other financial intermediary, or by
contacting Alliance:
By mail: c/o Alliance Fund Services, Inc.
P.O. Box 1520, Secaucus, NJ 07096
By phone: For Information and Literature:
(800) 824-1916
Or you may view or obtain these documents from the Securities and Exchange
Commission:
o Call the Commission at 1-202-942-8090 for information on the operation of
the Public Reference Room.
o Reports and other information about the Portfolio are available on the
EDGAR Database on the Commission's Internet site at http://www.sec.gov
o Copies of the information may be obtained, after paying a duplicating fee,
by electronic request at publicinfo@ sec.gov, or by writing the
Commission's Public Reference Section, Wash. DC 20549-0102
On the Internet: www.sec.gov
You also may find more information about Alliance and the Portfolio on the
Internet at: www.Alliancecapital.com.
--------------------------------------------------------------------------------
Table of Contents
-----------------
RISK/RETURN SUMMARY......................................................... 2
Performance and Bar Chart Information.................................... 2
FEES AND EXPENSES OF THE PORTFOLIO.......................................... 3
OTHER INFORMATION ABOUT THE PORTFOLIO'S
OBJECTIVES, STRATEGIES, AND RISKS ....................................... 3
Investment Objectives and Strategies..................................... 3
Risk Considerations...................................................... 4
MANAGEMENT OF THE PORTFOLIO................................................. 5
PURCHASE AND SALE OF SHARES................................................. 6
How The Portfolio Values Its Shares...................................... 6
How To Buy Shares........................................................ 6
How To Sell Shares....................................................... 7
Other.................................................................... 7
DIVIDENDS, DISTRIBUTIONS AND TAXES.......................................... 7
GENERAL INFORMATION......................................................... 8
--------------------------------------------------------------------------------
File No. 811-6068
AIRCAPROA1100
<PAGE>
This is filed pursuant to Rule 497(c).
File Nos. 33-34001 and 811-06068.
<PAGE>
--------------------------------------------------------------------------------
Alliance
Institutional
Reserves
--------------------------------------------------------------------------------
o California Tax-Free Portfolio
Prospectus
Class B Shares
November 22, 2000
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
--------------------------------------------------------------------------------
<PAGE>
Alliance Institutional Reserves, Inc. consists of six distinct portfolios.
This prospectus describes the Class B shares of the California Tax-Free
Portfolio. The Portfolio's investment adviser is Alliance Capital Management
L.P., a global investment manager providing diversified services to institutions
and individuals through a broad line of investments including more than 100
mutual funds.
--------------------------------------------------------------------------------
RISK/RETURN SUMMARY
--------------------------------------------------------------------------------
The following is a summary of certain key information about the Portfolio.
You will find additional information about the Portfolio, including a detailed
description of the risks of an investment in the Portfolio, after this summary.
Objectives: The investment objectives of the Portfolio are -- in the
following order of priority -- safety of principal, excellent liquidity and
maximum current income (exempt from Federal and California state personal income
taxes to the extent described below) to the extent consistent with the first two
objectives.
Principal Investment Strategy: The Portfolio is a "money market fund" that
seeks to maintain a stable net asset value of $1.00 per share. The Portfolio
invests primarily in high-quality municipal securities issued by the State of
California or its political subdivisions. The Portfolio is non-diversified and
only offered to residents of California.
Principal Risks: The principal risks of investing in the Portfolio are:
o Interest Rate Risk This is the risk that changes in interest rates will
adversely affect the yield or value of the Portfolio's investments in debt
securities.
o Credit Risk This is the risk that the issuer or guarantor of a debt
security will be unable or unwilling to make timely interest or principal
payments, or to otherwise honor its obligations. The degree of risk for a
particular security may be reflected in its credit rating. Credit risk includes
the possibility that any of the Portfolio's investments will have its credit
ratings downgraded.
o Municipal Market Risk This is the risk that special factors, such as
political and legislative changes and local business and economic developments,
may adversely affect the yield or value of the Portfolio's investments. Because
the Portfolio invests primarily in municipal securities of California issuers,
it is vulnerable to events adversely affecting California, including economic,
political or regulatory occurrences.
o Diversification Risk The Portfolio is not diversified and can invest
more of its assets in a relatively small number of issuers with a greater
concentration of risk. Factors affecting these issuers can have a more
significant effect on the Portfolio.
Another important thing for you to note:
An investment in the Portfolio is not a deposit in a bank and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. Although the Portfolio seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in the
Portfolio.
PERFORMANCE AND BAR CHART INFORMATION
There is no performance table or bar chart for the Portfolio because it
has not completed a full calendar year of operations.
You may obtain current seven-day yield information for the Portfolio by
calling (800) 237-5822.
2
<PAGE>
--------------------------------------------------------------------------------
FEES AND EXPENSES OF THE PORTFOLIO
--------------------------------------------------------------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Portfolio.
Shareholder Fees (fees paid directly from your investment)
None
Annual Portfolio Operating Expenses (expenses that are deducted from Portfolio
assets)
Management Fees................................................. .20%
Distribution (12b-1) Fees....................................... .10%
Other Expenses*................................................. .17%
----
Total Portfolio Operating Expenses.............................. .47%
Expense Reimbursement**......................................... (.17)%
----
Net Expenses.................................................... .30%
----------
* "Other Expenses" are based on estimated amounts for the current fiscal
year.
** Reflects Alliance's contractual reimbursement of a portion of the
Portfolio's operating expenses so that the Portfolio's expense ratio does
not exceed .30%. This reimbursement extends through the end of the
Portfolio's current fiscal year and may be extended by Alliance for
additional one year terms.
EXAMPLES***
The examples are to help you compare the cost of investing in the Portfolio with
the cost of investing in other funds. They assume that you invest $10,000 in the
Portfolio for the time periods indicated and then redeem all of your shares at
the end of those periods. They also assume that your investment has a 5% return
each year, the Portfolio's operating expenses stay the same, and all dividends
and distributions are reinvested. Your actual costs may be higher or lower.
Examples
--------
1 Year...................................................... $ 31
3 Years..................................................... $134
----------
*** These examples assume that Alliance's agreement to reimburse a portion of
the Portfolio's operating expenses is not extended beyond its initial
term.
--------------------------------------------------------------------------------
OTHER INFORMATION ABOUT THE PORTFOLIO'S OBJECTIVES, STRATEGIES, AND RISKS
--------------------------------------------------------------------------------
This section of the prospectus provides a more complete description of the
investment objectives and principal strategies and risks of the Portfolio.
Please note:
o Additional descriptions of the Portfolio's strategies and investments,
as well as other strategies and investments not described below, may be found in
the Portfolio's Statement of Additional Information or SAI.
o There can be no assurance that the Portfolio will achieve its investment
objectives.
o Except as noted, the Portfolio's investment objectives and strategies
are not fundamental and thus can be changed without a shareholder vote.
Investment Objectives and Strategies
As a money market fund, the Portfolio must meet the requirements of
Securities and Exchange Commission Rule 2a-7. The Rule imposes strict
requirements on the investment quality, maturity and diversification of the
Portfolio's investments. Under that Rule, the Portfolio's investments must have
a remaining maturity of no more than 397 days and the Portfolio must maintain an
average weighted maturity that does not exceed 90 days.
The Portfolio pursues its objectives by investing in high-quality
municipal securities and, as a matter of fundamental policy, normally will
invest at least 80% of its total assets in these securities. Although the
Portfolio may invest up to 20% of its total assets in taxable money market
securities, substantially all of the Portfolio's income normally will be
tax-exempt. The Portfolio may purchase
3
<PAGE>
municipal securities issued by other states if Alliance believes that suitable
municipal securities of California are not available for investment. To the
extent of its investments in other states' municipal securities, the Portfolio's
income will be exempt only from Federal income tax, not state personal income or
other state tax.
The Portfolio seeks maximum current income that is exempt from Federal and
California state personal income taxes by investing not less than 65% of its
total assets in a portfolio of high-quality municipal securities issued by the
State of California or its political subdivisions. The Portfolio also may invest
in restricted securities (i.e., securities subject to legal or contractual
restrictions on resale).
The Portfolio will limit its investments so that no more than 20% of its
total income is derived from municipal securities that bear interest subject to
the Federal alternative minimum tax ("AMT").
Municipal Securities. The Portfolio's investments in municipal securities
include municipal notes and short-term municipal bonds. Municipal notes are
generally used to provide for short-term capital needs and generally have
maturities of 397 days or less. Examples include tax anticipation and revenue
anticipation notes, which are generally issued in anticipation of various
seasonal revenues, bond anticipation notes, and tax-exempt commercial paper.
Short-term municipal bonds may include general obligation bonds, which are
secured by the issuer's pledge of its faith, credit, and taxing power for
payment of principal and interest, and revenue bonds, which are generally paid
from the revenues of a particular facility or a specific excise or other source.
The Portfolio may invest in adjustable rate obligations whose interest
rates are adjusted either at predesignated periodic intervals or whenever there
is a change in the market rate to which the security's interest rate is tied.
These adjustments tend to minimize changes in the market value of the obligation
and, accordingly, enhance the ability of the Portfolio to maintain a stable net
asset value. Adjustable rate securities purchased may include participation
interests in private activity bonds backed by letters of credit of Federal
Deposit Insurance Corporation member banks.
The Portfolio also may invest in stand-by commitments, which may involve
certain expenses and risks, but the Portfolio does not expect its investment in
stand-by commitments to comprise a significant portion of its investments. In
addition, the Portfolio may purchase when-issued securities.
Taxable Investments. The Portfolio may invest up to 20% of its total
assets in taxable money market securities, which may include obligations of the
U.S. Government and its agencies, high-quality certificates of deposit and
bankers' acceptances, prime commercial paper, and repurchase agreements.
Temporary Defensive Position. For temporary defensive purposes when
financial, economic, or market conditions warrant, the Portfolio may invest any
amount of its assets in taxable money market securities. When the Portfolio is
investing for temporary defensive purposes, it may not achieve its investment
objectives.
Risk Considerations
The Portfolio's principal risks are interest rate risk, credit risk and
municipal market risk. Because the Portfolio invests in short-term securities, a
decline in interest rates will affect the Portfolio's yields as these securities
mature or are sold and the Portfolio purchases new short-term securities with
lower yields. Generally, an increase in interest rates causes the value of a
debt instrument to decrease. The change in value for shorter-term securities is
usually smaller than for securities with longer maturities. Because the
Portfolio invests in securities with short maturities and seeks to maintain a
stable net asset value of $1.00 per share, it is possible, though unlikely, that
an increase in interest rates would change the value of your investment.
Credit risk is the possibility that a security's credit rating will be
downgraded or that the issuer of the security will default (fail to make
scheduled interest and principal payments). The Portfolio invests in
highly-rated securities to minimize credit risk.
The quality and liquidity of certain of the Portfolio's investments in
municipal securities are supported by credit and liquidity enhancements, such as
letters of credit, from third-party financial institutions. The Portfolio
continuously monitors the credit quality of third parties; however, changes in
the credit quality of these financial institutions could cause the Portfolio's
investments backed by that institution to lose value and affect the Portfolio's
share price.
4
<PAGE>
The Portfolio faces municipal market risk. This is the risk that special
factors may adversely affect the value of municipal securities and have a
significant effect on the yield or value of the Portfolio's investments. These
factors include political or legislative changes, uncertainties related to the
tax status of municipal securities, or the rights of investors in these
securities. Because the Portfolio invests primarily in municipal securities
issued by California or its political subdivisions, it is vulnerable to events
adversely affecting California's economy, including economic, political or
regulatory occurrences. The Portfolio's investments in certain municipal
securities with principal and interest payments that are made from the revenues
of a specific project or facility, and not general tax revenues, may have
increased risks. Factors affecting the project or facility, such as local
business or economic conditions, could have a significant effect on the
project's ability to make payments of principal and interest on these
securities.
The Portfolio may invest up to 10% of its net assets in illiquid
securities, including illiquid restricted securities. Investments in illiquid
securities may be subject to liquidity risk, which is the risk that, under
certain circumstances, particular investments may be difficult to sell at an
advantageous price. Illiquid restricted securities also are subject to the risk
that the Portfolio may be unable to sell the security due to legal or
contractual restrictions on resale.
The Portfolio also is subject to management risk because it is an actively
managed portfolio. Alliance will apply its investment techniques and risk
analyses in making investment decisions for the Portfolio, but there is no
guarantee that its techniques will produce the intended result.
--------------------------------------------------------------------------------
MANAGEMENT OF THE PORTFOLIO
--------------------------------------------------------------------------------
The Portfolio's investment adviser is Alliance Capital Management L.P.,
1345 Avenue of the Americas, New York, New York 10105. Alliance is a leading
international investment adviser managing client accounts with assets as of
October 2, 2000 totaling more than $474 billion (of which more than $187 billion
represented assets of investment companies). As of October 2, 2000, Alliance
managed retirement assets for many of the largest public and private employee
benefit plans (including 38 of the nation's FORTUNE 100 companies), for public
employee retirement funds in 35 states, for investment companies, and for
foundations, endowments, banks and insurance companies worldwide. The 53
registered investment companies, managed by Alliance, comprising 136 separate
investment portfolios, currently have approximately 6.3 million shareholder
accounts.
Alliance provides investment advisory services and order placement
facilities for the Portfolio. For these advisory services, the Portfolio pays
Alliance, for each fiscal year, a fee at an annualized rate of .20% as a
percentage of the average daily value of its net assets.
Alliance may make significant payments from its own resources, which may
include the management fees paid by the Portfolio, to compensate your
broker-dealer, depository institutions, or other persons for providing
distribution assistance and administrative services and to otherwise promote the
sale of Class B shares of the Portfolio, including paying for the preparation,
printing, and distribution of prospectuses and sales literature or other
promotional activities.
--------------------------------------------------------------------------------
PURCHASE AND SALE OF SHARES
--------------------------------------------------------------------------------
How The Portfolio Values Its Shares
The Portfolio's net asset value, or NAV, which is the price at which
shares of the Portfolio are sold and redeemed, is expected to be constant at
$1.00 per share, although this price is not guaranteed. The NAV is calculated at
12:00 noon, Eastern time, on each Portfolio business day (i.e., each weekday
exclusive of days the New York Stock Exchange or the banks in Massachusetts are
closed).
To calculate NAV, the Portfolio's assets are valued and totaled,
liabilities subtracted and the balance, called net assets, is divided by the
number of shares outstanding. The Portfolio values its securities at their
amortized cost. This method involves valuing an instrument at its cost
5
<PAGE>
and thereafter applying a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the investment.
How To Buy Shares
o Initial Investment
You may purchase Class B shares through your financial intermediary by
instructing the intermediary to invest in the Portfolio.
The minimum investment amount is $1,000,000 in the aggregate among all of
the Portfolios of Alliance Institutional Reserves, Inc. There is no minimum for
subsequent investments. The Portfolio reserves the right to vary the minimum
investment amounts.
o Subsequent Investments
By Check:
Mail or deliver your check or negotiable draft payable to your financial
intermediary, who will deposit it into the Portfolio. Please indicate your
brokerage account number, if applicable, on the check or draft.
By Sweep:
Your financial intermediary may offer an automatic "sweep" for the
Portfolio in the operation of brokerage cash accounts for its customers. Contact
your financial intermediary to determine if a sweep is available and what the
sweep requirements are.
If you invest by a check drawn on a member of the Federal Reserve System,
the check will be converted to Federal funds in one business day following
receipt and then invested in the Portfolio. If you invest by a check drawn on a
bank that is not a member of the Federal Reserve System, the check may take
longer to be converted and invested. All payments must be in U.S. dollars.
How To Sell Shares
You may "redeem" your shares (i.e., sell your shares) on any Portfolio
business day by contacting your financial intermediary. If your redemption
request is received by Alliance Fund Services, Inc. ("AFS") by 12:00 Noon,
Eastern time, your redemption proceeds normally will be wired the same business
day. If you recently purchased shares by check, you cannot redeem your
investment until the Portfolio is reasonably satisfied the check has cleared
(which may take up to 15 days).
If your financial intermediary offers an automatic sweep arrangement, you
also may redeem your shares by sweep. The sweep will automatically transfer from
your Portfolio account sufficient amounts to cover security purchases in your
brokerage account.
Other
The Portfolio has one transaction time each Portfolio business day, 12:00
Noon, Eastern time. Investments receive the full dividend for a day if the
investor's telephone order is received by AFS by 12:00 Noon, Eastern time, and
Federal funds or bank wire monies are received by State Street Bank before 12:00
Noon on that day.
Redemption proceeds are normally wired the same business day if a
redemption request is received by AFS prior to 12:00 Noon, Eastern time, but in
no event later than seven days, unless redemptions have been suspended or
postponed due to the determination of an "emergency" by the Securities and
Exchange Commission or to certain other unusual conditions. Shares do not earn
dividends on the day a redemption is effected.
A transaction, service, administrative or other similar fee may be charged
by your broker-dealer, agent, financial representative or other financial
intermediary with respect to the purchase, sale or exchange of shares made
through these financial intermediaries. These financial intermediaries may also
impose requirements with respect to the purchase, sale or exchange of shares
that are different from, or in addition to, those imposed by the Portfolio.
--------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
--------------------------------------------------------------------------------
The Portfolio's net income is calculated and paid daily as dividends to
shareholders. The dividends are automatically invested in additional shares in
your account. These additional shares are entitled to dividends on following
days resulting in compounding growth of income. The Portfolio expects that its
distributions will primarily consist of net income, or, if any, short-term
capital gains as opposed to long-term capital gains. For Federal income
6
<PAGE>
tax purposes, the Portfolio's dividend distributions of net income (or
short-term capital gains) that are not tax-exempt will be taxable to you as
ordinary income.
Distributions of tax-exempt interest income earned by the Portfolio are
not subject to Federal income tax (other than the AMT). Any exempt interest
dividends derived from interest on municipal securities subject to the AMT will
be a tax preference item for purposes of the Federal individual and corporate
AMT.
Distributions to residents of California out of income earned by the
Portfolio from California municipal securities or U.S. Government securities are
exempt from California personal income taxes.
