<PAGE>
1933 Act Registration No. 33-10261
1940 Act Registration No. 811-4905
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 27, 1995
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(Registration No. 33-10261)
Pre-Effective Amendment No. ______
Post-Effective Amendment No. 27
------
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
(Registration No. 811-4905)
Amendment No. 27
-------
(Check appropriate box or boxes)
PIPER FUNDS INC.
(Exact Name of Registrant as Specified in Charter)
Piper Jaffray Tower, 222 South 9th Street, Minneapolis, MN 55402
----------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (6l2) 342 6384
--------------
Paul A. Dow
Piper Capital Management Incorporated
Piper Jaffray Tower
222 South 9th Street, Minneapolis, Minnesota 55402
--------------------------------------------------
(Name and Address of Agent for Service)
Copy to:
Kathleen L. Prudhomme
Dorsey & Whitney P.L.L.P.
220 South Sixth Street
Minneapolis, Minnesota 55402
X immediately upon filing pursuant to paragraph (b) of rule 485
---
___ on (specify date) pursuant to paragraph (b) of rule 485
___ 75 days after filing pursuant to paragraph (a) of rule 485, unless
effectiveness is accelerated by the staff of the Securities and
Exchange Commission
___ on (specify date) pursuant to paragraph (a) of rule 485
The Registrant has registered an indefinite number of its common
shares pursuant to Regulation 270.24f-2 under the Investment Company Act of
1940. A Rule 24f-2 Notice for the fiscal year ended September 30, 1995 will
be filed on or before November 30, 1995.
<PAGE>
PIPER FUNDS INC.
Registration Statement on Form N 1A
-------------------------
CROSS REFERENCE SHEET
Pursuant to Rule 481(a)
-------------------------
<TABLE>
<CAPTION>
ITEM NO. PROSPECTUS HEADING
-------- ------------------
<S> <C>
1. Cover Page. . . . . . . . Cover Page
2. Synopsis. . . . . . . . . Introduction; Fund Expenses
3. Financial Highlights. . . Financial Highlights
4. General Description of
Registrant. . . . . . Introduction; Investment Objectives and Policies;
Characteristics and Risks of Securities and Special
Investment Methods; Special Investment Methods
5. Management of the Fund. . Management
6. Capital Stock and Other
Securities. . . . . . . General Information; Introduction; Dividends and
Distributions; Tax Status
7. Purchase of Securities
Being Offered . . . . . Distribution of Fund Shares; How to Purchase
Shares; Reducing Your Sales Charge; Special
Purchase Plans; Valuation of Shares; Shareholder
Services
8. Redemption or Repurchase. How to Redeem Shares; Shareholder Services
9. Pending Legal Proceedings. General Information
STATEMENT OF ADDITIONAL INFORMATION HEADING
-------------------------------------------
10. Cover Page. . . . . . . Cover Page
11. Table of Contents . . . Cover Page
12. General Information
and History. . . . . General Information; Pending Litigation
13. Investment Objectives
and Policies. . . . . Investment Objectives, Policies and Restrictions
<PAGE>
14. Management of the Fund. Directors and Executive Officers
15. Control Persons and
Principal Holders of
Securities . . . . . . Capital Stock and Ownership of Shares
16. Investment Advisory and
Other Services. . . . Investment Advisory and Other Services
17. Brokerage Allocation. . Portfolio Transactions and Allocation of
Brokerage
18. Capital Stock and Other
Securities. . . . . . Capital Stock and Ownership of Shares
19. Purchase, Redemption and
Pricing of Securities
Being Purchased . . . Net Asset Value and Public Offering Price;
Performance Comparisons; Purchase of Shares;
Redemption of Shares
20. Tax Status. . . . . . . Taxation
21. Underwriters. . . . . . Investment Advisory and Other Services;
Portfolio Transactions and Allocation of
Brokerage
22. Calculations of
Performance Data. . . Performance Comparisons
23. Financial Statements. . Financial Statements
</TABLE>
<PAGE>
PROSPECTUS DATED NOVEMBER 27, 1995
PIPER FUNDS INC.
PIPER JAFFRAY TOWER
222 SOUTH NINTH STREET, MINNEAPOLIS, MINNESOTA 55402-3804
(800) 866-7778 (TOLL FREE)
Growth Fund, Emerging Growth Fund, Growth and Income Fund, Equity Strategy
Fund and Balanced Fund (the "Funds") are series of Piper Funds Inc. (the
"Company"), an open-end mutual fund whose shares are currently offered in
thirteen series. Each Fund has its own investment objectives and policies
designed to meet different investment goals.
GROWTH FUND (formerly Value Fund) has a primary investment objective of
long-term capital appreciation with secondary objectives of current income and
conservation of principal. The Fund invests primarily in a diversified portfolio
of common stocks or securities convertible into or carrying rights to buy common
stocks.
EMERGING GROWTH FUND has an investment objective of long-term capital
appreciation. The Fund invests primarily in common stocks and securities
convertible into common stocks of emerging growth companies, with an emphasis on
companies headquartered or maintaining offices or manufacturing facilities in
states in which the Distributor maintains offices.
GROWTH AND INCOME FUND has investment objectives of both current income and
long-term growth of capital and income. The Fund invests in a broadly
diversified portfolio of securities, with an emphasis on securities of large,
established companies that have a history of dividend payments and that the
Adviser believes are undervalued.
EQUITY STRATEGY FUND has an investment objective of a high total investment
return consistent with prudent investment risk. The Fund invests primarily in
common stocks and securities convertible into or carrying rights to buy common
stocks of companies representing a number of different sectors of the economy.
In pursuing its objective, the Fund expects to have a high portfolio turnover
rate.
BALANCED FUND has investment objectives of both current income and long-term
capital appreciation consistent with conservation of principal. The Fund invests
primarily in common stocks and fixed-income securities with emphasis on
income-producing securities that appear to have some potential for capital
appreciation.
Investments in certain Funds may involve additional risks. Equity Strategy
Fund may engage in short-term trading in attempting to achieve its investment
objective, which will increase transaction costs. In addition, Equity Strategy
Fund may sell securities short. Each Fund may invest in illiquid securities
which will involve greater risk than investments in other securities and may
increase Fund expenses. See "Special Investment Methods" for a discussion of the
risks of each of these techniques.
This Prospectus concisely describes the information about the Funds that you
ought to know before investing. Please read it carefully before investing and
retain it for future reference.
A Statement of Additional Information about the Funds dated November 27,
1995, is available free of charge. Write to the Funds at Piper Jaffray Tower,
222 South Ninth Street, Minneapolis, Minnesota 55402-3804 or telephone (800)
866-7778 (toll free). The Statement of Additional Information has been filed
with the Securities and Exchange Commission and is incorporated in its entirety
by reference in this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
INTRODUCTION
Growth Fund (formerly Value Fund), Emerging Growth Fund, Growth and Income
Fund, Equity Strategy Fund and Balanced Fund (sometimes referred to herein as a
"Fund" or, collectively, as the "Funds") are series of Piper Funds Inc. (the
"Company"). The Company is an open-end management investment company organized
under the laws of the State of Minnesota in 1986, the shares of which are
currently offered in thirteen series. Each Fund has a different investment
objective and is designed to meet different investment needs and each Fund is
classified as a diversified fund.
THE INVESTMENT ADVISER
The Company is managed by Piper Capital Management Incorporated (the
"Adviser"), a wholly owned subsidiary of Piper Jaffray Companies Inc. Each Fund
pays the Adviser a fee for managing its investment portfolio. Fees for each Fund
are paid at an annual rate of .75% on net assets up to $100 million and are
scaled downward as assets increase in size. These fees are higher than fees paid
by most other investment companies. See "Management--Investment Adviser."
THE DISTRIBUTOR
Piper Jaffray Inc. ("Piper Jaffray"), a wholly owned subsidiary of Piper
Jaffray Companies Inc. and an affiliate of the Adviser, serves as Distributor of
the Funds' shares.
OFFERING PRICE
Shares of the Funds are offered to the public at the next determined net
asset value after receipt of an order by a shareholder's Piper Jaffray
Investment Executive or other broker-dealer, plus a maximum sales charge of 4%
of the offering price (4.17% of the net asset value) on purchases of less than
$100,000. The sales charge is reduced on a graduated scale on purchases of
$100,000 or more. In connection with purchases of $500,000 or more, there is no
initial sales charge; however, a 1% contingent deferred sales charge will be
imposed in the event of a redemption transaction occurring within 24 months
following such a purchase. See "How to Purchase Shares--Public Offering Price."
MINIMUM INITIAL AND SUBSEQUENT INVESTMENTS
The minimum initial investment for each Fund is $250. There is no minimum
for subsequent investments. See "How to Purchase Shares--Minimum Investments."
EXCHANGES
You may exchange your shares for shares of any other mutual fund managed by
the Adviser (except Hercules Funds Inc.) which is open to new investors and
eligible for sale in your state of residence. All exchanges are subject to the
minimum investment requirements and other applicable terms set forth in the
prospectus of the fund whose shares you acquire. You may make four exchanges per
year without payment of a service charge. Thereafter, there is a $5 service
charge for each exchange. See "Shareholder Services-- Exchange Privilege."
REDEMPTION PRICE
Shares of any Fund may be redeemed at any time at their net asset value next
determined after a redemption request is received by your Piper Jaffray
Investment Executive or other broker-dealer. A contingent deferred sales charge
will be imposed upon the redemption of certain shares initially purchased
without a sales charge. See "How to Redeem Shares--Contingent Deferred Sales
Charge." Each Fund reserves the right, upon 30 days' written notice, to redeem
an account in any Fund if the net asset value of the shares falls below $200.
See "How to Redeem Shares--Involuntary Redemption."
2
<PAGE>
CERTAIN RISK FACTORS TO CONSIDER
An investment in any of the Funds is subject to certain risks, as set forth
in detail under "Investment Objectives and Policies" and "Special Investment
Methods." As with other mutual funds, there can be no assurance that any Fund
will achieve its objective. Each of the Funds is subject to market risk (the
risk that a security will be worth less when it is sold than when it was bought
due to any number of factors, including reduced demand or loss of investor
confidence in the market) and/or interest-rate risk (the risk that rising
interest rates will make bonds issued at lower interest rates worth less). As a
result, the value of each Fund's shares will vary. Some or all of the Funds, to
the extent set forth under "Investment Objectives and Policies" and "Special
Investment Methods," may engage in the following investment practices: the use
of repurchase agreements, the lending of portfolio securities, borrowing from
banks, entering into options transactions on securities in which the Funds may
invest and on stock indexes, the use of stock index futures contracts and
interest rate futures contracts, entering into options on futures contracts, the
use of short sales, and the purchase or sale of securities on a "when-issued" or
forward commitment basis, including the use of mortgage dollar rolls. These
techniques may increase the volatility of a Fund's net asset value. Equity
Strategy Fund may engage in short-term trading in attempting to achieve its
investment objective, which will increase transaction costs. Balanced Fund and
Growth and Income Fund may purchase mortgage-related securities, including
derivative mortgage securities. In addition to interest rate risk,
mortgage-related securities are subject to prepayment risk. Recent market
experience has shown that certain derivative mortgage securities may be
extremely sensitive to changes in interest rates and in prepayment rates on the
underlying mortgage assets and, as a result, the prices of such securities may
be highly volatile. All of these transactions involve certain special risks, as
set forth under "Investment Objectives and Policies" and "Special Investment
Methods."
SHAREHOLDER INQUIRIES
Any questions or communications regarding a shareholder account should be
directed to your Piper Jaffray Investment Executive or, in the case of shares
held through another broker-dealer, to IFTC at (800) 874-6205. General inquiries
regarding the Funds should be directed to the Funds at the telephone number set
forth on the cover page of this Prospectus.
3
<PAGE>
FUND EXPENSES
<TABLE>
<CAPTION>
Emerging Growth and Equity
Growth Growth Income Strategy Balanced
Fund Fund Fund Fund Fund
------------ ------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)...... 4.00% 4.00% 4.00% 4.00% 4.00%
Exchange Fee * $ 0 0 0 0 0
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees............................ .71% .70% .75% .75% .75%
Rule 12b-1 Fees (after voluntary
limitation) **........................... .32% .32% .32% .32% .32%
Other Expenses (after voluntary expense
reimbursement) **........................ .24% .22% .25% .33% .25%
--- --- --- --- ---
Total Fund Operating Expenses (after
voluntary limitations and expense
reimbursements).......................... 1.27% 1.24% 1.32% 1.40% 1.32%
</TABLE>
- ---------
* There is a $5.00 fee for each exchange in excess of four exchanges per
year. See "How to Purchase Shares--Exchange Privilege."
** See the discussion below for an explanation of voluntary Rule 12b-1 fee
limitations and expense reimbursements.
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
Emerging Growth and Equity
Growth Growth Income Strategy Balanced
Fund Fund Fund Fund Fund
----------- ------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
1 Year ................ $ 52 52 53 53 53
3 Years ............... $ 79 78 80 80 80
5 Years ............... $ 107 106 109 109 109
10 Years ............... $ 187 185 193 193 193
</TABLE>
The purpose of the above Fund Expenses table is to assist you in
understanding the various costs and expenses that investors in the Funds will
bear directly or indirectly. THE EXAMPLE CONTAINED IN THE TABLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN.
The information set forth in the table is based on actual expenses
(including expenses paid through expense offset arrangements) incurred by the
Funds during the fiscal year ended September 30, 1995. The expenses for all
Funds reflect a voluntary limitation by the Distributor of the fee payable to it
under each Fund's Rule 12b-1 Plan to .32% of each Fund's average daily net
assets. In addition, the Adviser reimbursed Growth and Income Fund, Equity
Strategy Fund and Balanced Fund for the amount by which total Fund operating
expenses (excluding expenses paid through expense offset arrangements) for
fiscal 1995 exceeded 1.32% of average daily net assets. Absent any Rule 12b-1
fee limitations or expense
4
<PAGE>
reimbursements, Total Fund Operating Expenses for the fiscal year ended
September 30, 1995, as a percentage of average daily net assets, would have been
1.45% for Growth Fund, 1.42% for Emerging Growth Fund, 1.60% for Growth and
Income Fund, 1.63% for Equity Strategy Fund and 1.65% for Balanced Fund. The
voluntary Rule 12b-1 fee limitations for each Fund and the expense
reimbursements for Growth and Income Fund, Equity Strategy Fund and Balanced
Fund reflected in the Fund Expenses table may be discontinued at any time
after the fiscal 1996 year end. The Adviser may or may not assume additional
expenses of the Funds from time to time, in its discretion, while retaining
the ability to be reimbursed by the Funds for expenses assumed during a fiscal
year prior to the end of such year. The foregoing policy will have the effect
of lowering a Fund's overall expense ratio and increasing yield to investors
when such amounts are assumed or the inverse when such amounts are reimbursed.
As a result of each Fund's annual payment of its Rule 12b-1 fee, a portion
of which is considered an asset-based sales charge, long-term shareholders of a
Fund may pay more than the economic equivalent of the maximum 6.25% front end
sales charge permitted under the rules of the National Association of Securities
Dealers, Inc. For additional information, including a more complete explanation
of management and Rule 12b-1 fees, see "Management--Investment Adviser" and
"Distribution of Fund Shares."
5
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial highlights show certain per share data and selected
information for a share of capital stock outstanding during the indicated
periods for each Fund. This information has been audited by KPMG Peat Marwick
LLP, independent auditors, and should be read in conjunction with the financial
statements of each Fund contained in its annual report. An annual report of each
Fund is available without charge by contacting the Funds at 800-866-7778 (toll
free). In addition to financial statements, the annual reports contain further
information about the performance of the Funds.
GROWTH FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30, Period from
---------------------------------------------------------------- 11/1/88 to Year Ended
1995 1994 1993 1992 1991 1990 9/30/89 10/31/88
--------- --------- --------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.... $ 18.90 19.30 17.06 16.86 11.69 12.46 9.60 8.61
--------- --------- --------- --------- --------- --------- ----------- -----------
Operations:
Net investment income................. 0.08 0.08 0.12 0.17 0.19 0.20 0.17 0.19
Net realized and unrealized gains
(losses) on investments............. 3.60 (0.37) 2.24 0.76 5.18 (0.78) 2.86 0.98
--------- --------- --------- --------- --------- --------- ----------- -----------
Total from operations............. 3.68 (0.29) 2.36 0.93 5.37 (0.58) 3.03 1.17
--------- --------- --------- --------- --------- --------- ----------- -----------
Distributions from net investment
income................................ (0.08) (0.11) (0.12) (0.16) (0.20) (0.19) (0.17 ) (0.18)
Distributions from net realized gains... (2.10) -- -- (0.57) -- -- -- --
--------- --------- --------- --------- --------- --------- ----------- -----------
Total distributions............... (2.18) (0.11) (0.12) (0.73) (0.20) (0.19) (0.17 ) (0.18)
--------- --------- --------- --------- --------- --------- ----------- -----------
Net asset value, end of period.......... $ 20.40 18.90 19.30 17.06 16.86 11.69 12.46 9.60
--------- --------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- --------- ----------- -----------
Total return (%)+....................... 20.60 (1.51) 13.85 5.76 46.23 (4.81) 31.90 13.79
Net assets end of period (in
millions)............................. $ 172 195 252 200 107 47 37 19
Ratio of expenses to average daily net
assets (%)++.......................... 1.27 1.23 1.26 1.29 1.32 1.31 1.30 ** 1.30
Ratio of net investment income to
average daily net assets (%)++........ 0.40 0.43 0.66 1.04 1.25 1.57 1.75 ** 2.06
Portfolio turnover rate (excluding
short-term securities) (%)............ 80 11 45 36 36 37 48 52
<CAPTION>
Period from
3/16/87* to
10/31/87
-----------
<S> <C>
Net asset value, beginning of period.... 10.00
-----------
Operations:
Net investment income................. 0.10
Net realized and unrealized gains
(losses) on investments............. (1.40 )
-----------
Total from operations............. (1.30 )
-----------
Distributions from net investment
income................................ (0.09 )
Distributions from net realized gains... --
-----------
Total distributions............... (0.09 )
-----------
Net asset value, end of period.......... 8.61
-----------
-----------
Total return (%)+....................... (13.16 )
Net assets end of period (in
millions)............................. 18
Ratio of expenses to average daily net
assets (%)++.......................... 1.00 **
Ratio of net investment income to
average daily net assets (%)++........ 1.84 **
Portfolio turnover rate (excluding
short-term securities) (%)............ 32
</TABLE>
- ----------
*Commencement of operations.
**Adjusted to an annual basis.
+Total return is based on the change in net asset value during the period,
assumes reinvestment of all distributions and does not reflect a sales charge.
++During the periods reflected above, the Advisor and Distributor voluntarily
waived fees and expenses. Had the Fund paid all expenses and had the maximum
Rule 12b-1 fee been in effect, the ratios of expenses and net investment
income to average daily net assets would have been: 1.45%/022% in fiscal 1995,
1.42%/0.24% in fiscal 1994, 1.44%/0.48% in fiscal 1993, 1.47%/0.86% in fiscal
1992, 1.55%/1.02% in fiscal 1991, 1.64%/1.24% in fiscal 1990, 1.89%/1.16% in
fiscal 1989, 1.96%/1.40% in fiscal 1988 and 2.29%/0.55% in fiscal 1987.
Beginning in fiscal 1995, the expense ratio reflects the effect of gross
expenses paid indirectly by the Fund. Prior period expense ratios have not
been adjusted.
6
<PAGE>
EMERGING GROWTH FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
----------------------------------------------------------------
1995 1994 1993 1992 1991 1990*
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period................ $ 19.26 19.73 14.41 13.86 8.59 10.00
--------- --------- --------- --------- --------- ---------
Operations:
Net investment income (loss)...................... (0.11) (0.07) (0.05) (0.01) 0.02 0.02
Net realized and unrealized gains (losses) on
investments..................................... 6.80 (0.40) 5.37 0.64 5.28 (1.42)
--------- --------- --------- --------- --------- ---------
Total from operations......................... 6.69 (0.47) 5.32 0.63 5.30 (1.40)
--------- --------- --------- --------- --------- ---------
Distributions from net investment income............ -- -- -- -- (0.03) (0.01)
Distributions from net realized gains............... -- -- -- (0.08) -- --
--------- --------- --------- --------- --------- ---------
Total distributions........................... -- -- -- (0.08) (0.03) (0.01)
--------- --------- --------- --------- --------- ---------
Net asset value, end of period...................... $ 25.95 19.26 19.73 14.41 13.86 8.59
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Total return (%)+................................... 34.68 (2.38) 36.92 4.55 61.80 (14.01)
Net asset, end of period (in millions).............. $ 253 224 191 110 56 21
Ratio of expenses to average daily net assets
(%)++............................................. 1.24 1.24 1.29 1.30 1.30 1.30**
Ratio of net investment income to average daily net
assets (%)++...................................... (0.51) (0.38) (0.34) (0.14) 0.11 0.71**
Portfolio turnover rate (excluding short-term
securities) (%)................................... 33 31 30 21 27 6
</TABLE>
- ----------
*Period from 4/23/90 (commencement of operations) to 9/30/90.
**Adjusted to an annual basis.
+Total return is based on the change in net asset value during the period,
assumes reinvestment of all distributions and does not reflect a sales charge.
++During the periods reflected above, the Adviser and the Distributor
voluntarily waived fees and expenses. Had the Fund paid all expenses and had
the maximum Rule 12b-1 fee been in effect, the ratios of expenses and net
investment income to average daily net assets would have been: 1.42%/(0.69%)
in fiscal 1995, 1.44%/(0.58%) in fiscal 1994, 1.49%/(0.54%) in fiscal 1993,
1.56%/(0.40%) in fiscal 1992, 1.70%/(0.29%) in fiscal 1991 and 1.95%/0.06% in
fiscal 1990. Beginning in fiscal 1995, the expense ratio reflects the effect
of gross expenses paid indirectly by the Fund. Prior period expense ratios
have not been adjusted.
