As filed with the Securities and Exchange
Commission on November 22, 2000
File Nos. 33-34001
811-6068
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 20 X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940
Amendment No. 20 X
ALLIANCE INSTITUTIONAL RESERVES, INC.
(Exact Name of Registrant as Specified in Charter)
1345 Avenue of the Americas, New York, New York 10105
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including
Area Code:(800) 221-5672
EDMUND P. BERGAN, JR.
Alliance Capital Management L.P.
1345 Avenue of the Americas
New York, New York l0105
(Name and address of agent for service)
<PAGE>
It is proposed that this filing will become effective (check
appropriate box)
x immediately upon filing pursuant to paragraph (b)
on (date) pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a)(1)
on (date) pursuant to paragraph (a)(1)
75 days after filing pursuant to paragraph (a)(2)
on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
/ / This post-effective amendment designates a new
effective date for a previously filed post-
effective amendment.
This Post-Effective Amendment No. 20 relates solely to
the California Portfolio of the Registrant. No information
contained in the Registrant's Registration Statement
relating to the Prime Portfolio, the Government Portfolio,
the Tax-Free Portfolio, the Treasury Portfolio or the Trust
Portfolio of the Registrant is amended or superseded hereby.
<PAGE>
For more information about the Portfolio, the following
document is available upon request:
-- 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:
- Call the Commission at 1-202-942-8090 for
information on the operation of the Public
Reference Room.
- Reports and other information about the Fund are
available on the EDGAR Database on the Commission's
Internet site at http://www.sec.gov
- Copies of the information may be obtained, after
paying a duplicating fee, by electronic request at
[email protected], 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.
File No. 811-6068
TABLE OF CONTENTS
RISK/RETURN SUMMARY.........................................
FEES AND EXPENSES OF THE PORTFOLIO..........................
OTHER INFORMATION ABOUT THE PORTFOLIO'S OBJECTIVES,
STRATEGIES, AND RISKS....................................
Investment Objectives and Strategies........................
Risk Considerations.........................................
MANAGEMENT OF THE PORTFOLIO.................................
PURCHASE AND SALE OF SHARES.................................
How The Portfolio Values Its Shares.........................
How To Buy Shares...........................................
How To Sell Shares..........................................
Other.......................................................
DIVIDENDS, DISTRIBUTIONS AND TAXES..........................
GENERAL INFORMATION.........................................
2
ALLIANCE INSTITUTIONAL RESERVES
-- CALIFORNIA 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.
Alliance Institutional Reserves, Inc. consists of six
distinct Portfolios. This prospectus describes the Class A
shares of the California 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:
3
-- 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.
--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.
--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.
--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.
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)
4
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.................................... $119
---
*** These examples assume that Alliance's agreement to reimburse
a portion of the Portfolio's operating expenses is not extended
beyond its initial term.
5
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:
-- 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.
-- There can be no assurance that the Portfolio will achieve its
investment objectives.
-- Except as noted, (i) the Portfolio's investment objectives are
"fundamental" and cannot be changed without a shareholder vote,
and (ii) the Portfolio's investment policies 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 normally will invest not less
that 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
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-
6
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.
7
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.
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
8
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 June 30, 2000 totaling more
than $388 billion (of which more than $185 billion represented
assets of investment companies). As of June 30, 2000, Alliance
managed retirement assets for many of the largest public and
private employee benefit plans (including 29 of the nation's
FORTUNE 100 companies), for public employee retirement funds in
33 states, for investment companies, and for foundations,
endowments, banks and insurance companies worldwide. The 52
registered investment companies, managed by Alliance, comprising
122 separate investment portfolios, currently have more than 6.1
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
9
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.
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
-- 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:
10
State Street Bank and Trust Company
Boston, MA 02101
Alliance Institutional Reserves, Inc.--California 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.
-- 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.
-- 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 Portfolio
at the address set forth above.
11
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 AFS at (800) 237-5822. A
redemption must include your account name as registered with the
Portfolio and the account number. If AFS receives your telephone
redemption order by 12:00 Noon, Eastern time, AFS will send the
proceeds in Federal funds by wire to your designated bank account
that 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.
12
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.
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
13
requests. The telephone service may be suspended or terminated at
any time without notice.
14
<PAGE>
For more information about the Portfolio, the following document
is available upon request:
-- 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:
- Call the Commission at 1-202-942-8090 for
information on the operation of the Public
Reference Room.
- Reports and other information about the Fund are
available on the EDGAR Database on the Commission's
Internet site at http://www.sec.gov
- Copies of the information may be obtained, after
paying a duplicating fee, by electronic request at
[email protected], 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.
File No. 811-6068
15
<PAGE>
TABLE OF CONTENTS
RISK/RETURN SUMMARY........................................
FEES AND EXPENSES OF THE PORTFOLIO.........................
OTHER INFORMATION ABOUT THE PORTFOLIO'S OBJECTIVES,
STRATEGIES, AND RISKS....................................
Investment Objectives and Strategies.......................
Risk Considerations........................................
MANAGEMENT OF THE PORTFOLIO................................
PURCHASE AND SALE OF SHARES................................
How The Portfolio Values Its Shares........................
How To Buy Shares..........................................
How To Sell Shares.........................................
Other......................................................
DIVIDENDS, DISTRIBUTIONS AND TAXES.........................
DISTRIBUTION ARRANGEMENTS..................................
GENERAL INFORMATION........................................
16
<PAGE>
ALLIANCE INSTITUTIONAL RESERVES
CALIFORNIA 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.
Alliance Institutional Reserves, Inc. consists of six
distinct Portfolios. This prospectus describes the Class B
shares of the California 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:
17
<PAGE>
-- 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.
-- 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.
-- 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.
-- 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.
18
<PAGE>
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.
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
19
<PAGE>
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....................................$151
---
*** These examples assume that Alliance's agreement to reimburse
a portion of the Portfolio's operating expenses is not extended
beyond its initial term.