Each year shortly after December 31, the Portfolio will send you tax
information stating the amount and type of all of its distributions for the
year. Each investor should consult his or her own tax advisor to determine the
tax status, with regard to his or her tax situation, of distributions from the
Portfolio.
--------------------------------------------------------------------------------
DISTRIBUTION ARRANGEMENTS
--------------------------------------------------------------------------------
The Fund has adopted a plan under SEC Rule 12b-1 that allows the Portfolio
to pay asset-based sales charges or distribution and service fees in connection
with the distribution of each Portfolio's Class B shares. The amount of these
fees for the Portfolio's Class B shares is .10% as a percentage of aggregate
average daily net assets. Because these fees are paid out of the Portfolio'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 fees.
Financial intermediaries may receive different compensation for selling the
Portfolio's Class B shares and Class A and Class C shares, which are not offered
in this prospectus.
--------------------------------------------------------------------------------
GENERAL INFORMATION
--------------------------------------------------------------------------------
The Portfolio reserves the right to close an account that through
redemption is, in the aggregate among all Portfolios of Alliance Institutional
Reserves, Inc., less than $500,000. The Portfolio will send shareholders 60
days' written notice to increase the account value before the Portfolio closes
the account.
During drastic economic or market developments, you might have difficulty
in reaching AFS by telephone, in which event you should issue written
instructions to AFS. AFS is not responsible for the authenticity of telephone
requests to purchase or sell shares. AFS will employ reasonable procedures to
verify that telephone requests are genuine and could be liable for losses
resulting from unauthorized transactions if it failed to do so. Dealers and
agents may charge a commission for handling telephone requests. The telephone
service may be suspended or terminated at any time without notice.
7
<PAGE>
(This page left intentionally blank.)
8
<PAGE>
For more information about the Portfolio, the following document is available
upon request:
o Statement of Additional Information (SAI)
The Portfolio has an SAI, which contains more detailed information about the
Portfolio, including its operations and investment policies. The Portfolio's SAI
is incorporated by reference into (and is legally part of) this prospectus.
You may request a free copy of the SAI, or make inquiries concerning the
Portfolio, by contacting your broker or other financial intermediary, or by
contacting Alliance:
By mail: c/o Alliance Fund Services, Inc.
P.O. Box 1520, Secaucus, NJ 07096
By phone: For Information and Literature:
(800) 824-1916
Or you may view or obtain these documents from the Securities and Exchange
Commission:
o Call the Commission at 1-202-942-8090 for information on the operation of
the Public Reference Room.
o Reports and other information about the Portfolio are available on the
EDGAR Database on the Commission's Internet site at http://www.sec.gov
o Copies of the information may be obtained, after paying a duplicating fee,
by electronic request at publicinfo@ sec.gov, or by writing the
Commission's Public Reference Section, Wash. DC 20549-0102
On the Internet: www.sec.gov
You also may find more information about Alliance and the Portfolio on the
Internet at: www.Alliancecapital.com.
--------------------------------------------------------------------------------
Table of Contents
-----------------
RISK/RETURN SUMMARY......................................................... 2
FEES AND EXPENSES OF THE PORTFOLIO.......................................... 3
OTHER INFORMATION ABOUT THE PORTFOLIO'S OBJECTIVES,
STRATEGIES, AND RISKS ................................................... 3
Investment Objectives and Strategies..................................... 3
Risk Considerations...................................................... 4
MANAGEMENT OF THE PORTFOLIO................................................. 5
PURCHASE AND SALE OF SHARES................................................. 5
How The Portfolio Values Its Shares...................................... 5
How To Buy Shares........................................................ 6
How To Sell Shares....................................................... 6
Other.................................................................... 6
DIVIDENDS, DISTRIBUTIONS AND TAXES.......................................... 6
DISTRIBUTION ARRANGEMENTS................................................... 7
GENERAL INFORMATION......................................................... 7
--------------------------------------------------------------------------------
File No. 811-6068
AIRCAPROB1100
<PAGE>
This is filed pursuant to Rule 497(c).
File Nos. 33-34001 and 811-06068.
<PAGE>
--------------------------------------------------------------------------------
Alliance
Institutional
Reserves
--------------------------------------------------------------------------------
o California Tax-Free Portfolio
Prospectus
Class C Shares
November 22, 2000
The Securities and Exchange Commission has not approved or disapproved
these securities or passed upon the adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
--------------------------------------------------------------------------------
<PAGE>
Alliance Institutional Reserves, Inc. consists of six distinct portfolios.
This prospectus describes the Class C shares of the California Tax-Free
Portfolio. The Portfolio's investment adviser is Alliance Capital Management
L.P., a global investment manager providing diversified services to institutions
and individuals through a broad line of investments including more than 100
mutual funds.
--------------------------------------------------------------------------------
RISK/RETURN SUMMARY
--------------------------------------------------------------------------------
The following is a summary of certain key information about the Portfolio.
You will find additional information about the Portfolio, including a detailed
description of the risks of an investment in the Portfolio, after this summary.
Objectives: The investment objectives of the Portfolio are -- in the
following order of priority -- safety of principal, excellent liquidity and
maximum current income (exempt from Federal and California state personal income
taxes to the extent described below) to the extent consistent with the first two
objectives.
Principal Investment Strategy: The Portfolio is a "money market fund" that
seeks to maintain a stable net asset value of $1.00 per share. The Portfolio
invests primarily in high-quality municipal securities issued by the State of
California or its political subdivisions. The Portfolio is non-diversified and
only offered to residents of California.
Principal Risks: The principal risks of investing in the Portfolio are:
o Interest Rate Risk This is the risk that changes in interest rates will
adversely affect the yield or value of the Portfolio's investments in debt
securities.
o Credit Risk This is the risk that the issuer or guarantor of a debt
security will be unable or unwilling to make timely interest or principal
payments, or to otherwise honor its obligations. The degree of risk for a
particular security may be reflected in its credit rating. Credit risk includes
the possibility that any of the Portfolio's investments will have its credit
ratings downgraded.
o Municipal Market Risk This is the risk that special factors, such as
political and legislative changes and local business and economic developments,
may adversely affect the yield or value of the Portfolio's investments. Because
the Portfolio invests primarily in municipal securities of California issuers,
it is vulnerable to events adversely affecting California, including economic,
political or regulatory occurrences.
o Diversification Risk The Portfolio is not diversified and can invest
more of its assets in a relatively small number of issuers with a greater
concentration of risk. Factors affecting these issuers can have a more
significant effect on the Portfolio.
Another important thing for you to note:
An investment in the Portfolio is not a deposit in a bank and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. Although the Portfolio seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in the
Portfolio.
PERFORMANCE AND BAR CHART INFORMATION
There is no performance table or bar chart for the Portfolio because it
has not completed a full calendar year of operations.
You may obtain current seven-day yield information for the Portfolio by
calling (800) 237-5822.
2
<PAGE>
--------------------------------------------------------------------------------
FEES AND EXPENSES OF THE PORTFOLIO
--------------------------------------------------------------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Portfolio.
Shareholder Fees (fees paid directly from your investment)
None
Annual Portfolio Operating Expenses (expenses that are deducted from Portfolio
assets)
Management Fees.............................................. .20%
Distribution (12b-1) Fees.................................... .25%
Other Expenses*.............................................. .17%
----
Total Portfolio Operating Expenses........................... .62%
Expense Reimbursement**...................................... (.17%)
-----
Net Expenses................................................. .45%
----------
* "Other Expenses" are based on estimated amounts for the current fiscal
year.
** Reflects Alliance's contractual reimbursement of a portion of the
Portfolio's operating expenses so that the Portfolio's expense ratio does
not exceed .45%. This reimbursement extends through the end of the
Portfolio's current fiscal year and may be extended by Alliance for
additional one year terms.
EXAMPLES***
The examples are to help you compare the cost of investing in the Portfolio with
the cost of investing in other funds. They assume that you invest $10,000 in the
Portfolio for the time periods indicated and then redeem all of your shares at
the end of those periods. They also assume that your investment has a 5% return
each year, the Portfolio's operating expenses stay the same, and all dividends
and distributions are reinvested. Your actual costs may be higher or lower.
Examples
--------
1 Year..................................................... $ 46
3 Years.................................................... $181
----------
*** These examples assume that Alliance's agreement to reimburse a portion of
the Portfolio's operating expenses is not extended beyond its initial
term.
--------------------------------------------------------------------------------
OTHER INFORMATION ABOUT THE PORTFOLIO'S OBJECTIVES, STRATEGIES, AND RISKS
--------------------------------------------------------------------------------
This section of the prospectus provides a more complete description of the
investment objectives and principal strategies and risks of the Portfolio.
Please note:
o Additional descriptions of the Portfolio's strategies and investments,
as well as other strategies and investments not described below, may be found in
the Portfolio's Statement of Additional Information or SAI.
o There can be no assurance that the Portfolio will achieve its investment
objectives.
o Except as noted, the Portfolio's investment objectives and strategies
are not fundamental and thus can be changed without a shareholder vote.
Investment Objectives and Strategies
As a money market fund, the Portfolio must meet the requirements of
Securities and Exchange Commission Rule 2a-7. The Rule imposes strict
requirements on the investment quality, maturity and diversification of the
Portfolio's investments. Under that Rule, the Portfolio's investments must have
a remaining maturity of no more than 397 days and the Portfolio must maintain an
average weighted maturity that does not exceed 90 days.
The Portfolio pursues its objectives by investing in high-quality
municipal securities and, as a matter of fundamental policy, normally will
invest at least 80% of its total assets in these securities. Although the
Portfolio may invest up to 20% of its total assets in taxable money market
securities, substantially all of the Portfolio's income normally will be
tax-exempt. The Portfolio may purchase
3
<PAGE>
municipal securities issued by other states if Alliance believes that suitable
municipal securities of California are not available for investment. To the
extent of its investments in other states' municipal securities, the Portfolio's
income will be exempt only from Federal income tax, not state personal income or
other state tax.
The Portfolio seeks maximum current income that is exempt from Federal and
California state personal income taxes by investing not less than 65% of its
total assets in a portfolio of high-quality municipal securities issued by the
State of California or its political subdivisions. The Portfolio also may invest
in restricted securities (i.e., securities subject to legal or contractual
restrictions on resale).
The Portfolio will limit its investments so that no more than 20% of its
total income is derived from municipal securities that bear interest subject to
the Federal alternative minimum tax (the "AMT").
Municipal Securities. The Portfolio's investments in municipal securities
include municipal notes and short-term municipal bonds. Municipal notes are
generally used to provide for short-term capital needs and generally have
maturities of 397 days or less. Examples include tax anticipation and revenue
anticipation notes, which are generally issued in anticipation of various
seasonal revenues, bond anticipation notes, and tax-exempt commercial paper.
Short-term municipal bonds may include general obligation bonds, which are
secured by the issuer's pledge of its faith, credit, and taxing power for
payment of principal and interest, and revenue bonds, which are generally paid
from the revenues of a particular facility or a specific excise or other source.
The Portfolio may invest in adjustable rate obligations whose interest
rates are adjusted either at predesignated periodic intervals or whenever there
is a change in the market rate to which the security's interest rate is tied.
These adjustments tend to minimize changes in the market value of the obligation
and, accordingly, enhance the ability of the Portfolio to maintain a stable net
asset value. Adjustable rate securities purchased may include participation
interests in private activity bonds backed by letters of credit of Federal
Deposit Insurance Corporation member banks.
The Portfolio also may invest in stand-by commitments, which may involve
certain expenses and risks, but the Portfolio does not expect its investment in
stand-by commitments to comprise a significant portion of its investments. In
addition, the Portfolio may purchase when-issued securities.
Taxable Investments. The Portfolio may invest up to 20% of its total
assets in taxable money market securities, which may include obligations of the
U.S. Government and its agencies, high-quality certificates of deposit and
bankers' acceptances, prime commercial paper, and repurchase agreements.
Temporary Defensive Position. For temporary defensive purposes when
financial, economic, or market conditions warrant, the Portfolio may invest any
amount of its assets in taxable money market securities. When the Portfolio is
investing for temporary defensive purposes, it may not achieve its investment
objectives.
Risk Considerations
The Portfolio's principal risks are interest rate risk, credit risk and
municipal market risk. Because the Portfolio invests in short-term securities, a
decline in interest rates will affect the Portfolio's yields as these securities
mature or are sold and the Portfolio purchases new short-term securities with
lower yields. Generally, an increase in interest rates causes the value of a
debt instrument to decrease. The change in value for shorter-term securities is
usually smaller than for securities with longer maturities. Because the
Portfolio invests in securities with short maturities and seeks to maintain a
stable net asset value of $1.00 per share, it is possible, though unlikely, that
an increase in interest rates would change the value of your investment.
Credit risk is the possibility that a security's credit rating will be
downgraded or that the issuer of the security will default (fail to make
scheduled interest and principal payments). The Portfolio invests in
highly-rated securities to minimize credit risk.
The quality and liquidity of certain of the Portfolio's investments in
municipal securities are supported by credit and liquidity enhancements, such as
letters of credit, from third-party financial institutions. The Portfolio
continuously monitors the credit quality of third parties; however, changes in
the credit quality of these financial institutions could cause the Portfolio's
investments backed by that institution to lose value and affect the Portfolio's
share price.
4
<PAGE>
The Portfolio faces municipal market risk. This is the risk that special
factors may adversely affect the value of municipal securities and have a
significant effect on the yield or value of the Portfolio's investments. These
factors include political or legislative changes, uncertainties related to the
tax status of municipal securities, or the rights of investors in these
securities. Because the Portfolio invests primarily in municipal securities
issued by California or its political subdivisions, it is vulnerable to events
adversely affecting California's economy, including economic, political or
regulatory occurrences. The Portfolio's investments in certain municipal
securities with principal and interest payments that are made from the revenues
of a specific project or facility, and not general tax revenues, may have
increased risks. Factors affecting the project or facility, such as local
business or economic conditions, could have a significant effect on the
project's ability to make payments of principal and interest on these
securities.
The Portfolio may invest up to 10% of its net assets in illiquid
securities, including illiquid restricted securities. Investments in illiquid
securities may be subject to liquidity risk, which is the risk that, under
certain circumstances, particular investments may be difficult to sell at an
advantageous price. Illiquid restricted securities also are subject to the risk
that the Portfolio may be unable to sell the security due to legal or
contractual restrictions on resale.
The Portfolio also is subject to management risk because it is an actively
managed portfolio. Alliance will apply its investment techniques and risk
analyses in making investment decisions for the Portfolio, but there is no
guarantee that its techniques will produce the intended result.
--------------------------------------------------------------------------------
MANAGEMENT OF THE PORTFOLIO
--------------------------------------------------------------------------------
The Portfolio's investment adviser is Alliance Capital Management L.P.,
1345 Avenue of the Americas, New York, New York 10105. Alliance is a leading
international investment adviser managing client accounts with assets as of
October 2, 2000 totaling more than $474 billion (of which more than $187 billion
represented assets of investment companies). As of October 2, 2000, Alliance
managed retirement assets for many of the largest public and private employee
benefit plans (including 38 of the nation's FORTUNE 100 companies), for public
employee retirement funds in 35 states, for investment companies, and for
foundations, endowments, banks and insurance companies worldwide. The 53
registered investment companies, managed by Alliance, comprising 136 separate
investment portfolios, currently have more than 6.3 million shareholder
accounts.
Alliance provides investment advisory services and order placement
facilities for the Portfolio. For these advisory services, the Portfolio pays
Alliance, for each fiscal year, a fee at an annualized rate of .20% as a
percentage of the average daily value of its net assets.
Alliance may make significant payments from its own resources, which may
include the management fees paid by the Portfolio, to compensate your
broker-dealer, depository institutions, or other persons for providing
distribution assistance and administrative services and to otherwise promote the
sale of Class C shares of the Portfolio, including paying for the preparation,
printing, and distribution of prospectuses and sales literature or other
promotional activities.
--------------------------------------------------------------------------------
PURCHASE AND SALE OF SHARES
--------------------------------------------------------------------------------
How the Portfolio Values Its Shares
The Portfolio's net asset value, or NAV, which is the price at which
shares of the Portfolio are sold and redeemed, is expected to be constant at
$1.00 per share, although this price is not guaranteed. The NAV is calculated at
12:00 noon, Eastern time, on each Portfolio business day (i.e., each weekday
exclusive of days the New York Stock Exchange or the banks in Massachusetts are
closed).
To calculate NAV, the Portfolio's assets are valued and totaled,
liabilities subtracted and the balance, called
5
<PAGE>
net assets, is divided by the number of shares outstanding. The Portfolio values
its securities at their amortized cost. This method involves valuing an
instrument at its cost and thereafter applying a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the investment.
How To Buy Shares
o Initial Investment
You may purchase Class C shares through your financial intermediary by
instructing the intermediary to invest in the Portfolio.
The minimum investment amount is $1,000,000 in the aggregate among all of
the Portfolios of Alliance Institutional Reserves, Inc. There is no minimum for
subsequent investments. The Portfolio reserves the right to vary the minimum
investment amounts.
o Subsequent Investments
By Check:
Mail or deliver your check or negotiable draft payable to your financial
intermediary, who will deposit it into the Portfolio. Please indicate your
brokerage account number, if applicable, on the check or draft.
By Sweep:
Your financial intermediary may offer an automatic "sweep" for the
Portfolio in the operation of brokerage cash accounts for its customers. Contact
your financial intermediary to determine if a sweep is available and what the
sweep requirements are.
If you invest by a check drawn on a member of the Federal Reserve System,
the check will be converted to Federal funds in one business day following
receipt and then invested in the Portfolio. If you invest by a check drawn on a
bank that is not a member of the Federal Reserve System, the check may take
longer to be converted and invested. All payments must be in U.S. dollars.
How To Sell Shares
You may "redeem" your shares (i.e., sell your shares) on any Portfolio
business day by contacting your financial intermediary. If your redemption
request is received by Alliance Fund Services, Inc. ("AFS") by 12:00 Noon,
Eastern time, your redemption proceeds normally will be wired the same business
day. If you recently purchased shares by check, you cannot redeem your
investment until the Portfolio is reasonably satisfied the check has cleared
(which may take up to 15 days).