7
<PAGE>
GROWTH AND INCOME FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30,
------------------------------------------
1995 1994 1993 1992*
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net asset value, beginning of period.................................. $ 10.27 10.30 10.01 10.00
--------- --------- --------- ---------
Operations:
Net investment income............................................... 0.19 0.24 0.24 0.03
Net realized and unrealized gains (losses) on investments........... 2.70 0.02 0.29 (0.02)
--------- --------- --------- ---------
Total from operations........................................... 2.89 0.26 0.53 0.01
--------- --------- --------- ---------
Distributions from net investment income.............................. (0.19) (0.24) (0.24) --
Distributions from net realized gains................................. (0.04) (0.05) -- --
--------- --------- --------- ---------
Total distributions............................................. (0.23) (0.29) (0.24) --
--------- --------- --------- ---------
Net asset value, end of period........................................ $ 12.93 10.27 10.30 10.01
--------- --------- --------- ---------
--------- --------- --------- ---------
Total return (%)+..................................................... 28.81 2.53 5.41 0.10
Net assets, end of period (in millions)............................... $ 73 73 96 52
Ratio of expenses to average daily net assets (%)++................... 1.32 1.29 1.32 1.28**
Ratio of net investment income to average daily net assets (%)++...... 1.93 2.26 2.51 3.00**
Portfolio turnover rate (excluding short-term securities) (%)......... 14 20 26 1
</TABLE>
- ----------
*Period from 7/21/92 (commencement of operations) to 9/30/92.
**Adjusted to an annual basis.
+Total return is based on the change in net asset value during the period,
assumes reinvestment of all distributions and does not reflect a sales charge.
++During the periods reflected above, the Adviser and the Distributor
voluntarily waived fees and expenses. Had the Fund paid all expenses and had
the maximum Rule 12b-1 fee been in effect, the ratios of expenses and net
investment income to average daily net assets would have been: 1.60%/1.65% in
fiscal 1995, 1.62%/1.93% in fiscal 1994, 1.58%/2.25% in fiscal 1993 and
2.06%/2.22% in fiscal 1992. Beginning in fiscal 1995, the expense ratio
reflects the effect of gross expenses paid indirectly by the Fund. Prior
period expense ratios have not been adjusted.
8
<PAGE>
EQUITY STRATEGY FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30, Period from
---------------------------------------------------------------- 11/1/88 to
1995 1994 1993 1992 1991 1990 9/30/89
--------- --------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period... $ 17.17 16.84 13.57 12.82 9.17 10.05 8.07
--------- --------- --------- --------- --------- --------- ------
Operations:
Net investment income+++............. 0.11 0.07 0.03 0.08 0.07 0.10 0.38
Net realized and unrealized gains
(losses) on investments............ 2.27 0.29 3.30 0.71 3.65 (0.74) 1.85
--------- --------- --------- --------- --------- --------- ------
Total from operations............ 2.38 0.36 3.33 0.79 3.72 (0.64) 2.23
--------- --------- --------- --------- --------- --------- ------
Distributions from net investment
income............................... (0.09) (0.03) (0.06) (0.04) (0.07) (0.24) (0.25)
--------- --------- --------- --------- --------- --------- ------
Net asset value, end of period......... $ 19.46 17.17 16.84 13.57 12.82 9.17 10.05
--------- --------- --------- --------- --------- --------- ------
--------- --------- --------- --------- --------- --------- ------
Total return (%)+...................... 13.88 2.12 24.56 6.18 40.71 (6.61) 27.86
Net assets end of period (in
millions)............................ $ 48 78 84 9 9 8 13
Ratio of expenses to average daily net
assets (%)++......................... 1.40 1.32 1.28 1.47 1.32 1.49 1.30**
Ratio of net investment income to
average daily net assets (%)++....... 0.43 0.37 0.50 0.56 0.61 1.03 3.95**
Portfolio turnover rate (excluding
short-term securities) (%)........... 182 177 154 420 507 514 375
<CAPTION>
Period from
Year Ended 3/16/87* to
10/31/88 10/31/87
----------- -----------
<S> <C> <C>
Net asset value, beginning of period... 7.90 10.00
----- -----------
Operations:
Net investment income+++............. 0.09 0.08
Net realized and unrealized gains
(losses) on investments............ 0.19 (2.11)
----- -----------
Total from operations............ 0.28 (2.03)
----- -----------
Distributions from net investment
income............................... (0.11) 0.07
----- -----------
Net asset value, end of period......... 8.07 7.90
----- -----------
----- -----------
Total return (%)+...................... 3.47 (20.48)
Net assets end of period (in
millions)............................ 19 28
Ratio of expenses to average daily net
assets (%)++......................... 1.52 1.02**
Ratio of net investment income to
average daily net assets (%)++....... 1.13 1.51**
Portfolio turnover rate (excluding
short-term securities) (%)........... 202 200
</TABLE>
- ----------
*Commencement of operations.
**Adjusted to an annual basis.
+Total return is based on the change in net asset value during the period,
assumes reinvestment of all distributions and does not reflect a sales
charge.
++During the periods reflected above, the Adviser and Distributor voluntarily
waived fees and expenses. Had the Fund paid all expenses and had the maximum
Rule 12b-1 fee been in effect, the ratios of expenses and net investment
income to average daily net assets would have been: 1.63%/0.20% in fiscal
1995, 1.54%/0.15% in fiscal 1994, 1.86%/(0.08%) in fiscal 1993, 2.49%/(0.46%)
in fiscal 1992, 2.39%/(0.46%) in fiscal 1991, 2.55%/(0.03%) in fiscal 1990,
2.23%/3.02% in fiscal 1989, 2.20%/0.45% in fiscal 1988 and 2.24%/0.29% in
fiscal 1987. Beginning in fiscal 1995, the expense ratio reflects the effect
of gross expenses paid indirectly by the Fund. Prior period expense ratios
have not been adjusted.
+++For the years ended September 30, 1992, and October 31, 1988, gross expenses
included $0.02 per share of income tax expense.
9
<PAGE>
BALANCED FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30, Period from
---------------------------------------------------------------- 11/1/88 to
1995 1994 1993 1992 1991 1990 9/30/89
--------- --------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period... $ 11.81 12.23 11.88 10.77 8.87 10.00 9.19
--------- --------- --------- --------- --------- --------- ------
Operations:
Net investment income................ 0.47 0.38 0.34 0.38 0.43 0.42 0.44
Net realized and unrealized gains
(losses) on investments............ 1.93 (0.26) 0.65 1.17 1.89 (1.14) 0.83
--------- --------- --------- --------- --------- --------- ------
Total from operations............ 2.40 0.12 0.99 1.55 2.32 (0.72) 1.27
--------- --------- --------- --------- --------- --------- ------
Distributions from net investment
income............................... (0.35) (0.37) (0.34) (0.39) (0.42) (0.41) (0.46)
Distributions from net realized
gains................................ (0.12) (0.17) (0.30) (0.05) -- -- --
--------- --------- --------- --------- --------- --------- ------
Total distributions.............. (0.47) (0.54) (0.64) (0.44) (0.42) (0.41) (0.46)
--------- --------- --------- --------- --------- --------- ------
Net asset value, end of period......... $ 13.74 11.81 12.23 11.88 10.77 8.87 10.00
--------- --------- --------- --------- --------- --------- ------
--------- --------- --------- --------- --------- --------- ------
Total return (%)+...................... 21.78 1.00 8.51 14.75 26.61 (7.42) 14.20
Net assets end of period (in
millions)............................ $ 44 46 57 28 15 14 16
Ratio of expenses to average daily net
assets (%)++......................... 1.32 1.32 1.32 1.32 1.32 1.31 1.30**
Ratio of net investment income to
average daily net assets (%)++....... 3.54 3.03 3.13 3.57 4.15 4.32 5.15**
Portfolio turnover rate (excluding
short-term securities) (%)........... 39 62 41 58 44 105 95
<CAPTION>
Period from
Year Ended 3/16/87* to
10/31/88 10/31/87
----------- -----------
<S> <C> <C>
Net asset value, beginning of period... 8.97 10.00
----------- -----------
Operations:
Net investment income................ 0.51 0.28
Net realized and unrealized gains
(losses) on investments............ 0.22 (1.09)
----------- -----------
Total from operations............ 0.73 (0.81)
----------- -----------
Distributions from net investment
income............................... (0.51) (0.22)
Distributions from net realized
gains................................ -- --
----------- -----------
Total distributions.............. (0.51) (0.22)
----------- -----------
Net asset value, end of period......... 9.19 8.97
----------- -----------
----------- -----------
Total return (%)+...................... 8.53 (8.24)
Net assets end of period (in
millions)............................ 13 13
Ratio of expenses to average daily net
assets (%)++......................... 1.30 .99**
Ratio of net investment income to
average daily net assets (%)++....... 5.58 5.46**
Portfolio turnover rate (excluding
short-term securities) (%)........... 73 95
</TABLE>
- ----------
*Commencement of operations.
**Adjusted to an annual basis.
+Total return is based on the change in net asset value during the periods,
assumes reinvestment of all distributions and does not reflect a sales charge.
++During the periods reflected above, the Adviser and the Distributor
voluntarily waived fees and expenses. Had the Fund paid all expenses and had
the maximum Rule 12b-1 fee been in effect, the ratios of expenses and net
investment income to average daily net assets would have been: 1.65%/3.21% in
fiscal 1995, 1.60%/2.75% in fiscal 1994, 1.62%/2.83% in fiscal 1993,
1.77%/3.12% in fiscal 1992, 1.98%/3.49% in fiscal 1991, 1.96%/3.67% in fiscal
1990, 2.29%/4.16% in fiscal 1989, 2.09%/4.79% in fiscal 1988 and 1.96%/4.09%
in fiscal 1987. Beginning in fiscal 1995, the expense ratio reflects the
effect of gross expenses paid indirectly by the Fund. Prior period expense
ratios have not been adjusted.
10
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives listed below cannot be changed without shareholder
approval. The investment policies and techniques employed in pursuit of the
Funds' objectives may be changed without shareholder approval, unless otherwise
noted.
Because of the risks associated with common stock and bond investments, the
Funds are intended to be long-term investment vehicles and are not designed to
provide investors with a means of speculating on short-term market movements.
Investors should be willing to accept the risk of the potential for sudden,
sometimes substantial declines in market value. No assurance can be given that
the Funds will achieve their objectives or that shareholders will be protected
from the risk of loss that is inherent in equity and bond market investing.
GROWTH FUND
INVESTMENT OBJECTIVES. Growth Fund's primary investment objective is
long-term capital appreciation with secondary objectives of current income and
conservation of principal.
INVESTMENT POLICIES AND TECHNIQUES. Growth Fund (formerly known as Value
Fund) will maintain a carefully selected portfolio of securities broadly
diversified among industries and companies. The Fund will invest at least 60% of
its total assets in securities of large companies with market capitalizations of
over $500 million offering, in the opinion of the Adviser, long-term earnings
growth, a cyclical earnings rebound or above-average dividend yield when
compared to the S&P 500. Emphasis will be placed on common stocks of companies
which the Adviser believes are well managed with strong business fundamentals
and which are trading at a discount to the present value of their projected
future earnings. Growth Fund may also invest up to 40% of its total assets in
securities of medium ($100-$500 million market capitalization) and smaller sized
(under $100 million market capitalization) companies, some of which may be
considered speculative in nature, which the Adviser believes could generate high
levels of future revenue and earnings growth and where, in the Adviser's
opinion, the investment opportunity is not fully reflected in the price of the
securities.
Growth Fund will invest under normal market conditions not less than 90% of
its total assets in common stocks or securities convertible into or that carry
the right to buy common stocks and in repurchase agreements. See "Special
Investment Methods--Repurchase Agreements." Under unusual circumstances, as a
defensive measure, Growth Fund may retain cash or invest part or all of its
assets in short-term money market securities deemed by the Adviser to be
consistent with a temporary defensive posture. In addition, normally up to 5% of
the Fund's total assets will be held in short-term money market securities and
cash to pay redemption requests and Fund expenses. Investments in short-term
money market securities may include obligations of the U.S. Government and its
agencies and instrumentalities, time deposits, bank certificates of deposit,
bankers' acceptances, high-grade commercial paper and other money market
instruments. See "Investment Objectives, Policies and Restrictions" in the
Statement of Additional Information.
Growth Fund may write covered put and call options on the securities in
which it may invest, purchase put and call options with respect to such
securities, and enter into closing purchase and sale transactions with respect
thereto. Growth Fund may also purchase and write put and call options on stock
indexes listed on national securities exchanges. See "Special Investment
Methods--Options Transactions." In addition, solely for the purpose of hedging
against changes in the value of its portfolio securities due to anticipated
changes in the market, Growth Fund may enter into stock index futures contracts,
purchase and write put or call options on such contracts, and close such
contracts and options. See "Special Investment Methods--Futures
11
<PAGE>
Contracts and Options on Futures Contracts" and "--Risks of Transactions in
Futures Contracts and Options on Futures Contracts."
INVESTMENT RISKS. As a mutual fund investing primarily in common stocks,
Growth Fund is subject to market risk, i.e., the possibility that stock prices
in general will decline over short or even extended periods. The stock market
tends to be cyclical, with periods when stock prices generally rise and periods
when stock prices generally decline. The investment techniques used by the Fund
also pose certain risks. See "Special Investment Methods."
EMERGING GROWTH FUND
INVESTMENT OBJECTIVE. Emerging Growth Fund's investment objective is
long-term capital appreciation. Dividend and interest income from portfolio
securities, if any, is incidental to the Fund's objective.
INVESTMENT POLICIES AND TECHNIQUES. Emerging Growth Fund seeks to achieve
its objective by investing, under normal circumstances, at least 90% of its
assets in common stocks and securities convertible into common stocks of
companies which the Adviser believes to have superior appreciation potential.
Emerging Growth Fund invests primarily (i.e., at least 65% of its assets under
normal market conditions) in common stocks and securities convertible into
common stocks of small and medium sized companies that are early in their life
cycles but that have the potential to become major enterprises (emerging growth
companies). These companies generally will have annual gross revenues at the
time of purchase ranging from $10 million to $1 billion, and their shares will
frequently be traded in the over-the-counter market. Companies with revenues in
this range typically will have market capitalizations ranging from $250 million
to $4 billion. The Fund may also invest, however, in more established companies
whose rates of earnings growth are expected to accelerate because of special
factors such as a rejuvenated management, new products, changes in consumer
demand or basic changes in the economic environment, and in companies which
appear to be undervalued in relation to their long-term earning power or asset
values. Emerging Growth Fund also intends to invest at least 65% of its assets
in common stocks and securities convertible into common stocks of companies
headquartered or maintaining offices or manufacturing facilities in states in
which the Distributor maintains offices. This will allow the Fund to draw on the
Distributor's local expertise and research capabilities. The Distributor
currently maintains offices in Arizona, California, Colorado, Idaho, Illinois,
Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, New Jersey, New York,
North Dakota, Oregon, South Dakota, Utah, Washington, Wisconsin and Wyoming;
however, these states may change from time to time.
The Fund's emphasis on emerging growth companies stems from the Adviser's
belief that there are four broad phases of corporate growth, with the fastest
growth normally occurring in the second of these phases. The first phase of
corporate growth occurs during the infancy of a company. Investing in a company
during this phase of its growth involves high risk, with many companies failing
to survive. During the second phase of a company's growth, sometimes referred to
as the emerging growth phase, there is often a period of swift development
during which growth occurs at a rate generally not equaled by more mature
companies. There next occurs a third phase of established growth in which growth
is generally less dramatic because of competitive forces, regulations and
internal bureaucracy. This is followed by a fourth phase of maturity, when the
growth pattern of a company begins to roughly reflect the increase in gross
national product. The Adviser intends to focus on companies positioned in the
second phase of growth. Of course, the actual growth of a company is not
necessarily consistent with this pattern and cannot be foreseen. Consequently,
it may be difficult to determine the phase in which a company is currently
situated.
The following illustration represents the Adviser's conception of the four
growth phases of a successful business. This graph is presented for illustrative
purposes only, and does not represent the actual growth of a
12
<PAGE>
typical company. In addition, there is no necessary correlation between the
business growth of a company and the market value of its stock. This
illustration should not be considered a representation of the performance of the
common stocks in which the Fund invests.
[GRAPHIC]
Under unusual circumstances, as a defensive measure, Emerging Growth Fund
may retain cash or invest part or all of its assets in short-term money market
securities deemed by the Adviser to be consistent with a temporary defensive
posture. In addition, even when Emerging Growth Fund is "fully invested,"
normally up to 5% of the Fund's total assets will be held in short-term money
market securities and cash to pay redemption requests and Fund expenses.
Investments in short-term money market securities may include obligations of the
U.S. Government and its agencies and instrumentalities, time deposits, bank
certificates of deposit, bankers' acceptances, high-grade commercial paper and
other money market instruments. See "Investment Objectives, Policies and
Restrictions" in the Statement of Additional Information. Emerging Growth Fund
may also enter into repurchase agreements. See "Special Investment
Methods--Repurchase Agreements."
Emerging Growth Fund may write covered put and call options on the
securities in which it may invest, purchase put and call options with respect to
such securities, and enter into closing purchase and sale transactions with
respect thereto. Emerging Growth Fund may also purchase and write put and call
options on stock indexes listed on national securities exchanges. See "Special
Investment Methods--Options Transactions." In addition, solely for the purpose
of hedging against changes in the value of its portfolio securities due to
anticipated changes in the market, Emerging Growth Fund may enter into stock
index futures contracts, purchase and write put or call options on such
contracts, and close such contracts and options. See "Special Investment
Methods--Futures Contracts and Options on Futures Contracts" and "--Risks of
Transactions in Futures Contracts and Options on Futures Contracts."
INVESTMENT RISKS. As a mutual fund investing primarily in common stocks,
Emerging Growth Fund is subject to market risk, i.e., the possibility that stock
prices in general will decline over short or even extended periods. The stock
market tends to be cyclical, with periods when stock prices generally rise and
periods when stock prices generally decline. In addition, companies in which the
Fund invests also may involve certain special risks. Emerging growth companies
may have limited product lines, markets or financial resources, and they may be
dependent on a limited management group. The securities of emerging growth
companies may have limited market stability and may be subject to more abrupt or
erratic market movements than securities of larger, more established companies
or the market averages in general. Thus, shares of Emerging Growth Fund will
probably be subject to greater fluctuation in value than shares of a more
conservative equity fund and an investment in the Fund should not be considered
a total investment plan. In addition, Emerging Growth Fund may be less
diversified by industry and company than other funds with a similar investment
objective and no geographic limitation. The investment techniques used by the
Fund also pose certain risks. See "Special Investment Methods."
13
<PAGE>
GROWTH AND INCOME FUND
INVESTMENT OBJECTIVES. Growth and Income Fund's investment objectives are
to provide current income and long-term growth of capital and income.
INVESTMENT POLICIES AND TECHNIQUES. Growth and Income Fund will pursue its
investment objectives by investing in a broadly diversified portfolio of
securities, with an emphasis on securities of large, established companies that
have a history of dividend payments and that the Adviser believes are
undervalued. Companies will be selected on the basis of the Adviser's assessment
of their prospects for long-term growth in dividends and earnings. Additional
factors which the Adviser will consider include the stability of a company's
earnings as well as the sensitivity of that company's particular industry to
fluctuations in major economic variables, such as interest rates and industrial
production.
Under normal market conditions, Growth and Income Fund will invest
principally in common stocks and securities convertible into common stocks.
However, the Fund may also invest in debt securities, including U.S. Government
securities (securities issued or guaranteed as to payment of principal and
interest by the U.S. Government or its agencies or instrumentalities) and
nonconvertible preferred stocks. Investments in long-term debt securities,
including debt securities convertible into common stock, will be limited to U.S.
Government securities and those securities rated at the time of purchase within
the four highest investment grades assigned by Moody's Investors Service, Inc.
("Moody's") (Aaa, Aa, A or Baa) or Standard & Poor's Ratings Services ("Standard
& Poor's") (AAA, AA, A, or BBB), or to unrated securities judged by the Adviser
at the time of purchase to be of comparable quality. Debt securities rated Baa
and BBB have speculative characteristics; changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade bonds. In the
event a security held in Growth and Income Fund's portfolio is downgraded to a
rating below Baa or BBB, the Fund will sell such security as promptly as
practicable. For an explanation of Moody's and Standard & Poor's ratings, see
Appendix A to the Statement of Additional Information. U.S. Government
securities in which the Fund may invest include direct obligations of the U.S.
Treasury, such as U.S. Treasury bills, notes and bonds, and obligations of U.S.
Government agencies or instrumentalities. Obligations of U.S. Government
agencies or instrumentalities are backed in a variety of ways by the U.S.
Government or its agencies or instrumentalities. Some of these obligations, such
as Government National Mortgage Association mortgage-backed securities, are
backed by the full faith and credit of the U.S. Treasury. Others, such as
obligations of the Federal Home Loan Banks, are backed by the right of the
issuer to borrow from the Treasury. Still others, such as those issued by the
Federal National Mortgage Association, are backed by the discretionary authority
of the U.S. Government to purchase certain obligations of the agency or
instrumentality. Finally, obligations of other agencies or instrumentalities are
backed only by the credit of the agency or instrumentality issuing the
obligations. See "Investment Objectives and Policies--U.S. Government
Securities" in the Statement of Additional Information.
Under unusual circumstances, as a defensive measure, Growth and Income Fund
may retain cash or invest part or all of its assets in short-term money market
securities deemed by the Adviser to be consistent with a temporary defensive
posture. In addition, normally a small portion of the Fund's total assets will
be held in short-term money market securities and cash to pay redemption
requests and Fund expenses. Investments in short-term money market securities
may include obligations of the U.S. Government and its agencies and
instrumentalities, time deposits, bank certificates of deposit, bankers'
acceptances, high-grade commercial paper and other money market instruments. See
"Investment Objectives, Policies and Restrictions" in the Statement of
Additional Information. Growth and Income Fund may also enter into repurchase
agreements. See "Special Investment Methods--Repurchase Agreements."