20
<PAGE>
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:
-- 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.
-- There can be no assurance that the Portfolio will
achieve its investment objectives.
-- Except as noted, (i) the Portfolio's investment objectives are
"fundamental" and cannot be changed without a shareholder vote,
and (ii) the Portfolio's investment policies 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 normally will invest not less
that 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
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-
21
<PAGE>
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.
22
<PAGE>
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.
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
23
<PAGE>
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 June 30, 2000 totaling more
than $388 billion (of which more than $185 billion represented
assets of investment companies). As of June 30, 2000, Alliance
managed retirement assets for many of the largest public and
private employee benefit plans (including 29 of the nation's
FORTUNE 100 companies), for public employee retirement funds in
33 states, for investment companies, and for foundations,
endowments, banks and insurance companies worldwide. The 52
registered investment companies, managed by Alliance, comprising
122 separate investment portfolios, currently have more than 6.1
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
24
<PAGE>
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 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
-- 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.
-- Subsequent Investments
25
<PAGE>
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 sweet
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.
26
<PAGE>
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.
27
<PAGE>
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 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.
28
<PAGE>
For more information about the Portfolio, the following document
is available upon request:
-- 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:
- Call the Commission at 1-202-942-8090 for
information on the operation of the Public
Reference Room.
- Reports and other information about the Fund are
available on the EDGAR Database on the Commission's
Internet site at http://www.sec.gov
- Copies of the information may be obtained, after
paying a duplicating fee, by electronic request at
[email protected], 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.
File No. 811-6068
29
<PAGE>
TABLE OF CONTENTS
RISK/RETURN SUMMARY........................................
FEES AND EXPENSES OF THE PORTFOLIO.........................
OTHER INFORMATION ABOUT THE PORTFOLIO'S OBJECTIVES,
STRATEGIES, AND RISKS..................................
Investment Objectives and Strategies.......................
Risk Considerations........................................
MANAGEMENT OF THE PORTFOLIO................................
PURCHASE AND SALE OF SHARES................................
How The Portfolio Values Its Shares........................
How To Buy Shares..........................................
How To Sell Shares.........................................
Other......................................................
DIVIDENDS, DISTRIBUTIONS AND TAXES.........................
DISTRIBUTION ARRANGEMENTS..................................
GENERAL INFORMATION........................................
30
<PAGE>
ALLIANCE INSTITUTIONAL RESERVES
-- CALIFORNIA 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.
Alliance Institutional Reserves, Inc. consists of six
distinct Portfolios. This prospectus describes the Class C
shares of the California 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:
31
<PAGE>
-- 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.
-- 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.
-- 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.
-- 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.
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.
32
<PAGE>
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....................................$199
---
*** These examples assume that Alliance's agreement to reimburse
a portion of the Portfolio's operating expenses is not extended
beyond its initial term.
33
<PAGE>
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:
-- 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.
-- There can be no assurance that the Portfolio will achieve its
investment objectives.
-- Except as noted, (i) the Portfolio's investment objectives are
"fundamental" and cannot be changed without a shareholder vote,
and (ii) the Portfolio's investment policies 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 normally will invest not less
that 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
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-
34
<PAGE>
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.
35
<PAGE>
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.
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
36
<PAGE>
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 June 30, 2000 totaling more
than $388 billion (of which more than $185 billion represented
assets of investment companies). As of June 30, 2000, Alliance
managed retirement assets for many of the largest public and
private employee benefit plans (including 29 of the nation's
FORTUNE 100 companies), for public employee retirement funds in
33 states, for investment companies, and for foundations,
endowments, banks and insurance companies worldwide. The 52
registered investment companies, managed by Alliance, comprising
122 separate investment portfolios, currently have more than 6.1
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
9 37
<PAGE>
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 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
-- 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.
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-- 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 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.
39
<PAGE>
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.
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.
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<PAGE>
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 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.
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<PAGE>
Dealers and agents may charge a commission for handling telephone
requests. The telephone service may be suspended or terminated at
any time without notice.
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[LOGO] ALLIANCE INSTITUTIONAL RESERVES, INC.
-California 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 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......
<PAGE>
___________________________
(R): This registered service mark used under license from
the owner, Alliance Capital Management L.P.
2
<PAGE>
____________________________________________________________
THE FUND
____________________________________________________________
Alliance Institutional Reserves, Inc. (the "Fund") is an
open-end investment company. The California 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 one year or less
(which maturities, pursuant to Rule 2a-7 under the
Investment Company Act of 1940 as amended (the "Act"), may
extend to 397 days, or such greater length of time as may be
permitted from time to time pursuant to Rule 2a-7). 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
2
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than Rule 2a-7, the Portfolio will comply with the more
restrictive provisions of the Rule.
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
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<PAGE>
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.
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.
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).
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. 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
4
<PAGE>
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
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
5
<PAGE>
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
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.
6
<PAGE>
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. Such taxable money market securities
also are limited to remaining maturities of 397 days or less
pursuant to Rule 2a-7, or such greater length of time as may
be permitted from time to time pursuant to Rule 2a-7, at the
time of the Portfolio's investment, and the Portfolio's
municipal and taxable securities are maintained at a
dollar-weighted average of 90 days or less. 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
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
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<PAGE>
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
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
8
<PAGE>
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.
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
9
<PAGE>
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.
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
10
<PAGE>
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.
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.
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<PAGE>
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
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
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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
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
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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.
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").
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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.
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
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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.
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
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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
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.
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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
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.
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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
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.
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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
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
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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
federal 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
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.
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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.
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.
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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.
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.
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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
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.
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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.
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
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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
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
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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.
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.
27
<PAGE>
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
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.
28
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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
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
29
<PAGE>
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
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
30
<PAGE>
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
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
31
<PAGE>
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
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
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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;
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
33
<PAGE>
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,
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;
____________________
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
investment latitude described therein only in the event Rule
2a-7 is further amended in the future.