You also may redeem your shares:
By Sweep:
If your financial intermediary offers an automatic sweep arrangement, you
also may redeem your shares by sweep. The sweep will automatically transfer from
your Portfolio account sufficient amounts to cover security purchases in your
brokerage account.
By Checkwriting:
With this service, you may write checks made payable to any payee. First,
you must fill out a signature card, which you may obtain from your financial
intermediary. If you wish to establish this checkwriting service subsequent to
the opening of your Portfolio account, contact your financial intermediary.
There is no charge for this service, except that State Street Bank will impose
its normal charges for checks that are returned unpaid because of insufficient
funds or for checks upon which you have placed a stop order. The checkwriting
service enables you to receive the daily dividends declared on the shares to be
redeemed until the day that your check is presented for payment. You can not
write checks for more than the principal balance (not including any accrued
dividends) in your account.
Other
The Portfolio has one transaction time each Portfolio business day, 12:00
Noon, Eastern time. Investments receive the full dividend for a day if the
investor's telephone order is received by AFS by 12:00 Noon, Eastern time, and
Federal funds or bank wire monies are received by State Street Bank before 12:00
Noon on that day.
Redemption proceeds are normally wired the same business day if a
redemption request is received by AFS prior to 12:00 Noon, Eastern time, but in
no event later than seven days, unless redemptions have been suspended or
postponed due to the determination of an "emergency" by the Securities and
Exchange Commission or to certain other unusual conditions. Shares do not earn
dividends on the day a redemption is effected.
6
<PAGE>
A transaction, service, administrative or other similar fee may be charged
by your broker-dealer, agent, financial representative or other financial
intermediary with respect to the purchase, sale or exchange of shares made
through these financial intermediaries. These financial intermediaries may also
impose requirements with respect to the purchase, sale or exchange of shares
that are different from, or in addition to, those imposed by the Portfolio.
--------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
--------------------------------------------------------------------------------
The Portfolio's net income is calculated and paid daily as dividends to
shareholders. The dividends are automatically invested in additional shares in
your account. These additional shares are entitled to dividends on following
days resulting in compounding growth of income. The Portfolio expects that its
distributions will primarily consist of net income, or, if any, short-term
capital gains as opposed to long-term capital gains. For Federal income tax
purposes, the Portfolio's dividend distributions of net income (or short-term
capital gains) that are not tax-exempt will be taxable to you as ordinary
income.
Distributions of tax-exempt interest income earned by the Portfolio are
not subject to Federal income tax (other than the AMT). Any exempt-interest
dividends derived from interest on municipal securities subject to the AMT will
be a tax preference item for purposes of the Federal individual and corporate
AMT.
Distributions to residents of California out of income earned by the
Portfolio from California municipal securities or U.S. Government securities are
exempt from California personal income taxes.
Each year shortly after December 31, the Portfolio will send you tax
information stating the amount and type of all of its distributions for the
year. Each investor should consult his or her own tax advisor to determine the
tax status, with regard to his or her tax situation, of distributions from the
Portfolio.
--------------------------------------------------------------------------------
DISTRIBUTION ARRANGEMENTS
--------------------------------------------------------------------------------
The Fund has adopted a plan under SEC Rule 12b-1 that allows the Portfolio
to pay asset-based sales charges or distribution and service fees in connection
with the distribution of the Portfolio's Class C shares. The amount of these
fees for the Portfolio's Class C shares is .25% as a percentage of aggregate
average daily net assets. Because these fees are paid out of the Portfolio'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 fees.
Financial intermediaries may receive different compensation for selling the
Portfolio's Class C shares and Class A and Class B shares, which are not offered
in this prospectus.
--------------------------------------------------------------------------------
GENERAL INFORMATION
--------------------------------------------------------------------------------
The Portfolio reserves the right to close an account that through
redemption is, in the aggregate among all Portfolios of Alliance Institutional
Reserves, Inc., less than $500,000. The Portfolio will send shareholders 60
days' written notice to increase the account value before the Portfolio closes
the account.
During drastic economic or market developments, you might have difficulty
in reaching AFS by telephone, in which event you should issue written
instructions to AFS. AFS is not responsible for the authenticity of telephone
requests to purchase or sell shares. AFS will employ reasonable procedures to
verify that telephone requests are genuine and could be liable for losses
resulting from unauthorized transactions if it failed to do so. Dealers and
agents may charge a commission for handling telephone requests. The telephone
service may be suspended or terminated at any time without notice.
7
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8
<PAGE>
For more information about the Portfolio, the following document is available
upon request:
o Statement of Additional Information (SAI)
The Portfolio has an SAI, which contains more detailed information about the
Portfolio, including its operations and investment policies. The Portfolio's SAI
is incorporated by reference into (and is legally part of) this prospectus.
You may request a free copy of the SAI, or make inquires concerning the
Portfolio, by contacting your broker or other financial intermediary, or by
contacting Alliance:
By mail: c/o Alliance Fund Services, Inc.
P.O. Box 1520,
Secaucus, New Jersey 07096
By phone: For Information and Literature:
(800) 824-1916
Or you may view or obtain these documents from the Securities and Exchange
Commission:
o Call the Commission at 1-202-942-8090 for information on the operation of
the Public Reference Room.
o Reports and other information about the Portfolio are available on the
EDGAR Database on the Commission's Internet site at http://www.sec.gov
o Copies of the information may be obtained, after paying a duplicating fee,
by electronic request at publicinfo@ sec.gov, or by writing the
Commission's Public Reference Section, Wash. DC 20549-0102
On the Internet: www.sec.gov
You also may find more information about Alliance and the Portfolio on the
Internet at: www.Alliancecapital.com.
--------------------------------------------------------------------------------
Table of Contents
-----------------
RISK/RETURN SUMMARY......................................................... 2
FEES AND EXPENSES OF THE PORTFOLIO.......................................... 3
OTHER INFORMATION ABOUT THE PORTFOLIO'S
OBJECTIVES, STRATEGIES, AND RISKS......................................... 3
Investment Objectives and Strategies...................................... 3
Risk Considerations....................................................... 4
MANAGEMENT OF THE PORTFOLIO................................................. 5
PURCHASE AND SALE OF SHARES................................................. 5
How The Portfolio Values Its Shares....................................... 5
How To Buy Shares......................................................... 6
How To Sell Shares........................................................ 6
Other..................................................................... 6
DIVIDENDS, DISTRIBUTIONS AND TAXES.......................................... 7
DISTRIBUTION ARRANGEMENTS................................................... 7
GENERAL INFORMATION......................................................... 7
--------------------------------------------------------------------------------
File No. 811-6068
AIRCAPROC1100
<PAGE>
This is filed pursuant to Rule 497(c).
File Nos. 33-34001 and 811-06068.
<PAGE>
[LOGO] ALLIANCE INSTITUTIONAL RESERVES, INC.
-California Tax-Free Portfolio
____________________________________________________________
c/o Alliance Fund Services, Inc.
P.O. Box 1520, Secaucus, New Jersey 07096
Toll Free (800) 221-5672
____________________________________________________________
STATEMENT OF ADDITIONAL INFORMATION
November 22, 2000
___________________________________________________________
This Statement of Additional Information is not a prospectus
and should be read in conjunction with the Fund's current
Prospectuses, dated November 22, 2000, (the "Prospectuses")
which describe the Class A, Class B and Class C shares of
the California Tax-Free Portfolio of the Fund. A copy of
the Prospectuses may be obtained by contacting Alliance Fund
Services, Inc. at the address or telephone number shown
above.
TABLE OF CONTENTS
Page
The Fund..............................................
Investment Objectives and Policies....................
Investment Restrictions ..............................
Management............................................
Expenses of the Fund..................................
Purchase and Redemption of Shares.....................
Daily Dividends-Determination of Net Asset Value......
Taxes.................................................
General Information...................................
Appendix A - Commercial Paper and Bond Ratings........
Appendix B - Description of Municipal Securities......
___________________________
(R): This registered service mark used under license from
the owner, Alliance Capital Management L.P.
<PAGE>
____________________________________________________________
THE FUND
____________________________________________________________
Alliance Institutional Reserves, Inc. (the "Fund") is an
open-end investment company. The California Tax-Free
Portfolio, which is non-diversified (the "Portfolio"), is
described by the Prospectuses which supplement this
Statement of Additional Information. Additional portfolios
of the Fund, the Prime Portfolio, the Government Portfolio,
the Tax-Free Portfolio, the Treasury Portfolio and the Trust
Portfolio, are described in separate prospectuses and
statements of additional information. The Fund changed its
name from ACM Institutional Reserves, Inc. to Alliance
Institutional Reserves, Inc. effective June 29, 1998.
____________________________________________________________
INVESTMENT OBJECTIVES AND POLICIES
____________________________________________________________
The investment objectives of the Portfolio are - in the
following order of priority - safety of principal, excellent
liquidity, and maximum current income (exempt from Federal
and California state personal income taxes) to the extent
consistent with the first two objectives. The Portfolio
pursues its objectives by maintaining a portfolio of high-
quality municipal securities, all of which, at the time of
investment, have remaining maturities of 397 days, or such
greater length of time as may be permitted from time to time
pursuant to Rule 2a-7 under the Investment Company Act of
1940, as amended (the "Act"). The Fund may in the future
establish additional portfolios which may have different
investment objectives. As is true with all investment
companies, there can be no assurance that any of the
Portfolio's objectives will be achieved.
General
The Portfolio will comply with Rule 2a-7 under the Act,
as amended from time to time, including the diversification,
quality and maturity conditions imposed by the Rule. To the
extent that the Portfolio's limitations are more permissive
than Rule 2a-7, the Portfolio will comply with the more
restrictive provisions of the Rule.
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<PAGE>
Currently, pursuant to Rule 2a-7, the Portfolio may
invest only in U.S. dollar-denominated "Eligible Securities"
(as that term is defined in the Rule) that have been
determined by the Portfolio's adviser, Alliance Capital
Management L.P. ("Alliance" or the "Adviser") to present
minimal credit risks pursuant to procedures approved by the
Board of Directors. Generally, an Eligible Security is a
security that (i) has a remaining maturity of 397 days or
less and (ii) is rated, or is issued by an issuer with
short-term debt outstanding that is rated, in one of the two
highest rating categories by two nationally recognized
statistical rating organizations ("NRSROS") or, if only one
NRSRO has issued a rating, by that NRSRO (the "requisite
NRSROs"). A first tier security is an Eligible Security
that has received a short-term rating from the requisite
NRSROs in the highest short-term rating category for debt
obligations, or is an unrated security deemed to be of
comparable quality. Unrated securities may also be Eligible
Securities if the Adviser determines that they are of
comparable quality to a rated Eligible Security pursuant to
guidelines approved by the Board of Directors. A
description of the ratings of some NRSROs appears in
Appendix A attached hereto. Securities in which the
Portfolio invests may be subject to liquidity or credit
enhancements. These securities are generally considered to
be Eligible Securities if the enhancement or the issuer of
the enhancement has received the appropriate rating from the
requisite NRSROs.
Under Rule 2a-7, with respect to 75% of its assets, the
Portfolio may not invest more than five percent of its
assets in the securities of any one issuer other than the
United States Government, its agencies and
instrumentalities. Government securities are considered to
be first tier securities. In addition, the Portfolio may
not invest in a conduit security that has received, or is
deemed comparable in quality to a conduit security that has
received, the second highest rating by the requisite number
of NRSROs (a "second tier security") if immediately after
the acquisition thereof the Portfolio would have invested
more than (A) the greater of one percent of its total assets
or one million dollars in securities issued by that issuer
which are second tier securities, or (B) five percent of its
total assets in second tier securities (the "second tier
security restriction"). A conduit security for purposes of
Rule 2a-7 is a security nominally issued by a municipality,
but dependent for principal and interest payments on non-
municipal issuer's revenues from a non-municipal project.
3
<PAGE>
Portfolio Policies
As a matter of fundamental policy, the Portfolio, except
when assuming a temporary defensive position, must maintain
at least 80% of its total assets in municipal securities.
Although the Portfolio may invest up to 20% of its total
assets in taxable money market securities, substantially all
of the Portfolio's income normally will be tax-exempt. The
Portfolio may purchase municipal securities issued by states
other than the State of California if the Adviser believes
that suitable municipal securities of that state are not
available for investment. To the extent it invests in other
states' municipal securities, the Portfolio's income will be
exempt only from Federal income tax, not state personal
income tax or other state tax.
To the extent consistent with its other investment
objectives, the Portfolio seeks maximum current income that
is exempt from both Federal income taxes and State of
California tax by investing principally in a non-diversified
portfolio of high quality municipal securities issued by the
State of California or its political subdivisions. Except
when the Portfolio assumes a temporary defensive position,
at least 65% of its total assets will be so invested. The
Portfolio also may invest in restricted securities. Those
restricted securities that are determined by the Adviser to
be liquid in accordance with procedures adopted by the Board
of Directors, including securities eligible for resale under
Rule 144A under the Securities Act of 1933 (the "Securities
Act"), will not be treated as illiquid securities.
Restricted securities are securities subject to contractual
or legal restrictions on resale, such as those arising from
an issuer's reliance upon certain exemptions from
registration under the Securities Act. Shares of the
Portfolio are offered only to California residents.
Apart from the risks associated with investment in any
money market fund seeking tax-exempt income, such as default
by municipal issuers and fluctuation in short-term interest
rates, investors in the Portfolio should consider the
greater risks of the Portfolio's concentration versus the
safety that comes with a less concentrated investment
portfolio and should compare yields available on portfolios
of California issues with those of more diversified
portfolios, including other states' issues, before making an
investment decision. The Portfolio is a non-diversified
4
<PAGE>
investment company and, accordingly, the permitted
concentration of investments may present greater risks than
in the case of a diversified investment company. (See below
"Special Risk Factors of Concentration in a Single State.")
Municipal Securities
The term "municipal securities," as used in the
Prospectuses and this Statement of Additional Information,
means obligations issued by or on behalf of states,
territories, and possessions of the United States or their
political subdivisions, agencies and instrumentalities, the
interest from which is exempt (subject to the alternative
minimum income tax) from Federal income taxes. The
municipal securities in which the Portfolio invests include
those obligations which at the time of purchase:
1. are backed by the full faith and credit of the
United States; or
2. are municipal notes, municipal bonds or other types
of municipal securities rated in the two highest
rating categories by the requisite nationally
recognized statistical rating organizations
("NRSROs") such as Moody's Investors Services, Inc.
or Standard and Poor's Corporation, or judged by
the Adviser to be of comparable quality. (See
Appendix B for a description of municipal
securities and Appendix A for a description of
these ratings.)
Alternative Minimum Tax
Under current Federal income tax law, (1) interest on
tax-exempt municipal securities issued after August 7, 1986
which are "specified private activity bonds" and the
proportionate share of any exempt-interest dividend paid by
a regulated investment company that receives interest from
such private activity bonds, will be treated as an item of
tax preference for purposes of the alternative minimum tax
("AMT") imposed on individuals and corporations, though for
regular Federal income tax purposes such interest will
remain fully tax-exempt, and (2) interest on all tax-exempt
obligations will be included in "adjusted current earnings"
of corporations for AMT purposes. Such "private activity"
municipal bonds ("AMT-Subject Bonds") have provided, and may
continue to provide, somewhat higher yields than other
comparable municipal securities. However, the Portfolio
5
<PAGE>
will limit its investments so that no more than 20% of its
total income is derived from municipal securities that bear
interest subject to the AMT.
Investors should consider that, in most instances, no
state, municipality or other governmental unit with taxing
power will be obligated with respect to AMT-Subject Bonds.
AMT-Subject Bonds are in most cases revenue bonds and do not
generally have the pledge of the credit or the taxing power,
if any, of the issuer of such bonds. AMT-Subject Bonds are
generally limited obligations of the issuer supported by
payments from private business entities and not by the full
faith and credit of a state or any governmental subdivision.
Typically the obligation of the issuer of AMT-subject bonds
is to make payments to bond holders only out of and to the
extent of, payments made by the private business entity for
whose benefit the AMT-subject bonds were issued. Payment of
the principal and interest on such revenue bonds depends
solely on the ability of the user of the facilities financed
by the bonds to meet its financial obligations and the
pledge, if any, of real and personal property so financed as
security for such payment. It is not possible to provide
specific detail on each of these obligations in which
Portfolio assets may be invested.
Taxable Securities And Temporary Defensive Position
Although the Portfolio expects to be largely invested in
municipal securities, the Portfolio may elect to invest up
to 20% of its total assets in taxable money market
securities when such action is deemed to be in the best
interests of shareholders. For temporary defensive
purposes, when, in the judgment of the Adviser, financial,
economic, and/or market conditions warrant, the Portfolio
may invest any amount of its total assets in taxable money
market securities. When the Portfolio is investing for
temporary defensive purposes, it may not achieve its
investment objectives. Taxable money market securities
purchased by the Portfolio include those described below:
1. marketable obligations of, or guaranteed by, the
United States Government, its agencies or
instrumentalities; or
2. certificates of deposit, bankers' acceptances and
interest-bearing savings deposits of banks having
total assets of more than $1 billion and which are
6
<PAGE>
members of the Federal Deposit Insurance
Corporation; or
3. commercial paper of prime quality rated in the two
highest rating categories by the requisite NRSROs
or, if not rated, issued by companies which have
outstanding debt issue rated in the two highest
rating categories by the requisite NRSROs. (See
Appendix A for description of these ratings.)
Adjustable Rate Obligations
The interest rate payable on certain municipal
securities in which the Portfolio may invest, called
"adjustable rate" obligations, is not fixed and may
fluctuate based upon changes in market rates. The interest
rate payable on an adjustable rate municipal security is
adjusted either at predesignated periodic intervals or
whenever there is a change in the market rate to which the
security's interest rate is tied. Other features may
include the right of the Portfolio to demand prepayment of
the principal amount and accrued interest of the obligation
prior to its stated maturity and the right of the issuer to
prepay the principal amount and accrued interest prior to
maturity. The main benefit of a adjustable rate municipal
security is that the interest rate adjustment minimizes
changes in the market value of the obligation. As a result,
the purchase of adjustable rate municipal securities
enhances the ability of the Portfolio to maintain a stable
net asset value per share and to sell an obligation prior to
maturity at a price approximating the full principal amount.