14
<PAGE>
Growth and Income Fund may write covered put and call options on the
securities in which it may invest, purchase put and call options with respect to
such securities, and enter into closing purchase and sale transactions with
respect thereto. Growth and Income Fund may also purchase and write put and call
options on stock indexes listed on national securities exchanges. See "Special
Investment Methods--Options Transactions." In addition, solely for the purpose
of hedging against changes in the value of its portfolio securities due to
anticipated changes in the market, Growth and Income Fund may enter into stock
index futures contracts and interest rate futures contracts, purchase and write
put or call options on such contracts, and close such contracts and options. See
"Special Investment Methods--Futures Contracts and Options on Futures Contracts"
and "--Risks of Transactions in Futures Contracts and Options on Futures
Contracts."
Growth and Income Fund may purchase or sell securities on a "when-issued" or
"forward commitment" basis and may enter into mortgage "dollar rolls." The use
of these techniques could result in increased volatility of the Fund's net asset
value. See "Special Investment Methods--When-Issued Securities."
INVESTMENT RISKS. As a mutual fund investing primarily in common stocks,
Growth and Income Fund is subject to market risk, i.e., the possibility that
stock prices in general will decline over short or even extended periods. The
stock market tends to be cyclical, with periods when stock prices generally rise
and periods when stock prices generally decline.
Because Growth and Income Fund also may invest in debt securities, the Fund
may be subject to interest rate risk as well. Bond prices generally vary
inversely with changes in the level of interest rates so that when interest
rates rise, the prices of bonds fall; conversely, when interest rates fall, bond
prices rise. Investments in debt securities may also subject the Fund to credit
risk. Credit risk, also know as default risk, is the possibility that a bond
issuer will fail to make timely payments of interest or principal. As discussed
above, the Fund's investments in long-term debt securities are limited to U.S.
Government securities and securities which, at the time of purchase, are rated
investment grade or are judged by the Adviser to be of comparable quality. The
investment techniques used by the Fund also pose certain risks. See "Special
Investment Methods."
EQUITY STRATEGY FUND
INVESTMENT OBJECTIVE. Equity Strategy Fund's investment objective is to
provide a high total investment return consistent with prudent investment risk.
INVESTMENT POLICIES AND TECHNIQUES. Equity Strategy Fund invests primarily
(at least 65% of its assets under normal market conditions) in common stocks and
in securities that are convertible into or that carry rights to buy common
stocks of companies representing a number of different sectors of the economy.
The Fund seeks to achieve its objective by varying the weighting of its
portfolio among the different sectors. The sectors in which the Fund currently
invests are: Basic Energy, Basic Materials, Industrial Manufacturing, Utilities,
Commercial and Industrial Services, Financial, Consumer Staples, Consumer
Cyclical, Health Care, Technology and Transportation. For a description of the
scope of each of these industry sectors, see Appendix D to the Statement of
Additional Information.
In selecting investments for Equity Strategy Fund, the Adviser intends to
follow the investment strategies used by Piper Jaffray in developing the
MicroGroup Project. The MicroGroup Project divides over 5,300 individual issuers
into over 350 MicroGroups, which are groups of stocks that have similar trading
patterns and whose earnings or revenues are derived from similar lines of
business. Stocks of companies that are broadly diversified may be included in
more than one MicroGroup and possibly in more than one sector. The MicroGroups
are then split into the eleven broader economic sectors listed above. For
example, the Transportation Sector consists of Airline, Air Freight, Trucking,
Freight Forwarder, Railroad and Marine Transportation MicroGroups. Divisions
into sectors and MicroGroups are based upon the concept that
15
<PAGE>
stocks of issuers engaged in similar operations will respond to market forces in
a similar manner. The number of sectors into which the MicroGroup Project
divides the economy may change from time to time, and Equity Strategy Fund may
invest in any of these sectors. Equity Strategy Fund may invest up to 25% of its
total assets in common stocks or securities convertible into common stocks that
are deemed by the Adviser to have investment merit but that are not included in
any of the MicroGroups. Most typically, a stock will not be included in a
MicroGroup for one of the following reasons: (a) the stock is being issued in
connection with an initial public offering and has not yet been placed in a
MicroGroup; (b) the issuer's line of business precludes an ideal fit into a
MicroGroup (e.g., the issuer is too specialized or too diversified); or (c) the
stock is that of a foreign issuer. (No more than 5% of the total assets of
Equity Strategy Fund will be invested in the securities of foreign issuers.)
In response to changes or anticipated changes in the general economy and
within one or more particular industry sectors, the Adviser may increase,
decrease or eliminate entirely a particular sector's representation in the
Fund's portfolio, which may result in a higher portfolio turnover rate than
experienced by other equity funds. Sector and MicroGroup selections are based
upon both fundamental factors (e.g., economic and interest rate sensitivity) and
technical factors (e.g., whether the sector or MicroGroup appears to be under
accumulation or distribution) and upon relative strength considerations (whether
the sector or MicroGroup is outperforming or underperforming the market).
Component companies of selected MicroGroups are in turn evaluated based upon
fundamental earnings developments, financial condition and technical
considerations. As a result of adhering to these principles, it is anticipated
that Equity Strategy Fund will invest in both large- and small-capitalization
issues, some of which may be considered speculative in nature.
From time to time, for temporary defensive purposes, Equity Strategy Fund
may retain cash or invest part or all of its assets in short-term money market
securities deemed by the Adviser to be consistent with a temporary defensive
posture. In addition, even when Equity Strategy Fund is "fully invested,"
normally up to 5% of the Fund's total assets will be held in short-term money
market securities and cash, to pay redemption requests and Fund expenses.
Investments in short-term money market securities may include obligations of the
U.S. Government and its agencies and instrumentalities, time deposits, bank
certificates of deposit, bankers' acceptances, high-grade commercial paper and
other money market instruments. See "Investment Objectives, Policies and
Restrictions" in the Statement of Additional Information. Equity Strategy Fund
may also enter into repurchase agreements. See "Special Investment
Methods--Repurchase Agreements."
Equity Strategy Fund may write covered put and call options on the
securities in which it may invest, purchase put and call options with respect to
such securities, and enter into closing purchase and sale transactions with
respect thereto. Equity Strategy Fund may also purchase and write put and call
options on stock indexes listed on national securities exchanges. See "Special
Investment Methods--Options Transactions." In addition, solely for the purpose
of hedging against changes in the value of its portfolio securities due to
anticipated changes in the market, Equity Strategy Fund may enter into stock
index futures contracts, purchase and write put or call options on such
contracts, and close such contracts and options. See "Special Investment
Methods--Futures Contracts and Options on Futures Contracts" and "--Risks of
Transactions in Futures Contracts and Options on Futures Contracts." Equity
Strategy Fund may also make short sales of securities. See "Special Investment
Methods--Short Sales."
INVESTMENT RISKS. As a mutual fund investing primarily in common stocks,
Equity Strategy Fund is subject to market risk, i.e., the possibility that stock
prices in general will decline over short or even extended periods. The stock
market tends to be cyclical, with periods when stock prices generally rise and
periods when stock prices generally decline. The investment results of the Fund
will also depend upon the Adviser's ability to anticipate correctly the relative
performance of various industry sectors. The Fund's investment
16
<PAGE>
results would suffer, for example, if none or only a small portion of the Fund's
assets were allocated to a particular sector during a significant market advance
in that sector, or if a major portion of its assets were allocated to a
particular sector during a market decline in that sector. The Adviser's strategy
may result in the Fund investing in both large and small capitalization issues,
some of which may be considered speculative in nature. The investment techniques
used by the Fund also pose certain risks. See "Special Investment Methods."
BALANCED FUND
INVESTMENT OBJECTIVES. Balanced Fund has investment objectives of both
current income and long-term capital appreciation consistent with conservation
of principal.
INVESTMENT POLICIES AND TECHNIQUES. It is intended that the assets of
Balanced Fund will be invested on the basis of combined considerations of risk,
income, capital appreciation and protection of capital value. The Fund may
invest in any type or class of securities, including money market securities,
fixed-income securities, such as bonds, debentures, preferred stocks and U.S.
Government securities (securities issued or guaranteed as to payment of
principal and interest by the U.S. Government or its agencies or
instrumentalities), senior securities convertible into common stocks and common
stocks. The Fund may invest up to 25% of its total assets in foreign securities.
See "Special Investment Methods--Foreign Securities." Balanced Fund may also
enter into repurchase agreements. See "Special Investment Methods--Repurchase
Agreements." The mix of securities in the Fund's portfolio will be determined on
the basis of existing and anticipated market conditions. Consequently, the
relative percentages of each type of security in the portfolio may be expected
to fluctuate. At least 35% of the Fund's total assets, however, must be invested
in fixed-income securities. To pay redemption requests and Fund expenses,
normally up to 5% of the Fund's total assets will be held in short-term money
market securities and cash.
Investments in long-term debt securities will be limited to U.S. Government
securities and to those securities rated at the time of purchase within the four
highest investment grades assigned by Moody's (Aaa, Aa, A or Baa) or Standard &
Poor's (AAA, AA, A or BBB) or unrated securities judged by the Adviser at the
time of purchase to be of comparable quality. Debt securities rated Baa and BBB
have speculative characteristics; changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds. In the event a
security held in Balanced Fund's portfolio is downgraded to a rating below Baa
or BBB, the Fund will sell such security as promptly as practicable. For an
explanation of Moody's and Standard & Poor's ratings, see Appendix A to the
Statement of Additional Information. Not more than 20% of the long-term debt
securities held at any one time by Balanced Fund will be unrated. U.S.
Government securities in which the Fund may invest include direct obligations of
the U.S. Treasury, such as U.S. Treasury bills, notes and bonds, and obligations
of U.S. Government agencies or instrumentalities. Obligations of U.S. Government
agencies or instrumentalities are backed in a variety of ways by the U.S.
Government or its agencies or instrumentalities. Some of these obligations, such
as Government National Mortgage Association mortgage-backed securities, are
backed by the full faith and credit of the U.S. Treasury. Others, such as
obligations of the Federal Home Loan Banks, are backed by the right of the
issuer to borrow from the Treasury. Still others, such as those issued by the
Federal National Mortgage Association, are backed by the discretionary authority
of the U.S. Government to purchase certain obligations of the agency or
instrumentality. Finally, obligations of other agencies or instrumentalities are
backed only by the credit of the agency or instrumentality issuing the
obligations. The Fund may invest in mortgage-related U.S. Government securities,
including derivative mortgage securities. Recent market experience has shown
that certain derivative mortgage securities may be extremely sensitive to
changes in interest rates and in prepayment rates on the underlying mortgage
assets and, as a result, may be highly volatile. However, Balanced Fund will not
invest more than 5% of its net assets, in the aggregate, in
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the following types of derivative mortgage securities: inverse floaters,
interest only, principal only, inverse interest only and Z tranches of
collateralized mortgage obligations, and stripped mortgage-backed securities.
See "Investment Objectives and Policies--U.S. Government Securities" in the
Statement of Additional Information. Investments in short-term money market
securities may include obligations of the U.S. Government and its agencies and
instrumentalities, time deposits, bank certificates of deposit, bankers'
acceptances, high-grade commercial paper and other money market instruments. See
"Investment Objectives, Policies and Restrictions" in the Statement of
Additional Information.
Balanced Fund may write covered put and call options on the securities in
which it may invest, purchase put and call options with respect to such
securities, and enter into closing purchase and sale transactions with respect
thereto. Balanced Fund may also purchase and write put and call options on stock
indexes listed on national securities exchanges. See "Special Investment
Methods--Options Transactions." In addition, solely for the purpose of hedging
against changes in the value of its portfolio securities due to anticipated
changes in the market and in interest rates, Balanced Fund may enter into stock
index futures contracts and interest rate futures contracts, purchase and write
put or call options on such contracts, and close such contracts and options. See
"Special Investment Methods--Futures Contracts and Options on Futures Contracts"
and "--Risks of Transactions in Futures Contracts and Options on Futures
Contracts."
Balanced Fund may purchase or securities on a "when-issued" or "forward
commitment" basis and may enter into mortgage "dollar rolls." The use of these
techniques could result in increased volatility of the Fund's net asset value.
See "Special Investment Methods--When-Issued Securities."
EFFECTIVE DURATION. In managing the fixed income portion of Balanced Fund's
portfolio, the Adviser will attempt to maintain an average effective duration of
3 to 6 1/2 years. Effective duration estimates the interest rate risk (price
volatility) of a security, I.E., how much the value of the security is expected
to change with a given change in interest rates. The longer a security's
effective duration, the more sensitive its price is to changes in interest
rates. For example, if interest rates were to increase by 1%, the market value
of a bond with an effective duration of five years would decrease by about 5%,
with all other factors being constant.
It is important to understand that, while a valuable measure, effective
duration is based on certain assumptions and has several limitations. It is most
useful as a measure of interest rate risk when interest rate changes are small,
rapid and occur equally across all the different points of the yield curve. In
addition, effective duration is difficult to calculate precisely for bonds with
prepayment options, such as mortgage-backed securities, because the calculation
requires assumptions about prepayment rates. For example, when interest rates go
down, homeowners may prepay their mortgages at a higher rate than assumed in the
initial effective duration calculation, thereby shortening the effective
duration of the Fund's mortgage-backed securities. Conversely, if rates
increase, prepayments may decrease to a greater extent than assumed, extending
the effective duration of such securities. For these reasons, the effective
durations of funds which invest a significant portion of their assets in
mortgage-backed securities can be greatly affected by changes in interest rates.
INVESTMENT RISKS. The Fund may invest in any type or class of securities,
including money market securities, fixed-income securities and common stocks. As
a result, investors in the Fund will be exposed to the market risks of both
common stocks and bonds. Stock market risk is the possibility that stock prices
in general will decline over short or even extended periods. The stock market
tends to be cyclical, with periods when stock prices generally rise and periods
when stock prices generally decline. Bond market risk is the potential for
fluctuations in the market value of bonds. Bond prices vary inversely with
changes in the level of interest rates. When interest rates rise, the prices of
bonds fall; conversely, when interest rates fall, bond prices rise.
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To the extent the Fund invests in mortgage-related securities, the Fund will
also be subject to prepayment risk. Prepayment risk results because, as interest
rates fall, homeowners are more likely to refinance their home mortgages. When
home mortgages are refinanced, the principal on mortgage-related securities held
by the Fund is "prepaid" earlier than expected. The Fund must then reinvest the
unanticipated principal payments, just at a time when interest rates on new
mortgage investments are falling. Prepayment risk has two important effects on
the Fund:
- When interest rates fall and additional mortgage prepayments must be
reinvested at lower interest rates, the income of the Fund will be
reduced.
- When interest rates fall, prices on mortgage-backed securities may not
rise as much as comparable Treasury bonds because bond market investors
may anticipate an increase in mortgage prepayments and a likely decline in
income.
Balanced Fund's investments in mortgage-related securities also subject the
Fund to extension risk. Extension risk is the possibility that rising interest
rates may cause prepayments to occur at a slower than expected rate. This
particular risk may effectively change a security which was considered short- or
intermediate-duration at the time of purchase into a long-duration security.
Long-duration securities generally fluctuate more widely in response to changes
in interest rates than short- or intermediate-duration securities.
Investments in debt securities may also subject the Fund to credit risk.
Credit risk, also known as default risk, is the possibility that a bond issuer
will fail to make timely payments of interest or principal. As discussed above,
the Fund's investments in long-term debt securities are limited to U.S.
Government securities and securities which, at the time of purchase, are rated
investment grade or are judged by the Adviser to be of comparable quality. The
investment techniques used by the Fund and the Fund's ability to invest up to
25% of its total assets in foreign securities also pose certain risks. See
"Special Investment Methods."
Investors should also be aware that the investment results of the Fund
depend upon the Adviser's ability to anticipate correctly the relative
performance and risks of stocks, bonds and money market instruments. The Fund's
investment results would suffer, for example, if only a small portion of the
Fund's assets were invested in stocks during a significant market advance, or if
a major portion of its assets were invested in stocks during a market decline.
Similarly, the Fund's performance could deteriorate if the Fund were
substantially invested in bonds at a time when interest rates moved adversely.
SPECIAL INVESTMENT METHODS
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with respect to securities
issued or guaranteed as to payment of principal and interest by the U.S.
Government or its agencies or instrumentalities. A repurchase agreement involves
the purchase by a Fund of securities with the condition that after a stated
period of time the original seller (a member bank of the Federal Reserve System
or a recognized securities dealer) will buy back the same securities
("collateral") at a predetermined price or yield. Repurchase agreements involve
certain risks not associated with direct investments in securities. In the event
the original seller defaults on its obligation to repurchase, as a result of its
bankruptcy or otherwise, the Fund will seek to sell the collateral, which action
could involve costs or delays. In such case, the Fund's ability to dispose of
the collateral to recover such investment may be restricted or delayed. While
collateral will at all times be maintained in an amount equal to the repurchase
price under the agreement (including accrued interest due thereunder), to the
extent proceeds from the sale of collateral were less than the repurchase price,
a Fund would suffer a loss.
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Repurchase agreements maturing in more than seven days are considered illiquid
and subject to each Fund's restriction on investing in illiquid securities.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, each Fund may lend portfolio
securities up to one-third of the value of its total assets to broker-dealers,
banks or other financial borrowers of securities. As with other extensions of
credit, there are risks of delay in recovery or even loss of rights in the
collateral should the borrower of the securities fail financially. However, the
Funds will only enter into loan arrangements with broker-dealers, banks or other
institutions which the Adviser has determined are creditworthy under guidelines
established by the Company's Board of Directors and will receive collateral in
the form of cash, U.S. Government securities or other high-grade debt
obligations equal to at least 100% of the value of the securities loaned. The
value of the collateral and of the securities loaned will be marked to market on
a daily basis. During the time portfolio securities are on loan, the borrower
pays the Fund an amount equivalent to any dividends or interest paid on the
securities and the Fund may invest the cash collateral and earn additional
income or may receive an agreed upon amount of interest income from the
borrower. However, the amounts received by the Fund may be reduced by finders'
fees paid to broker-dealers and related expenses.
BORROWING
Each Fund may borrow money from banks for temporary or emergency purposes in
an amount up to 10% of the value of the Fund's total assets. Interest paid by a
Fund on borrowed funds would decrease the net earnings of that Fund. None of the
Funds will purchase portfolio securities while outstanding borrowings (other
than reverse repurchase agreements) exceed 5% of the value of the Fund's total
assets. Each Fund may mortgage, pledge or hypothecate its assets in an amount
not exceeding 10% of the value of its total assets to secure temporary or
emergency borrowing. The policies set forth in this paragraph are fundamental
and may not be changed without the approval of a majority of a Fund's shares.
OPTIONS TRANSACTIONS
WRITING COVERED OPTIONS. Each Fund may write (i.e., sell) covered put and
call options with respect to the securities in which they may invest. By writing
a call option, a Fund becomes obligated during the term of the option to deliver
the securities underlying the option upon payment of the exercise price if the
option is exercised. By writing a put option, a Fund becomes obligated during
the term of the option to purchase the securities underlying the option at the
exercise price if the option is exercised. With respect to put options written
by any Fund, there will have been a predetermination that acquisition of the
underlying security is in accordance with the investment objective of such Fund.
The principal reason for writing call or put options is to obtain, through
the receipt of premiums, a greater current return than would be realized on the
underlying securities alone. The Funds receive premiums from writing call or put
options, which they retain whether or not the options are exercised. By writing
a call option, a Fund might lose the potential for gain on the underlying
security while the option is open, and by writing a put option a Fund might
become obligated to purchase the underlying security for more than its current
market price upon exercise.
For Growth Fund, Emerging Growth Fund, Growth and Income Fund and Balanced
Fund, the aggregate value of the securities or other collateral underlying the
calls and obligations underlying the puts written by a Fund, determined as of
the date the options are sold, will not exceed 25% of the net assets of such
Fund. For Equity Strategy Fund, the aggregate value of the securities or other
collateral underlying the puts written
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by the Fund, determined as of the date the options are sold, will not exceed 50%
of the Fund's net assets. Equity Strategy Fund may write covered call options
without limit.
PURCHASING OPTIONS. Each Fund may purchase put options, solely for hedging
purposes, in order to protect portfolio holdings in an underlying security
against a substantial decline in the market value of such holdings ("protective
puts"). Such protection is provided during the life of the put because a Fund
may sell the underlying security at the put exercise price, regardless of a
decline in the underlying security's market price. Any loss to a Fund is limited
to the premium paid for, and transaction costs paid in connection with, the put
plus the initial excess, if any, of the market price of the underlying security
over the exercise price. However, if the market price of such security
increases, the profit a Fund realizes on the sale of the security will be
reduced by the premium paid for the put option less any amount for which the put
is sold.
Each Fund may also purchase call options solely for the purpose of hedging
against an increase in prices of securities that the Fund ultimately wants to
buy. Such protection is provided during the life of the call option because the
Fund may buy the underlying security at the call exercise price regardless of
any increase in the underlying security's market price. In order for a call
option to be profitable, the market price of the underlying security must rise
sufficiently above the exercise price to cover the premium and transaction
costs. By using call options in this manner, a Fund will reduce any profit it
might have realized had it bought the underlying security at the time it
purchased the call option by the premium paid for the call option and by
transaction costs.
The Funds may purchase and write only exchange-traded put and call options.
STOCK INDEX OPTION TRADING. The Funds may purchase and write put and call
options on stock indexes listed on national securities exchanges. Stock index
options will be purchased for the purpose of hedging against changes in the
value of a Fund's portfolio securities due to anticipated changes in the market.
Stock index options will be written for hedging purposes and to realize income
from the premiums received on the sale of such options. Options on stock indexes
are similar to options on stock except that, rather than the right to take or
make delivery of stock at a specified price, an option on a stock index gives
the holder the right to receive, upon exercise of the option, an amount of cash
if the closing level of the stock index upon which the option is based is
greater than, in the case of a call, or less than, in the case of a put, the
exercise price of the option. The writer of the option is obligated to make
delivery of this amount. The value of a stock index fluctuates with changes in
the market values of the stocks included in the index. The index may include
stocks representative of the entire market, such as the S&P 500, or may include
only stocks in a particular industry or market segment, such as the AMEX Oil and
Gas Index. The effectiveness of purchasing or writing stock index options as a
hedging technique depends upon the extent to which price movements in a Fund's
portfolio correlate with price movements of the stock index selected.