34
<PAGE>
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.
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.
35
<PAGE>
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
an asterisk 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.
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.
____________________
2. An interested person as defined in the Act.
36
<PAGE>
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.
ANDREW M. ARAN - Senior Vice President, 43, is a Senior
Vice President of ACMC with which he has been associated
since prior to 1995.
37
<PAGE>
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.
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.
38
<PAGE>
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.
39
<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 June 30, 2000
totaling more than $388 billion (of which approximately $185
billion represented assets of investment companies). As of
June 30, 2000, the Adviser managed retirement assets for
many of the largest public and private employee benefit
plans (including 29 of the nation's FORTUNE 100 companies),
for public employee retirement funds in 33 out of the 50
states, for investment companies, and for foundations,
endowments, banks and insurance companies worldwide. The 52
registered investment companies managed by the Adviser,
comprising 122 separate investment portfolios, currently
have more than 6.1 million shareholder accounts.
40
<PAGE>
Alliance Capital Management Corporation ("ACMC") is the
general partner of Alliance and an indirect wholly-owned
subsidiary of AXA Financial, Inc. ("AXA Financial"), a
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
____________________
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 Advisers.
41
<PAGE>
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
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
42
<PAGE>
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
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.
43
<PAGE>
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
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.
44
<PAGE>
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.
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
45
<PAGE>
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
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),
46
<PAGE>
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
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.
47
<PAGE>
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
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
48
<PAGE>
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
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
49
<PAGE>
from the Portfolio are, however, subject to the California
Corporate Franchise Tax payable by corporate shareholders.
____________________________________________________________
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.
50
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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
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,
51
<PAGE>
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.
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.
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____________________________________________________________
APPENDIX A
COMMERCIAL PAPER AND BOND RATINGS
____________________________________________________________
Municipal and Corporate Bonds
The two higher ratings of Moody's Investors Service, Inc.
("Moody"s) for municipal and corporate bonds are Aaa an 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 very
strong or strong capacity to pay principal and interest. Those
A-1
<PAGE>
issues rated SP-1 which are determined to possess overwhelming
safety characteristics 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 an 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
rates "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 state maturity of 365 days or less. It is issued
by agencies of state and local governments to finance
B-1
<PAGE>
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
<PAGE>
PART C
OTHER INFORMATION
ITEM 23. Exhibits
(a) (1) Articles of Incorporation of the Registrant
dated March 22, 1998 - Incorporated by
reference to Exhibit 1(a) to Post-Effective
Amendment No. 13 to Registrant's Registration
Statement on Form N-1A, filed with the
Securities and Exchange Commission on
August 28, 1997.
(2) Certificate of Correction to Articles of
Incorporation of the Registrant dated June 21,
1990 - Incorporated by reference to Exhibit
1(a) to Post-Effective Amendment No. 13 to
Registrant's Registration Statement on Form
N-1A, filed with the Securities and Exchange
Commission on August 28, 1997.
(3) Articles Supplementary of the Registrant dated
July 17, 1992 - Incorporated by reference to
Exhibit 1(b) to Post-Effective Amendment
No. 13 to Registrant's Registration Statement
on Form N-1A, filed with the Securities and
Exchange Commission on August 28, 1997.
(4) Articles of Amendment of the Registrant dated
June 2, 1998 - Incorporated by reference to
Exhibit 1(d) to Post-Effective Amendment
No. 15 to Registrant's Registration Statement
on Form N-1A, filed with the Securities and
Exchange Commission on June 29, 1998.
(5) Articles Supplementary of the Registrant dated
June 2, 1998 - Incorporated by reference to
Exhibit 1(e) to Post-Effective Amendment
No. 15 to Registrant's Registration Statement
on Form N-1A, filed with the Securities and
Exchange Commission on June 29, 1998.
(6) Articles of Amendment of the Registrant dated
June 25, 1998 - Incorporated by reference to
Exhibit 1(f) to Post-Effective Amendment
No. 15 to Registrant's Registration Statement
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on Form N-1A, filed with the Securities and
Exchange Commission on June 29, 1998.
(7) Articles Supplementary of the Registrant dated
November 6, 2000 - Filed herewith.
(b) By-Laws - Amended and Restated - Incorporated
by reference to Exhibit 2 to Post-Effective
Amendment No. 13 to Registrant's Registration
Statement on Form N-1A, filed with the
Securities and Exchange Commission on
August 28, 1997.
(c) See Exhibit (b).
(d) Advisory Agreement between the Registrant and
Alliance Capital Management L.P., amended
June 29, 1998 - Incorporated by reference to
Exhibit 5(b) to Post-Effective Amendment
No. 15 to Registrant's Registration Statement
on Form N-1A, filed with the Securities and
Exchange Commission on June 29, 1998.
(e) (1) Distribution Agreement between the Registrant
and Alliance Fund Distributors, Inc. -
Incorporated by reference to Exhibit No. 6 to
Post-Effective Amendment No. 13 of the
Registrant's Form N-1A, filed August 28, 1997.
(2) Distribution Agreement between the Registrant
and Alliance Fund Distributors, Inc., amended
June 29, 1998 - Incorporated by reference to
Exhibit 6(b) to Post-Effective Amendment
No. 15 to Registrant's Registration Statement
on Form N-1A, filed with the Securities and
Exchange Commission on June 29, 1998.
(f) Not applicable.
(g) Custodian Contract between the Registrant and
State Street Bank - Incorporated by reference
to Exhibit 8 to Post-Effective Amendment
No. 13 to Registrant's Registration Statement
on Form N-1A, filed with the Securities and
Exchange Commission on August 28, 1997.
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(h) Transfer Agency Agreement between the
Registrant and Alliance Fund Services, Inc. -
Incorporated by reference to Exhibit 9 to
Post-Effective Amendment No. 13 to
Registrant's Registration Statement on Form
N-1A, filed with the Securities and Exchange
Commission on August 28, 1997.