The payment of principal and interest by issuers of certain
municipal securities purchased by the Portfolio may be
guaranteed by letter of credit or other credit facilities
offered by banks or other financial institutions. Such
guarantees will be considered in determining whether a
municipal security meets the Portfolio's investment quality
requirements.
Adjustable rate obligations purchased by the Portfolio
may include participation interests in adjustable rate
industrial development bonds that are backed by irrevocable
letters of credit or guarantees of banks that meet criteria
for banks described above in "Taxable Securities." Purchase
of a participation interest gives the Portfolio an undivided
interest in certain such bonds. The Portfolio can exercise
the right, on not more than 30 days' notice, to sell such an
instrument back to the bank from which it purchased the
7
<PAGE>
instrument and draw on the letter of credit for all or any
part of the principal amount of the Portfolio's
participation interest in the instrument, plus accrued
interest, but will generally do so only (i) as required to
provide liquidity to the Portfolio, (ii) to maintain a high
quality investment portfolio, or (iii) upon a default under
the terms of the demand instrument. Banks retain portions
of the interest paid on such adjustable rate industrial
development bonds as their fees for servicing such
instruments and the issuance of related letters of credit
and repurchase commitments. The Portfolio follows Rule 2a-7
with respect to its investments in adjustable rate
instruments supported by letters of credit and participation
interests.
The Portfolio will not purchase participation interests
in adjustable rate industrial development bonds unless the
interest earned by the Portfolio from the bonds in which it
holds participation interests is considered to be exempt
from Federal income taxes. The Adviser will monitor the
pricing, quality and liquidity of adjustable rate demand
obligations and participation interests therein held by the
Portfolio on the basis of published financial information,
rating agency reports and other research services to which
the Adviser may subscribe.
Standby Commitments
The Portfolio may purchase municipal securities together
with the right to resell them to the seller at an
agreed-upon price or yield within specified periods prior to
their maturity dates. Such a right to resell is commonly
known as a "standby commitment," and the aggregate price
which the Portfolio pays for securities with a standby
commitment may be higher than the price which otherwise
would be paid.
The acquisition of a standby commitment does not affect
the valuation or maturity of underlying municipal securities
which continue to be valued in accordance with the amortized
cost method. Standby commitments acquired by the Portfolio
are valued at zero in determining net asset value. Where
the Portfolio pays directly or indirectly for a standby
commitment, its cost is reflected as unrealized depreciation
for the period during which the commitment is held. Standby
commitments do not affect the average weighted maturity of
the Portfolio's portfolio of securities.
8
<PAGE>
Repurchase Agreements
The Portfolio may also enter into repurchase agreements
pertaining to the types of securities in which it may
invest. A repurchase agreement arises when a buyer
purchases a security and simultaneously agrees to resell it
to the vendor on an agreed-upon future date, normally one
day or a few days later. The resale price is greater than
the purchase price, reflecting an agreed-upon market rate
which is effective for the period of time the buyer's money
is invested in the security and which is not related to the
coupon rate on the purchased security. Repurchase
agreements may be entered into with creditworthy
counterparties as determined by the Adviser, including
broker-dealers, member banks of the Federal Reserve System
or "primary dealers" (as designated by the Federal Reserve
Bank of New York) in U.S. Government securities or with
State Street Bank and Trust Company ("State Street Bank"),
the Fund's Custodian. For each repurchase agreement, the
Portfolio requires continual maintenance of the market value
of underlying collateral in amounts equal to, or in excess
of, the agreement amount. In the event that a counterparty
defaulted on its repurchase obligation, the Portfolio might
suffer a loss to the extent that the proceeds from the sale
of the collateral were less than the repurchase price. If
the vendor became bankrupt, the Portfolio might be delayed
in selling the collateral. Repurchase agreements often are
for short periods such as one day or a week, but may be
longer. Pursuant to Rule 2a-7, a repurchase agreement is
deemed to be an acquisition of the underlying securities,
provided that the obligation of the seller to repurchase the
securities from the money market fund is collateralized
fully (as defined in such Rule). Accordingly, the
counterparty of a fully collateralized repurchase agreement
is deemed to be the issuer of the underlying securities.
Reverse Repurchase Agreements
The Portfolio may also enter into reverse repurchase
agreements, which involve the sale of money market
securities held by the Portfolio with an agreement to
repurchase the securities at an agreed-upon price, date and
interest payment. The Portfolio does not currently intend
to enter into such agreements during the coming year.
9
<PAGE>
When-Issued Securities
Certain issues that the Portfolio is permitted to
purchase are offered on a "when-issued" basis. When so
offered, the price, which is generally expressed in yield
terms, is fixed at the time the commitment to purchase is
made, but delivery and payment for the when-issued
securities take place at a later date. Normally, the
settlement date occurs from within ten days to one month
after the purchase of the issue. During the period between
purchase and settlement, no payment is made by the Portfolio
to the issuer and, thus, no interest accrues to the
Portfolio from the transaction. When-issued securities may
be sold prior to the settlement date, but the Portfolio
makes when-issued commitments only with the intention of
actually acquiring the securities. To facilitate such
acquisitions, the Fund's Custodian will maintain, in a
separate account of the Portfolio, U.S. Government
securities or other liquid high grade debt securities having
value equal to or greater than commitments held by the
Portfolio. Similarly, a separate account will be maintained
to meet obligations in respect of reverse repurchase
agreements. On delivery dates for such transactions, the
Portfolio will meet its obligations from maturities or sales
of the securities held in the separate account and/or from
the available cash flow. If the Portfolio, however, chooses
to dispose of the right to acquire a when-issued security
prior to its acquisition, it can incur a gain or loss. At
the time the Portfolio makes the commitment to purchase a
security on a when-issued basis, it records the transaction
and reflects the value of the security in determining its
net asset value.
Illiquid Securities and Restricted Securities
The Portfolio will not invest more than 10% of its net
assets in illiquid securities (including illiquid restricted
securities). Illiquid securities may include securities
that are not readily marketable and securities subject to
legal or contractual restrictions on resale.Restricted
securities that are determined by the Adviser to be liquid
in accordance with procedures adopted by the Directors,
including securities eligible for resale under Rule 144A
under the Securities Act of 1933, as amended (the
"Securities Act") and commercial paper issued in reliance
upon the exemption from registration in Section 4(2) of the
Securities Act, will not be treated as illiquid for purposes
of the restriction on illiquid securities.
10
<PAGE>
Restricted securities are securities subject to the
contractual or legal restrictions on resale, such as those
arising from an issuer's reliance upon certain exemptions
from registration under the Securities Act. As to illiquid
securities, the Portfolio is subject to a risk that, should
the Portfolio desire to sell them when a ready buyer is not
available at a price the Portfolio deems representative of
their value, the value of the Portfolio's net assets could
be adversely affected.
The Fund's Directors have the ultimate responsibility
for determining whether specific securities are liquid or
illiquid. The Directors have delegated the function of
making day-to-day determinations of liquidity to the
Adviser, pursuant to guidelines approved by the Directors.
Following the purchase of a restricted security by the
Portfolio, the Adviser monitors continuously the liquidity
of such security and reports to the Directors regarding
purchases of liquid restricted securities.
Asset-Backed Securities
The Portfolio may invest in asset-backed securities that
meet its existing diversification, quality and maturity
criteria. Asset-backed securities are securities issued by
special purpose entities whose primary assets consist of a
pool of loans or accounts receivable. The securities may be
in the form of a beneficial interest in a special purpose
trust, limited partnership interest, or commercial paper or
other debt securities issued by a special purpose
corporation. Although the securities may have some form of
credit or liquidity enhancement, payments on the securities
depend predominately upon collection of the loans and
receivables held by the issuer.
General
Yields on municipal securities are dependent on a
variety of factors, including the general condition of the
money market and of the municipal bond and municipal note
market, the size of a particular offering, the maturity of
the obligation and the rating of the issue. Municipal
securities with longer maturities tend to produce higher
yields and are generally subject to greater price movements
than obligations with shorter maturities. An increase in
interest rates will generally reduce the market value of
11
<PAGE>
portfolio investments and a decline in interest rates will
generally increase the value of portfolio investments.
There can be no assurance, as is true with all investment
companies, that the Portfolio's investment objectives will
be achieved. The achievement of the Portfolio's investment
objectives is dependent in part on the continuing ability of
the issuers of municipal securities in which the Portfolio
invests to meet their obligations for the payment of
principal and interest when due. Municipal securities
historically have not been subject to registration with the
Commission, although there have been proposals which would
require registration in the future. The Portfolio generally
will hold securities to maturity rather than follow a
practice of trading. However, the Portfolio may seek to
improve its income by selling certain portfolio securities
prior to maturity in order to take advantage of yield
disparities that occur in the securities market.
After purchase by the Portfolio, a security may cease to
be rated or its rating may be reduced below the minimum
required for purchase by the Portfolio. Neither event
requires sales of such security by the Portfolio, but the
Adviser will consider such event in its determination of
whether the Portfolio should continue to hold the security,
pursuant to Rule 2a-7. To the extent that the ratings given
by Moody's or Standard & Poor's may change as a result of
changes in such organizations or their rating systems, the
Adviser will attempt to substitute comparable ratings.
Obligations of issuers of municipal securities are
subject to the provisions of bankruptcy, insolvency, and
other laws affecting the rights and remedies of creditors,
such as the Bankruptcy Code. In addition, the obligations
of such issuers may become subject to laws enacted in the
future by Congress, state legislatures, or referenda
extending the time for payment of principal and/or interest,
or imposing other constraints upon enforcement of such
obligations or upon ability of municipalities to levy taxes.
There is also the possibility that, as a result of
litigation or other conditions, the ability of any issuer to
pay, when due, the principal or the interest on its
municipal securities may be materially affected.
Except as otherwise provided above, the Portfolio's
investment objectives and policies are not designated
"fundamental policies" within the meaning of the Act and
may, therefore, be changed without a shareholder vote.
However, the Portfolio will not change its investment
12
<PAGE>
policies without contemporaneous written notice to
shareholders.
Special Risk Factors of Concentration in a Single State
The primary purpose of investing in a portfolio of a
single state's municipal securities is the special tax
treatment accorded that state's resident individual
investors. However, payment of interest and preservation of
principal is dependent upon the continuing ability of the
state's issuers and/or obligors of its state, municipal and
public authority debt obligations to meet their obligations
thereunder. Investors should consider the greater risk of
the concentration of the Portfolio versus the safety that
comes with a less concentrated investment portfolio and
should compare yields available on portfolios of
California's issues with those of more diversified
portfolios, including other states' issues, before making an
investment decision. The Adviser believes that by
maintaining the Portfolio's investment portfolio in liquid,
short-term, high-quality investments, including the
participation interests and other variable rate obligations
that have credit support such as letters of credit from
major financial institutions, the Portfolio is largely
insulated from the credit risks that exist on long-term
municipal securities of the relevant state.
The following summary is included for the purpose of
providing a general description of the credit and financial
conditions of California. The summary is not intended to
provide a complete description of the state. While the
Portfolio has not undertaken to independently verify such
information, it has no reason to believe that such
information is not correct in all material aspects. The
summary does not provide specific information regarding all
securities in which the Portfolio is permitted to invest and
in particular does not provide specific information on the
private business entities whose obligations support the
payments on AMT-Subject Bonds.
The following is based on information obtained from an
Official Statement, dated June 1, 2000, relating to
$350,000,000 State of California General Obligation Bonds
and the California State Budget Highlights 2000-2001.
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Constitutional Limits on Spending and Taxes
Certain California (the "State") constitutional
amendments, legislative measures, executive orders, civil
actions and voter initiatives could adversely affect the
ability of issuers of the State's municipal securities to
pay interest and principal on municipal securities.
Article XIII B. On November 6, 1979, the State's voters
approved Proposition 4, which added Article XIII B to the
State Constitution. Pursuant to Article XIII B, the State
is subject to an annual appropriations limit (the
"Appropriations Limit").
Article XIII B was modified substantially by
Propositions 98 and 111 in 1988 and 1990, respectively.
(See "Proposition 98" below.) "Appropriations subject to
limitation," with respect to the State, are authorizations
to spend "proceeds of taxes," which consist of tax revenues,
and certain other funds, including proceeds from regulatory
licenses, user charges or other fees to the extent that such
proceeds exceed "the cost reasonably borne by the entity in
providing the regulation, product or service," but "proceeds
of taxes" exclude most state subsidies to local governments,
tax refunds and some benefit payments such as unemployment
insurance. No limit is imposed on appropriations of funds
which are not "proceeds of taxes," such as reasonable user
charges or fees, and certain other non-tax funds.
Not included in the Appropriations Limit are
appropriations for the debt service costs of bonds existing
or authorized by January 1, 1979, or subsequently authorized
by the voters, appropriations required to comply with
mandates of courts or the federal government, appropriations
for qualified capital outlay projects, appropriations of
revenues derived from any increase in gasoline taxes and
motor vehicle weight fees above January 1, 1990 levels, and
appropriation of certain special taxes imposed by initiative
(e.g., cigarette and tobacco taxes). The Appropriations
Limit may also be exceeded in cases of emergency.
The State's yearly Appropriations Limit is based on the
limit for the prior year with annual adjustments for changes
in California per capita personal income and population and
any transfers of financial responsibility for providing
services to or from another unit of government.
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As originally enacted in 1979, the Appropriations Limit
was based on 1978-79 fiscal year authorizations to expend
proceeds of taxes and was adjusted annually to reflect
changes in cost of living and population (using different
definitions, which were modified by Proposition 111).
Starting in the 1991-92 Fiscal Year, the Appropriations
Limit was recalculated by taking the actual 1986-87 limit
and applying the annual adjustments as if Proposition 111
had been in effect.
Proposition 98. On November 8, 1988, voters approved
Proposition 98, a combined initiative constitutional
amendment and statute called the "Classroom Instructional
Improvement and Accountability Act." Proposition 98 changed
State funding of public education below the university
level, and the operation of the State Appropriations Limit,
primarily by guaranteeing local schools and community
colleges ("K-14 schools") a minimum share of General Fund
revenues. Under Proposition 98 (as modified by "Proposition
111" which was enacted on June 5, 1990), K-14 schools are
guaranteed the greater of (a) in general, a fixed percent of
General Fund revenues (the "first test"), (b) the amount
appropriated to K-14 schools in the prior year, adjusted for
changes in the cost of living (measured as in Article XIII B
by reference to State per capita personal income) and
enrollment (the "second test"), or (c) a third test, which
would replace the second test in any year when the
percentage growth in per capita General Fund revenues from
the prior year plus one half of one percent is less than the
percentage growth in State per capita personal income.
Under the third test, schools would receive the amount
appropriated in the prior year adjusted for changes in
enrollment and per capita General Fund revenues, plus an
additional small adjustment factor. If the third test is
used in any year, the difference between the third test and
the second test would become a "credit" to schools which
would be the basis of payments in future years when per
capita General Fund revenue growth exceeds per capita
personal income growth. Legislation adopted prior to the
end of the 1988-89 Fiscal Year, implementing Proposition 98,
determined the K-14 schools' funding guarantee under the
first test to be 40.3 percent of the General Fund Tax
revenues, based on 1986-87 appropriations. However, that
amount has been adjusted to 35 percent to account for a
subsequent redirection of local property taxes, since such
redirection directly affects the share of General Fund
revenues to schools.
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During the recession in the early 1990s, General Fund
revenues for several years were less than originally
projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum
percentage provided in the law. The Legislature responded to
these developments by designating the "extra" Proposition 98
payments in one year as a "loan" from future years'
entitlements. By implementing these actions, per-pupil
funding from Proposition 98 sources stayed almost constant
at approximately $4,220 from Fiscal Year 1991-92 to Fiscal
Year 1993-94.
In 1992, a lawsuit was filed, called California
Teachers' Association v. Gould, which challenged the
validity of these off-budget loans. The settlement of this
case, finalized in July 1996, provides, among other things,
that both the State and K-14 schools share in the repayment
of prior years' emergency loans to schools. Of the total
$1.76 billion in loans, the State will repay $935 million by
forgiveness of the amount owed, while schools will repay
$825 million. The State share of the repayment will be
reflected as an appropriation above the current Proposition
98 base calculation. The schools' share of the repayment
will count as appropriations that count toward satisfying
the Proposition 98 guarantee, or from "below" the current
base. Repayments are spread over the eight-year period of
1994-95 through 2001-02 to mitigate any adverse fiscal
impact. The Director of Finance has certified that a
settlement has occurred, allowing approximately $351 million
in appropriations from the 1995-96 Fiscal Year to be
disbursed to schools in August 1996.
State Indebtedness
As part of its cash management program, the State has
regularly issued short-term obligations to meet cash flow
needs. Between spring 1992 and summer 1994, the State had
depended upon external borrowing, including borrowings
extending into the subsequent fiscal year, to meet its cash
needs, including repayment of maturing Notes and Warrants.
The State has not had to resort to such cross-year borrowing
after the 1994-95 Fiscal Year. The State issued $1.7
billion of revenue anticipation notes for the 1998-99 Fiscal
Year, which matured on June 30, 1999.
As of April 1, 2000, the State had outstanding
$20,637,886,000 aggregate principal amount of long-term
general obligation bonds, and unused voter authorizations
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for the future issuance of $15,672,749,000 of long-term
general obligation bonds. This latter figure consists of
$3,641,734,000 of authorized commercial paper notes (of
which $773,565,000 was outstanding), which had not yet been
refunded by general obligation bonds, and $12,031,015,000 of
other authorized but unissued general obligation debt.
The State has always paid the principal of and interest
on its general obligation bonds, lease-purchase debt, and
short-term obligations, including revenue anticipation notes
and revenue anticipation warrants when due.