For further information concerning the characteristics and risks of options
transactions, see "Investment Objectives, Policies and Restrictions--Options" in
the Statement of Additional Information.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Each Fund may purchase and sell interest rate futures contracts. Balanced
Fund and Growth and Income Fund also may purchase and sell interest rate futures
contracts. The futures contracts in which the Funds may invest have been
developed by and are traded on national commodity exchanges. Stock index futures
contracts may be based upon broad-based stock indexes such as the S&P 500 or
upon narrow-based stock indexes. A buyer entering into a stock index futures
contract will, on a specified future date, pay or receive a final cash payment
equal to the difference between the actual value of the stock index on the last
day of the
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contract and the value of the stock index established by the contract. An
interest rate futures contract is an agreement to purchase or sell an agreed
amount of debt securities at a set price for delivery on a future date.
The purpose of the acquisition or sale of a futures contract by a Fund is to
hedge against fluctuations in the value of its portfolio without actually buying
or selling securities. For example, if a Fund owns long-term U.S. Government
securities and interest rates are expected to increase, the Fund might sell
futures contracts. If interest rates did increase, the value of the U.S.
Government securities in the Fund's portfolio would decline, but the value of
the Fund's futures contracts would increase at approximately the same rate,
thereby keeping the net asset value of the Fund from declining as much as it
otherwise would have. If, on the other hand, the Fund held cash reserves and
short-term investments pending anticipated investment in long-term obligations
and interest rates were expected to decline, the Fund might purchase futures
contracts for U.S. Government securities. Since the behavior of such contracts
would generally be similar to that of long-term securities, the Fund could take
advantage of the anticipated rise in the value of long-term securities without
actually buying them until the market had stabilized. At that time, the Fund
could accept delivery under the futures contracts or the futures contracts could
be liquidated and the Fund's reserves could then be used to buy long-term
securities in the cash market. The Funds will engage in such transactions only
for hedging purposes, on either an asset-based or a liability-based basis, in
each case in accordance with the rules and regulations of the Commodity Futures
Trading Commission. See Appendix B and Appendix C to the Statement of Additional
Information.
Each Fund may purchase and sell put and call options on futures contracts
and enter into closing transactions with respect to such options to terminate
existing positions. The Funds may use such options on futures contracts in
connection with their hedging strategies in lieu of purchasing and writing
options directly on the underlying securities or purchasing and selling the
underlying futures contracts.
There are risks in using futures contracts and options on futures contracts
as hedging devices. The primary risks associated with the use of futures
contracts and options thereon are (a) the prices of futures contracts and
options may not correlate perfectly with the market value of the securities
subject to the hedge and (b) the possible lack of a liquid secondary market for
a futures contract and the resulting inability to close a futures position prior
to its maturity date. With respect to stock index futures contracts, the risk of
imperfect correlation increases as the composition of a Fund's portfolio
diverges from the securities included in the applicable stock index. The Adviser
will attempt to reduce this risk, to the extent possible, by entering into
futures contracts on indexes whose movements it believes will have a significant
correlation with movements in the value of the Fund's portfolio securities
sought to be hedged. The risk that a Fund will be unable to close out a futures
position will be minimized by entering into such transactions on a national
exchange with an active and liquid secondary market.
Additional information with respect to interest rate and stock index futures
contracts, together with information regarding options on such contracts, is set
forth in Appendix B and Appendix C, respectively, to the Statement of Additional
Information.
WHEN-ISSUED SECURITIES
Balanced Fund and Growth and Income Fund may purchase securities on a
"when-issued" basis and may purchase or sell securities on a "forward
commitment" basis. When such transactions are negotiated, the price is fixed at
the time the commitment is made, but delivery and payment for the securities
take place at a later date. The Funds will not accrue income with respect to
when-issued or forward commitment securities prior to their stated delivery
date. Pending delivery of the securities, each Fund maintains in a segregated
account cash or liquid high-grade debt obligations in an amount sufficient to
meet its purchase commitments.
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The purchase of securities on a when-issued or forward commitment basis
exposes the Funds to risk because the securities may decrease in value prior to
their delivery. Purchasing securities on a when-issued or forward commitment
basis involves the additional risk that the return available in the market when
the delivery takes place will be higher than that obtained in the transaction
itself. A Fund's purchase of securities on a when-issued or forward commitment
basis while remaining substantially fully invested increases the amount of the
Fund's assets that are subject to market risk to an amount that is greater than
the Fund's net asset value, which could result in increased volatility of the
price of the Fund's shares. For additional information concerning when-issued
and forward commitment transactions, see "Investment Objectives, Policies and
Restrictions" in the Statement of Additional Information.
MORTGAGE DOLLAR ROLLS
In connection with their ability to purchase securities on a when-issued or
forward commitment basis, Balanced Fund and Growth and Income Fund may enter
into mortgage "dollar rolls" in which a Fund sells securities for delivery in
the current month and simultaneously contracts with the same counterparty to
repurchase similar (same type, coupon and maturity) but not identical securities
on a specified future date. The Fund gives up the right to receive principal and
interest paid on the securities sold. However, the Fund would benefit to the
extent of any difference between the price received for the securities sold and
the lower forward price for the future purchase plus any fee income received.
Unless such benefits exceed the income, capital appreciation and gain or loss
due to mortgage prepayments that would have been realized on the securities sold
as part of the mortgage dollar roll, the use of this technique will diminish the
investment performance of the Fund compared with what such performance would
have been without the use of mortgage dollar rolls. Each Fund will hold and
maintain in a segregated account until the settlement date cash or liquid
high-grade debt securities in an amount equal to the forward purchase price. The
benefits derived from the use of mortgage dollar rolls may depend upon the
Adviser's ability to predict correctly mortgage prepayments and interest rates.
There is no assurance that mortgage dollar rolls can be successfully employed.
In addition, the use of mortgage dollar rolls by a Fund while remaining
substantially fully invested increases the amount of the Fund's assets that are
subject to market risk to an amount that is greater than the Fund's net asset
value, which could result in increased volatility of the price of the Fund's
shares.
For financial reporting and tax purposes, the Funds treat mortgage dollar
rolls as two separate transactions: one involving the purchase of a security and
a separate transaction involving a sale. The Funds do not currently intend to
enter into mortgage dollar rolls that are accounted for as a financing.
No more than one-third of a Fund's total assets may be committed to the
purchase of securities on a when-issued or forward commitment basis, including
mortgage dollar roll purchases.
SHORT SALES
Equity Strategy Fund may make short sales, which are transactions in which
the Fund sells a security it does not own in anticipation of a decline in the
market value of that security. To complete such a transaction, Equity Strategy
Fund must borrow the security to make delivery to the buyer. The Fund then is
obligated to replace the security borrowed by purchasing it at the market price
at the time of replacement. The price at such time may be more or less than the
price at which the security was sold by the Fund. Until the security is
replaced, the Fund is required to pay to the lender any dividends or interest
which accrue during the period of the loan. To borrow the security, Equity
Strategy Fund also may be required to pay a premium, which would increase the
cost of the securities sold. The proceeds of the short sale will be retained by
the broker, to the extent necessary to meet margin requirements, until the short
position is closed out.
Equity Strategy Fund will incur a loss as a result of the short sale if the
price of the security increases between the date of the short sale and the date
on which the Fund replaces the borrowed security. Equity
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Strategy Fund will realize a gain if the security declines in price between
those dates. The amount of any gain will be decreased, and the amount of any
loss increased, by the amount of any premium, dividends or interest Equity
Strategy Fund may be required to pay in connection with the short sale.
No securities will be sold short if, after effect is given to any such short
sale, the total market value of all securities sold short would exceed 5% of the
value of the Fund's total assets. In addition, the value of the securities of
any one issuer in which Equity Strategy Fund is short will not exceed the lesser
of 2% of the value of the Fund's net assets or 2% of the securities of any class
of any issuer. Equity Strategy Fund will make short sales (other than short
sales "against the box," as discussed below) only of securities listed on a
national securities exchange.
In addition to the short sales discussed above, Equity Strategy Fund may
also make short sales "against the box" of securities or maintain a short
position, provided that at all times when a short position is open the Fund owns
an equal amount of such securities or securities convertible into or
exchangeable, without payment of any further consideration, for securities of
the same issue as, and equal in amount to, the securities sold short. Not more
than 50% of the Fund's total assets (determined at the time of the short sale)
may be held as collateral for such sales. Such sales will be made for the
purpose of hedging against an anticipated decline in the underlying securities.
ILLIQUID SECURITIES
As a nonfundamental investment restriction that may be changed at any time
without shareholder approval, no Fund will invest more than 15% of its net
assets in illiquid securities. A security is considered illiquid if it cannot be
sold in the ordinary course of business within seven days at approximately the
price at which it is valued. Illiquid securities may offer a higher yield than
securities which are more readily marketable, but they may not always be
marketable on advantageous terms.
The sale of illiquid securities often requires more time and results in
higher brokerage charges or dealer discounts and other selling expenses than
does the sale of securities eligible for trading on national securities
exchanges or in the over-the-counter markets. A Fund may be restricted in its
ability to sell such securities at a time when the Adviser deems it advisable to
do so. In addition, in order to meet redemption requests, a Fund may have to
sell other assets, rather than such illiquid securities, at a time which is not
advantageous.
"Restricted securities" are securities which were originally sold in private
placements and which have not been registered under the Securities Act of 1933
(the "1933 Act"). Such securities generally have been considered illiquid, since
they may be resold only subject to statutory restrictions and delays or if
registered under the 1933 Act. In 1990, however, the Securities and Exchange
Commission adopted Rule 144A under the 1933 Act, which provides a safe harbor
exemption from the registration requirements of the 1933 Act for resales of
restricted securities to "qualified institutional buyers," as defined in the
rule. The result of this rule has been the development of a more liquid and
efficient institutional resale market for restricted securities. Thus,
restricted securities are no longer necessarily illiquid. The Funds may
therefore invest in Rule 144A securities and treat them as liquid when they have
been determined to be liquid by the Board of Directors of the Company or by the
Adviser subject to the oversight of and pursuant to procedures adopted by the
Board of Directors. See "Investment Objectives, Policies and
Restrictions--Illiquid Securities" in the Statement of Additional Information.
Similar determinations may be made with respect to commercial paper issued in
reliance on the so-called "private placement" exemption from registration under
Section 4(2) of the 1933 Act and with respect to IO, PO and inverse floating
classes of mortgage-backed securities issued by the U.S. Government or its
agencies and instrumentalities.
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FOREIGN SECURITIES
As nonfundamental investment objectives which may be changed at any time
without shareholder approval, Balanced Fund may invest up to 25% of its total
assets in foreign securities and each of the other Funds may invest up to 5% of
its total assets in such securities. The value of foreign securities investments
may be affected by changes in currency rates or exchange control regulations,
changes in governmental administration or economic or monetary policy (in this
country or abroad) or changed circumstances in dealings between nations. Costs
may be incurred in connection with conversions between various currencies.
Moreover, there may be less publicly available information about foreign issuers
than about domestic issuers, and foreign issuers may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to those of domestic issuers. Securities of some foreign issuers are
less liquid and more volatile than securities of comparable domestic issuers and
foreign brokerage commissions are generally higher than in the United States.
Foreign securities markets may also be less liquid, more volatile and less
subject to government supervision than in the United States. Investments in
foreign countries could be affected by other factors not present in the United
States, including expropriation, confiscatory taxation and potential
difficulties in enforcing contractual obligations and could be subject to
extended settlement periods.
In addition, as a result of their investments in foreign securities, the
Funds may receive interest or dividend payments, or the proceeds of the sale or
redemption of such securities, in the foreign currencies in which such
securities are denominated. Under certain circumstances, such as where the
Adviser believes that the applicable exchange rate is unfavorable at the time
the currencies are received or the Adviser anticipates, for any other reason,
that the exchange rate will improve, the Funds may hold such currencies for an
indefinite period of time. While the holding of currencies will permit the Funds
to take advantage of favorable movements in the applicable exchange rate, such
strategy also exposes the Funds to risk of loss if exchange rates move in a
direction adverse to a Fund's position. Such losses could reduce any profits or
increase any losses sustained by the Funds from the sale or redemption of
securities, and could reduce the dollar value of interest or dividend payments
received.
PORTFOLIO TURNOVER
Equity Strategy Fund may engage in short-term trading in attempting to
achieve its investment objective. It may be expected that a substantial portion
of Equity Strategy Fund's portfolio will at times consist of securities believed
to have potential primarily for short-term gains. The Fund may also take
short-term gains on securities originally purchased for their long-term
potential should the price objective be achieved earlier than anticipated, or
sell securities where the Adviser believes that growth is no longer feasible or
that the risk of market decline is too great. Since Equity Strategy Fund engages
in short-term trading, it pays greater brokerage commission costs or mark-up
charges. High portfolio turnover also may increase short-term capital gains,
which are taxable as ordinary income when distributed to shareholders.
While it is not the policy of any of the remaining Funds to trade actively
for short-term profits, each Fund will dispose of securities without regard to
the time they have been held when such action appears advisable to the Adviser.
In the case of each Fund, frequent changes may result in higher brokerage and
other costs for the Fund. The method of calculating portfolio turnover rate is
set forth in the Statement of Additional Information under "Investment
Objectives, Policies and Restrictions--Portfolio Turnover." Portfolio turnover
rates for the Funds are set forth in "Financial Highlights."
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INVESTMENT RESTRICTIONS
Each Fund has adopted certain fundamental and nonfundamental investment
restrictions in addition to those set forth above. As a fundamental investment
restriction which may not be changed without shareholder approval, no Fund will
invest 25% or more of its total assets in any one industry. (This restriction
does not apply to securities of the U.S. Government or its agencies and
instrumentalities and repurchase agreements relating thereto. As to utility
companies, gas, electric, telephone, telegraph, satellite and microwave
communications companies are considered as separate industries.) In addition, as
a nonfundamental investment restriction which may be changed at any time without
shareholder approval, no Fund will invest more than 5% of its total assets in
the securities of issuers which, with their predecessors, have a record of less
than three years' continuous operation. A list of each Fund's fundamental and
nonfundamental investment restrictions is set forth in the Statement of
Additional Information.
Except for each Fund's policy regarding borrowing, if a percentage
restriction set forth under "Investment Objectives and Policies" or under
"Special Investment Methods" is adhered to at the time of an investment, a later
increase or decrease in percentage resulting from changes in values or assets
will not constitute a violation of such restriction.
MANAGEMENT
BOARD OF DIRECTORS
The Company's Board of Directors has the primary responsibility for
overseeing the overall management of the Company and electing its officers.
INVESTMENT ADVISER
Piper Capital Management Incorporated (the "Adviser") has been retained
under an Investment Advisory and Management Agreement with the Company to act as
the Funds' investment adviser subject to the authority of the Board of
Directors.
In addition to acting as the investment adviser for the other series of the
Company, the Adviser also serves as investment adviser to a number of other
open-end and closed-end investment companies and to various other concerns,
including pension and profit-sharing funds, corporate funds and individuals. As
of November 1, 1995, the Adviser rendered investment advice regarding
approximately $9 billion of assets. The Adviser is a wholly owned subsidiary of
Piper Jaffray Companies Inc., a publicly held corporation which is engaged
through its subsidiaries in various aspects of the financial services industry.
The address of the Adviser is Piper Jaffray Tower, 222 South Ninth Street,
Minneapolis, Minnesota 55402-3804.
The Adviser furnishes each Fund with investment advice and supervises the
management and investment programs of the Funds. The Adviser furnishes at its
own expense all necessary administrative services, office space, equipment and
clerical personnel for servicing the investments of the Funds. The Adviser also
provides investment advisory facilities and executive and supervisory personnel
for managing the investments and effecting the portfolio transactions of the
Funds. In addition, the Adviser pays the salaries and fees of all officers and
directors of the Company who are affiliated with the Adviser.
Under the Investment Advisory and Management Agreement, each Fund pays the
Adviser monthly fees at an annual rate of .75% on average daily net assets up to
$100 million. These fees are higher than fees paid by most other investment
companies. The fees are scaled downward as net assets increase in size to as low
as .50% on net assets of over $500 million.
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PORTFOLIO MANAGEMENT
Beginning December 9, 1994, Steven V. Markusen assumed primary
responsibility for the day-to-day management of the Growth Fund's portfolio. Mr.
Markusen has been a Senior Vice President of the Adviser since December 1993.
Prior to that, he served as a Senior Vice President of Investment Advisers,
Inc., in Minneapolis, Minnesota, where he was responsible for managing
institutional equity and balanced portfolios and the IAI Growth Fund. In
addition, he was responsible for a group which managed $2.5 billion in large
capitalization growth equity assets. Before joining Investment Advisers, Inc. in
1989, Mr. Markusen was a Vice President with INVESCO Funds, where he managed
three equity funds for five years. He is a Chartered Financial Analyst ("CFA")
and has 12 years of financial experience.
Sandra K. Shrewsbury has been primarily responsible for the day-to-day
management of the Emerging Growth Fund's portfolio since 1993. Ms. Shrewsbury
has been a Vice President of the Distributor since 1990, prior to which she had
been an Assistant Vice President of the Distributor. She is a CFA and has 13
years of financial experience.
Paul A. Dow has been primarily responsible for the day-to-day management of
the Growth and Income Fund's portfolio since the Fund's inception in 1992. Mr.
Dow has shared that primary responsibility with Michael S. Wallace since October
1995. Mr. Dow has been a Senior Vice President of the Adviser since February
1989 and Chief Investment Officer of the Adviser since December 1989. He is a
CFA and has 22 years of financial experience. Mr. Wallace has been a portfolio
manager for the Adviser since December 1994, prior to which he had been an
analyst for the Adviser since June 1993. Prior to joining the Adviser, Mr.
Wallace was a Financial Analyst for Allstate Insurance Company from 1987 to
1991. He has an MBA in Finance and Accounting from Cornell University and six
years of financial experience.
Edward P. Nicoski has been primarily responsible for the day-to-day
management of the Equity Strategy Fund's portfolio since the Fund's inception in
1987. Mr. Nicoski has been a Vice President of the Adviser since October 1985
and a Managing Director of the Distributor since November 1986. He is a CFA with
26 years of financial experience.
Bruce D. Salvog and David M. Steele have been primarily responsible for the
day-to-day management of the fixed income portion of Balanced Fund's portfolio
since 1992. Mr. Salvog has been a Senior Vice President of the Adviser since
1992. He has an AB from Harvard University and 26 years of financial experience.
Mr. Steele has been a Senior Vice President of the Adviser since 1992. He has an
MBA from the University of Southern California and 16 years of financial
experience. Paul A. Dow has been primarily responsible for the day-to-day
management of the equity portion of Balanced Fund's portfolio since 1989. He has
shared that primary responsibility with John K. Schonberg since October 1995.
Mr. Dow is also portfolio manager for Growth and Income Fund and his experience
is discussed above. Mr. Schonberg has been a portfolio manager for the Adviser
since 1989, prior to which he had been a research analyst for the Distributor
since 1987. Mr. Schonberg has eight years of financial experience.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN
Investors Fiduciary Trust Company ("IFTC"), 127 West Tenth Street, Kansas
City, Missouri 64105, (800) 874-6205, serves as Custodian for the Funds'
portfolio securities and cash and as Transfer Agent and Dividend Disbursing
Agent for the Funds.
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The Company has entered into Shareholder Account Servicing Agreements with
the Distributor and Piper Trust Company, an affiliate of the Distributor and the
Adviser. Under these agreements, the Distributor and Piper Trust Company provide
transfer agent and dividend disbursing agent services for certain shareholder
accounts. For more information, see "Investment Advisory and Other
Services--Transfer Agent and Dividend Disbursing Agent" in the Statement of
Additional Information.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
The Adviser selects brokers and futures commission merchants to use for the
Funds' portfolio transactions. In making its selection, the Adviser may consider
a number of factors, which are more fully discussed in the Statement of
Additional Information, including, but not limited to, research services, the
reasonableness of commissions and quality of services and execution. A broker's
sales of shares of any series of the Company may also be considered a factor if
the Adviser is satisfied that a Fund would receive from that broker the most
favorable price and execution then available for a transaction. Portfolio
transactions for the Funds may be effected through the Distributor on a
securities exchange in compliance with Section 17(e) of the Investment Company
Act of 1940, as amended (the "1940 Act"). For more information, see "Portfolio
Transactions and Allocation of Brokerage" in the Statement of Additional
Information.
DISTRIBUTION OF FUND SHARES
Piper Jaffray acts as the principal distributor of the Funds' shares. The
Company has adopted a Distribution Plan (the "Plan") as required by Rule 12b-1
under the 1940 Act. Under the Plan, the Distributor is paid a total fee in
connection with the servicing of each Fund's shareholder accounts and in
connection with distribution related services provided with respect to each
Fund. This fee is calculated and paid monthly at an annual rate equal to .50% of
the average daily net assets of each Fund.
A portion of the total fee equal to .25% of each Fund's average daily net
assets is categorized as a distribution fee intended to compensate the
Distributor for its expenses incurred in connection with the sale of Fund
shares. The remaining portion of the fee, equal to .25% of each Fund's average
daily net assets, is categorized as a servicing fee intended to compensate the
Distributor for ongoing servicing and/or maintenance of shareholder accounts.
The Distributor has voluntarily agreed to limit the total fee payable under the
Plan to .32% of each Fund's average daily net assets. This limitation may be
revised or terminated at any time after fiscal 1996 year end. Payments made
under the Plan are not tied exclusively to expenses actually incurred by the
Distributor and may exceed such expenses. The Adviser and the Distributor, out
of their own assets, may pay for certain expenses incurred in connection with
the distribution of shares of the Funds. In particular, the Adviser may make
payments out of its own assets to Piper Jaffray Investment Executives and other
broker dealers in connection with their sales of shares of the Funds. See "How
to Purchase Shares--Purchase Price." Further information regarding the Plan is
contained in the Statement of Additional Information.
The Distributor uses all or a portion of its Rule 12b-1 fee to make payments
to Investment Executives of the Distributor and broker-dealers which have
entered into sales agreements with the Distributor. If shares of a Fund are sold
by a representative of a broker-dealer other than the Distributor, the
broker-dealer is paid .30% of the average daily net assets of the Fund
attributable to shares sold by the broker-dealer's representative. If shares of
a Fund are sold by an Investment Executive of the Distributor, compensation is
paid to the Investment Executive in the manner set forth in a written agreement,
in an amount not to exceed .30% of the average daily net assets of the Fund
attributable to shares sold by the Investment Executive.