(i)(1) Opinion of Seward & Kissel LLP - Incorporated
by reference to Exhibit 10(a) to Post-
Effective Amendment No. 15 to Registrant's
Registration Statement on Form N-1A, filed
with the Securities and Exchange Commission on
June 29, 1998.
(2) Opinion of Venable, Baetjer and Howard -
Incorporated by reference to Exhibit 10(b) to
Pre-Effective Amendment No. 2 to Registrant's
Registration Statement on Form N-1A, filed
with the Securities and Exchange Commission on
June 18, 1990.
(3) Opinion and Consent of Seward & Kissel LLP -
Filed herewith.
(j) Not applicable.
(k) Not applicable.
(l) Not applicable.
(m) See Exhibit (e)(2).
(n) Rule 18f-3 Plan - Incorporated by reference to
Exhibit 18 to Post-Effective Amendment No. 15
to Registrant's Registration Statement on Form
N-1A, filed with the Securities and Exchange
Commission on June 29, 1998.
(o) Reserved.
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(p) Not applicable (Money Market Fund).
Other Exhibits:
Powers of Attorney of Messrs. Carifa, Dievler, Dobkin,
Foulk, Hester, Michel, Robinson and Ms. Block -
Incorporated by reference to Other Exhibits to Post-
Effective Amendment No. 15 to Registrant's Registration
Statement on Form N-1A, filed with the Securities and
Exchange Commission on June 29, 1998.
ITEM 24. Persons Controlled by or under Common Control
with the Fund.
Registrant does not control any person. Information
regarding the persons under common control with the
Registrant is contained in Exhibit 22 to the
Registration Statement on Form S-1 under the Securities
Act of 1933 of The Equitable Holding Companies
Incorporated (Registration No. 33-48115).
ITEM 25. Indemnification
It is the Registrant's policy to indemnify its
directors and officers, employees and other agents
to the maximum extent permitted by Section 2-418 of
the General Corporation Law of the State of
Maryland and as set forth in Articles EIGHTH and
NINTH of Registrant's Articles of Incorporation,
filed as Exhibit (a)(1), and Section 7 of the
Distribution Services Agreement filed as
Exhibit (e)(1), all as set forth below. The
liability of the Registrant's directors and
officers is dealt with in Articles EIGHTH and NINTH
of Registrant's Articles of Incorporation, as set
forth below. The Adviser's liability for any loss
suffered by the Registrant or its shareholders is
set forth in Section 4 of the Advisory Agreement
filed as Exhibit (d) to this Registration
Statement, as set forth below.
Section 2-418 of the Maryland General Corporation
Law reads as follows:
"2-418 INDEMNIFICATION OF DIRECTORS,
OFFICERS, EMPLOYEES AND AGENTS.--(a) In this
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section the following words have the meaning
indicated.
(1) "Director" means any person who is or was
a director of a corporation and any person who,
while a director of a corporation, is or was
serving at the request of the corporation as a
director, officer, partner, trustee, employee, or
agent of another foreign or domestic corporation,
partnership, joint venture, trust, other
enterprise, or employee benefit plan.
(2) "Corporation" includes any domestic or
foreign predecessor entity of a corporation in a
merger, consolidation, or other transaction in
which the predecessor's existence ceased upon
consummation of the transaction.
(3) "Expenses" include attorney's fees.
(4) "Official capacity" means the following:
(i) When used with respect to a
director, the office of director in the
corporation; and
(ii) When used with respect to a person
other than a director as contemplated in subsection
(j), the elective or appointive office in the
corporation held by the officer, or the employment
or agency relationship undertaken by the employee
or agent in behalf of the corporation.
(iii) "Official capacity" does not
include service for any other foreign or domestic
corporation or any partnership, a person who was,
is, or is threatened to be made a named defendant
or respondent in a proceeding.
(6) "Proceeding" means any threatened,
pending or completed action, suit or proceeding,
whether civil, criminal, administrative, or
investigative.
(b)(1) A corporation may indemnify any
director made a party to any proceeding by reason
of service in that capacity unless it is
[6~established that:
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(i) The act or omission of the director was
material to the matter giving rise to the
proceeding; and
1. Was committed in bad faith; or
2. Was the result of active and
deliberate dishonesty; or
(ii) The director actually received an
improper personal benefit in money, property, or
services; or
(iii) In the case of any criminal proceeding,
the director had reasonable cause to believe that
the act or omission was unlawful.
(2) (i) Indemnification may be against
judgments, penalties, fines, settlements, and
reasonable expenses actually incurred by the
director in connection with the proceeding.
(ii) However, if the proceeding was one
by or in the right of the corporation,
indemnification may not be made in respect of any
proceeding in which the director shall have been
adjudged to be liable to the corporation.
(3) (i) The termination of any proceeding by
judgment, order or settlement does not create a
presumption that the director did not meet the
requisite standard of conduct set forth in this
subsection.
(ii) The termination of any proceeding
by conviction, or a plea of nolo contendere or its
equivalent, or an entry of an order of probation
prior to judgment, creates a rebuttable presumption
that the director did not meet that standard of
conduct.
(c) A director may not be indemnified under
subsection (b) of this section in respect of any
proceeding charging improper personal benefit to
the director, whether or not involving action in
the director's official capacity, in which the
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director was adjudged to be liable on the basis
that personal benefit was improperly received.
(d) Unless limited by the charter:
(1) A director who has been successful, on
the merits or otherwise, in the defense of any
proceeding referred to in subsection (b) of this
section shall be indemnified against reasonable
expenses incurred by the director in connection
with the proceeding.