1997-98 Fiscal Year
On January 9, 1997, the Governor released his proposed
budget for the 1997-98 Fiscal Year (the"Governor's Budget").
The Governor's Budget projected General Fund revenues and
transfers of $50.7 billion, and expenditures of $50.3
billion.
The Budget Act, signed by the Governor, anticipated
General Fund revenues and transfers of $52.5 billion (a 6.8
percent increase over the final 1996-97 amount), and
expenditures of $52.8 billion (an 8.0 percent increase from
the 1996-97 levels). The Budget Act also included Special
Fund expenditures of $14.4 billion (as against estimated
Special Fund revenues of $14.0 billion), and $2.1 billion of
expenditures from various Bond Funds. Following enactment
of the Budget Act, the State implemented its normal annual
cash flow borrowing program, issuing $3.0 billion of notes
which matured on June 30, 1998.
Among the major features of the 1997-98 Budget Act were
the following:
1. For the second year in a row, the Budget contained
a large increase in funding for K-14 education under
Proposition 98, reflecting strong revenues which exceeded
initial budgeted amounts. Part of the nearly $1.75 billion
in increased spending was allocated to prior fiscal years.
Funds were provided to fully pay for the cost-of-living
component of Proposition 98, and to extend the class size
reduction and reading initiatives.
2. The Budget Act reflected the $1.228 billion pension
case judgment payment, and brought funding of the State's
pension contribution back to the quarterly basis which
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existed prior to the deferral actions which were invalidated
by the courts.
3. Funding from the General Fund for the University of
California and California State University was increased by
about 6 percent ($121 million and $107 million,
respectively), and there was no increase in student fees.
4. Unlike prior years, the Budget Act did not depend
on uncertain federal budget actions. About $300 million in
federal funds, already included in the federal Fiscal Year
1997 and 1998 budgets, was included in the Budget Act, to
offset incarceration costs for illegal aliens.
5. The Budget Act contained no tax increases, and no
tax reductions. The Renters Tax Credit was suspended for
another year, saving approximately $500 million.
The Department of Finance released updated estimates for
the 1997-98 Fiscal Year Budget Proposal. Total revenues and
transfers were projected at $52.9 billion, up approximately
$360 million from the Budget Act projection. Expenditures
for the fiscal year were expected to rise approximately $200
million above the original Budget Act, to $53.0 billion.
The balance in the budget reserve, the SFEU, was projected
to be $329 million on June 30, 1998, compared to $461
million on June 30, 1997.
1998-1999 Fiscal Years
When the Governor released his proposed 1998-99 Fiscal
Year Budget in January, 1998, he projected General Fund
revenues for the 1998-99 Fiscal Year of $55.4 billion, and
proposed expenditures in the same amount. By the time the
Governor released the May Revision to the 1998-99 Budget
("1998 May Revision") on May 14, 1998, the Administration
projected that revenues for the 1997-98 and 1998-99 Fiscal
Years combined would be more than $4.2 billion higher than
was projected in January, 1998. The Governor proposed that
most of this increased revenue be dedicated to fund a 75
percent cut in the Vehicle License Fee ("VLF").
The Legislature passed the 1998-99 Budget Bill on August
11, 1998, and the Governor signed it on August 21, 1998. In
signing the Budget Bill, the Governor used his line-item
veto power to reduce expenditures by $1.360 billion from the
General Fund, and $160 million from special funds. Of this
total, the Governor indicated that about $250 million of
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vetoed funds were "set aside" to fund programs for
education. Vetoed items included education funds, salary
increases and many individual resources and capital
projects.
The 1998-99 Budget Act was based on projected General
Fund revenues and transfers of $57.0 billion (after giving
effect to various tax reductions enacted in 1997 and 1998),
a 4.2 percent increase from the then revised 1997-98
figures. Special Fund revenues were estimated at $14.3
billion. The revenue projections were based on the 1998 May
Revision.
After giving effect to the Governor's vetoes, the Budget
Act provided authority for expenditures of $57.3 billion
from the General Fund (a 7.3 percent increase from 1997-98),
$14.7 billion from Special Funds, and $3.4 billion from bond
funds. The Budget Act projected a balance in the SFEU at
June 30, 1999 (but without including the "set aside" veto
amount) of $1.255 billion, a little more than 2 percent of
General Fund revenue. The Budget Act assumed the State will
carry out its normal intra-year cash flow borrowing in the
amount of $1.7 billion of revenue anticipation notes, which
were issued on October 1, 1998.
The most significant feature of the 1998-99 budget was
agreement on a total of $1.4 billion of tax cuts. The
central element was a bill which provided for a phased-in
reduction of the VLF. Since the VLF was transferred to
cities and counties under then-existing law, the bill
provided for the General Fund to replace the lost revenues.
Started on January 1, 1999, the VLF has been reduced by 25
percent, at a cost to the General Fund of approximately $500
million in the 1998-99 Fiscal Year and about $1 billion
annually thereafter.
In addition to the cut in VLF, the 1998-99 budget
included both temporary and permanent increases in the
personal income tax dependent credit ($612 million General
Fund cost in 1998-99, but less in future years), a
nonrefundable renters tax credit ($133 million), and various
targeted business tax credits ($106 million).
Other significant elements of the revised 1998-99 Budget
were as follows:
1. Proposition 98 funding for K-12 schools was
increased by $2.2. billion in General Fund moneys over
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revised 1997-98 levels, over $1 billion higher than the
minimum Proposition 98 guarantee.
2. Funding for higher education increased
substantially above the actual 1997-98 level. General Fund
support was increased by $339 million (15.6 percent) for the
University of California and $271 million (14.5 percent) for
the California State University system. In addition,
Community Colleges increased by $183 million (9.0 percent).
3. The Budget included increased funding for health,
welfare and social services programs. A 4.9 percent grant
increase was included in the basic welfare grants, the first
increase in those grants in 9 years.
4. Funding for the judiciary and criminal justice
programs increased by about 15 percent over 1997-98,
primarily to reflect increased State support for local trial
courts and rising prison population.
5. Various other highlights of the revised Budget
included new funding for resources projects, dedication of
$240 million of General Fund moneys for capital outlay
projects, funding of a state employee salary increase,
funding of 2,000 new Department of Transportation positions
to accelerate transportation construction projects, and
funding of the Infrastructure and Economic Development Bank
($50 million).
6. The State received approximately $167 million of
federal reimbursements to offset costs related to the
incarceration of undocumented alien felons for federal
fiscal year 1997. The State anticipated receiving
approximately $173 million in federal reimbursements for
fiscal year 1998.
The May Revision to the 1999-2000 Governor's Budget
released on May 14, 1999 (the "1999 May Revision"), reported
that stronger than expected economic conditions in the State
for the latter part of 1998 and into 1999 would produce
total 1998-99 General Fund revenues of about $57.9 billion,
almost $1 billion above the Budget Act estimates, and $1.6
billion above the initial estimates in the January
Governor's Budget. The 1999 May Revision projects 1998-99
General Fund expenditures of $58.6 billion, about $400
million higher than the January Governor's Budget estimate.
Some of this additional revenue will be directed to K-14
schools pursuant to Proposition 98. The 1999 May Revision
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projected a balance in the SFEU at June 30, 1999 of almost
$1.9 billion, $1.3 billion higher than estimated in January.
1999-00 Fiscal Year
On January 8, 1999, the Governor released his proposed
budget for Fiscal Year 1999-00 (the "January Governor's
Budget"). The January Governor's Budget generally reported
that General Fund revenues for 1998-99 and 1999-00 would be
lower than earlier projections (primarily due to weaker
overseas economic conditions perceived in late 1998), while
some caseloads would be higher than earlier projections.
The January Governor's Budget proposed $60.5 billion of
expenditures in 1999-00, with a $415 million SFEU reserve at
June 30, 2000. The proposal contained some education
funding initiatives and certain limited initiatives in other
areas, but was overall relatively limited by the expectation
of small revenue gains. As noted above, the 1999 May
Revision now projects over $7.0 billion of additional
revenues for the 1999-00 Fiscal Years. The Governor's
updated spending plan calls for General Fund expenditures of
$67.3 billion in 1999-00. Some of the principal proposals
in the 1999 May Revision are summarized below:
1. Proposition 98 funding for K-12 schools was
increased by $1.6 billion in General Fund moneys over
revised 1998-99 levels, $108.6 million higher than the
minimum Proposition 98 guarantee. Of the 1999-00 funds,
major new programs included money for reading improvement,
new textbooks, school safety, improving teacher quality,
funding teacher bonuses, providing greater accountability
for school performance, increasing preschool and after
school care programs and funding deferred maintenance of
school facilities. The Budget also includes $310 million as
repayment of prior years' loans to schools, as part of the
settlement of the CTA v. Gould lawsuit. See also "State
Finances - Proposition 98" above.
2. Funding for higher education increased
substantially above the actual 1998-99 level. General Fund
support was increased by $184 million (7.3 percent) for the
University of California and $126 million (5.9 percent) for
the California State University system. In addition,
Community Colleges funding increased by $324.3 million (6.6
percent). As a result, undergraduate fees at UC and CSU
will be reduced for the second consecutive year, and the
per-unit charge at Community Colleges will be reduced by $1.
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3. The Budget included increased funding of nearly
$600 million for health and human services.
4. About $800 million from the general fund will be
directed toward infrastructure costs, including $425 million
in additional funding for the Infrastructure Bank, initial
planning costs for a new prison in the Central Valley,
additional equipment for train and ferry service, and
payment of deferred maintenance for state parks.
5. The Legislature enacted a one-year additional
reduction of 10 percent of the VLF for calendar year 2000,
at a General Fund cost of about $250 million in each of FY
1999-00 and 2000-01 to make up lost funding to local
governments. Conversion of this one-time reduction to a
permanent cut will remain subject to the revenue tests in
the legislation adopted last year. See "State Finances -
Sources of Tax Revenue - Special Fund Revenue" above.
Several other targeted tax cuts, primarily for businesses,
were also approved, at a cost of $54 million in 1999-00.
6. A one-time appropriation of $150 million, to be
split between cities and counties, was made to offset
property tax shifts during the early 1990's. Additionally,
an ongoing $50 million was appropriated as a subvention to
cities for jail booking or processing fees charged by
counties when an individual arrested by city personnel is
taken to a county detention facility.
Proposed 2000-01 Fiscal Year Budget
On January 10, 2000, Governor Davis released his
proposed budget for Fiscal Year 2000-01. The 2000-01
Governor's Budget generally reflected an estimate that
General Fund revenues for Fiscal Year 1999-2000 would be
higher than projections made at the time of the 1999 Budget
Act. Even these positive estimates proved to be greatly
understated as continuing economic growth and stock market
gains (at least through the first quarter of 2000) resulted
in a surge of revenues. The Administration estimated in the
2000 May Revision that General Fund revenues would total
$70.9 billion in 1999-2000, and $73.8 billion in 2000-01, a
two-year increase of $12.3 billion above the January
Governor's Budget revenue estimates. The 2000-01 revenue
estimate assumes a $545 million reduction in personal income
tax revenue from the Governor's proposal to provide an
income tax exemption for all teachers in the State.
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The 2000 May Revision proposes General Fund expenditures
of $78.2 billion, as compared to an original spending
proposal of $68.8 billion in the January Governor's Budget.
Included in the revised Budget are set-asides of $500
million for legal contingencies and $200 million for various
one-time legislative initiatives. Based on the proposed
revenues and expenditures, the 2000 May Revision projects
the June 30, 2001 balance in the SFEU to be $1.769 billion,
up from $1.238 billion proposed in the January Governor's
Budget.
The 2000 May Revision contains a number of proposals for
spending the additional revenues, mostly in 2000-01.
According to a report by the Legislative Analyst's Office,
about $7.2 billion is proposed for one-time expenditures,
including a general tax rebate and senior citizen's tax
relief ($1.9 billion), aid to public schools ($1.5 billion),
transportation ($1.5 billion), housing ($500 million), set-
asides and increased reserves ($600 million) and other uses
($1.2 billion). About $5.1 billion is proposed for program
enhancements which would be permanent, including increased
Proposition 98 funds for schools ($2.4 billion), tax relief
(S600 million, including the exemption for teachers
mentioned above), transportation ($440 million per year for
five years), health and social services ($1.1 billion) and
other ($600 million). All of these proposals are subject to
review and action by the Legislature.
Economic Overview
California's economy, the largest among the 50 states
and one of the largest in the world, has major components in
high technology, trade, entertainment, agriculture,
manufacturing, tourism, construction and services. Since
1994, California's economy has been performing strongly
after suffering a deep recession between 1990-93.
The economic expansion has been marked by strong growth
in high technology manufacturing and business services
(including software, computer programming and the Internet),
nonresidential construction, entertainment and tourism-
related industries. Growth in 1999 was greater than earlier
years in the economic expansion, with 3.7% year-over-year
increase in nonfarm payroll employment. Unemployment, now
less than 5%, is at the lowest rate in over 30 years.
Taxable sales in the first quarter of 2000 are 10% above
year-earlier levels. Significant economic improvement in
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Asia (Japan excluded), ongoing strength in NAFTA partners
Mexico and Canada, and stronger growth in Europe are
expected to further increase California-made exports in 2000
and 2001. Nonresidential construction has been strong for
the past four years. New residential construction has
increased since lows of the early 1990's recession, but
remains lower than during the previous economic expansion in
the 1980's.
Litigation
The State is presently involved in certain legal
proceedings that, if decided against the State, may require
the State to make significant future expenditures or may
impair future revenue sources. Following are the more
significant lawsuits pending against the State as of June 1,
1999:
On June 24, 1998, plaintiffs in Howard Jarvis Taxpayers
Association et al. v. Kathleen Connell filed a complaint for
certain declaratory and injunctive relief challenging the
authority of the State Controller to make payments from the
State Treasury in the absence of a state budget. On July
21, 1998, the trial court issued a preliminary injunction
prohibiting the State Controller from paying moneys from the
State Treasury for fiscal year 1998-99, with certain limited
exceptions, in the absence of a state budget. The
preliminary injunction, among other things, prohibited the
State Controller from making any payments pursuant to any
continuing appropriation. On July 22 and 27, 1998, various
employee unions which had intervened in the case appealed
the trial court's preliminary injunction and asked the Court
of Appeal to stay the preliminary injunction. On July 28,
1998, the Court of Appeal granted the unions' requests and
stayed the preliminary injunction pending the Court of
Appeal's decision on the merits of the appeal. On August 5,
1998, the Court of Appeal denied the plaintiffs' request to
reconsider the stay. Also on July 22, 1998, the State
Controller asked the California Supreme Court to immediately
stay the trial court's preliminary injunction and to
overrule the order granting the preliminary injunction on
the merits. On July 29, 1998, the Supreme Court transferred
the State Controller's request to the Court of Appeal. The
matters are now pending before the Court of Appeal. Briefs
have been submitted; no date has yet been set for oral
argument.
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The State is involved in ongoing litigation related to
state-mandated claims, initially filed in 1980 and 1981,
concerning the costs of providing special education programs
and services to disabled children. The case, Thomas Hayes
v. Commission on State Mandates, related to state- mandated
costs. The action involved an appeal by the Director of
Finance from a 1984 decision by the State Board of Control
(now succeeded by the Commission on State Mandates ) in
favor of the local school districts' claims for
reimbursement. In the trial and appellate courts, the State
successfully established that federal special education
requirements impose a "federal mandate" upon the State.
Accordingly, the courts reversed the Board of Control's
decision and remanded the case to the Commission to
determine what remained of the claim. On remand, the
claimant identified several specific aspects of the State's
special education program that allegedly exceeded federal
requirements. The Commission has since expanded the claim
to include supplemental claims filed by several other
institutions. To date, the Legislature has not appropriated
funds. The Commission issued a decision in December 1998
determining that a small number of components of the State's
special education program are state mandated local costs.
The administrative proceeding is in the "parameters and
guidelines" stage where the Commission is considering
whether and to what extent the costs associated with the
state mandated components of the special education program
are offset by funds that the State already allocates to that
program. The State's position is that all costs are offset
by existing funding. The State has the option to seek
judicial review of the mandate finding. Potential liability
of the State, if all potentially eligible school districts
pursue timely claims, has been estimated by the Department
of Finance to be in excess of $1.5 billion, if the State is
not credited for its existing funding of the program. The
Commission was unable to resolve two other identified
aspects of the state's program due to tie votes. As such,
the Commission referred these matters to an administrative
law judge for preparation of recommended decisions. One of
these matters encompasses all special education services for
students between the ages of 3 to 5 and 18 to 21, and thus
represents significant additional potential liability if the
claim is ultimately upheld and the State is denied credit
for its existing funding.
In January of 1997, California experienced major
flooding with preliminary estimates of property damage of
approximately $1.6 to $2.0 billion. In McMahon v. State, a
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substantial number of plaintiffs have joined suit against
the State, local agencies, and private companies and
contractors seeking compensation for the damages they
suffered as a result of the 1997 flooding. After various
pre-trial proceedings, the State filed its answer to the
plaintiffs' complaint in January of 2000. No trial date has
been set. The State is vigorously defending the action.
The State is a defendant in Ceridian Corporation v.
Franchise Tax Board, which challenges the constitutionality
of a Revenue & Taxation Code section which limits deductions
for insurance dividends to those dividends paid from
earnings previously subject to California taxation. On
August 13, 1998, the trial court issued a judgment against
the Franchise Tax Board. The Franchise Tax Board has
appealed the judgment. Briefing has been completed. The
State has taken the position that, if the challenged section
of the Revenue & Taxation Code is struck down, all
deductions relating to dividends would be eliminated and the
result would be additional income to the State. Plaintiffs,
however, contend that if they prevail, the deduction should
be extended to all dividends which would result in a one-
time liability for open years of approximately $60 million,
including interest, and an annual revenue loss of
approximately $10 million. No date has yet been set for
oral argument.