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HOW TO PURCHASE SHARES
GENERAL
The Funds' shares may be purchased at the public offering price from the
Distributor and from other broker-dealers who have sales agreements with the
Distributor. The address of the Distributor is that of the Funds. The
Distributor reserves the right to reject any purchase order. You should be aware
that, because the Funds do not issue stock certificates, Fund shares must be
kept in an account with the Distributor or with IFTC. All investments must be
arranged through your Piper Jaffray Investment Executive or other broker-dealer.
PURCHASE PRICE
You may purchase shares of the Funds at the net asset value per share next
calculated after receipt of your order by your Piper Jaffray Investment
Executive or other broker-dealer, plus a front-end sales charge as follows:
<TABLE>
<CAPTION>
Sales Charge Sales Charge
as a Percentage of as a Percentage of
Amount of Transaction at Offering Price Offering Price Net Asset Value
- --------------------------------------------------------- ------------------- -------------------
<S> <C> <C>
Less than $100,000....................................... 4.00% 4.17%
$100,000 but less than $250,000.......................... 3.25% 3.36%
$250,000 but less than $500,000.......................... 2.50% 2.56%
$500,000 and over........................................ 0.00% 0.00%
</TABLE>
This table sets forth total sales charges or underwriting commissions. The
Distributor may reallow up to the entire sales charge to broker-dealers in
connection with their sales of shares. These broker-dealers may, by virtue of
such reallowance, be deemed to be "underwriters" under the 1933 Act.
The Distributor will make certain payments to its Investment Executives and
to other broker-dealers in connection with their sales of Fund shares. See
"Distribution of Fund Shares" above. In addition, the Distributor or the
Adviser, at their own expense, provide promotional incentives to Investment
Executives of the Distributor and to broker-dealers who have sales agreements
with the Distributor in connection with sales of shares of the Funds, other
series of the Company and other mutual funds for which the Adviser acts as
investment adviser. In some instances, these incentives may be made available
only to certain Investment Executives or broker-dealers who have sold or may
sell significant amounts of such shares. The incentives may include payment for
travel expenses, including lodging at luxury resorts, incurred in connection
with sales seminars.
PURCHASES OF $500,000 OR MORE
If you make a purchase of $500,000 or more (including purchases made under a
Letter of Intent), a 1% contingent deferred sales charge will be assessed in the
event you redeem shares within 24 months following the purchase. This sales
charge will be paid to the Distributor. For more information, please refer to
the Contingent Deferred Sales Charge section of "How To Redeem Shares." The
Distributor currently pays its Investment Executives and other broker-dealers
fees in connection with these purchases as follows:
<TABLE>
<CAPTION>
Fee as a Percentage
Amount of Transaction of Offering Price
- --------------------------------------------------------------------------- --------------------
<S> <C>
First $1,000,000........................................................... 1.00%
Next $2,000,000............................................................ 0.75%
Next $2,000,000............................................................ 0.50%
Next $5,000,000............................................................ 0.25%
Above $10,000,000.......................................................... 0.15%
</TABLE>
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Piper Jaffray Investment Executives and other broker-dealers generally will
not receive a fee in connection with purchases on which the contingent deferred
sales charge is waived. However, the Distributor, in its discretion, may pay a
fee out of its own assets to its Investment Executives and other broker-dealers
in connection with purchases by employee benefit plans on which no sales charge
is imposed. Please see the Special Purchase Plans section of "Reducing Your
Sales Charge."
MINIMUM INVESTMENTS
A minimum initial investment of $250 is required. There is no minimum for
subsequent investments. The Distributor, in its discretion, may waive the
minimum.
REDUCING YOUR SALES CHARGE
You may qualify for a reduced sales charge through one or more of several
plans. You must notify your Piper Jaffray Investment Executive or broker-dealer
at the time of purchase to take advantage of these plans.
AGGREGATION
Front-end or initial sales charges may be reduced or eliminated by
aggregating your purchase with purchases of certain related personal accounts.
In addition, purchases made by members of certain organized groups will be
aggregated for purposes of determining sales charges. Sales charges are
calculated by adding the dollar amount of your current purchase to the higher of
the cost or current value of shares of any Piper fund sold with a sales charge
that are currently held by you and your related accounts or by other members of
your group.
QUALIFIED GROUPS. You may group purchases in the following personal
accounts together:
- Your individual account.
- Your spouse's account.
- Your children's accounts (if they are under the age of 21).
- Your employee benefit plan accounts if they are exclusively for your
benefit. This includes accounts such as IRAs, individual 403(b) plans or
single-participant Keogh-type plans.
- A single trust estate or single fiduciary account if you are the trustee
or fiduciary.
Additionally, purchases made by members of any organized group meeting the
requirements listed below may be aggregated for purposes of determining sales
charges:
- The group has been in existence for more than six months.
- It is not organized for the purpose of buying redeemable securities of a
registered investment company.
- Purchases must be made through a central administration, or through a
single dealer, or by other means that result in economy of sales effort or
expense.
An organized group does not include a group of individuals whose sole
organizational connection is participation as credit card holders of a company,
policyholders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser.
RIGHT OF ACCUMULATION
Sales charges for purchases of Fund shares into Piper Jaffray accounts will
be automatically calculated taking into account the dollar amount of any new
purchases along with the higher of current value or cost of shares previously
purchased in any other mutual fund managed by the Adviser (except Hercules Funds
Inc.) that was sold with a sales charge. For other broker-dealer accounts, you
should notify your Investment Executive at the time of purchase of additional
Piper fund shares you may own.
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LETTER OF INTENT
Your sales charge may be reduced by signing a non-binding Letter of Intent.
This Letter of Intent will state your intention to invest $100,000 or more in
any of the mutual funds managed by the Adviser that are sold with a sales charge
(except Hercules Funds Inc.) over a 13-month period, beginning not earlier than
90 days prior to the date you sign the Letter. You will pay the lower sales
charge applicable to the total amount you plan to invest over the 13-month
period. Part of your shares will be held in escrow to cover additional sales
charges that may be due if you do not invest the planned amount. Please see
"Purchase of Shares" in the Statement of Additional Information for more
details. You can contact your Piper Jaffray Investment Executive or other
broker-dealer for an application.
SPECIAL PURCHASE PLANS
For more information on any of the following special purchase plans, contact
your Piper Jaffray Investment Executive or other broker-dealer.
PURCHASES BY PIPER JAFFRAY COMPANIES INC., ITS SUBSIDIARIES AND ASSOCIATED
PERSONS
Piper Jaffray Companies Inc. and its subsidiaries may buy shares of the
Funds without incurring a sales charge. The following persons associated with
such entities also may buy Fund shares without paying a sales charge:
- Officers, directors and partners.
- Employees and retirees.
- Sales representatives.
- Spouses or children under the age of 21 of any of the above.
- Any trust, pension, profit-sharing or other benefit plan for any of the
above.
PURCHASES BY BROKER-DEALERS
Employees of broker-dealers who have entered into sales agreements with the
Distributor, and spouses and children under the age of 21 of such employees, may
buy shares of the Funds without incurring a sales charge.
PURCHASES BY OTHER INDIVIDUALS WITHOUT A SALES CHARGE
The following other individuals and entities also may buy Fund shares
without paying a sales charge:
- Clients of the Adviser buying shares of the Funds in their advisory
accounts.
- Discretionary accounts at Piper Trust Company and participants in
investment companies exempt from registration under the 1940 Act that are
managed by the Adviser.
- Trust companies and bank trust departments using funds over which they
exercise exclusive discretionary investment authority and which are held
in a fiduciary, agency, advisory, custodial or similar capacity.
- Investors purchasing shares through a Piper Jaffray Investment Executive
if the purchase of such shares is funded by the proceeds from the sale of
shares of any non-money market open-end mutual fund. This privilege is
available for 30 days after the sale.
PURCHASES BY EMPLOYEE BENEFIT PLANS AND TAX-SHELTERED ANNUITIES
- Shares of the Funds will be sold at net asset value, without a sales
charge, to employee benefit plans containing an actively maintained
qualified cash or deferred arrangement under Section 401(k) of the
Internal Revenue Code of 1986, as amended (the "Code") (a "401(k) Plan").
In the event a 401(k) Plan of an employer has purchased shares in the
Funds or any other series of the Company (other than
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a money market fund) during any calendar quarter, any other employee
benefit plan of such employer that is a qualified plan under Section
401(a) of the Code also may purchase shares of the Funds during such
quarter without incurring a sales charge.
- Custodial accounts under Section 403(b) of the Code (known as
tax-sheltered annuities) also may buy shares of the Funds without
incurring a sales charge.
HOW TO REDEEM SHARES
NORMAL REDEMPTION
You may redeem all or a portion of your shares on any day that a Fund values
its shares. (Please refer to "Valuation of Shares" below for more information.)
Your shares will be redeemed at the net asset value next calculated after the
receipt of your instructions in good form by your Piper Jaffray Investment
Executive or other broker-dealer as explained below.
PIPER JAFFRAY INC. ACCOUNTS. To redeem your shares, please contact your
Piper Jaffray Investment Executive with an oral request to redeem your shares.
OTHER BROKER-DEALER ACCOUNTS. To redeem your shares, you may either contact
your broker-dealer with an oral request or send a written request directly to
the Funds' transfer agent, IFTC. This request should contain: the dollar amount
or number of shares to be redeemed, your Fund account number and either a social
security or tax identification number (as applicable). You should sign your
request in exactly the same way the account is registered. If there is more than
one owner of the shares, all owners must sign. A signature guarantee is required
for redemptions over $25,000. Please contact IFTC or refer to "Redemption of
Shares" in the Statement of Additional Information for more details.
CONTINGENT DEFERRED SALES CHARGE
If you invest $500,000 or more and, as a result, pay no front-end sales
charge, you may incur a contingent deferred sales charge if you redeem within 24
months. This charge will be equal to 1% of the lesser of the net asset value of
the shares at the time of purchase or at the time of redemption. This charge
does not apply to amounts representing an increase in the value of Fund shares
due to capital appreciation or to shares acquired through reinvestment of
dividend or capital gain distributions. In determining whether a contingent
deferred sales charge is payable, shares that are not subject to any deferred
sales charge will be redeemed first, and other shares will then be redeemed in
the order purchased.
LETTER OF INTENT. In the case of a Letter of Intent, the 24-month period
begins on the date the Letter of Intent is completed.
SPECIAL PURCHASE PLANS. If you purchased your shares through one of the
plans described above under "Special Purchase Plans," the contingent deferred
sales charge will be waived. In addition, the contingent deferred sales charge
will be waived in the event of:
- The death or disability (as defined in Section 72(m)(7) of the Code) of
the shareholder. (This waiver will be applied to shares held at the time
of death or the initial determination of disability of either an
individual shareholder or one who owns the shares as a joint tenant with
the right of survivorship or as a tenant in common.)
- A lump sum distribution from an employee benefit plan qualified under
Section 401(a) of the Code, an individual retirement account under Section
408(a) of the Code or a simplified employee pension plan under Section
408(k) of the Code.
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- Systematic withdrawals from any such plan or account if the shareholder is
at least 59 1/2 years old.
- A tax-free return of the excess contribution to an individual retirement
account under Section 408(a) of the Code.
- Involuntary redemptions effected pursuant to the right to liquidate
shareholder accounts having an aggregate net asset value of less than
$200.
EXCHANGES. If you exchange your shares, no contingent deferred sales charge
will be imposed. However, the charge will apply if you subsequently redeem the
new shares within 24 months of the original purchase.
REINSTATEMENT PRIVILEGE. If you elect to use the Reinstatement Privilege
(please see "Shareholder Services" below), any contingent deferred sales charge
you paid will be credited to your account (proportional to the amount
reinvested). Please see "Redemption of Shares" in the Statement of Additional
Information for more details.
PAYMENT OF REDEMPTION PROCEEDS
After your shares have been redeemed, the cash proceeds will normally be
sent to you or your broker-dealer within three business days. In no event will
payment be made more than seven days after receipt of your order in good form.
However, payment may be postponed or the right of redemption suspended for more
than seven days under unusual circumstances, such as when trading is not taking
place on the New York Stock Exchange. Payment of redemption proceeds may also be
delayed if the shares to be redeemed were purchased by a check drawn on a bank
which is not a member of the Federal Reserve System, until such checks have
cleared the banking system (normally up to 15 days from the purchase date).
INVOLUNTARY REDEMPTION
Each Fund reserves the right to redeem your account at any time the net
asset value of the account falls below $200 as the result of a redemption or
exchange request. You will be notified in writing prior to any such redemption
and will be allowed 30 days to make additional investments before the redemption
is processed.
SHAREHOLDER SERVICES
AUTOMATIC MONTHLY INVESTMENT PROGRAM
You may arrange to make additional automated purchases of shares of the
Funds or certain other mutual funds managed by the Adviser. You can
automatically transfer $100 or more per month from your bank, savings and loan
or other financial institution to purchase additional shares. In addition, if
you hold your shares in a Piper Jaffray account you may arrange to make such
additional purchases by having $25 or more automatically transferred each month
from any of the money market fund series of the Company. You should contact your
Piper Jaffray Investment Executive or IFTC to obtain authorization forms or for
additional information.
REINSTATEMENT PRIVILEGE
If you have redeemed shares of a Fund, you may be eligible to reinvest in
shares of any fund managed by the Adviser without payment of an additional sales
charge (except Hercules Funds Inc.). The reinvestment request must be made
within 30 days of the redemption. This privilege is subject to the eligibility
of share purchases in your state as well as the minimum investment requirements
and any other applicable terms in the prospectus of the fund being acquired.
EXCHANGE PRIVILEGE
If your investment goals change, you may prefer a fund with a different
objective. If you are considering an exchange into another mutual fund managed
by the Adviser, you should carefully read the appropriate prospectus for
additional information about that fund. A prospectus may be obtained through
your Piper Jaffray Investment Executive, your broker-dealer or the Distributor.
To exchange your shares, please contact your Piper Jaffray Investment Executive,
your broker-dealer or IFTC.
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You may exchange your shares for shares of any other mutual fund managed by
the Adviser (except Hercules Funds Inc.) that is open to new investors. All
exchanges are subject to the eligibility of share purchases in your state as
well as the minimum investment requirements and any other applicable terms in
the prospectus of the fund being acquired. Exchanges are made on the basis of
the net asset values of the funds involved, except that investors exchanging
into a fund which has a higher sales charge must pay the difference.
You may make four exchanges per year without payment of a service charge.
Thereafter, you will pay a $5 service charge for each exchange. The Company
reserves the right to change or discontinue the exchange privilege, or any
aspect of the privilege, upon 60 days' written notice.
TELEPHONE TRANSACTION PRIVILEGES
PIPER JAFFRAY INC. ACCOUNTS. If you hold your shares in a Piper Jaffray
account, you may telephone your Investment Executive to execute any transaction
or to apply for many shareholder services. In some cases, you may be required to
complete a written application.
OTHER BROKER-DEALER ACCOUNTS. If you hold your shares in an account with
your broker-dealer or at IFTC, you may authorize telephone privileges by
completing the Account Application and Services Form. Please contact your
broker-dealer or IFTC (800-874-6205) for an application or for more details. The
Funds will employ reasonable procedures to confirm that a telephonic request is
genuine, including requiring that payment be made only to the address of record
or the bank account designated on the Account Application and Services Form and
requiring certain means of telephonic identification. A Fund employing such
procedures will not be liable for following instructions communicated by
telephone that it reasonably believes to be genuine. If a Fund does not employ
such procedures, it may be liable for any losses due to unauthorized or
fraudulent telephone transactions. It may be difficult to reach the Funds by
telephone during periods when market or economic conditions lead to an unusually
large volume of telephone requests. If you cannot reach the Funds by telephone,
you should contact your broker-dealer or issue written instructions to IFTC at
the address set forth herein. See "Management--Transfer Agent, Dividend
Disbursing Agent and Custodian." The Funds reserve the right to suspend or
terminate their telephone services at any time without notice.
DIRECTED DIVIDENDS
You may direct income dividends and capital gains distributions to be
invested in any other mutual fund managed by the Adviser (other than a money
market fund or Hercules Funds Inc.) that is offered in your state. This
investment will be made at net asset value. It will not be subject to a minimum
investment amount except that you must hold shares in such fund (including the
shares being acquired with the dividend or distribution) with a value at least
equal to such fund's minimum initial investment amount.
SYSTEMATIC WITHDRAWAL PLAN
If your account has a value of $5,000 or more, you may establish a
Systematic Withdrawal Plan for any of the Funds. This plan will allow you to
receive regular periodic payments by redeeming as many shares from your account
as necessary. As with other redemptions, a redemption to make a withdrawal is a
sale for federal income tax purposes. Payments made under a Systematic
Withdrawal Plan cannot be considered as actual yield or income since part of the
payments may be a return of capital.
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A request to establish a Systematic Withdrawal Plan must be submitted in
writing to your Piper Jaffray Investment Executive or other broker-dealer. There
are no service charges for maintenance; the minimum amount that you may withdraw
each period is $100. You will be required to have any income dividends and any
capital gains distributions reinvested. You may choose to have withdrawals made
monthly, quarterly or semiannually. Please contact your Piper Jaffray Investment
Executive, other broker-dealer or IFTC for more information.
You should be aware that additional investments in an account that has an
active Systematic Withdrawal Plan may be inadvisable due to sales charges and
tax liabilities. Please refer to "Redemption of Shares" in the Statement of
Additional Information for additional details.
ACCOUNT PROTECTION
If you purchased your shares of any of the Funds through a Piper Jaffray
Investment Executive, you may choose from several account options. Your
investments in any of the Funds held in a Piper Jaffray account (except for
non-"PAT" accounts) would be protected up to $25 million. Investments held in
non-"PAT" Piper Jaffray accounts are protected up to $2.5 million. In each case,
the Securities Investor Protection Corporation ("SPIC") provides $500,000 of
protection; the additional coverage is provided by The Aetna Casualty & Surety
Company. This protection does not cover any declines in the net asset value of
Fund shares.
CONFIRMATION OF TRANSACTIONS AND REPORTING OF OTHER INFORMATION
Each time there is a transaction involving your Fund shares, such as a
purchase, redemption or dividend reinvestment, you will receive a confirmation
statement describing that activity. This information will be provided to you
from either Piper Jaffray, your broker-dealer or IFTC. In addition, you will
receive various IRS forms after the first of each year detailing important tax
information and each Fund is required to supply annual and semiannual reports
that list securities held by the Fund and include the current financial
statements of the Fund.
HOUSEHOLDING. If you have multiple accounts with Piper Jaffray, you may
receive some of the above information in combined mailings. This will not only
help to reduce Fund expenses, it will help the environment by saving paper.
Please contact your Piper Jaffray Investment Executive for more information.
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income, if any, will be paid quarterly by
Growth Fund, Growth and Income Fund and Balanced Fund and annually by Emerging
Growth Fund and Equity Strategy Fund. Net realized capital gains, if any, will
be distributed at least once annually by each Fund.
BUYING A DIVIDEND. On the ex-dividend date for a distribution, a Fund's
share price is reduced by the amount of the distribution. If you buy shares just
before the ex-dividend date ("buying a dividend"), you will pay the full price
for the shares and then receive a portion of the price back as a taxable
distribution.
DISTRIBUTION OPTIONS. All net investment income dividends and net realized
capital gains distributions for a Fund generally will be payable in additional
shares of that Fund at net asset value ("Reinvestment Option"). If you wish to
receive your distributions in cash, you must notify your Piper Jaffray
Investment Executive or other broker-dealer. You may elect either to receive
income dividends in cash and capital gains distributions in additional shares of
the Fund at net asset value ("Split Option"), or to receive both income
dividends and capital gains distributions in cash ("Cash Option"). You may also
direct income dividends and capital gains distributions to be invested in
another mutual fund managed by the Adviser. See "Shareholder Services--Directed
Dividends" above. The taxable status of income dividends and/or net capital
gains distributions is not affected by whether they are reinvested or paid in
cash.
35
<PAGE>
VALUATION OF SHARES
The Funds compute their net asset value on each day the New York Stock
Exchange (the "Exchange") is open for business. The calculation is made as of
the regular close of the Exchange (currently 4:00 p.m. New York time) after the
Funds have declared any applicable dividends.
The net asset value per share for each of the Funds is determined by
dividing the value of the securities owned by the Fund plus any cash and other
assets (including interest accrued and dividends declared but not collected)
less all liabilities by the number of Fund shares outstanding. For the purposes
of determining the aggregate net assets of the Funds, cash and receivables will
be valued at their face amounts. Interest will be recorded as accrued and
dividends will be recorded on the ex-dividend date. Securities traded on a
national securities exchange or on the Nasdaq National Market System are valued
at the last reported sale price that day. Securities traded on a national
securities exchange or on the Nasdaq National Market System for which there were
no sales on that day and securities traded on other over-the-counter markets for
which market quotations are readily available are valued at the mean between the
bid and asked prices. If a Fund should have an open short position as to a
security, the valuation of the contract will be at the average of the bid and
asked prices. Portfolio securities underlying actively traded options will be
valued at their market price as determined above. The current market value of
any exchange-traded option held or written by a Fund is its last sales price on
the exchange prior to the time when assets are valued. Lacking any sales that
day, the options will be valued at the mean between the current closing bid and
asked prices. Financial futures are valued at the settlement price established
each day by the board of trade or exchange on which they are traded.
The value of certain fixed-income securities will be provided by an
independent pricing service, which determines these valuations at a time earlier
than the close of the Exchange. Pricing services consider such factors as
security prices, yields, maturities, call features, ratings and developments
relating to specific securities in arriving at securities valuations.
Occasionally events affecting the value of such securities may occur between the
time valuations are determined and the close of the Exchange. If events
materially affecting the value of such securities occur during such period, or
if the Company's management determines for any other reason that valuations
provided by the pricing service are inaccurate, such securities will be valued
at their fair value according to procedures decided upon in good faith by the
Board of Directors. In addition, any securities or other assets of a Fund for
which market prices are not readily available will be valued at their fair value
in accordance with such procedures.