(2) A court of appropriate jurisdiction upon
application of a director and such notice as the
court shall require, may order indemnification in
the following circumstances:
(i) If it determines a director is entitled
to reimbursement under paragraph (1) of this
subsection, the court shall order indemnification,
in which case the director shall be entitled to
recover the expenses of securing such
reimbursement; or
(ii) If it determines that the director is
fairly and reasonably entitled to indemnification
in view of all the relevant circumstances, whether
or not the director has met the standards of
conduct set forth in subsection (b) of this section
or has been adjudged liable under the circumstances
described in subsection (c) of this section, the
court may order such indemnification as the court
shall deem proper. However, indemnification with
respect to any proceeding by or in the right of the
corporation or in which liability shall have been
adjudged in the circumstances described in
subsection (c) shall be limited to expenses.
(3) A court of appropriate jurisdiction may
be the same court in which the proceeding involving
the director's liability took place.
(e)(1) Indemnification under subsection (b)
of this section may not be made by the corporation
unless authorized for a specific proceeding after a
determination has been made that indemnification of
the director is permissible in the circumstances
because the director has met the standard of
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conduct set forth in subsection (b) of this
section.
(2) Such determination shall be made:
(i) By the board of directors by a majority
vote of a quorum consisting of directors not, at
the time, parties to the proceeding, or, if such a
quorum cannot be obtained, then by a majority vote
of a committee of the board consisting solely of
two or more directors not, at the time, parties to
such proceeding and who were duly designated to act
in the matter by a majority vote of the full board
in which the designated directors who are parties
may participate;
(ii) By special legal counsel selected by the
board or a committee of the board by vote as set
forth in subparagraph (I) of this paragraph, or, if
the requisite quorum of the full board cannot be
obtained therefor and the committee cannot be
established, by a majority vote of the full board
in which director who are parties may participate;
or
(iii) By the stockholders.
(3) Authorization of indemnification and
determination as to reasonableness of expenses
shall be made in the same manner as the
determination that indemnification is permissible.
However, if the determination that indemnification
is permissible is made by special legal counsel,
authorization of indemnification and determination
as to reasonableness of expenses shall be made in
the manner specified in subparagraph (ii) of
paragraph (2) of this subsection for selection of
such counsel.
(4) Shares held by directors who are parties
to the proceeding may not be voted on the subject
matter under this subsection.
(f)(1) Reasonable expenses incurred by a
director who is a party to a proceeding may be paid
or reimbursed by the corporation in advance of the
final disposition of the proceeding, upon receipt
by the corporation of:
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(i) A written affirmation by the director of
the director's good faith belief that the standard
of conduct necessary for indemnification by the
corporation as authorized in this section has been
met; and
(ii) A written undertaking by or on behalf of
the director to repay the amount if it shall
ultimately be determined that the standard of
conduct has not been met.
(2) The undertaking required by subparagraph
(ii) of paragraph (1) of this subsection shall be
an unlimited general obligation of the director but
need not be secured and may be accepted without
reference to financial ability to make the
repayment.
(3) Payments under this subsection shall be
made as provided by the charter, bylaws, or
contract or as specified in subsection (e) of this
section.
(g) The indemnification and advancement of
expenses provided or authorized by this section may
not be deemed exclusive of any other rights, by
indemnification or otherwise, to which a director
may be entitled under the charter, the bylaws, a
resolution of stockholders or directors, an
agreement or otherwise, both as to action in an
official capacity and as to action in another
capacity while holding such office.
(h) This section does not limit the
corporation's power to pay or reimburse expenses
incurred by a director in connection with an
appearance as a witness in a proceeding at a time
when the director has not been made a named
defendant or respondent in the proceeding.
(i) For purposes of this section:
(1) The corporation shall be deemed to have
requested a director to serve an employee benefit
plan where the performance of the director's duties
to the corporation also imposes duties on, or
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otherwise involves services by, the director to the
plan or participants or beneficiaries of the plan:
(2) Excise taxes assessed on a director with
respect to an employee benefit plan pursuant to
applicable law shall be deemed fines; and
(3) Action taken or omitted by the director
with respect to an employee benefit plan in the
performance of the director's duties for a purpose
reasonably believed by the director to be in the
interest of the participants and beneficiaries of
the plan shall be deemed to be for a purpose which
is not opposed to the best interests of the
corporation.
(j) Unless limited by the charter:
(1) An officer of the corporation shall be
indemnified as and to the extent provided in
subsection (d) of this section for a director and
shall be entitled, to the same extent as a
director, to seek indemnification pursuant to the
provisions of subsection (d);
(2) A corporation may indemnify and advance
expenses to an officer, employee, or agent of the
corporation to the same extent that it may
indemnify directors under this section; and
(3) A corporation, in addition, may indemnify
and advance expenses to an officer, employee, or
agent who is not a director to such further extent,
consistent with law, as may be provided by its
charter, bylaws, general or specific action of its
board of directors or contract.
(k)(1) A corporation may purchase and maintain
insurance on behalf of any person who is or was a
director, officer, employee, or agent of the
corporation, or who, while a director, officer,
employee, or agent of the corporation, is or was
serving at the request, of the corporation as a
director, officer, partner, trustee, employee, or
agent of another foreign or domestic corporation,
partnership, joint venture, trust, other
enterprise, or employee benefit plan against any
liability asserted against and incurred by such
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person in any such capacity or arising out of such
person's position, whether or not the corporation
would have the power to indemnify against liability
under the provisions of this section.
(2) A corporation may provide similar
protection, including a trust fund, letter of
credit, or surety bond, not inconsistent with this
section.
(3) The insurance or similar protection may
be provided by a subsidiary or an affiliate of the
corporation.
(l) Any indemnification of, or advance of
expenses to, a director in accordance with this
section, if arising out of a proceeding by or in
the right of the corporation, shall be reported in
writing to the stockholders with the notice of the
next stockholders' meeting or prior to the
meeting."
Articles EIGHTH and NINTH of the
Registrant's Articles of Incorporation provide as
follows:
EIGHTH: (a) To the full extent that limitations on the
liability of directors and officers are permitted
by the Maryland General Corporation Law, no
director or officer of the Corporation shall have
any liability to the Corporation or its
stockholders for damages. This limitation on
liability applies to events occurring at the time a
person serves as a director or officer of the
Corporation whether or not such person is a
director or officer at the time of any proceeding
in which liability is asserted.