The State is also a defendant in First Credit Bank etc.
v. Franchise Tax Board which challenges a Revenue & Taxation
Code section similar to the one challenged in the Ceridian
case, but applicable to a different group of corporate
taxpayers. The State's motion for summary judgment is
currently pending and a trial date has been set in September
2000. A decision in the Ceridian case could impact the
outcome of this case. The State has taken the position
that, if the challenged section of the Revenue & Taxation
Code is struck down, all deductions relating to dividends
would be eliminated and the result would be additional
income to the State. Plaintiffs, however, contend that if
they prevail, the deduction should be extended to all
dividends which would result in a one-time liability for
open years of approximately $385 million, including
interest, and an annual revenue loss of approximately S60
million.
The State is involved in a lawsuit related to
contamination at the Stringfellow toxic waste site. In
United States, People of the State of California v. J.B.
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Stringfellow, Jr., et al., the State is seeking recovery for
past costs of cleanup of the site, a declaration that the
defendants are jointly and severally liable for future
costs, and an injunction ordering completion of the cleanup.
However, the defendants have filed a counterclaim against
the State for alleged negligent acts, resulting in
significant findings of liability against the State as
owner, operator, and generator of wastes taken to the site.
The State has appealed the rulings. Present estimates of
the cleanup range from $400 million to $600 million.
Potential State liability falls within this same range.
However, all or a portion of any judgment against the State
could be satisfied by recoveries from the State's insurance
carriers. The State has filed a suit against certain of
these carriers. The trial is expected to begin in 2001.
The State is a defendant in Paterno v. State of
California, a coordinated action involving 3,000 plaintiffs
seeking recovery for damages caused by the Yuba River flood
of February 1986. The trial court found liability in
inverse condemnation and awarded damages of $500,000 to a
sample of plaintiffs. The State's potential liability to
the remaining plaintiffs ranges from $800 million to $1.5
billion. In 1992, the State and plaintiffs filed appeals.
In August 1999, the Court of Appeal issued a decision
reversing the trial court's judgment against the State and
remanding the case for retrial on the inverse condemnation
cause of action. The California Supreme Court denied
plaintiffs' petition for review. No trial date has been set
although trial management issues, including whether
plaintiffs have the right to a jury trial on their inverse
condemnation claim and whether trial should be held in Yuba
County, are presently being considered by the trial court.
Plaintiffs in County of San Bernardino v. Barlow
Respiratory Hospital and related actions seek mandamus
relief requiring the State to retroactively increase out-
patient Medi-Cal reimbursement rates. Plaintiffs have
estimated the damages to be several hundred million dollars.
The State is vigorously defending these cases, as well as
related federal cases addressing the calculation of Medi-Cal
reimbursement rates in the future. Trial is scheduled for
September 2000.
The State is involved in two refund actions, Cigarettes
Cheaper!, et al. v. Board of Equalization, et al. and
California Assn. Of Retail Tobacconists (CART), et al. v.
Board of Equalization, et al., that challenge the
27
<PAGE>
constitutionality of Proposition 10, approved by the voters
in 1998. Plaintiffs allege that Proposition 10, which
increases the excise tax on tobacco products, violates 11
sections of the California Constitution and related
provisions of law. Plaintiffs Cigarettes Cheaper! seek
declaratory and injunctive relief and a refund of over $4
million. The CART case filed by retail tobacconists in San
Diego seeks a refund of $5 million. Plaintiffs
McLane/Suneast seek a refund between $500,000 and $1
million. The State is vigorously contesting these cases.
The State's motion for judgment on the pleadings was granted
but the court gave the three sets of plaintiffs permission
to amend their complaints. As a result, the defendants'
motion for summary judgment was taken off the calendar. A
hearing on the State's demurrer to the third amended
complaint by CART, the second amended complaint by
Cigarettes Cheaper! and the first amended complaint by
McLane/Suneast is pending. The State has obtained several
protective orders and extensive discovery continues. If the
statute is declared unconstitutional, exposure may include
the entire $750 million collected annually with interest.
The State is involved in two cases challenging the
constitutionality of the interest offset provisions of the
Revenue and Taxation Code: Hunt-Wesson, Inc., v. Franchise
Tax Board and F.W. Woolworth Co. and Kinney Shoe Corporation
v. Franchise Tax Board. In both cases, the Franchise Tax
Board prevailed in the California Court of Appeal and the
California Supreme Court denied taxpayers' petitions for
review. In both cases, the United States Supreme Court
granted certiorari. On February 22, 2000, the United States
Supreme Court reversed and remanded the Hunt-Wesson case to
the California Court of Appeal for further proceedings.
Although the Court did not take similar action in the
Woolworth Co. case, it is anticipated that it will do so.
The Franchise Tax Board recently estimated that the adverse
decisions in these cases will result in a reduction in state
revenues of approximately $15 million annually, with past
year collection and interest exposure of approximately S95
million.
Guy F. Atkinson Company of California v. Franchise Tax
Board is a corporation tax refund action involving the solar
energy system tax credit provided for under the Revenue &
Taxation Code. The case went to trial in May 1998 and the
trial court entered judgment in favor of the Franchise Tax
Board. The taxpayer has filed an appeal to the California
Court of Appeal and briefing is completed. Oral argument is
28
<PAGE>
scheduled for June 7, 2000. The Franchise Tax Board
estimates that the cost would be $150 million annually if
the plaintiff prevails. Allowing refunds for all open years
would entail a refund of at least S500 million.
Jordan, et al. v. Department of Motor Vehicles, et al.,
challenges the validity of the Vehicle Smog Impact Fee, a
$300 fee which is collected by the Department of Motor
Vehicles from vehicle registrants when a vehicle without a
California new-vehicle certification is first registered in
California. The plaintiffs contend that the fee violates
the interstate commerce and equal protection clauses of the
United States Constitution as well as Article XIX of the
State Constitution. In October, 1999 the Court of Appeal
upheld a trial court judgment for the plaintiffs and the
State has declined to appeal further. Although refunds
through the court actions could be limited by a three-year
statute of limitations, with a potential liability of about
$750 million, the Governor has proposed refunding fees
collected back to the initiation of these fees in 1990.
Legislation has been enacted, which the Governor is prepared
to sign, providing a $665 million supplemental appropriation
in 1999-2000 to pay these claims (see "Current State Budget
-- 1999-2000 Fiscal Year Budget').
PTI Inc., et al. v. Philip Morris, et al. was filed by
five distributors in the cigarette import-/re-entry
business, seeking to overturn the tobacco Master Settlement
Agreement (MSA) entered between 46 states and the tobacco
industry in November, 1998. See "State Finances - Tobacco
Litigation" above. The primary focus of the complaint is
the provision of the MSA encouraging participating states to
adopt a statute requiring nonparticipating manufacturers to
either become participating manufacturers and share the
financial obligations under the MSA or pay money into an
escrow account. Plaintiffs seek compensatory and punitive
damages against the state and state officials and an order
placing tobacco settlement funds into a trust to be
administered by the court for the treatment of medical
expenses of persons injured by tobacco products. Plaintiffs
have filed an amended complaint and the State has filed a
motion to dismiss the amended complaint. A hearing on the
State's motion to dismiss was heard on May 8, 2000. The
potential fiscal impact of an adverse ruling is largely
unknown, but could exceed the full amount of the settlement
(estimated to be $1 billion annually, of which 50 percent
will go directly to the State's General Fund and the other
29
<PAGE>
50 percent directly to the State's 58 counties and 4 largest
cities).
In FORCES Action Project et al. v. State of California
et al., various smokers rights groups challenge the tobacco
settlement as it pertains to California, Utah and the City
and County of San Francisco. Plaintiffs assert a variety of
constitutional challenges, including that the settlement
represents an unlawful tax on smokers. Motions to dismiss
by all defendants, including the tobacco companies, were
eventually converted to summary judgment motions by the
court and heard on September 17, 1999. On January 5, 2000,
the court dismissed the complaint for lack of subject matter
jurisdiction because the plaintiffs lacked standing to sue.
The court also concluded that the plaintiffs' claims against
the State and its officials are barred by the 11th
Amendment. Plaintiffs have appealed. Briefing is expected
to be complete by July, 2000.
Louis Bolduc et al. v. State of California et al. is a
class action filed on July 13, 1999 by six Medi-Cal
beneficiaries who have received medical treatment for
smoking-related diseases. Plaintiffs allege the State owes
them an unspecified portion of the tobacco settlement monies
under a federal regulation that requires a state to turn
over to an injured Medicaid beneficiary any monies the state
recovers from a third party tortfeasor in excess of the
costs of the care provided. The State moved to dismiss the
complaint on September 8, 1999. On February 29, 2000, the
court denied the State's motion to dismiss, but struck the
Plaintiffs' class action allegations. The State is seeking
appellate review of that portion of the court's order
denying its motion to dismiss, and plaintiffs have appealed
the court's striking of their class action allegations. All
written briefs should be filed by August 2000.
Arnett v. California Public Employees Retirement System,
et. al. was filed by seven former employees of the State of
California and local agencies, seeking back wages, damages
and injunctive relief. Plaintiffs are former public safety
members who began employment after the age of 40 and are
recipients of Industrial Disability Retirement ("IDR")
benefits. Plaintiffs contend that the formula which
determines the amount of IDR benefits violates the federal
Age Discrimination in Employment Act of 1967 ("ADEA").
Plaintiffs contend that, but for their ages at hire, they
would receive increased monthly IDR benefits similar to
their younger counterparts who began employment before the
30
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age of 40. CalPERS has estimated the liability to the State
as approximately $315.5 million were the plaintiffs to
prevail. The District Court dismissed the complaint for
failure to state a claim. On August 17, 1999, the Ninth
Circuit Court of Appeals reversed the District Court's
dismissal of the complaint. The State sought further review
in the United States Supreme Court. On January 11, 2000,
the United States Supreme Court in Kimel v. Florida Board of
Regents, held that Congress did not abrogate the sovereign
immunity of the states when it enacted the ADEA.
Thereafter, on January 18, 2000, the Supreme Court granted
the petition for writ of certiorari in Arnett, vacated the
judgment of the Ninth Circuit, and remanded the case to the
Ninth Circuit for further proceedings consistent with Kimel.
In turn, the Ninth Circuit has remanded the case to the
District Court and the state has filed a motion to dismiss
the complaint based upon a lack of subject matter
jurisdiction.
On March 30, 2000, a group of students, parents, and
community based organizations representing school children
in the Los Angeles Unified School District brought a lawsuit
against the State Allocation Board ("SAB"), the State Office
of Public School Construction ('OPSC") and a number of State
officials (Godinez, et al. v. Davis, et al.) in the Superior
Court in the County of Los Angeles. The lawsuit principally
alleges SAB and OPSC have unconstitutionally and improperly
allocated funds to local school districts for new public
school construction as authorized by the Class Size
Reduction Kindergarten-University Public Education
Facilities Bond Act (hereafter referred to as "Proposition
1A"). Plaintiffs allege that funds are not being allocated
reasonably and fairly according to need on the basis of a
uniform, state wide assessment of highest priority needs.
Plaintiffs seek a declaration of the illegality of the
current allocation system, and a preliminary and permanent
injunction and/or a writ of mandate against further
allocation of Proposition 1A funds unless the allocation
system is modified. On May 12, 2000, Judge David P. Yaffe
of the Superior Court denied Plaintiffs' request for a
temporary restraining order, and a hearing on Plaintiffs'
request for a preliminary injunction is scheduled on June
20, 2000. The State will vigorously defend this lawsuit.
The Plaintiffs have not questioned the legality of, or
sought any relief concerning, any commercial paper notes or
bonds issued by the State under Proposition 1A, all of which
funded projects based on allocations made prior to the
filing of the lawsuit. The Attorney General is of the
31
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opinion that the lawsuit does not affect the validity of any
State bonds.
____________________________________________________________
INVESTMENT RESTRICTIONS
____________________________________________________________
Unless otherwise specified to the contrary, the
following restrictions may not be changed without the
affirmative vote of (1) 67% or more of the shares
represented at a meeting at which more than 50% of the
outstanding shares are present in person or by proxy or
(2) more than 50% of the outstanding shares, whichever is
less. If a percentage restriction is adhered to at the time
of an investment, a later increase or decrease in percentage
resulting from a change in values of portfolio securities or
in the amount of the Portfolio's assets will not constitute
a violation of that restriction.
The Portfolio:
1. May not invest more than 25% of its total assets in
the securities of issuers conducting their principal business
activities in any one industry, provided that for purposes of
this policy (a) there is no limitation with respect to
investments in municipal securities (including industrial
development bonds), securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, certificates of
deposit, bankers' acceptances and interest-bearing savings
deposits, and (b) consumer finance companies, industrial finance
companies and gas, electric, water and telephone utility
companies are each considered to be separate industries. For
purposes of this restriction, the Portfolio will regard the
entity which has the primary responsibility for the payment of
interest and principal as the issuer;
2. May not borrow money except from banks on a
temporary basis or via entering into reverse repurchase
agreements for extraordinary or emergency purposes in an
aggregate amount not to exceed 15% of the Portfolio's total
assets. Such borrowings may be used, for example, to facilitate
the orderly maturation and sale of portfolio securities during
periods of abnormally heavy redemption requests, if they should
occur, such borrowings may not be used to purchase investments
and the Portfolio will not purchase any investment while any such
borrowings exist;
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<PAGE>
3. May not issue senior securities except to the
extent permitted by the 1940 Act;
4. May not pledge, hypothecate, mortgage or otherwise
encumber its assets except to secure borrowings, including
reverse repurchase agreements, effected within the limitations
set forth in restriction 2;
5. May not make loans of money or securities except by
the purchase of debt obligations in which the Portfolio may
invest consistent with its investment objectives and policies and
by investment in repurchase agreements;
6. May not invest in real estate (other than
securities secured by real estate or interests therein or
securities issued by companies which invest in real estate or
interests therein), commodities or commodity contracts; and
7. May not act as an underwriter of securities.
NON-FUNDAMENTAL POLICIES
The following policies are not fundamental and may be
changed by the Board of Directors without shareholder approval.
If a percentage restriction is adhered to at the time of an
investment, a later increase or decrease in percentage resulting
from a change in value of portfolio securities or in amount of
the Portfolio's assets will not constitute a violation of that
restriction.
The Portfolio:
1. May not invest more than 5% of its total assets in
the securities of any one issuer (other than securities issued or
guaranteed by the U.S. Government, its agencies or
instrumentalities), except that with respect to 50% of the
Portfolio's total assets the Portfolio may invest in the
securities of as few as four issuers (provided that no more than
25% of the Portfolio's total assets are invested in the
securities of any one issuer).1 For purposes of this limitation,
____________________
1. As a matter of operating policy, pursuant to Rule 2a-7, the
Portfolio may, with respect to 75% of its assets, invest no
more than 5% of its assets in the securities of any one
issuer; the remaining 25% of the Portfolio's assets may be
invested in securities of one or more issuers provided that
they are "first tier securities" as defined in Rule 2a-7.
The policy described herein would give the Portfolio the
(Footnote continued)
33
<PAGE>
the issuer of the letter of credit or other guarantee backing a
participation interest in a variable rate industrial development
bond is deemed to be the issuer of such participation interest;
2. May not purchase more than 10% of any class of the
voting securities of any one issuer except securities issued or
guaranteed by the U.S. Government, its agencies or
instrumentalities;
3. May not invest more than 25% of its total assets in
municipal securities the interest upon which is paid from
revenues of similar-type projects;
4. May not enter into repurchase agreements not
terminable within seven days if, as a result thereof, more than
10% of the Portfolio's net assets would be committed to such
repurchase agreements;
5. May not purchase any securities on margin;
6. May not make short sales of securities or maintain
a short position or write, purchase or sell puts (except for
standby commitments as described in the Prospectus and above),
calls, straddles, spreads or combinations thereof; and
7. May not invest more than 10% of its net assets in
illiquid securities.
____________________________________________________________
MANAGEMENT
____________________________________________________________
Organization
The Portfolio is a series of Alliance Institutional
Reserves, Inc., an open-end management investment company
registered under the 1940 Act and organized as a Maryland
corporation on March 21, 1990. The Portfolio's activities
are supervised by the Board of Directors. The Adviser
provides investment advice and, in general, conducts the
management and investment program of the Fund, subject to
the general supervision and control of the Board of
Directors.
____________________
(Footnote continued)
investment latitude described therein only in the event Rule
2a-7 is further amended in the future.
34
<PAGE>
Normally, shares of each series are entitled to one vote
per share, and vote as a single series, on matters that
affect each series in substantially the same manner.
Maryland law does not require annual meetings of
shareholders and it is anticipated that shareholder meetings
will be held only when required by federal or Maryland law.
Shareholders have available certain procedures for the
removal of directors.
Directors and Officers
The Directors and principal officers of the Fund and
their primary occupations during the past five years are set
forth below. Unless otherwise specified, the address of
each such person is 1345 Avenue of the Americas, New York,
New York 10105. Those Directors whose names are followed by
a footnote are "interested persons" of the Fund as
determined under the Act. Each Director and officer is
affiliated as such with one or more of the other registered
investment companies that are advised by the Adviser.
Directors
JOHN D. CARIFA, 55, Chairman of the Board of Directors,
is the President, Chief Operating Officer and a Director of
Alliance Capital Management Corporation ("ACMC"), with which
he has been associated since prior to 1995.2
RUTH BLOCK, 69, was formerly Executive Vice President
and Chief Insurance Officer of The Equitable; Chairman and
Chief Executive Officer of Evlico; a Director of Avon,
Tandem Financial Group and Donaldson, Lufkin & Jenrette
Securities Corporation. She is currently a Director of
Ecolab Incorporated (specialty chemicals) and BP Amoco
Corporation (oil and gas). Her address is P.O. Box 4623,
Stamford, Connecticut, 06903.
DAVID H. DIEVLER, 71, is currently an independent
consultant. Until December 1994 he was Senior Vice
President of ACMC responsible for mutual fund
administration. Prior to joining ACMC in 1984 he was Chief
Financial Officer of Eberstadt Asset Management since 1968.
Prior to that he was a Senior Manager of Price Waterhouse &
Co. Member of American Institute of Certified Public
Accountants since 1953. His address is P.O. Box 167, Spring
Lake, New Jersey, 07762.