TAX STATUS
Each Fund is treated as a separate corporation for federal income tax
purposes under the Internal Revenue Code of 1986, as amended (the "Code").
Therefore, each Fund is treated separately in determining whether it qualifies
as a regulated investment company under the Code and for purposes of determining
the net ordinary income (or loss), net realized capital gains (or losses) and
distributions necessary to relieve such Fund of any federal income tax
liability. Each Fund qualified as a regulated investment company during its last
taxable year and intends to so qualify during the current taxable year. If so
qualified, a Fund will not be liable for federal income taxes to the extent it
distributes its taxable income to shareholders.
Distributions by a Fund are generally taxable to the shareholders, whether
received in cash or additional shares of the Fund (or shares of another mutual
fund managed by the Adviser). Under the Code, corporate shareholders generally
may deduct 70% of distributions from a Fund attributable to dividends paid by
domestic corporations. Distributions of net capital gains (designated as
"capital gain dividends") are taxable to shareholders as long-term capital
gains, regardless of the length of time the shareholder has held the shares of
the Fund.
36
<PAGE>
A shareholder will recognize a capital gain or loss upon the sale or
exchange of shares in a Fund if, as is normally the case, the shares are capital
assets in the shareholder's hands. This capital gain or loss will be long-term
if the shares have been held for more than one year.
The foregoing relates to federal income taxation as in effect as of the date
of this Prospectus. For a more detailed discussion of the federal income tax
consequences of investing in shares of the Funds, see "Taxation" in the
Statement of Additional Information. Before investing in any of the Funds, you
should check the consequences of your local and state tax laws.
PERFORMANCE COMPARISONS
Advertisements and other sales literature for Growth Fund, Emerging Growth
Fund, Growth and Income Fund, Equity Strategy Fund and Balanced Fund may refer
to a Fund's "average annual total return" and "cumulative total return." In
addition, Growth and Income Fund and Balanced Fund may provide yield
calculations in advertisements and other sales literature. When a Fund
advertises its yield, it will also advertise its total return as required by the
rules of the Securities and Exchange Commission. All such yield and total return
quotations are based upon historical earnings and are not intended to indicate
future performance. The return on and principal value of an investment in any of
the Funds will fluctuate, so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
Yield calculations will be based upon a 30-day period stated in the
advertisement and will be calculated by dividing the net investment income per
share (as defined under Securities and Exchange Commission rules and
regulations) earned during the advertised period by the offering price per share
(including the maximum sales charge) on the last day of the period. The result
will then be "annualized" using a formula that provides for semi-annual
compounding of income.
Average annual total return is the average annual compounded rate of return
on a hypothetical $1,000 investment made at the beginning of the advertised
period. Cumulative total return is calculated by subtracting a hypothetical
$1,000 payment to a Fund from the redeemable value of such payment at the end of
the advertised period, dividing such difference by $1,000 and multiplying the
quotient by 100. In calculating average annual and cumulative total return, the
maximum sales charge is deducted from the hypothetical investment and all
dividends and distributions are assumed to be reinvested. Such total return
quotations may be accompanied by quotations which do not reflect the reduction
in value of the initial investment due to the sales charge, and which thus will
be higher.
Comparative performance information also may be used from time to time in
advertising the Funds' shares. For example, advertisements may compare the
Funds' performance to that of various unmanaged market indices, or may include
performance data from Lipper Analytical Services, Inc., Morningstar, Inc. or
other entities or organizations which track the performance of investment
companies.
For additional information regarding comparative performance information and
the calculation of yield, average annual total return and cumulative total
return, see "Performance Comparisons" in the Statement of Additional
Information.
GENERAL INFORMATION
The Company, which was organized under the laws of State of Minnesota in
1986, is authorized to issue a total of 10 trillion shares of common stock, with
a par value of $.01 per share. Four hundred billion of these shares have been
authorized by the Board of Directors to be issued in thirteen separate series,
as follows: Growth Fund, Emerging Growth Fund, Growth and Income Fund, Equity
Strategy Fund, Balanced
37
<PAGE>
Fund, Government Income Fund, Short-Intermediate Bond Fund, Institutional
Government Income Portfolio, National Tax-Exempt Fund and Minnesota Tax-Exempt
Fund, each of which has ten billion authorized shares, and Money Market Fund,
Tax-Exempt Money Market Fund and U.S. Government Money Market Fund, each of
which has one hundred billion authorized shares.
The Board of Directors is empowered under the Company's Articles of
Incorporation to issue additional series of the Company's common stock without
shareholder approval. In addition, the Board of Directors may, without
shareholder approval, create and issue one or more additional classes of shares
within each Fund, as well as within any series of the Company created in the
future. See "Capital Stock and Ownership of Shares" in the Statement of
Additional Information.
All shares, when issued, will be fully paid and nonassessable and will be
redeemable. All shares have equal voting rights. They can be issued as full or
fractional shares. A fractional share has pro-rata the same kind of rights and
privileges as a full share. The shares possess no preemptive or conversion
rights.
Each share of a series has one vote (with proportionate voting for
fractional shares) irrespective of the relative net asset value of the series'
shares. On some issues, such as the election of directors, all shares of the
Company vote together as one series. On an issue affecting only a particular
series, the shares of the affected series vote separately. Cumulative voting is
not authorized. This means that the holders of more than 50% of the shares
voting for the election of directors can elect 100% of the directors if they
choose to do so, and, in such event, the holders of the remaining shares will be
unable to elect any directors.
The Bylaws of the Company provide that shareholder meetings be held only
with such frequency as required under Minnesota law. Minnesota corporation law
requires only that the Board of Directors convene shareholder meetings when it
deems appropriate. In addition, Minnesota law provides that if a regular meeting
of shareholders has not been held during the immediately preceding 15 months, a
shareholder or shareholders holding 3% or more of the voting shares of the
Company may demand a regular meeting of shareholders by written notice given to
the chief executive officer or chief financial officer of the Company. Within 30
days after receipt of the demand, the Board of Directors shall cause a regular
meeting of shareholders to be called, which meeting shall be held no later than
90 days after receipt of the demand, all at the expense of the Company. In
addition, the 1940 Act requires a shareholder vote for all amendments to
fundamental investment policies and restrictions and for all amendments to
investment advisory contracts and Rule 12b-1 distribution plans. The 1940 Act
also provides that Directors of the Company may be removed by action of the
record holders of two-thirds or more of the outstanding shares of the Company.
The Directors are required to call a meeting of shareholders for the purpose of
voting upon the question of removal of any Director when so requested in writing
by the record holders of at least 10% of the Company's outstanding shares.
PENDING LEGAL PROCEEDINGS
Complaints have been brought against the Adviser and the Distributor
relating to another series of the Company and to other investment companies for
which the Adviser acts or has acted as investment adviser or subadviser. These
lawsuits do not involve the Funds. A number of complaints have been brought in
federal and state court against the Institutional Government Income Portfolio
("PJIGX") series of the Company, the Adviser, the Distributor, and certain
individuals affiliated or formerly affiliated with the Adviser and the
Distributor. In addition, complaints have been filed in federal court relating
to a number of closed-end investment companies managed by the Adviser and two
open-end investment companies for which the Adviser has acted as sub-adviser.
The complaints, which ask for rescission of plaintiff shareholders' purchases or
compensatory damages, plus interest, costs and expenses, generally allege, among
other things, certain violations of federal and/or state securities laws,
including the making of materially misleading statements in
38
<PAGE>
prospectuses concerning investment policies and risks. See "Pending Litigation"
in the Statement of Additional Information.
A settlement agreement has been reached with respect to one of the
complaints involving PJIGX. An Amended Consolidated Class Action Complaint,
which represents a consolidation of claims previously brought by 11 persons or
entities, was filed on October 5, 1994 in the United States District Court,
District of Minnesota. The named plaintiffs in this putative class action (the
"PJIGX action") purport to represent a class of individuals and groups who
purchased shares of PJIGX during the period from July 1, 1991 through May 9,
1994. The named plaintiffs and defendants have entered into a settlement
agreement which has received preliminary approval from the Court. The terms of
the settlement are set forth in a Settlement Agreement dated July 20, 1995 (as
modified by an Addendum filed on July 28, 1995). The Settlement Agreement
contained a provision which would have permitted the defendants to cancel the
Agreement if shareholders who had incurred a cumulative "loss" (as defined under
the Agreement) of more than 10% of the loss sustained by the entire class had
opted out. The October 2, 1995 deadline for requesting exclusion from the class
has passed, and the loss sustained by persons requesting exclusion is less than
10%. If granted final approval by the Court, the settlement agreement would
provide up to approximately $70 million to class members in payments scheduled
over approximately three years. Such payments would be made by Piper Jaffray
Companies and the Adviser and would not be an obligation of the Company. Six
additional complaints have been brought and a number of actions have been
commenced in arbitration relating to PJIGX. The complaints generally have been
consolidated with the PJIGX action for pretrial purposes and the arbitrations
and litigations have been stayed pending entry of an order by the Court
permitting those class members who have requested exclusion to proceed with
their actions.
The Adviser and the Distributor to not believe that the PJIGX settlement or
any outstanding complaint or action in arbitration will have a material adverse
effect on their ability to perform under their agreements with the Company or a
material adverse effect on the Funds, and they intend to defend such lawsuits
and actions vigorously.
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS (AND/OR IN THE STATEMENT OF ADDITIONAL INFORMATION REFERRED TO
ON THE COVER PAGE OF THIS PROSPECTUS,), AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
FUNDS OR PIPER JAFFRAY INC. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION.
39
<PAGE>
PIPER FUNDS INC.
INVESTMENT ADVISER
Piper Capital Management Incorporated
DISTRIBUTOR
Piper Jaffray Inc.
CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
LEGAL COUNSEL
Dorsey & Whitney P.L.L.P.
Table of Contents
<TABLE>
<CAPTION>
PAGE
<S> <C>
Introduction......................... 2
Fund Expenses........................ 4
Financial Highlights................. 6
Investment Objectives and Policies... 11
Special Investment Methods........... 19
Management........................... 26
Distribution of Fund Shares.......... 28
SHAREHOLDER GUIDE TO INVESTING
How to Purchase Shares............. 29
Reducing Your Sales Charge......... 30
Special Purchase Plans............. 31
How to Redeem Shares............... 32
Shareholder Services............... 33
Dividends and Distributions........ 35
Valuation of Shares.................. 36
Tax Status........................... 36
Performance Comparisons.............. 37
General Information.................. 37
</TABLE>
XGF/XTR-05
[GRAPHIC]
<PAGE>
PROSPECTUS DATED NOVEMBER 27, 1995
PIPER FUNDS INC.
GOVERNMENT INCOME FUND
SHORT-INTERMEDIATE BOND FUND
PIPER JAFFRAY TOWER
222 SOUTH NINTH STREET, MINNEAPOLIS, MINNESOTA 55402-3804
(800) 866-7778 (TOLL FREE)
Government Income Fund and Short-Intermediate Bond Fund are series of Piper
Funds Inc. (the "Company"), an open-end mutual fund whose shares are currently
offered in thirteen series. Each Fund is classified as a diversified mutual
fund.
GOVERNMENT INCOME FUND has an investment objective of high current income to
the extent consistent with preservation of capital. The Fund will invest
primarily in securities which are issued or guaranteed as to payment of
principal and interest by the U.S. Government or its agencies or
instrumentalities. The Fund invests a significant portion of its assets in
mortgage-related U.S. Government securities, which may include derivative
mortgage securities. The Fund will limit its aggregate investments in inverse
floating, interest only and principal only derivative mortgage securities to 10%
of net assets.
SHORT-INTERMEDIATE BOND FUND has an investment objective of current income
consistent with the Fund's stated maturity limits and quality standards and
preservation of capital. The Fund seeks to achieve its objective by investing
primarily in a broad range of investment quality debt securities with remaining
maturities of five years or less.
Investments in the Funds may involve additional risks. The Funds may engage
in short-term trading in attempting to achieve their investment objectives,
which will increase transaction costs. In addition, Government Income Fund may
enter into reverse repurchase agreements as a means of borrowing for investment
purposes. Government Income Fund invests a significant portion of its assets in
mortgage-related U.S. Government securities, which may include derivative
mortgage securities. Each Fund may invest in illiquid securities which will
involve greater risk than investments in other securities and may increase Fund
expenses. See "Characteristics and Risks of Securities and Special Investment
Methods" for a discussion of the risks of each of these techniques. The market
values of the securities in which the Funds invest will fluctuate with changing
interest rates, as will each Fund's net asset value.
This Prospectus concisely describes the information about the Funds that you
ought to know before investing. Please read it carefully before investing and
retain it for future reference.
A Statement of Additional Information about the Funds dated November 27,
1995 is available free of charge. Write to the Funds at Piper Jaffray Tower, 222
South Ninth Street, Minneapolis, Minnesota 55402-3804 or telephone (800)
866-7778 (toll free). The Statement of Additional Information has been filed
with the Securities and Exchange Commission and is incorporated in its entirety
by reference in this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
INTRODUCTION
Government Income Fund ("Government Fund") and Short-Intermediate Bond Fund
("Bond Fund") (sometimes referred to herein as a "Fund" or, collectively, as the
"Funds") are series of Piper Funds Inc. (the "Company"), an open-end management
investment company organized under the laws of the State of Minnesota in 1986,
the shares of which are currently issued in thirteen separate series. Each Fund
has different investment objective, as described on the cover page of this
Prospectus, and is designed to meet different investment needs. The Funds are
classified as diversified mutual funds.
THE INVESTMENT ADVISER
The Company is managed by Piper Capital Management Incorporated (the
"Adviser"), a wholly owned subsidiary of Piper Jaffray Companies Inc. Each Fund
pays the Adviser a fee for managing its investment portfolio. The fees for
Government Fund and Bond Fund are paid at annual rates of .50% and .40%,
respectively, of average daily net assets. The fee for Government Fund is scaled
downward as assets increase in size above $250 million. See
"Management--Investment Adviser."
THE DISTRIBUTOR
Piper Jaffray Inc. ("Piper Jaffray"), a wholly owned subsidiary of Piper
Jaffray Companies Inc. and an affiliate of the Adviser, serves as Distributor of
the Funds' shares.
OFFERING PRICE
Shares of the Funds are offered to the public at the next determined net
asset value after receipt of an order by a shareholder's Piper Jaffray
Investment Executive or other broker-dealer, plus a maximum sales charge of 4%
of the offering price (4.17% of the net asset value) for Government Fund and
1.5% of the offering price (1.52% of the net asset value) for Bond Fund, in each
case on purchases of less than $100,000. The sales charge is reduced on a
graduated scale on purchases of $100,000 or more. In connection with purchases
of $500,000 or more, there is no initial sales charge; however, a contingent
deferred sales charge of 1% for Government Fund and .2% for Bond Fund will be
imposed in the event of a redemption transaction occurring within 24 months
following such a purchase. See "How to Purchase Shares--Public Offering Price."
MINIMUM INITIAL AND SUBSEQUENT INVESTMENTS
The minimum initial investment for each Fund is $250. There is no minimum
for subsequent investments. See "How to Purchase Shares--Minimum Investments."
EXCHANGES
You may exchange your shares for shares of any other mutual fund managed by
the Adviser (except Hercules Funds Inc.) which is open to new investors and
eligible for sale in your state of residence. All exchanges are subject to the
minimum investment requirements and other applicable terms set forth in the
prospectus of the fund whose shares you acquire. Exchanges are made on the basis
of the net asset values of the funds involved, except that investors exchanging
into a fund which has a higher sales charge must pay the difference. You may
make four exchanges per year without payment of a service charge. Thereafter,
there is a $5 service charge for each exchange. See "Shareholder
Services--Exchange Privilege."
REDEMPTION PRICE
Shares of either Fund may be redeemed at any time at their net asset value
next determined after a redemption request is received by your Piper Jaffray
Investment Executive or other broker-dealer. A contingent deferred sales charge
will be imposed upon the redemption of certain shares initially purchased
without a sales charge. See "How to Redeem Shares--Contingent Deferred Sales
Charge." Each Fund
2
<PAGE>
reserves the right, upon 30 days' written notice, to redeem an account if the
net asset value of the shares falls below $200. See "How to Redeem
Shares--Involuntary Redemption."
CERTAIN RISK FACTORS TO CONSIDER
An investment in either Fund is subject to certain risks, as set forth in
detail under "Investment Objectives and Policies" and "Characteristics and Risks
of Securities and Special Investment Methods." As with other mutual funds, there
can be no assurance that either Fund will achieve its objective. Each of the
Funds is subject to interest-rate risk (the risk that rising interest rates will
make bonds issued at lower interest rates worth less). As a result, the value of
each Fund's shares will vary. Each Fund is also subject to credit risk (the risk
that a bond issuer will fail to make timely payments of interest or principal)
to the extent it invests in non-U.S. Government securities. Each of the Funds
may engage in the following investment practices: the use of repurchase
agreements, the lending of portfolio securities, borrowing from banks and the
purchase or sale of securities on a "when-issued" or forward commitment basis,
including the use of mortgage dollar rolls. In addition, Government Fund may
enter into reverse repurchase agreements, engage in options transactions on the
securities in which it may invest and enter into interest rate futures contracts
and options on futures contracts. All of these techniques may increase the
volatility of a Fund's net asset value. Government Fund may engage in
over-the-counter ("OTC") options transactions. The staff of the Securities and
Exchange Commission has taken the position that purchased OTC options and the
assets used as "cover" for written OTC options are illiquid securities (with an
exception for a certain percentage of such options in limited circumstances).
See "Characteristics and Risks of Securities and Special Investment Methods--
Options Transactions." The Funds may engage in short-term trading in attempting
to achieve their investment objectives, which will increase transaction costs.
The Funds may purchase mortgage-related securities which, in addition to
interest rate risk, are subject to prepayment risk. (Prepayment risk may be
reduced for Bond Fund by the requirement that no security in the Fund's
portfolio may have a remaining maturity of more than five years.) Government
Fund's investments in mortgage-related securities include securities commonly
referred to as derivative mortgage securities. Recent market experience has
shown that certain derivative mortgage securities may be extremely sensitive to
changes in interest rates and in prepayment rates on the underlying mortgage
assets and, as a result, the prices of such securities may be highly volatile.
All of these transactions involve certain special risks, as set forth under
"Investment Objectives and Policies" and "Characteristics and Risks of
Securities and Special Investment Methods."
SHAREHOLDER INQUIRIES
Any questions or communications regarding a shareholder account should be
directed to your Piper Jaffray Investment Executive or, in the case of shares
held through another broker-dealer, to IFTC at (800) 874-6205. General inquiries
regarding the Funds should be directed to the Funds at the telephone number set
forth on the cover page of this Prospectus.
3
<PAGE>
FUND EXPENSES
<TABLE>
<CAPTION>
Government Short-Intermediate
Income Bond
Fund Fund
---------- ------------------
<S> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)...... 4.00% 1.50%
Exchange Fee (1)........................... $0 $0
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees............................ .50% .40%
Rule 12b-1 Fees (after voluntary limitation
for Government Fund) (2)................. .32% .20%
Other Expenses (after voluntary expense
reimbursement for Bond Fund) (2)......... .29% .15%
--- ---
Total Fund Operating Expenses (after
voluntary limitations and expense
reimbursements).......................... 1.11% .75%
</TABLE>
- ------------------------
(1) There is a $5.00 fee for each exchange in excess of four exchanges per year.
See "How to Purchase Shares--Exchange Privilege."
(2) See the discussion below for an explanation of voluntary Rule 12b-1 fee
limitations and expense reimbursements.
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
Government Short-Intermediate
Income Bond
Fund Fund
---------- ------------------
<S> <C> <C>
1 Year...................................... $ 51 $ 23
3 Years..................................... $ 74 $ 39
5 Years..................................... $ 99 $ 56
10 Years..................................... $170 $107
</TABLE>
The purpose of the above Fund Expenses table is to assist you in
understanding the various costs and expenses that investors in the Funds will
bear directly or indirectly. The Example contained in the table should not be
considered a representation of past or future expenses. Actual expenses may be
greater or less than those shown.
The information in the table for Government Fund is based on actual expenses
incurred by the Fund during the fiscal year ended September 30, 1995. The
information set forth above for Bond Fund reflects the Adviser's intention to
reimburse such Fund for the amount, if any, by which total Fund operating
expenses for fiscal 1996 exceed .75% of average daily net assets. The Funds have
adopted a Rule 12b-1 Plan under which Government Fund and Bond Fund pay the
Distributor fees equal, on an annual basis, to .50% and .20%, respectively, of
each such Fund's average daily net assets in connection with the servicing of
Fund shareholder accounts and the provision of distribution related services to
the Funds. The Distributor has
4
<PAGE>
voluntarily limited the fee payable by Government Fund to an annual rate of .32%
of average daily net assets. The voluntary Rule 12b-1 fee limitation for
Government Fund and the expense reimbursements for Bond Fund reflected in the
Fund Expenses table may be revised or terminated at any time after the fiscal
1996 year end. The Adviser may or may not assume additional expenses of the
Funds from time to time, in its discretion, while retaining the ability to be
reimbursed by the Funds for expenses assumed during a fiscal year prior to the
end of such year. The foregoing policy will have the effect of lowering a Fund's
overall expense ratio and increasing yield to investors when such amounts are
assumed or the inverse when such amounts are reimbursed.
Absent the voluntary Rule 12b-1 fee limitation, Total Fund Operating
Expenses for the fiscal year ended September 30, 1995 would have been 1.29% of
average daily net assets for Government Fund. Bond Fund commenced operations on
April 10, 1995 and the Adviser and Distributor waived all fees and paid all
expenses for the fiscal period ended September 30, 1995. Absent any voluntary
expense reimbursements or waivers, the Total Fund Operating Expenses for Bond
Fund would have been 23.0% of average daily net assets for Bond Fund.
As a result of Government Fund's annual payment of its Rule 12b-1 fee, a
portion of which is considered an asset-based sales charge, long-term
shareholders of Government Fund may pay more than the economic equivalent of the
maximum 6.25% front end sales charge permitted under the rules of the National
Association of Securities Dealers, Inc. For additional information, including a
more complete explanation of management and Rule 12b-1 fees, see
"Management--Investment Adviser" and "Distribution of Fund Shares."