(b) The Corporation shall indemnify and advance
expenses to its currently acting and its former
directors to the full extent that indemnification
of directors is permitted by the Maryland General
Corporation Law. The Corporation shall indemnify
and advance expenses to its officers to the same
extent as its directors and to such further extent
as is consistent with law. The Board of Directors
may by By-Law, resolution or agreement make further
provisions for indemnification of directors,
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officers, employees and agents to the full extent
permitted by the Maryland General Corporation Law.
(c) No provision of this Article shall be effective
to protect or purport to protect any director or
officer of the Corporation against any liability to
the Corporation or its stockholders to which he
would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the
conduct of his office.
(d) References to the Maryland General Corporation
Law in this Article are to that law as from time to
time amended. No amendment to the Charter of the
Corporation shall affect any right of any person
under this Article based on any event, omission or
proceeding prior to the amendment."
NINTH: A director or officer of the Corporation, in his
capacity as such director or officer, shall not be
personally liable to the Corporation or its
stockholders for monetary damages except for
liability (i) to extent that it is proved that the
person actually received an improper benefit or
profit in money, property or services, for the
amount of the benefit or profit in money, property
or services actually received, or (ii) to the
extent that a judgment or other final adjudication
adverse to the person is entered in a proceeding
based on a finding in the proceeding that the
person's actions, or failure to act, was the result
of active and deliberate dishonesty and was
material to the cause of action adjudicated in the
proceeding; provided that nothing herein shall
protect any director or officer of the Corporation
against any liability to the Corporation or to its
[6~security holders to which he would otherwise be
subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of
the duties involved in the conduct of his office.
If the Maryland General Corporation Law is amended
to authorize corporate action further eliminating
or limiting the personal liability of directors or
officers, then the liability of the director or
officer of the Corporation shall be eliminated to
the fullest extent permitted by the Maryland
General Corporation Law, as so amended. Any repeal
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or modification of this Article NINTH by the
stockholders of the Corporation shall not adversely
affect any right or protection of a director or
officer of the Corporation existing at the time of
such repeal or modification based on events or
omissions prior thereto.
The Advisory Agreement between the Registrant and
Alliance Capital Management L.P. provides that Alliance
Capital Management L.P. will not be liable under such
agreement for any mistake of judgment or in any event
whatsoever except for lack of good faith and that nothing
therein shall be deemed to protect Alliance Capital
Management L.P. against any liability to the Registrant or
its security holders to which it would otherwise be subject
by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties thereunder, or
by reason of reckless disregard of its duties and
obligations thereunder.
The Distribution Agreement between the Registrant
and Alliance Fund Distributors, Inc. provides that the
Registrant will indemnify, defend and hold Alliance Fund
Distributors, Inc., and any person who controls it within
the meaning of Section 15 of the Investment Company Act of
1940, free and harmless from and against any and all claims,
demands, liabilities and expenses which Alliance Fund
Distributors, Inc. or any controlling person may incur
arising out of or based upon any alleged untrue statement of
a material fact contained in Registrant's Registration
Statement, Prospectus or Statement of Additional Information
or arising out of, or based upon any alleged omission to
state a material fact required to be stated in any one of
the foregoing or necessary to make the statements in any one
of the foregoing not misleading.
The foregoing summaries are qualified by the entire
text of Registrant's Articles of Incorporation, the Advisory
Agreement between Registrant and Alliance Capital Management
L.P. and the Distribution Agreement between Registrant and
Alliance Fund Distributors, Inc. which are filed herewith as
Exhibits (a)(1), (d) and (e)(1), respectively, in response
to Item 23 and each of which are incorporated by reference
herein.
Insofar as indemnification for liabilities arising
under the Securities Act of 1933 (the "Securities Act") may
be permitted to directors, officer and controlling persons
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of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that, in the
opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or the
Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or
controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
The Registrant participates in a joint directors
and officers liability insurance policy issued by the ICI
Mutual Insurance Company. Coverage under this policy has
been extended to directors, trustees and officers of the
investment companies managed by Alliance Capital Management
L.P. Under this policy, outside trustees and directors
would be covered up to the limits specified for any claim
against them for acts committed in their capacities as
trustee or director. A pro rata share of the premium for
this coverage is charged to each investment company and to
the Adviser.
ITEM 26. Business and Other Connections of Investment
Adviser.
The descriptions of Alliance Capital
Management L.P. under the caption "The Adviser" in
the Prospectus and "Management of the Fund" in the
Prospectus and in the Statement of Additional
Information constituting Parts A and B,
respectively, of this Registration Statement are
incorporated by reference herein.
The information as to the directors and
executive officers of Alliance Capital Management
Corporation, the general partner of Alliance
Capital Management L.P., set forth in Alliance
Capital Management L.P.'s Form ADV filed with the
Securities and Exchange Commission on April 21,
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1988 (File No. 801-32361) and amended through the
date hereof, is incorporated by reference.
Item 27. Principal Underwriters
(a) Alliance Fund Distributors, Inc., the Registrant's
Principal Underwriter in connection with the sale
of shares of the Registrant. Alliance Fund
Distributors, Inc. also acts as Principal
Underwriter or Distributor for the following
investment companies:
AFD Exchange Reserves
Alliance All-Asia Investment Fund, Inc.
Alliance Balanced Shares, Inc.
Alliance Bond Fund, Inc.
Alliance Capital Reserves
Alliance Disciplined Value Fund, Inc.
Alliance Global Dollar Government Fund, Inc.
Alliance Global Small Cap Fund, Inc.
Alliance Global Strategic Income Trust, Inc.
Alliance Government Reserves
Alliance Greater China '97 Fund, Inc.
Alliance Growth and Income Fund, Inc.
Alliance Health Care Fund, Inc.