____________________
2. An interested person as defined in the Act.
35
<PAGE>
JOHN H. DOBKIN, 58, is a consultant. During 1988-92, he
was a Director and Chairman of the Audit Committee of ACMC.
Previously, he was Director of the National Academy of
Design. Formerly he was a Senior Adviser (June 1999 - June
2000) and President (December 1989 - May 1999) of Historic
Hudson Valley (historic preservation). His address is P.O.
Box 12, Annandale, New York 12504.
WILLIAM H. FOULK, JR., 68, is an Investment Adviser and
independent consultant. He was formerly Senior Manager of
Barrett Associates, Inc., a registered investment adviser,
with which he had been associated since prior to 1995. He
was formerly Deputy Comptroller of the State of New York
and, prior thereto, Chief Investment Officer of the New York
Bank for Savings. His address is Room 100, 2 Greenwich
Plaza, Greenwich, Connecticut 06830.
DR. JAMES M. HESTER, 76, is President of the Harry Frank
Guggenheim Foundation with which he has been associated
since prior to 1995. He was formerly President of New York
University and the New York Botanical Garden, Rector of the
United Nations University and Vice Chairman of the Board of
the Federal Reserve Bank of New York. His address is 25
Cleveland Lane, Princeton, New Jersey 08540.
CLIFFORD L. MICHEL, 61, is a member of the law firm of
Cahill Gordon & Reindel with which he has been associated
since prior to 1995. He is President, Chief Executive
Officer and Director of Wenonah Development Company
(investments) and a Director of Placer Dome, Inc. (mining).
His address is St. Bernard's Road, Gladstone, New Jersey
07934.
DONALD J. ROBINSON, 66, is Senior Counsel of the law
firm of Orrick, Herrington & Sutcliffe LLP since January
1995. He was formerly a senior partner and a member of the
Executive Committee of that firm. He was also a member of
the Municipal Securities Rulemaking Board and a Trustee of
the Museum of the City of New York from 1977-1995. His
address is 98 Hell's Peak Road, Weston, Vermont 05161.
Officers
RONALD M. WHITEHILL - President, 62, is a Senior Vice
President of ACMC and President and Chief Executive Officer
of Alliance Cash Management Services with which he has been
associated since prior to 1995.
36
<PAGE>
ANDREW M. ARAN - Senior Vice President, 43, is a Senior
Vice President of ACMC with which he has been associated
since prior to 1995.
DREW A. BIEGEL - Senior Vice President, 49, is a Vice
President of Alliance Fund Distributors, Inc. ("AFD") with
which he has been associated since prior to 1995.
KATHLEEN A. CORBET, Senior Vice President, 40, is an
Executive Vice President of ACMC with which she has been
associated since prior to 1995.
WILLIAM E. OLIVER - Senior Vice President, 51, is a
Senior Vice President of ACMC with which he has been
associated since prior to 1995.
RAYMOND J. PAPERA - Senior Vice President, 44, is a
Senior Vice President of ACMC with which he has been
associated since prior to 1995.
KENNETH T. CARTY - Vice President, 39, is a Vice
President of ACMC with which he has been associated since
prior to 1995.
JOHN F. CHIODI, JR. - Vice President, 34, is a Vice
President of ACMC with which he has been associated since
prior to 1995.
MARIA R. CONA - Vice President, 45, is an Assistant Vice
President of ACMC with which she has been associated since
prior to 1995.
JOSEPH DONA - Vice President, 39, is a Vice President of
ACMC with which he has been associated since prior to 1995.
FRANCES M. DUNN - Vice President, 30, is a Vice
President of ACMC with which she has been associated since
prior to 1995.
JOSEPH R. LASPINA - Vice President, 40, is Vice
President of AFD with which he has been associated since
prior to 1995.
EILEEN M. MURPHY - Vice President, 29, is a Vice
President of ACMC with which she has been associated since
prior to 1995.
37
<PAGE>
MARIA C. SAZON - Vice President, 34, is a Vice President
of ACMC with which she has been associated since 1997.
Prior thereto she was a municipal bond analyst at Financial
Guaranty Insurance Company since prior to 1995.
EDMUND P. BERGAN, JR., Secretary, 50, is a Senior Vice
President and the General Counsel of AFD and Alliance Fund
Services, Inc. ("AFS") with which he has been associated
since prior to 1995.
MARK D. GERSTEN, Treasurer and Chief Financial Officer,
50, is a Senior Vice President of AFS and a Vice President
of AFD with which he has been associated since prior to
1995.
VINCENT S. NOTO, Controller, 35, is a Vice President of
AFS with which he has been associated since prior to 1995.
ANDREW L. GANGOLF - Assistant Secretary, 46, is a Senior
Vice President and Assistant General Counsel of AFD with
which he has been associated since prior to 1995.
DOMENICK PUGLIESE - Assistant Secretary, 39, is a Senior
Vice President and Assistant General Counsel of AFD with
which he has been associated since prior to 1995.
The aggregate compensation paid by the Fund to each of
the Directors during its fiscal year ended April 30, 2000,
the aggregate compensation paid to each of the Directors
during calendar year 1999 by all of the registered
investment companies to which the Adviser provides
investment advisory services (collectively, the "Alliance
Fund Complex"), and the total number of registered
investment companies (and separate investment portfolios
within those companies) in the Alliance Fund Complex with
respect to which each of the Directors serves as a director
or trustee, are set forth below. Neither the Fund nor any
registered investment company in the Alliance Fund Complex
provides compensation in the form of pension or retirement
benefits to any of its directors or trustees. Each of the
Directors is a director or trustee of one or more other
registered investment companies in the Alliance Fund
Complex.
38
<PAGE>
Total Number Total Number
of Registered of Investment
Investment Portfolios
Companies Within the
Total the Alliance Alliance Fund
Compensation Fund Complex, Complex,
from the Including the Including the
Alliance Fund, as to Fund, as to
Aggregate Fund which the which the
Compensation Complex, Director is Director is
from the Including a Director a Director
Name of Director Fund the Fund or Trustee or Trustee
--------------- ----------- ------------ ------------- -------------
John D. Carifa $-0- $-0- 49 107
Ruth Block $3,592 $154,263 38 83
David H. Dievler $4,092 $210,188 44 90
John H. Dobkin $3,842 $206,488 41 87
William H. Foulk, Jr. $4,092 $246,413 45 102
Dr. James M. Hester $4,092 $164,138 39 84
Clifford L. Michel $4,092 $183,388 39 86
Donald J. Robinson $4,092 $154,313 41 96
As of August 11, 2000, the Directors and officers of the
Fund as a group owned less than 1% of the outstanding shares
of each Portfolio.
The Adviser
The Fund's investment adviser is Alliance Capital
Management L.P., 1345 Avenue of the Americas, New York, New
York 10105. The Adviser is a leading international adviser
managing client accounts with assets as of October 2, 2000
totaling more than $474 billion (of which approximately $187
billion represented assets of investment companies). As of
October 2, 2000, the Adviser managed retirement assets for
many of the largest public and private employee benefit
plans (including 38 of the nation's FORTUNE 100 companies),
for public employee retirement funds in 35 out of the 50
states, for investment companies, and for foundations,
endowments, banks and insurance companies worldwide. The 53
registered investment companies managed by the Adviser,
comprising 136 separate investment portfolios, currently
have more than 6.3 million shareholder accounts.
Alliance Capital Management Corporation ("ACMC") is the
general partner of Alliance and an indirect wholly-owned
subsidiary of AXA Financial, Inc. ("AXA Financial"), a
39
<PAGE>
Delaware corporation whose shares are traded on the New York
Stock Exchange ("NYSE"). As of October 2, 2000, AXA
Financial and certain of its subsidiaries were the
beneficial owners of approximately 52% of the outstanding
Alliance units. Alliance Capital Management Holding L.P.
("Alliance Holding") owned approximately 30% of the
outstanding Alliance units.3 Equity interests in Alliance
Holding are traded on the NYSE in the form of units.
Approximately 98% of such units are owned by the public and
management or employees of Alliance and approximately 2% are
owned by AXA Financial. As of June 30, 2000, AXA, a French
insurance holding company, owned approximately 60% of the
issued and outstanding shares of common stock of AXA
Financial.
Under the Advisory Agreement, the Adviser provides the
Portfolio and pays all compensation of Directors of the Fund
who are affiliated persons of the Adviser. The Adviser or
its affiliates also furnish the Fund without charge with
management supervision and assistance and office facilities.
Under the Advisory Agreement, the Portfolio pays the Adviser
at an annual rate of .20% of the average daily value of its
net assets. The fee is accrued daily and paid monthly.
The Adviser has undertaken, that if, in any fiscal year,
the aggregate expenses with respect to a class of shares of
the Portfolio, exclusive of taxes, brokerage, interest on
borrowings and extraordinary expenses, but including the
management fee and any applicable distribution services fee,
exceed .20%, .30% or .45% of the Portfolio's aggregate
operating expenses for the fiscal year attributable to the
Portfolio's Class A shares, Class B shares or Class C
shares, respectively, the Portfolio may deduct from the
payment to be made to the Adviser, or the Adviser will
otherwise bear, such expenses unless the Adviser provides
the Fund with at least 60 days' notice prior to the end of
____________________
3. Until October 29, 1999, Alliance Holding served as the
investment adviser to the Fund. On that date, Alliance
Holding reorganized by transferring its business to the
Adviser. Prior thereto, the Adviser had no material
business operations. One result of the reorganization
was that the Advisory Agreement, then between the Fund
and Alliance Holding, was transferred to the Adviser,
and ownership of Alliance Fund Distributors, Inc. and
Alliance Fund Services, Inc., the Fund's principal
underwriter and transfer agent, respectively, also was
transferred to the Adviser.
40
<PAGE>
the fiscal year of its determination not to extend the
agreement. The Adviser may make payments from time to time
from its own resources, which may include the management
fees paid by the Portfolio, to compensate broker-dealers,
including Donaldson, Lufkin & Jenrette Securities Corp. and
its Pershing Division, affiliates of the Adviser, depository
institutions and other financial intermediaries that engage
in or support the distribution of shares of the Fund for
shareholder servicing, and to pay for the preparation,
printing and distribution of prospectuses and other
literature or other promotional activities.
The Advisory Agreement will remain in effect from year
to year, provided that such continuance is specifically
approved at least annually by a vote of a majority of each
Portfolio's outstanding voting securities or by the Fund's
Board of Directors, including in either case approval by a
majority of the Directors who are not parties to the
Advisory Agreement or interested persons as defined in the
Act. The Advisory Agreement may be terminated with respect
to the Portfolio without penalty on 60 days' written notice
at the option of either party or by vote of a majority of
the outstanding voting securities of the Portfolio; it will
automatically terminate in the event of assignment. The
Adviser is not liable for any action or inaction with regard
to its obligations under the Advisory Agreement as long as
it does not exhibit willful misfeasance, bad faith, gross
negligence, or reckless disregard of its obligations.
____________________________________________________________
EXPENSES OF THE FUND
____________________________________________________________
Distribution Agreement
The Fund has entered into a Distribution Agreement (the
"Agreement") with Alliance Fund Distributors, Inc., the
Fund's principal underwriter (the "Principal Underwriter"),
to permit the Fund to pay distribution services fees to
defray expenses associated with distribution of its Class B
and Class C shares in accordance with a plan of distribution
which is included in the Agreement and has been duly adopted
and approved in accordance with Rule 12b-1 adopted by the
Commission under the Act (the "Rule 12b-1 Plan").
Under the Agreement, the Treasurer of the Fund reports
the amounts expended under the Rule 12b-1 Plan and the
41
<PAGE>
purposes for which such expenditures were made to the
Directors of the Fund for their review on a quarterly basis.
Also, the Agreement provides that the selection and
nomination of Directors who are not interested persons of
the Fund (as defined in the Act) are committed to the
discretion of such disinterested Directors then in office.
The Agreement was initially approved by the Directors of the
Fund at a meeting held on June 22, 1998.
In approving the Agreement, the Directors of the Fund
determined that there was a reasonable likelihood that the
Agreement would benefit the Fund and its shareholders.
Information with respect to distribution services fees and
other revenues and expenses of the Principal Underwriter
will be presented to the Directors each year for their
consideration in connection with their deliberations as to
the continuance of the Agreement. In their review of the
Agreement, the Directors will be asked to take into
consideration separately with respect to each class the
distribution expenses incurred with respect to such class.
The distribution services fee of a particular class will not
be used to subsidize the provision of distribution services
with respect to any other class.
Distribution services fees are accrued daily and paid
monthly and are charged as expenses of the Fund as accrued.
The distribution services fees attributable to the Class B
shares and Class C shares are designed to permit an investor
to purchase such shares through broker-dealers, depository
institutions or other financial intermediaries and at the
same time to permit the Principal Underwriter to compensate
such broker-dealers, including Donaldson, Lufkin & Jenrette
Securities Corp. and its Pershing Division, affiliates of
the Adviser, depository institutions or other financial
intermediaries in connection with the sale of such shares or
the provision of administrative or other services to the
holders of such shares. The distribution services fee for
the Portfolio is an amount equal to, on an annualized basis,
.10% of the aggregate average daily net assets attributable
to the Class B shares of the Portfolio and .25% of the
aggregate average daily net assets attributable to the
Class C shares of the Portfolio.
The Agreement became effective on July 22, 1992, and was
amended to become effective with respect to shares in the
Treasury Portfolio and the Class B shares and Class C shares
of the other Portfolios on June 29, 1998. The Agreement was
amended to become effective with respect to shares in the
42
<PAGE>
Portfolio on June 29, 2000. The Agreement will continue in
effect from year to year with respect to each class of
shares of the Portfolio, provided, however, that such
continuance with respect to that class is specifically
approved annually by the Directors of the Fund or by vote of
the holders of a majority of the outstanding voting
securities (as defined in the Act) of that class, and in
either case, by a majority of the Directors of the Fund who
are not parties to this agreement or interested persons, as
defined in the Act, of any such party (other than as
trustees of the Fund) and who have no direct or indirect
financial interest in the operation of the Rule 12b-1 Plan
or any agreement related thereto. In the event that the
Agreement is terminated or not continued with respect to the
Class B shares or Class C shares, (i) no distribution
services fees (other than current amounts accrued but not
yet paid) would be owed by the Fund to the Principal
Underwriter with respect to that class, and (ii) the Fund
would not be obligated to pay the Principal Underwriter for
any amounts expended under the Agreement not previously
recovered by the Principal Underwriter from distribution
services fees in respect of shares of such class or through
deferred sales charges.
All material amendments to the Agreement will become
effective only upon approval as provided in the preceding
paragraph; and the Agreement may not be amended in order to
increase materially the costs that the Fund may bear
pursuant to the Agreement without the approval of a majority
of the holders of the outstanding voting shares of the Fund
or the class or classes of the Fund affected. The Agreement
may be terminated (a) by the Fund without penalty at any
time by a majority vote of the holders of the Fund's
outstanding voting securities, voting separately by class,
or by a majority vote of the disinterested Directors or
(b) by the Principal Underwriter. To terminate the
Agreement, any party must give the other parties 60 days'
written notice; to terminate the Rule 12b-1 Plan only, the
Fund is not required to give prior notice to the Principal
Underwriter. The Agreement will terminate automatically in
the event of its assignment.
Transfer Agency Agreement
Alliance Fund Services, Inc. ("AFS"), P.O. Box 1520,
Secaucus, NJ 07096-1520 and Alliance Fund Distributors, Inc.
("AFD"), 1345 Avenue of the Americas, New York, NY 10105,
are the Fund's Transfer Agent and Distributor, respectively.
43
<PAGE>
AFS, an indirect wholly-owned subsidiary of Alliance,
receives a minimum transfer agency fee per month for each of
the Class A shares, Class B shares and Class C shares of the
Fund, plus reimbursement for out-of-pocket expenses.
____________________________________________________________
PURCHASE AND REDEMPTION OF SHARES
____________________________________________________________
The Fund may refuse any order for the purchase of
shares. The Fund reserves the right to suspend the sale of
the Portfolio's shares to the public in response to
conditions in the securities markets or for other reasons.
Shareholders maintaining accounts in the Portfolio
through brokerage firms, depository institutions or other
financial intermediaries should be aware that such
institutions necessarily set deadlines for receipt of
transaction orders from their clients that are earlier than
the transaction times of the Fund itself so that the
institutions may properly process such orders prior to their
transmittal to State Street Bank. Should an investor place
a transaction order with such an institution after its
deadline, the institution may not effect the order with the
Fund until the next business day. Accordingly, an investor
should familiarize himself or herself with the deadlines set
by his or her institution.
Except with respect to telephone orders, investors whose
payment in Federal Funds or bank wire monies are received by
State Street Bank by 12:00 Noon (Eastern time) will become
shareholders on, and will receive the dividend declared,
that day. A telephone order for the purchase of shares will
become effective, and the shares purchased will receive the
dividend on shares declared on that day, if such order is
received by AFS by 12:00 Noon (Eastern time) and Federal
Funds or bank wire monies are received by State Street bank
prior to 12:00 Noon (Eastern time) of such day. Federal
Funds are a bank's deposits in a Federal Reserve Bank.
These Funds can be transferred by Federal Reserve wire from
the account of one member bank to that of another member
bank on the same day and are considered to be immediately
available Funds; similar immediate availability is accorded
monies received at State Street Bank by bank wire. Money
transmitted by a check drawn on a member of the Federal
Reserve System is converted to Federal Funds in one business
day following receipt. Checks drawn on banks which are not
44
<PAGE>
members of the Federal Reserve System may take longer. All
payments (including checks from individual investors) must
be in United States dollars.
All shares purchased are confirmed monthly to each
shareholder and are credited to his or her account at net
asset value. To avoid unnecessary expense to the Fund and
to facilitate the immediate redemption of shares, stock
certificates, for which no charge is made, are not issued
except upon the written request of the shareholder.
Certificates are not issued for fractional shares. Shares
for which certificates have been issued are not eligible for
any of the optional methods of withdrawal. The Fund
reserves the right to reject any purchase order.