5
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial highlights show certain per share data and selected
information for a share of capital stock outstanding during the indicated
periods for each Fund. This information has been audited by KPMG Peat Marwick
LLP, independent auditors, and should be read in conjunction with the financial
statements of each Fund contained in its annual report. An annual report of each
Fund is available without charge by contacting the Funds at 800-866-7778 (toll
free). In addition to financial statements, the annual reports contain further
information about the performance of the Funds.
GOVERNMENT INCOME FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30, Period from Year
-------------------------------------------------------- 11/1/88 to Ended
1995 1994 1993 1992 1991 1990 9/30/89 10/31/88
-------- -------- -------- -------- ------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period....... $ 8.42 10.01 9.86 9.69 9.02 9.18 9.50 9.40
-------- -------- -------- -------- ------- ------- ----- --------
Operations:
Net investment income.................... 0.60 0.69 0.80 0.90 0.84 0.81 0.76 0.82
Net realized and unrealized gains
(losses) on investments................ 0.60 (1.58) 0.15 0.17 0.67 (0.16) (0.32) 0.10
-------- -------- -------- -------- ------- ------- ----- --------
Total from operations................ 1.20 (0.89) 0.95 1.07 1.51 0.65 0.44 0.92
-------- -------- -------- -------- ------- ------- ----- --------
Distributions from net investment income... (0.63) (0.68) (0.80) (0.90) (0.84) (0.81) (0.76) (0.82)
Distributions from net realized
gains.................................... -- (0.02) -- -- -- -- -- --
-------- -------- -------- -------- ------- ------- ----- --------
Total distributions.................. (0.63) (0.70) (0.80) (0.90) (0.84) (0.81) (0.76) (0.82)
-------- -------- -------- -------- ------- ------- ----- --------
Net asset value, end of period............. $ 8.99 8.42 10.01 9.86 9.69 9.02 9.18 9.50
-------- -------- -------- -------- ------- ------- ----- --------
-------- -------- -------- -------- ------- ------- ----- --------
Total return+.............................. 14.87% (9.26%) 10.06% 11.57% 17.51% 7.31% 4.78% 10.18%
Net assets, end of period
(in millions)............................ $ 106 126 160 124 76 73 85 62
Ratio of expenses to average daily net
assets++................................. 1.11% 1.05% 1.09% 1.11% 1.18% 1.08% 1.15%** 1.23%
Ratio of net investment income to average
daily net assets++....................... 7.02% 7.43% 8.10% 9.15% 9.00% 8.87% 8.81%** 8.68%
Portfolio turnover rate (excluding
short-term securities)................... 87% 121% 191% 118% 110% 202% 149% 217%
<CAPTION>
Period
from
3/16/87*
to
10/31/87
---------
<S> <C>
Net asset value, beginning of period....... 10.00
---------
Operations:
Net investment income.................... 0.45
Net realized and unrealized gains
(losses) on investments................ (0.60)
---------
Total from operations................ (0.15)
---------
Distributions from net investment income... (0.45)
Distributions from net realized
gains.................................... --
---------
Total distributions.................. (0.45)
---------
Net asset value, end of period............. 9.40
---------
---------
Total return+.............................. 1.41%
Net assets, end of period
(in millions)............................ 75
Ratio of expenses to average daily net
assets++................................. .70%**
Ratio of net investment income to average
daily net assets++....................... 8.07%**
Portfolio turnover rate (excluding
short-term securities)................... 281%
</TABLE>
- ------------------------------
*Commencement of operations.
**Adjusted to an annual basis.
+Total return is based on the change in net asset value during the period,
assumes reinvestment of all distributions and does not reflect a sales charge.
++The ratio of expenses to average net assets excludes interest expense which
has been presented net of the related interest income in the financial
statements. During the periods reflected above, the Fund's Rule 12b-1 fee was
voluntarily limited by the Distributor. Had the maximum Rule 12b-1 fee of .50%
been in effect, the ratios of expenses and net investment income to average
daily net assets would have been: 1.29%/6.84% in fiscal 1995, 1.24%/7.24% in
fiscal 1994, 1.27%/7.92% in fiscal 1993, 1.29%/8.97% in fiscal 1992,
1.36%/8.82% in fiscal 1991, 1.27%/8.68% in fiscal 1990, 1.35%/8.61% in fiscal
1989, 1.43%/8.48% in fiscal 1988 and 1.48%/7.29% in fiscal 1987. Beginning in
fiscal 1995, the expense ratio reflects the effect of gross expenses paid
indirectly by the Fund. Prior period expense ratios have not been adjusted.
6
<PAGE>
SHORT-INTERMEDIATE BOND FUND
<TABLE>
<CAPTION>
Period
from
4/10/95*
to
9/30/95
---------
<S> <C>
Net asset value, beginning of period....... $ 10.00
---------
Operations:
Net investment income.................... 0.28
Net realized and unrealized gains
(losses) on investments................ 0.09
---------
Total from operations................ 0.37
---------
Distributions from net investment income... (0.28)
Distributions from net realized gains...... --
---------
Total distributions.................. (0.28)
---------
Net asset value, end of period............. $ 10.09
---------
---------
Total return+.............................. 3.73%
Net assets, end of period (in millions).... $ 0.1
Ratio of expenses to average daily net
assets++................................. 0.0%**
Ratio of net investment income to average
daily net assets++....................... 6.12%**
Portfolio turnover rate (excluding
short-term securities)................... 31%
</TABLE>
- ------------------------
*Commencement of operations.
**Adjusted to an annual basis.
+Total return is based on the change in net asset value during the period,
assumes reinvestment of all distributions and does not reflect a sales charge.
++The Adviser and the Distributor voluntarily agreed to waive all fees and
expenses for the Fund during the period from April 10, 1995 (commencement of
operations) to September 30, 1995. Had fees and expenses not been waived, the
ratios of expenses and net investment income to average daily net assets would
have been 23.0%/(16.88%). The expense ratio reflects the effect of gross
expenses paid indirectly by the Fund.
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives listed below cannot be changed without shareholder
approval. The investment policies and techniques employed in pursuit of the
Funds' objectives may be changed without shareholder approval, unless otherwise
noted.
Because of the risks associated with bond investments, the Funds are
intended to be long-term investment vehicles and are not designed to provide
investors with a means of speculating on short-term market movements. Investors
should be willing to accept the risk of the potential for sudden, sometimes
substantial declines in market value. No assurance can be given that the Funds
will achieve their objectives or that shareholders will be protected from the
risk of loss that is inherent in bond market investing.
GOVERNMENT INCOME FUND
INVESTMENT OBJECTIVE. Government Income Fund ("Government Fund") has an
investment objective of high current income to the extent consistent with
preservation of capital.
INVESTMENT POLICIES AND TECHNIQUES. Government Fund invests primarily in
securities which are issued or guaranteed as to payment of principal and
interest by the U.S. Government or its agencies or instrumentalities ("U.S.
Government Securities"). The Fund invests a significant portion of its assets in
mortgage-related U.S. Government Securities. The Fund may also invest up to 10%
of its total assets in mortgage-related
7
<PAGE>
securities issued by private entities. The Fund's investments in
mortgage-related securities may include derivative mortgage securities; however,
the Fund will limit its aggregate investments in inverse floating, interest only
and principal only derivative mortgage securities (discussed below under
"Characteristics and Risks of Securities and Special Investment Methods") to 10%
of net assets. Recent market experience has shown that certain derivative
mortgage securities may be extremely sensitive to changes in interest rates and
in prepayment rates on the underlying mortgage assets and, as a result, the
prices of such securities may be highly volatile. In addition, the Fund may
invest in repurchase agreements and enter into reverse repurchase agreements
with respect to U.S. Government Securities. See "Characteristics and Risk of
Securities and Special Investment Methods--Repurchase Agreements" and "--Reverse
Repurchase Agreements." Under normal circumstances, the Fund will invest at
least 65% of the value of its total assets in U.S. Government Securities, which
amount does not include mortgage-related securities issued by private entities.
The Fund may also invest in cash and short-term money market securities and, for
temporary defensive purposes, may invest more than 35% of its total assets in
such securities. Investments in short-term money market securities may include
U.S. Government securities, time deposits, bank certificates of deposit,
bankers' acceptances, high-grade commercial paper and other money market
instruments. See "Investment Objectives, Policies and Restrictions--Short-Term
Money Market Securities" in the Statement of Additional Information.
Government Fund may write covered put and call options on U.S. Government
Securities, purchase such put and call options, and enter into closing purchase
and sale transactions with respect thereto. See "Characteristics and Risk of
Securities and Special Investment Methods--Options Transactions." For the
purpose of hedging against changes in the value of the Fund's portfolio
securities due to fluctuations in interest rates, Government Fund may enter into
interest rate futures contracts, purchase and write put or call options on such
contracts, and close such contracts and options. See "Characteristics and Risks
of Securities and Special Investment Methods--Futures Contracts and Options on
Futures Contracts" and "--Risks of Transactions in Futures Contracts and Options
on Futures Contracts." Government Fund also may lend portfolio securities up to
one-third of the value of its total assets. See "Characteristics and Risks of
Securities and Special Investment Methods--Lending of Portfolio Securities."
Government Fund may purchase or sell securities offered on a "when-issued"
or "forward commitment" basis and, in connection therewith, may enter into
mortgage "dollar rolls." The Fund may also enter into reverse repurchase
agreements. The use of these techniques could result in increased volatility of
the Fund's net asset value. See "Characteristics and Risks of Securities and
Special Investment Methods--When-Issued Securities," "--Mortgage Dollar Rolls"
and "--Reverse Repurchase Agreements."
The Adviser will attempt to maintain an average effective duration of 4 to
7 1/2 years for Government Fund's portfolio. Effective duration estimates the
interest rate risk of a security. See "Characteristics and Risks of Securities
and Special Investment Methods--Effective Duration."
INVESTMENT RISKS. Government Fund is subject to interest rate risk, which
is the potential for a decline in bond prices due to rising interest rates. In
general, bond prices vary inversely with interest rates. When interest rates
rise, bond prices generally fall. Conversely, when interest rates fall, bond
prices generally rise. Interest rate risk applies to U.S. Government Securities
as well as other bonds. U.S. Government Securities are guaranteed only as to the
payment of interest and principal. The current market prices for such securities
are not guaranteed and will fluctuate. The Fund also is subject to a certain
amount of credit risk. Credit risk, also known as default risk, is the
possibility that a bond issuer will fail to make timely payments of interest or
principal. Up to 35% of the Fund's total assets may be invested in securities
which are not issued or guaranteed as to the payment of principal and interest
by the U.S. Government or its agencies or instrumentalities.
8
<PAGE>
Government Fund invests a significant portion of its assets in
mortgage-related securities. As a result, the Fund is subject to prepayment
risk. Prepayment risk results because, as interest rates fall, homeowners are
more likely to refinance their home mortgages. When home mortgages are
refinanced, the principal on mortgage-related securities held by the Fund is
"prepaid" earlier than expected. The Fund must then reinvest the unanticipated
principal payments at a time when interest rates on new mortgage investments are
falling. Prepayment risk has two important effects on the Fund:
-When interest rates fall and additional mortgage prepayments must be
reinvested at lower interest rates, the income of the Fund will be reduced.
-When interest rates fall, prices on mortgage-backed securities may not rise
as much as comparable Treasury bonds because bond market investors may
anticipate an increase in mortgage prepayments and a likely decline in
income.
Government Fund's investments in mortgage-related securities also subject
the Fund to extension risk. Extension risk is the possibility that rising
interest rates may cause prepayments to occur at a slower than expected rate.
This particular risk may effectively change a security which was considered
short- or intermediate-duration at the time of purchase into a long-duration
security. Long-duration securities generally fluctuate more widely in response
to changes in interest rates than short- or intermediate-duration securities.
The Fund's investments in mortgage-related securities include derivative
mortgage securities such as collateralized mortgage obligations and stripped
mortgage-backed securities which may involve risks in addition to those found in
other mortgage-related securities. Recent market experience has shown that
certain derivative mortgage securities may be highly sensitive to changes in
interest and prepayment rates and, as a result, the prices of such securities
may be highly volatile. In addition, recent market experience has shown that
during periods of rising interest rates, the market for certain derivative
mortgage securities may become more unstable and such securities may become more
difficult to sell as market makers choose not to repurchase such securities or
offer prices, based on current market conditions, which are unacceptable to the
Fund. The investment techniques used by the Fund also pose certain risks. See
"Characteristics and Risks of Securities and Special Investment Methods."
SHORT-INTERMEDIATE BOND FUND
INVESTMENT OBJECTIVE. Short-Intermediate Bond Fund ("Bond Fund") has an
investment objective of current income consistent with the Fund's stated
maturity limits and quality standards and preservation of capital.
INVESTMENT POLICIES AND TECHNIQUES. Bond Fund will seek to realize its
objective by investing in a diversified portfolio of debt securities. Under
normal circumstances, the Fund will invest at least 65% of its total assets in
the following debt securities, and generally expects to have at least 90% of its
total assets invested therein: U.S. Government Securities (including
mortgage-related securities), corporate fixed-income securities (excluding, for
purposes of the 65% requirement, preferred or preference stock) and other
fixed-income securities, including privately issued mortgage-backed securities,
asset-backed securities, U.S. dollar-denominated Yankee bonds and short-term
fixed-income securities. In addition, Bond Fund may invest in repurchase
agreements with respect to U.S. Government Securities. See "Characteristics and
Risks of Securities and Special Investment Methods--Repurchase Agreements." The
Fund's investments in short-term fixed-income securities may include time
deposits, bank certificates of deposit, bankers' acceptances, high-grade
commercial paper and other money market instruments. See "Investment Objectives,
Policies and Restrictions--Short-Term Money Market Securities" in the Statement
of Additional Information.
The Fund will limit its investments to securities with remaining maturities
at the time of purchase of no more than five years. Under normal circumstances,
the Fund will attempt to maintain a dollar weighted
9
<PAGE>
average maturity of its investments ranging from two to four years. For purposes
of these policies, an instrument which has a "put" or demand feature entitling
the holder to receive the principal amount of the underlying security upon
demand on or after a date certain will be treated as maturing on such date,
rather than the stated maturity date of the security.
The Fund's investments in mortgage-related securities may include certain
tranches of collateralized mortgage obligations. The Fund, however, will not
invest in any inverse floating, interest only, principal only or inverse
interest only tranches of collateralized mortgage obligations, in any stripped
mortgage-backed securities, or in any other mortgage-related securities that are
considered "high risk" under the supervisory policies of the Office of the
Comptroller of the Currency applicable to national banks. See "Investment
Objectives and Policies--High Risk Mortgage Securities" in the Statement of
Additional Information. In addition, all of Bond Fund's investments in
mortgage-related securities must meet the Fund's stated maturity limits and
credit quality standards.
Bond Fund will invest only in securities rated investment grade (securities
rated Baa or better by Moody's Investors Service, Inc. ("Moody's") or BBB or
better by Standard & Poor's Corporation ("Standard & Poor's")) or, in the case
of unrated securities, judged to be of comparable quality by the Adviser. If a
credit rating agency lowers the rating of a portfolio security held by Bond Fund
to below investment grade, the Fund may retain the portfolio security if the
Adviser deems it in the best interest of the Fund's shareholders, provided that
in no event will more than 5% of the Fund's net assets be invested in fixed-
income securities rated lower than investment grade. Bond Fund generally expects
to maintain an overall dollar-weighted average credit quality of its portfolio
securities of at least Aa or AA, as rated by Moody's or Standard & Poor's,
respectively, and in no event will have an average credit quality lower than A.
(In determining the Fund's overall dollar-weighted average quality, unrated
securities are treated as if rated, based on the Adviser's view of their
comparability to rated securities.) Securities rated Baa are considered by
Moody's as medium-grade obligations which lack outstanding investment
characteristics and in fact have speculative characteristics as well, while
securities rated BBB are regarded by Standard & Poor's as having an adequate
capacity to pay principal and interest. Bond Fund may be more dependent on the
Adviser's investment analysis with respect to securities for which a comparable
quality determination is made than is the case with respect to rated securities.
See Appendix A to the Statement of Additional Information for a description of
Moody's and Standard & Poor's ratings applicable to fixed income securities.
Bond Fund may purchase or sell securities offered on a "when-issued" or
"forward commitment" basis and, in connection therewith, may enter into mortgage
"dollar rolls." Bond Fund will not enter into such transactions for the purpose
of investment leverage and will maintain in a segregated account cash or cash
equivalent securities in an amount sufficient to meet its purchase commitments
under such transactions. See "Characteristics and Risks of Securities and
Special Investment Methods--When-Issued Securities" and
"--Mortgage Dollar Rolls." Bond Fund also may lend portfolio securities up to
one-third of the value of its total assets. See "Characteristics and Risks of
Securities and Special Investment Methods--Lending of Portfolio Securities."
Bond Fund will not purchase or sell options on securities or enter into futures
contracts or options thereon.
The Adviser will attempt to maintain an average effective duration of 1 1/2
to 3 1/2 years for Bond Fund's portfolio. Effective duration estimates the
interest rate risk of a security. See "Characteristics and Risks of Securities
and Special Investment Methods--Effective Duration."
INVESTMENT RISKS. Bond Fund is subject to interest rate risk, which is the
potential for a decline in bond prices due to rising interest rates. In general,
bond prices vary inversely with interest rates. When interest rates rise, bond
prices generally fall. Conversely, when interest rates fall, bond prices
generally rise. Interest
10
<PAGE>
rate risk applies to U.S. Government Securities as well as other bonds. U.S.
Government Securities are guaranteed only as to the payment of interest and
principal. The current market prices for such securities are not guaranteed and
will fluctuate. In general, shorter term bonds are less sensitive to interest
rate changes, but longer term bonds generally offer higher yields. By investing
in bonds with remaining maturities of less than five years, Bond Fund seeks to
reduce the risks of price fluctuation, but it may offer lower income than a fund
composed primarily of longer term bonds.
Bond Fund is subject to prepayment risk to the extent it invests in
mortgage-related securities. See "Government Income Fund--Investment Risks"
above. Prepayment risk may be reduced for Bond Fund, however, by the requirement
that no security in the Fund's portfolio may have a remaining maturity of more
than five years.
Bond Fund also is subject to credit risk. Credit risk, also known as default
risk, is the possibility that a bond issuer will fail to make timely payments of
interest or principal. The investment techniques used by Bond Fund also pose
certain risks. See "Characteristics and Risks of Securities and Special
Investment Methods."
CHARACTERISTICS AND RISKS OF SECURITIES
AND SPECIAL INVESTMENT METHODS
The following describes in greater detail the different types of securities
and investment techniques used by one or both Funds. Additional information
about the Funds' investments and investment practices may be found in the
Statement of Additional Information.
GENERAL
The different types of securities in which the Funds invest all have
attendant risks of varying degrees. Because each Fund seeks a different
investment objective and has different investment policies, each is subject to
varying degrees of financial, market and credit risks. Therefore, investors
should carefully consider the investment objective, investment policies and
potential risks of either Fund before investing. Certain types of investments
and investment techniques that may be used by one or both of the Funds are
described in greater detail, including the risks of each, in this section.
U.S. GOVERNMENT SECURITIES
Each Fund may invest in U.S. Government Securities. Such securities are
issued or guaranteed as to payment of principal and interest by the U.S.
Government or its agencies or instrumentalities. The current market prices for
such securities are not guaranteed and will fluctuate. The Funds may invest in
direct obligations of the U.S. Treasury, such as U.S. Treasury bills, notes and
bonds, and in obligations of U.S. Government agencies or instrumentalities,
including, but not limited to, Federal Home Loan Banks, the Farmers Home
Administration, Federal Farm Credit Banks, the Federal National Mortgage
Association, the Government National Mortgage Association, the Federal Home Loan
Mortgage Corporation, the Financing Corporation and the Student Loan Marketing
Association.
Obligations of U.S. Government agencies or instrumentalities are backed in a
variety of ways by the U.S. Government or its agencies or instrumentalities.
Some of these obligations, such as Government National Mortgage Association
mortgage-backed securities, are backed by the full faith and credit of the U.S.
Treasury. Others, such as obligations of the Federal Home Loan Banks, are backed
by the right of the issuer to borrow from the Treasury. Still others, such as
those issued by the Federal National Mortgage Association, are backed by the
discretionary authority of the U.S. Government to purchase certain obligations
of the agency or instrumentality. Finally, obligations of other agencies or
instrumentalities are backed only by the credit of the agency or instrumentality
issuing the obligations.
11
<PAGE>
U.S. Government Securities include securities that have no coupons, or have
been stripped of their unmatured interest coupons, individual interest coupons
from such securities that trade separately, and evidences of receipt of such
securities. Such securities may pay no cash income, and are purchased at a deep
discount from their value at maturity. Because interest on zero coupon
securities is not distributed on a current basis but is, in effect, compounded,
zero coupon securities tend to be subject to greater market risk than
interest-paying securities of similar maturities. The Funds may also invest in
custodial receipts issued in connection with so called trademark zero coupon
securities, such as CATs and TIGRs. Since such securities are not issued by the
U.S. Treasury, however, they are not considered U.S. Government Securities for
purposes of the Funds' investment policies, although the underlying bond
represented by such receipt is a debt obligation of the U.S. Treasury. Other
zero coupon Treasury securities (STRIPs and CUBEs) are direct obligations of the
U.S. Government and therefore are considered U.S. Government Securities for
purposes of the Funds' investment policies.
MORTGAGE-RELATED SECURITIES
Each Fund may invest in U.S. Government mortgage-related securities and in
mortgage-related securities issued by private entities. Mortgage-related
securities are securities that, directly or indirectly, represent participations
in, or are secured by and payable from, loans secured by real property.