Alliance High Yield Fund, Inc.
Alliance Institutional Funds, Inc.
Alliance Institutional Reserves, Inc.
Alliance International Fund
Alliance International Premier Growth Fund, Inc.
Alliance Limited Maturity Government Fund, Inc.
Alliance Money Market Fund
Alliance Mortgage Securities Income Fund, Inc.
Alliance Multi-Market Strategy Trust, Inc.
Alliance Municipal Income Fund, Inc.
Alliance Municipal Income Fund II
Alliance Municipal Trust
Alliance New Europe Fund, Inc.
Alliance North American Government Income Trust, Inc.
Alliance Premier Growth Fund, Inc.
Alliance Quasar Fund, Inc.
Alliance Real Estate Investment Fund, Inc.
Alliance Select Investor Series, Inc.
Alliance Technology Fund, Inc.
Alliance Utility Income Fund, Inc.
Alliance Variable Products Series Fund, Inc.
Alliance Worldwide Privatization Fund, Inc.
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The Alliance Fund, Inc.
The Alliance Portfolios
(b) The following are the Directors and Officers of
Alliance Fund Distributors, Inc., the principal
place of business of which is 1345 Avenue of the
Americas, New York, New York, 10105.
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME UNDERWRITER REGISTRANT
Michael J. Laughlin Director and Chairman
John D. Carifa Director Chairman
Robert L. Errico Director and President
Geoffrey L. Hyde Director and Senior
Vice President
Dave H. Williams Director
David Conine Executive Vice President
Richard K. Saccullo Executive Vice President
Edmund P. Bergan, Jr. Senior Vice President, Secretary
General Counsel and
Secretary
Richard A. Davies Senior Vice President
and Managing Director
Robert H. Joseph, Jr. Senior Vice President
and Chief Financial Officer
Anne S. Drennan Senior Vice President
and Treasurer
Benji A. Baer Senior Vice President
John R. Bonczek Senior Vice President
Karen J. Bullot Senior Vice President
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John R. Carl Senior Vice President
James S. Comforti Senior Vice President
James L. Cronin Senior Vice President
Byron M. Davis Senior Vice President
Mark J. Dunbar Senior Vice President
Donald N. Fritts Senior Vice President
Andrew L. Gangolf Senior Vice President Assistant
and Assistant General Secretary
Counsel
Bradley F. Hanson Senior Vice President
George H. Keith Senior Vice President
Richard E. Khaleel Senior Vice President
Stephen R. Laut Senior Vice President
Susan L. Matteson-King Senior Vice President
Daniel D. McGinley Senior Vice President
Antonios G. Poleondakis Senior Vice President
Robert E. Powers Senior Vice President
Domenick Pugliese Senior Vice President Assistant
and Assistant General Secretary
Counsel
Kevin A. Rowell Senior Vice President
John P. Schmidt Senior Vice President
Raymond S. Sclafani Senior Vice President
Gregory K. Shannahan Senior Vice President
Scott C. Sipple Senior Vice President
Joseph F. Sumanski Senior Vice President
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Peter J. Szabo Senior Vice President
William C. White Senior Vice President
Richard A. Winge Senior Vice President
Emilie D. Wrapp Senior Vice President
and Assistant General
Counsel
Gerard J. Friscia Vice President and
Controller
Ricardo Arreola Vice President
Kenneth F. Barkoff Vice President
Adam J. Barnett Vice President
Charles M. Barrett Vice President
Matthew F. Beaudry Vice President
Leo Benitez Vice President
Gregory P. Best Vice President
Dale E. Boyd Vice President
Robert F. Brendli Vice President
Christopher L. Butts Vice President
Thomas C. Callahan Vice President
Kevin T. Cannon Vice President
John M. Capeci Vice President
John P. Chase Vice President
Doris T. Ciliberti Vice President
William W. Collins, Jr. Vice President
Leo H. Cook Vice President
Russell R. Corby Vice President
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John W. Cronin Vice President
Robert J. Cruz Vice President
Richard W. Dabney Vice President
Daniel J. Deckman Vice President
Sherry V. Delaney Vice President
Richard P. Dyson Vice President
John C. Endahl Vice President
John E. English Vice President
Sohaila S. Farsheed Vice President
Daniel J. Frank Vice President
Shawn C. Gage Vice President
Joseph C. Gallagher Vice President
Michael J. Germain Vice President
Mark D. Gersten Vice President Treasurer and
Chief
Financial
Officer
Hyman Glasman Vice President
John Grambone Vice President
Charles M. Greenberg Vice President
Alan Halfenger Vice President
William B. Hanigan Vice President
Michael S. Hart Vice President
Scott F. Heyer Vice President
Timothy A. Hill Vice President
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Brian R. Hoegee Vice President
George R. Hrabovsky Vice President
Michael J. Hutten Vice President
Scott Hutton Vice President
Oscar J. Isoba Vice President
Richard D. Keppler Vice President
Richard D. Kozlowski Vice President
Daniel W. Krause Vice President
Donna M. Lamback Vice President
P. Dean Lampe Vice President
Henry Michael Lesmeister Vice President
Eric L. Levinson Vice President
James M. Liptrot Vice President
James P. Luisi Vice President
Michael F. Mahoney Vice President
Kathryn Austin Masters Vice President
Shawn P. McClain Vice President
David L. McGuire Vice President
Jeffrey P. Mellas Vice President
Michael V. Miller Vice President
Thomas F. Monnerat Vice President
Timothy S. Mulloy Vice President
Joanna D. Murray Vice President
Michael F. Nash, Jr. Vice President
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<PAGE>
Timothy H. Nasworthy Vice President
Nicole Nolan-Koester Vice President
Daniel A. Notto Vice President
Peter J. O'Brien Vice President
John C. O'Connell Vice President
John J. O'Connor Vice President
Daniel P. O'Donnell Vice President
Richard J. Olszewski Vice President
Catherine N. Peterson Vice President
James J. Posch Vice President
Bruce W. Reitz Vice President