The Fund reserves the right to close out an account that
is below $500,000 after at least 60 days' written notice to
the shareholder unless the balance in such account is
increased to at least that amount during such period. For
purposes of this calculation, the sum of a shareholder's
balance in all of the Portfolios of the Fund will be
considered as one account.
A "business day," during which purchases and redemptions
of Fund shares can become effective and the transmittal of
redemption proceeds can occur, is considered for Fund
purposes as any weekday exclusive of national holidays on
which the New York Stock Exchange is closed and of Good
Friday and Martin Luther King, Jr. Day; if one of these
holidays falls on a Saturday or Sunday, purchases and
redemptions will likewise not be processed on the preceding
Friday or the following Monday, respectively. On any such
day that is an official bank holiday in Massachusetts,
neither purchases nor wire redemptions can become effective
because Federal Funds cannot be received or sent by State
Street Bank. On such days, therefore, the Fund can only
accept redemption orders for which shareholders desire
remittance by check. The right of redemption may be
suspended or the date of a redemption payment postponed for
any period during which the New York Stock Exchange is
closed (other than customary weekend and holiday closings),
when trading on the New York Stock Exchange is restricted,
or an emergency (as determined by the Commission) exists, or
the Commission has ordered such a suspension for the
protection of shareholders. The value of a shareholder's
investment at the time of redemption may be more or less
than his cost, depending on the market value of the
45
<PAGE>
securities held by the Fund at such time and the income
earned.
____________________________________________________________
DAILY DIVIDENDS - DETERMINATION OF NET ASSET VALUE
____________________________________________________________
All net income of the Portfolio is determined at 12:00
Noon (Eastern time) and is paid immediately thereafter pro
rata to shareholders of record of the Portfolio via
automatic investment in additional full and fractional
shares in each shareholder's account at the rate of one
share for each dollar distributed. As such additional
shares are entitled to dividends on following days, a
compounding growth of income occurs.
The Portfolio's net income consists of all accrued
interest income on assets less expenses allocable to the
Portfolio (including accrued expenses and fees payable to
the Adviser) applicable to that dividend period. Realized
gains and losses of the Portfolio are reflected in its net
asset value and are not included in net income. Net asset
value per share of the Portfolio is expected to remain
constant at $1.00 since all net income of the Portfolio is
declared as a dividend each time net income is determined
and net realized gains and losses, if any, are expected to
be relatively small.
The valuation of the Portfolio's portfolio securities is
based upon their amortized cost which does not take into
account unrealized securities gains or losses as measured by
market valuations. The amortized cost method involves
valuing an instrument at its cost and thereafter applying a
constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest
rates on the market value of the instrument. During periods
of declining interest rates, the daily yield on shares of
the Portfolio may be higher than that of a fund with
identical investments utilizing a method of valuation based
upon market prices for its portfolio instruments; the
converse would apply in a period of rising interest rates.
The Fund maintains procedures designed to maintain, to
the extent reasonably possible, the price per share of the
Portfolio as computed for the purpose of sales and
redemptions at $1.00. Such procedures include review of the
Portfolio's portfolio holdings by the Directors at such
46
<PAGE>
intervals as they deem appropriate to determine whether and
to what extent the net asset value of the Portfolio
calculated by using available market quotations or market
equivalents deviates from net asset value based on amortized
cost. There can be no assurance, however, that the Fund's
net asset value per share will remain constant at $1.00.
The net asset value of the shares of the Portfolio is
determined each Fund business day (and on such other days as
the Directors deem necessary) at 12:00 Noon (Eastern time).
The net asset value per share of the Portfolio is calculated
by taking the sum of the value of the Portfolio's
investments and any cash or other assets, subtracting
liabilities, and dividing by the total number of shares of
that Portfolio outstanding. All expenses, including the
fees payable to the Adviser, are accrued daily.
____________________________________________________________
TAXES
____________________________________________________________
Federal Income Tax Considerations
The Portfolio intends to qualify for each taxable year
to be taxed as a "regulated investment company" under the
Internal Revenue Code of 1986, as amended (the "Code"), and,
as such, will not be liable for Federal income and excise
taxes on the net income and capital gains distributed to its
shareholders. Since the Portfolio distributes all of its
net income and capital gains, the Portfolio should thereby
avoid all Federal income and excise taxes.
For shareholder's Federal income tax purposes,
distributions to shareholders out of tax-exempt interest
income earned by the Portfolio generally are not subject to
Federal income tax. See, however, "Investment Objectives
and Polices - Alternative Minimum Tax" above.
Distributions out of taxable interest income, other
investment income, and short-term capital gains are taxable
to shareholders as ordinary income. Since the Portfolio's
investment income is derived from interest rather than
dividends, no portion of such distributions is eligible for
the dividends-received deduction available to corporations.
Long-term capital gains, if any, distributed by the
Portfolio to a shareholder are taxable to the shareholder as
long-term capital gain, irrespective of the length of time
47
<PAGE>
he may have held his shares. Distributions of short and
long-term capital gains, if any, are normally made once each
year shortly before the close of the Fund's fiscal year,
although such distributions may be made more frequently if
necessary in order to maintain the Portfolio's net asset
value at $1.00 per share.
Interest on indebtedness incurred by shareholders to
purchase or carry shares of the Portfolio is not deductible
for Federal income tax purposes. Under rules of the
Internal Revenue Service for determining when borrowed Funds
are used for purchasing or carrying particular assets, the
Portfolio shares may be considered to have been purchased or
carried with borrowed funds even though those funds are not
directly linked to the shares. Further, persons who are
"substantial users" (or related persons) of facilities
financed by private activity bonds (within the meaning of
Section 147(a) of the Code) should consult their tax
advisers before purchasing shares of the Portfolio.
Substantially all of the dividends paid by the Portfolio
are anticipated to be exempt from Federal income taxes.
Shortly after the close of each calendar year, a notice is
sent to each shareholder advising him of the total dividends
paid into his or her account for the year and the portion of
such total that is exempt from Federal income taxes. This
portion is determined by the ratio of the tax-exempt income
to total income for the entire year and, thus, is an annual
average rather than day-by-day determination for each
shareholder.
Any loss realized on shares of the Portfolio that are
held for six months or less will not be realized for Federal
income tax purposes to the extent of any exempt-interest
dividends received on such shares.
Shareholders who are individual residents of California
are not subject to the California personal income tax on
distributions from the Portfolio which are designated as
derived from municipal securities issued by the State of
California or its political subdivisions. Distributions
from the Portfolio are, however, subject to the California
Corporate Franchise Tax payable by corporate shareholders.
48
<PAGE>
____________________________________________________________
GENERAL INFORMATION
____________________________________________________________
Portfolio Transactions. Subject to the general
supervision of the Directors of the Fund, the Adviser is
responsible for the investment decisions and the placing of
the orders for portfolio transactions for the Portfolio.
Because the Portfolio invests in securities with short
maturities, there is a relatively high portfolio turnover
rate. However, the turnover rate does not have an adverse
effect upon the net yield and net asset value of the
Portfolio's shares since the portfolio transactions occur
primarily with issuers, underwriters or major dealers in
money market instruments acting as principals. Such
transactions are normally on a net basis which do not
involve payment of brokerage commissions. The cost of
securities purchased from an underwriter usually includes a
commission paid by the issuer to the underwriters;
transactions with dealers normally reflect the spread
between bid and asked prices.
The Portfolio has no obligation to enter into
transactions in portfolio securities with any dealer,
issuer, underwriter or other entity. In placing orders, it
is the policy of the Portfolio to obtain the best price and
execution for its transactions. Where best price and
execution may be obtained from more than one dealer, the
Adviser may, in its discretion, purchase and sell securities
through dealers who provide research, statistical and other
information to the Adviser. Such services may be used by
the Adviser for all of its investment advisory accounts and,
accordingly, not all such services may be used by the
Adviser in connection with the Portfolio. The supplemental
information received from a dealer is in addition to the
services required to be performed by the Adviser under the
Advisory Agreement, and the expenses of the Adviser will not
necessarily be reduced as a result of the receipt of such
information.
Capitalization
All shares of the Portfolio participate equally in
dividends and distributions from the Portfolio, including
any distributions in the event of a liquidation. Each share
of the Portfolio is entitled to one vote for all purposes.
Shares of all classes vote for the election of Directors and
49
<PAGE>
on any other matter that affects all Portfolios of the Fund
in substantially the same manner as a single class, except
as otherwise required by law. As to matters affecting the
Portfolio differently, such as approval of the Advisory
Agreement, shares of the Portfolio vote as a separate class.
There are no conversion or preemptive rights in connection
with any shares of the Fund. Since voting rights are
noncumulative, holders of more than 50% of the shares voting
for the election of Directors can elect all of the
Directors. Procedures for calling a shareholders' meeting
for the removal of Directors of the Fund, similar to those
set forth in Section 16(c) of the Act and in the Fund's
By-Laws, will be available to shareholders of the Portfolio.
Special meetings of stockholders for any purpose may be
called by 10% of its outstanding shareholders. All shares
of the Portfolio when duly issued will be fully paid and
non-assessable. The rights of the holders of shares of a
class may not be modified except by the vote of a majority
of the outstanding shares of such class.
The Board of Directors is authorized to reclassify and
issue any unissued shares to any number of additional series
without shareholder approval. Accordingly, the Directors in
the future, for reasons such as the desire to establish one
or more additional portfolios with different investment
objectives, policies or restrictions, may create additional
series of shares. Any issuance of shares of another class
would be governed by the Act and Maryland law.
Legal Matters. The legality of the shares offered hereby has
been passed upon by Seward & Kissel LLP, New York, New York,
counsel for the Fund and the Adviser.
Accountants. PricewaterhouseCoopers LLP, New York, New York,
are the independent auditors for the Fund.
Yield Quotations and Performance Information. Advertisements
containing yield quotations for the Portfolio for the Fund may
from time to time be sent to investors or placed in newspapers,
magazines or other media on behalf of the Fund. These
advertisements may quote performance rankings, ratings or data
from independent organizations or financial publications such as
Lipper Analytical Services, Inc., Morningstar, Inc., IBC's Money
Fund Report, IBC's Money Market Insight or Bank Rate Monitor or
compare the Fund's performance to bank money market deposit
accounts, certificates of deposit or various indices. Yield
quotations are calculated in accordance with the standardized
method referred to in Rule 482 under the Securities Act of 1933.
50
<PAGE>
From time to time the Portfolio advertises its "yield" and
"effective yield." Both yield figures are based on historical
earnings and are not intended to indicate future performance. To
calculate the "yield," the amount of dividends paid on a share
during a specified seven-day period is assumed to be paid each
week over a 52-week period and is shown as a percentage of the
investment. To calculate "effective yield," which will be higher
than the "yield" because of compounding, the dividends paid are
assumed to be reinvested.
Yield quotations for the Portfolio are thus determined by
(i) computing the net change over a seven-day period, exclusive
of the capital changes, in the value of a hypothetical
pre-existing account having a balance of one share of such
Portfolio at the beginning of such period, (ii) dividing the net
change in account value by the value of the account at the
beginning of the base period to obtain the base period return,
and (iii) multiplying the base period return by (365/7) with the
resulting yield figure carried to the nearest hundredth of one
percent. The Portfolio's effective annual yield represents a
compounding of the annualized yield according to the formula:
effective yield = [(base period return + 1) 365/7] - 1.
51
<PAGE>
____________________________________________________________
APPENDIX A
COMMERCIAL PAPER AND BOND RATINGS
____________________________________________________________
Municipal and Corporate Bonds
The two highest ratings of Moody's Investors Service, Inc.
("Moody"s) for municipal and corporate bonds are Aaa and Aa.
Bonds rated Aaa are judged by Moody's to be of the best quality.
Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally
known as high-grade bonds. Moody's states that Aa bonds are
rated lower than the best bonds because margins of protection or
other elements make long-term risks appear somewhat larger than
Aaa securities. The generic rating Aa may be modified by the
addition of the numerals 1, 2 or 3. The modifier 1 indicates
that the security ranks in the higher end of the Aa rating
category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of
such rating category.
The two highest ratings of Standard & Poor's for municipal
and corporate bonds AAA and AA. Bonds rated AAA have the highest
rating assigned by Standard & Poor's to debt obligation.
Capacity to pay interest and repay principal is extremely strong.
Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in
a small degree. The AA rating may be modified by the addition of
a plus (+) or Minus (-) sign to show relative standing within
rating category.
Short-Term Municipal Securities
Moody's highest rating for short-term municipal loans is
MIG-1/VMIG-1. Moody's states that short-term municipal
securities rated MIG-1/VMIG-1 are of the best quality, enjoying
strong protection from established cash flows of funds for their
servicing or from established and broad-based access to the
market for refinancing, or both. Loans bearing the MIG-2/VMIG-2
designation are of high quality, with margins of protection ample
although not so large as in the MIG-1/VMIG-1 group.
Standard & Poor's highest rating for short-term municipal
loans is SP-1. Standard & Poor's stated that short-term
municipal securities bearing the SP-1 designation have a strong
capacity to pay principal and interest. Those issues rated SP-1
A-1
<PAGE>
which are determined to possess a very strong capacity to pay
principal and interest will be given a plus (+) designation.
Issues rate SP-2 have satisfactory capacity to pay principal and
interest.
Other Municipal Securities and Commercial Paper
"Prime-1" is the highest rating assigned by Moody's for other
short-term municipal securities and commercial paper, and "A-1+"
and "A-1" are the two highest ratings for commercial paper
assigned by Standard & Poor's (Standard & Poor's does not rate
short-term tax-free obligations). Moody's uses the numbers 1, 2,
and 3 to denote relative strength within its highest
classification of "Prime", while Standard & Poor's uses the
number 1+, 1, 2 and 3 to denote relative strength within its
highest classification of "A". Issuers rated "Prime" by Moody's
have the following characteristics: their short-term debt
obligations carry the smallest degree of investment risk, margins
of support for current indebtedness are large or stable with cash
flow and asset protection well assured, current liquidity
provides ample coverage of near-term liabilities and unused
alternative financing arrangements are generally available.
While protective elements may change over the intermediate or
longer term, such changes are most unlikely to impair the
fundamentally strong position of short-term obligations.
Commercial paper issuers rated "A" by Standard & Poor's have the
following characteristics: liquidity ratios are better than
industry average, long-term debt rating is A or better, the
issuer has access to at least two additional channels of
borrowing, and basic earnings and cash flow are in an upward
trend. Typically, the issuer is a strong company in a
well-established industry and has superior management.
A-2
<PAGE>
____________________________________________________________
APPENDIX B
DESCRIPTION OF MUNICIPAL SECURITIES
____________________________________________________________
Municipal Notes generally are used to provide for short-term
capital needs and usually have maturities of one year or less.
They include the following:
1. Project Notes, which carry a U.S. Government guarantee,
are issued by public bodies (called "local issuing
agencies") created under the laws of a state, territory,
or U.S. possession. They have maturities that range up
to one year from the date of issuance. Project Notes
are backed by an agreement between the local issuing
agency and the Federal Department of Housing and Urban
Development. These Notes provide financing for a wide
range of financial assistance programs for housing,
redevelopment, and related needs (such as low-income
housing programs and renewal programs).
2. Tax Anticipation Notes are issued to finance working
capital needs of municipalities. Generally, they are
issued in anticipation of various seasonal tax revenues,
such as income, sales use and business taxes, and are
payable from these specific future taxes.
3. Revenue Anticipation Notes are issued in expectation of
receipt of other types of revenues, such as Federal
revenues available under the Federal Revenue Sharing
Programs.
4. Bond Anticipation Notes are issued to provide interim
financing until long-term financing can be arranged. In
most cases, the long-term bonds then provide the money
for the repayment of the Notes.
5. Construction Loan Notes are sold to provide construction
financing. After successful completion and acceptance,
many projects receive permanent financing through the
Federal Housing Administration under the Federal
National Mortgage Association or the Government National
Mortgage Association.
6. Tax-Exempt Commercial Paper is a short-term obligation
with a stated maturity of 365 days or less. It is
issued by agencies of state and local governments to
B-1
<PAGE>
finance seasonal working capital needs or as short-term
financing in anticipation of longer term financing.
Municipal Bonds, which meet longer term capital needs and
generally have maturities of more than one year when issued, have
three principal classifications:
1. General Obligation Bonds are issued by such entities as
states, countries, cities, towns, and regional
districts. The proceeds of these obligations are used
to fund a wide range of public projects, including
construction or improvement of schools, highways and
roads, and water and sewer systems. The basic security
behind General Obligation Bonds is the issuer's pledge
of its full faith and credit and taxing power for the
payment of principal and interest. The taxes that can
be levied for the payment of debt service may be limited
or unlimited as to the rate or amount of special
assessments.
2. Revenue Bonds generally are secured by the net revenues
derived from a particular facility, group of facilities,
or, in some cases, the proceeds of a special excise of
other specific revenue source. Revenue Bonds are issued
to finance a wide variety of capital projects including
electric, gas, water and sewer systems; highways,
bridges and tunnels; port and airport facilities;
colleges and universities; and hospitals. Many of
these Bonds provide additional security in the form of a
debt service reserve fund to be used to make principal
and interest payments. Housing authorities have a wide
range of security, including partially or fully insured
mortgages, rent subsidized and/or collateralized
mortgages, and/or the net revenues from housing or other
public projects. Some authorities provide further
security in the form of a state's ability (without
obligation) to make up deficiencies in the debt service
reserve fund.
3. Industrial Development Bonds are considered municipal
bonds if the interest paid thereon is exempt from
Federal income tax and are issued by or on behalf of
public authorities to raise money to finance various
privately operated facilities for business and
manufacturing, housing, sports, and pollution control.
These Bonds are also used to finance public facilities
such as airports, mass transit systems, ports, and
parking. The payment of the principal and interest on
B-2
<PAGE>
such Bonds is dependent solely on the ability of the
facility's user to meet its financial obligations and
the pledge, if any, of real and personal property as
security for such payment.
B-3
00250072.BA7