Jeffrey B. Rood Vice President
Karen C. Satterberg Vice President
Robert C. Schultz Vice President
Richard J. Sidell Vice President
Clara Sierra Vice President
Teris A. Sinclair Vice President
Jeffrey C. Smith Vice President
David A. Solon Vice President
Martine H. Stansbery, Jr. Vice President
Eileen Stauber Vice President
Michael J. Tobin Vice President
Joseph T. Tocyloski Vice President
Benjamin H. Travers Vice President
C-23
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David R. Turnbough Vice President
Andrew B. Vaughey Vice President
Wayne W. Wagner Vice President
Mark E. Westmoreland Vice President
Paul C. Wharf Vice President
Stephen P. Wood Vice President
Keith A. Yoho Vice President
Michael W. Alexander Assistant Vice
President
Richard J. Appaluccio Assistant Vice
President
Paul G. Bishop Assistant Vice
President
Mark S. Burns Assistant Vice
President
Maria L. Carreras Assistant Vice
President
Judith A. Chin Assistant Vice
President
Jorge Ciprian Assistant Vice
President
William P. Condon Assistant Vice
President
Jean A. Coomber Assistant Vice
President
Dorsey Davidge Assistant Vice
President
Ralph A. DiMeglio Assistant Vice
President
C-24
<PAGE>
Faith C. Deutsch Assistant Vice
President
Timothy J. Donegan Assistant Vice
President
Joan Eilbott Assistant Vice
President
Adam E. Engelhardt Assistant Vice
President
Michael J. Eustic Assistant Vice
President
Michele Grossman Assistant Vice
President
Arthur F. Hoyt, Jr. Assistant Vice
President
David A. Hunt Assistant Vice
President
Theresa Iosca Assistant Vice
President
Erik A. Jorgensen Assistant Vice
President
Eric G. Kalender Assistant Vice
President
Elizabeth E. Keefe Assistant Vice
President
Edward W. Kelly Assistant Vice
President
Victor Kopelakis Assistant Vice
President
Jeffrey M. Kusterer Assistant Vice
President
C-25
<PAGE>
Alexandra C. Landau Assistant Vice
President
Lauren E. Lindner Assistant Vice
President
Evamarie C. Lombardo Assistant Vice
President
Amanda McNichol Assistant Vice
President
Richard F. Meier Assistant Vice
President
Charles B. Nanick Assistant Vice
President
Alex E. Pady Assistant Vice
President
Raymond E. Parker Assistant Vice
President
Wandra M. Perry-Hartsfield Assistant Vice
President
Rizwan A. Raja Assistant Vice
President
Carol H. Rappa Assistant Vice
President
Brendan J. Reynolds Assistant Vice
President
James A. Rie Assistant Vice
President
Lauryn A. Rivello Assistant Vice
President
Christina Santiago Assistant Vice
President
C-26
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Nandy D. Testa Assistant Vice
President
Margaret M. Tompkins Assistant Vice
President
Marie R. Vogel Assistant Vice
President
Nina C. Wilkinson Assistant Vice
President
Wesley S. Williams Assistant Vice
President
Matthew Witschel Assistant Vice
President
Mark R. Manley Assistant Secretary
(c) Not applicable.
ITEM 28. Location of Accounts and Records.
The accounts, books and other documents required to
be maintained by Section 31(a) of the Investment Company Act
of 1940 and the Rules thereunder are maintained as follows:
journals, ledgers, securities records and other original
records are maintained principally at the offices of
Alliance Fund Services, Inc. 500 Plaza Drive, Secaucus, New
Jersey 07094 and at the offices of State Street Bank and
Trust Company, the Registrant's Custodian, 225 Franklin
Street, Boston, Massachusetts 02110. All other records so
required to be maintained are maintained at the offices of
Alliance Capital Management L.P., 1345 Avenue of the
Americas, New York, New York 10105.
ITEM 29. Management Services.
Not applicable.
ITEM 30. Undertakings.
Subject to the terms and conditions of Section
15(d) of the Securities Exchange Act of 1934, the
undersigned Registrant hereby undertakes to file with the
Securities and Exchange Commission such supplementary and
C-27
<PAGE>
periodic information, documents and reports as may be
prescribed by any rule or regulation of the Commission
heretofore or hereafter duly adopted pursuant to authority
conferred in that section.
The Registrant undertakes to furnish each person to
whom a prospectus is delivered with a copy of the
Registrant's latest annual report to shareholders, upon
request and without charge.
C-28
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act
of 1933, as amended, and the Investment Company Act of 1940,
as amended, the Registrant certifies that it meets all of
the requirements for effectiveness of this Amendment to its
Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this Amendment to
its Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New
York and State of New York on the 22nd day of November,
2000.
ALLIANCE INSTITUTIONAL RESERVES, INC.
By /s/ John D. Carifa
___________________________
John D. Carifa
Chairman
Pursuant to the requirements of the Securities Act
of l933, as amended, this Amendment to the Registration
Statement has been signed below by the following persons in
the capacities and on the date indicated:
Signature Title Date
1) Principal
Executive Officer
/s/ John D. Carifa Chairman November 22, 2000
_____________________
John D. Carifa
2) Principal Financial and
Accounting Officer
/s/ Mark D. Gersten Treasurer November 22, 2000
_____________________ and Chief
Mark D. Gersten Financial
Officer
All of the Directors:
____________________
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Ruth Block
John D. Carifa
David H. Dievler
John H. Dobkin
William H. Foulk, Jr.
James M. Hester
Clifford L. Michel
Donald J. Robinson
By: /s/ Edmund P. Bergan, Jr. November 22, 2000
_______________________
(Attorney-in-Fact)
C-30
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Index to Exhibits
(a)(7) Articles Supplementary of the Registrant dated
November 6, 2000.
(i)(3) Opinion and Consent of Seward & Kissel LLP
C-31