Mortgage-related securities, as the term is used in this Prospectus, include
guaranteed mortgage pass-through securities, private mortgage pass-through
securities, adjustable rate mortgage securities and derivative mortgage
securities such as collateralized mortgage obligations and stripped
mortgage-backed securities. Mortgage-related securities fall into three
categories: (a) those issued or guaranteed by the United States Government or
one of its agencies or instrumentalities, such as Government National Mortgage
Association ("GNMA"), Federal National Mortgage Association ("FNMA") and Federal
Home Loan Mortgage Corporation ("FHLMC"); (b) those issued by non-governmental
issuers that represent interests in, or are collateralized by, mortgage-related
securities issued or guaranteed by the United States Government or one of its
agencies or instrumentalities; and (c) those issued by non-governmental issuers
that represent an interest in, or are collateralized by, whole mortgage loans or
mortgage-related securities without a government guarantee but usually with
over-collateralization or some other form of private credit enhancement.
Non-governmental issuers referred to in (b) and (c) above include originators of
and investors in mortgage loans, including savings and loan associations,
mortgage bankers, commercial banks, investment banks and special purpose
subsidiaries of the foregoing. Securities in categories (b) and (c) are not
considered U.S. Government Securities for purposes of this Prospectus.
(a) GUARANTEED MORTGAGE PASS-THROUGH SECURITIES. The government guaranteed
mortgage pass-through securities in which each Fund may invest include
certificates issued or guaranteed by GNMA, FNMA and FHLMC, which represent
interests in underlying residential mortgage loans. These mortgage pass-through
securities provide for the pass-through to investors of their pro-rata share of
monthly payments (including any prepayments) made by the individual borrowers on
the pooled mortgage loans, net of any fees paid to the guarantor of such
securities and the servicer of the underlying mortgage loans. Each of GNMA, FNMA
and FHLMC guarantee timely distributions of interest to certificate holders.
GNMA and FNMA guarantee timely distributions of scheduled principal. FHLMC
generally guarantees only ultimate collection of principal of the underlying
mortgage loans. For a further description of these securities, see "Investment
Objectives, Policies and Restrictions--Mortgage-Related Securities" in the
Statement of Additional Information.
(b) PRIVATE MORTGAGE PASS-THROUGH SECURITIES. Private mortgage
pass-through securities ("Private Pass-Throughs") are structured similarly to
GNMA, FNMA and FHLMC mortgage pass-through securities and are issued by
originators of and investors in mortgage loans, including savings and loan
associations,
12
<PAGE>
mortgage bankers, commercial banks, investment banks and special purpose
subsidiaries of the foregoing. These securities usually are backed by a pool of
conventional fixed rate or adjustable loans. Since Private Pass-Throughs
typically are not guaranteed by an entity having the credit status of GNMA, FNMA
or FHLMC, such securities generally are structured with one or more types of
credit enhancement. See "Investment Objectives, Policies and
Restrictions--Mortgage-Related Securities" in the Statement of Additional
Information.
(c) ADJUSTABLE RATE MORTGAGE SECURITIES. Government Fund may also invest
in adjustable rate mortgage securities ("ARMS"). Bond Fund currently does not
anticipate investing in ARMS, although such investments are permitted if they
meet the Fund's stated maturity and credit quality standards. ARMS are
pass-through mortgage securities collateralized by mortgages with interest rates
that are adjusted from time to time. The adjustments usually are determined in
accordance with a predetermined interest rate index and may be subject to
certain limits. While the values of ARMS, like other debt securities, generally
vary inversely with changes in market interest rates (increasing in value during
periods of declining interest rates and decreasing in value during periods of
increasing interest rates), the values of ARMS should generally be more
resistant to price swings than other debt securities because the interest rates
of ARMS move with market interest rates. The adjustable rate feature of ARMS
will not, however, eliminate fluctuations in the prices of ARMS, particularly
during periods of extreme fluctuations in interest rates. ARMS typically have
caps which limit the maximum amount by which the interest rate may be increased
or decreased at periodic intervals or over the life of the loan. To the extent
that interest rates increase in excess of the caps, ARMS can be expected to
behave more like traditional debt securities and to decline in value to a
greater extent than would be the case in the absence of such caps. Also, since
many adjustable rate mortgages only reset on an annual basis, it can be expected
that the prices of ARMS will fluctuate to the extent that changes in prevailing
interest rates are not immediately reflected in the interest rates payable on
the underlying adjustable rate mortgages.
(d) COLLATERALIZED MORTGAGE OBLIGATIONS. Each Fund may invest, within the
limits discussed below, in CMOs (collateralized mortgage obligations and
multiclass pass-through securities unless the context otherwise indicates),
which are derivative mortgage securities. Collateralized mortgage obligations
are debt instruments issued by special purpose entities which are secured by
pools of mortgage loans or other mortgage-related securities. Multi-class
pass-through securities are equity interests in a trust composed of mortgage
loans or other mortgage-related securities. Payments of principal and interest
on underlying collateral provide the funds to pay debt service on the
collateralized mortgage obligation or make scheduled distributions on the
multi-class pass-through security. CMOs may be issued by agencies or
instrumentalities of the U.S. Government or by private organizations.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMO, often referred to as a "tranche," is issued at a specific
coupon rate and has a stated maturity or final distribution date. Principal
prepayments on collateral underlying a CMO may cause it to be retired
substantially earlier than the stated maturities or final distribution dates.
The principal and interest on the underlying mortgages may be allocated
among the several tranches of a CMO in many ways. For example, certain tranches
may have variable or floating interest rates and others may be stripped
securities which provide only the principal or interest feature of the
underlying security. See "Stripped Mortgage-Backed Securities," below.
Generally, the purpose of the allocation of the cash flow of a CMO to the
various tranches is to obtain a more predictable cash flow to certain of the
individual tranches than exists with the underlying collateral of the CMO. As a
general rule, the more predictable the cash flow is on a CMO tranche, the lower
the anticipated yield will be on that tranche at the time of issuance relative
to prevailing market yields on mortgage-related securities. As part of the
process of creating more predictable cash flows on most of the tranches of a
CMO, one or more tranches generally must be created that absorb
13
<PAGE>
most of the volatility in the cash flows on the underlying mortgage loans. The
yields on these tranches, which may include inverse floaters, interest only and
principal only tranches and Z tranches, discussed below, are generally higher
than prevailing market yields on mortgage-related securities with similar
maturities. As a result of the uncertainty of the cash flows of these tranches,
the market prices of and yield on these tranches generally may be more volatile.
An inverse floater is a CMO tranche with a coupon rate that moves inversely
to a designated index, such as LIBOR (London Inter-Bank Offered Rate) or COFI
(Cost of Funds Index). Like most other fixed-income securities, the value of
inverse floaters will decrease as interest rates increase. Inverse floaters,
however, may exhibit greater price volatility than the majority of mortgage
pass-through securities or CMOs. Coupon rates on inverse floaters typically
change at a multiple of the changes in the relevant index rate. Thus, any rise
in the index rate (as a consequence of an increase in interest rates) causes a
correspondingly greater drop in the coupon rate of an inverse floater while any
drop in the index rate causes a correspondingly greater increase in the coupon
of an inverse floater. Some inverse floaters also exhibit extreme sensitivity to
changes in prepayments.
Z tranches of CMOs defer interest and principal payments until one or more
other classes of the CMO have been paid in full. Interest accrues on the Z
tranche, being added to principal, and is compounded through the accretion
period. After the other classes have been paid in full, interest payments begin
and continue through maturity. Z tranches have characteristics similar to zero
coupon bonds. Like a zero coupon bond, during its accretion period a Z tranche
has the advantage of eliminating the risk of reinvesting interest payments at
lower rates during a period of declining market interest rates. At the same
time, however, and also like a zero coupon bond, the market value of a Z tranche
can be expected to fluctuate more widely with changes in market interest rates
than would the market value of a tranche which pays interest currently. In
addition, changes in prepayment rates on the underlying mortgage loans will
affect the accretion period of a Z tranche, and therefore also are likely to
influence its market value.
Bond Fund will not invest in any tranche of a CMO that would be considered
"high risk" under the supervisory policies of the Office of the Comptroller of
the Currency applicable to national banks. See "Investment Objectives and
Policies" in the Statement of Additional Information. For example, Bond Fund
will not invest in "inverse floaters," interest only and principal only tranches
or inverse interest only tranches. In addition, any CMO tranches in which Bond
Fund invests must meet the Fund's stated maturity and credit quality standards.
Government Fund may invest in any CMO tranche, but will limit its aggregate
investments in inverse floaters and interest only and principal tranches of CMOs
(or classes of SMBS, as described in more detail below) to 10% of the Fund's net
assets.
(e) STRIPPED MORTGAGE-BACKED SECURITIES. Government Fund may invest in
stripped mortgage-backed securities ("SMBS"), which are derivative multi-class
mortgage securities. Bond Fund may not invest in SMBS. SMBS may be issued by
agencies or instrumentalities of the United States Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage bankers, commercial banks, investment banks and special
purpose subsidiaries of the foregoing.
There are generally two classes of SMBS, one of which (the interest only or
"IO" class) entitles the holders thereof to receive distributions consisting
solely or primarily of all or a portion of the interest on the underlying pool
of mortgage loans or mortgage-related securities ("Mortgage Assets") and the
other of which (the principal only or "PO" class) entitles the holders thereof
to receive distributions consisting solely or primarily of all or a portion of
the principal of the underlying pool of Mortgage Assets. The cash flows and
yields on IO and PO classes are extremely sensitive to the rate of principal
payments (including prepayments) on the related underlying Mortgage Assets. For
example, a rapid or slow rate of principal payments may have
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a material adverse effect on the yield to maturity of IOs or POs, respectively.
If the underlying Mortgage Assets experience greater than anticipated
prepayments of principal, an IO investor may incur substantial losses.
Conversely, if the underlying Mortgage Assets experience slower than anticipated
prepayments of principal, the yield on a PO class will be affected more severely
than would be the case with a traditional mortgage-related security. Government
Fund will limit its aggregate investments in IO and PO classes and inverse
floaters to 10% of the Fund's net assets.
CORPORATE FIXED-INCOME SECURITIES
Bond Fund may invest in corporate fixed-income securities, which include
corporate bonds, debentures, notes and other similar corporate debt instruments.
Fixed-income securities may be acquired with warrants attached. Corporate
income-producing securities may also include forms of preferred or preference
stock, although such securities are not considered debt securities for purposes
of the requirement that Bond Fund invest at least 65% of its total assets in
debt securities.
Bond Fund's investments in corporate fixed-income securities may also
include zero coupon, pay-in-kind and delayed interest securities. Zero coupon
securities pay no cash income to their holders until they mature and are issued
at substantial discounts from their value at maturity. When held to maturity,
their entire return comes from the difference between their purchase price and
their maturity value. Pay-in-kind securities pay interest through the issuance
to the holders of additional securities. Delayed interest securities are
securities that remain zero coupon securities until a predetermined date at
which time the stated coupon rate becomes effective and interest becomes payable
at regular intervals. Because interest on zero coupon, pay-in-kind and delayed
interest securities is not paid on a current basis, the values of securities of
this type are subject to greater fluctuations than are the value of securities
that distribute income regularly and may be more speculative than such
securities. Accordingly, the values of these securities may be highly volatile
as interest rates rise or fall. In addition, Bond Fund's investments in zero
coupon, pay-in-kind and delayed interest securities will result in special tax
consequences. Although zero coupon securities do not make interest payments, for
tax purposes a portion of the difference between a zero coupon security's
maturity value and its purchase price is taxable income of the Fund each year.
ASSET-BACKED SECURITIES
Bond Fund may invest in asset-backed securities. Such securities represent
the application of the securitization techniques used to develop
mortgage-related securities to a broad range of other assets. Through the use of
trusts and special purpose corporations, various types of assets, primarily
automobile and credit card receivables and home equity loans, are being
securitized in pass-through structures similar to the mortgage pass-through
structures described above or in a pay-through structure similar to the CMO
structure.
In general, the collateral supporting asset-backed securities is of shorter
maturity than mortgage loans and is less likely to experience substantial
prepayments. As with mortgage-related securities, asset-backed securities are
often backed by a pool of assets representing obligations of a number of
different parties and use various credit enhancement techniques.
Generally, asset-backed securities involve many of the risks associated with
mortgage-related securities; however, asset-backed securities involve certain
risks that are not posed by mortgage-related securities, resulting mainly from
the fact that asset-backed securities do not usually contain the complete
benefit of a security interest in the related collateral. For example, credit
card receivables generally are unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, including the
bankruptcy laws, some of which may reduce the ability to obtain full payment. In
the case of automobile
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receivables, due to various legal and economic factors, proceeds for repossessed
collateral may not always be sufficient to support payments on these securities.
YANKEE BONDS
Bond Fund may invest in Yankee bonds, which are dollar denominated
fixed-income securities of foreign-domiciled issuers that are publicly traded in
the United States. The prominant issuers of Yankee bonds are supranational
agencies and Canadian provinces (including provincial utilities). Supranational
organizations are entities designated or supported by a government or government
entity to promote economic development, and include, among others, the Asian
Development Bank, the European Coal and Steel Community, the European Economic
Community and the World Bank. These organizations do not have taxing authority
and are dependent upon their members for payments of interest and principal.
Each supranational entity's lending activities are limited to a percentage of
its total capital (including "callable capital" contributed by members at the
entity's call), reserves and net income. Foreign corporations may also issue
Yankee bonds. Investments in Yankee bonds may involve risks not typically
associated with investments in domestic issuers. With respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
the Fund's investments in those countries. Moreover, individual foreign
economies may differ favorably or unfavorably from the United States economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payment position. Bond
Fund will invest only in Yankee bonds that meet the Fund's maturity limits and
quality standards.
EFFECTIVE DURATION
Effective duration estimates the interest rate risk (price volatility) of a
security, I.E., how much the value of the security is expected to change with a
given change in interest rates. The longer a security's effective duration, the
more sensitive its price is to changes in interest rates. For example, if
interest rates were to increase by 1%, the market value of a bond with an
effective duration of five years would decrease by about 5%, with all other
factors being constant.
It is important to understand that, while a valuable measure, effective
duration is based on certain assumptions and has several limitations. It is most
useful as a measure of interest rate risk when interest rate changes are small,
rapid and occur equally across all the different points of the yield curve. In
addition, effective duration is difficult to calculate precisely for bonds with
prepayment options, such as mortgage-backed securities, because the calculation
requires assumptions about prepayment rates. For example, when interest rates go
down, homeowners may prepay their mortgages at a higher rate than assumed in the
initial effective duration calculation, thereby shortening the effective
duration of the Fund's mortgage-backed securities. Conversely, if rates
increase, prepayments may decrease to a greater extent than assumed, extending
the effective duration of such securities. For these reasons, the effective
durations of funds which invest a significant portion of their assets in
mortgage-backed securities can be greatly affected by changes in interest rates.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with respect to U.S.
Government Securities. A repurchase agreement involves the purchase by a Fund of
securities with the condition that after a stated period of time the original
seller (a member bank of the Federal Reserve System or a recognized securities
dealer) will buy back the same securities ("collateral") at a predetermined
price or yield. Repurchase agreements involve certain risks not associated with
direct investments in securities. In the event the original seller defaults on
its obligation to repurchase, as a result of its bankruptcy or otherwise, the
Fund will seek to sell the collateral, which action could involve costs or
delays. In such case, the Fund's ability to dispose of the
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collateral to recover such investment may be restricted or delayed. While
collateral will at all times be maintained in an amount equal to the repurchase
price under the agreement (including accrued interest due thereunder), to the
extent proceeds from the sale of collateral were less than the repurchase price,
a Fund would suffer a loss. Repurchase agreements maturing in more than seven
days are considered illiquid and subject to each Fund's restriction on investing
in illiquid securities.
REVERSE REPURCHASE AGREEMENTS
Government Fund may engage in "reverse repurchase agreements" with banks and
securities dealers. Bond Fund may not enter into such agreements. Reverse
repurchase agreements are ordinary repurchase agreements in which the Fund is
the seller of, rather than the investor in, securities and agrees to repurchase
them at an agreed upon time and price. Use of a reverse repurchase agreement may
be preferable to a regular sale and later repurchase of the securities because
it avoids certain market risks and transaction costs. Because certain of the
incidents of ownership of the security are retained by the Fund, reverse
repurchase agreements are considered a form of borrowing by the Fund from the
buyer, collateralized by the security. At the time the Fund enters into a
reverse repurchase agreement, cash, U.S. Government securities or other liquid
high-grade debt obligations having a value sufficient to make payments for the
securities to be repurchased will be segregated, and will be maintained
throughout the period of the obligation. Reverse repurchase agreements will be
used as a means of borrowing for investment purposes. This speculative technique
is referred to as leveraging. Leveraging may exaggerate the effect on net asset
value of any increase or decrease in the market value of the Fund's portfolio.
Money borrowed for leveraging will be subject to interest costs which may or may
not be recovered by income from or appreciation of the securities purchased. No
more than 25% of the total assets of Government Fund will be subject to reverse
repurchase agreements.
To attempt to minimize the risk to principal associated with leverage,
Government Fund will enter into reverse repurchase agreements only if such
agreements have terms of one year or less, and only if the Fund is able to
invest the proceeds in securities which the Adviser believes have limited
volatility and a higher interest rate than that payable on the reverse
repurchase agreements. The Adviser believes that such limited use of leverage
will facilitate Government Fund's ability to provide high current income without
adversely affecting the Fund's ability to preserve capital.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, each Fund may lend portfolio
securities up to one-third of the value of its total assets to broker-dealers,
banks or other financial borrowers of securities. As with other extensions of
credit, there are risks of delay in recovery or even loss of rights in the
collateral should the borrower of the securities fail financially. However, the
Funds will only enter into loan arrangements with broker-dealers, banks or other
institutions which the Adviser has determined are creditworthy under guidelines
established by the Company's Board of Directors and will receive collateral in
the form of cash, U.S. Government securities or other high-grade debt
obligations equal to at least 100% of the value of the securities loaned. The
value of the collateral and of the securities loaned will be marked to market on
a daily basis. During the time portfolio securities are on loan, the borrower
pays the Fund an amount equivalent to any dividends or interest paid on the
securities and the Fund may invest the cash collateral and earn additional
income or may receive an agreed upon amount of interest income from the
borrower. However, the amounts received by the Fund may be reduced by finders'
fees paid to broker-dealers and related expenses.
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BORROWING
Each Fund may borrow money from banks for temporary or emergency purposes in
an amount up to 10% of the value of the Fund's total assets. Interest paid by a
Fund on borrowed funds would decrease the net earnings of that Fund. Neither
Fund will purchase portfolio securities while outstanding borrowings (other than
reverse repurchase agreements in the case of Government Fund) exceed 5% of the
value of the Fund's total assets. Each Fund may mortgage, pledge or hypothecate
its assets in an amount not exceeding 10% of the value of its total assets to
secure temporary or emergency borrowing. The policies set forth in this
paragraph are fundamental and may not be changed without the approval of a
majority of a Fund's shares.
OPTIONS TRANSACTIONS
WRITING COVERED OPTIONS. Government Fund may write (i.e., sell) covered put
and call options with respect to the securities in which it may invest. By
writing a call option, the Fund becomes obligated during the term of the option
to deliver the securities underlying the option upon payment of the exercise
price if the option is exercised. By writing a put option, the Fund becomes
obligated during the term of the option to purchase the securities underlying
the option at the exercise price if the option is exercised. With respect to put
options written by Government Fund, there will have been a predetermination that
acquisition of the underlying security is in accordance with the investment
objective of the Fund.
The principal reason for writing call or put options is to obtain, through
the receipt of premiums, a greater current return than would be realized on the
underlying securities alone. Government Fund receives premiums from writing call
or put options, which it retains whether or not the options are exercised. By
writing a call option, the Fund might lose the potential for gain on the
underlying security while the option is open, and by writing a put option the
Fund might become obligated to purchase the underlying security for more than
its current market price upon exercise.
The aggregate value of the securities or other collateral underlying the
puts written by Government Fund, determined as of the date the options are sold,
will not exceed 50% of net assets of the Fund. Government Fund may write covered
call options without limit.
PURCHASING OPTIONS. Government Fund may purchase put options, solely for
hedging purposes, in order to protect portfolio holdings in an underlying
security against a substantial decline in the market value of such holdings
("protective puts"). Such protection is provided during the life of the put
because the Fund may sell the underlying security at the put exercise price,
regardless of a decline in the underlying security's market price. Any loss to
the Fund is limited to the premium paid for, and transaction costs paid in
connection with, the put plus the initial excess, if any, of the market price of
the underlying security over the exercise price. However, if the market price of
such security increases, the profit the Fund realizes on the sale of the
security will be reduced by the premium paid for the put option less any amount
for which the put is sold.
Government Fund may also purchase call options solely for the purpose of
hedging against an increase in prices of securities that the Fund ultimately
wants to buy. Such protection is provided during the life of the call option
because the Fund may buy the underlying security at the call exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. By using call options in this manner, Government Fund will
reduce any profit it might have realized had it bought the underlying security
at the time it purchased the call option by the premium paid for the call option
and by transaction costs.
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In addition to exchange-traded put and call options, Government Fund may
also purchase and write over-the-counter ("OTC") put and call options in
negotiated transactions with the writers of the options since options on many of
the portfolio securities held by the Fund are not traded on an exchange.
Government Fund will purchase OTC options only from investment dealers and other
financial institutions (such as commercial banks or savings and loan
associations) deemed creditworthy by the Adviser.
OTC options are two-party contracts with price and terms negotiated between
buyer and seller. In contrast, exchange-traded options are third-party contracts
with standardized strike prices and expiration dates, and are purchased from a
clearing corporation. Exchange-traded options have a continuous liquid market
while OTC options may not. The staff of the Securities and Exchange Commission
(the "SEC") has taken the position that purchased OTC options and the assets
used to "cover" written OTC options are illiquid securities; however, the entire
amount of assets used to cover OTC options written by the Fund will not be
treated as illiquid in certain circumstances, as set forth in the Statement of
Additional Information. Government Fund will treat OTC options, to the extent
set forth in the Statement of Additional Information, as subject to the Fund's
limitation on illiquid securities.
For further information concerning the characteristics and risks of options
transactions, see "Investment Objectives, Policies and Restrictions--Options" in
the Statement of Additional Information.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Government Fund may purchase and sell interest rate futures contracts on
national commodity exchanges. An interest rate futures contract is an agreement
to purchase or sell an agreed amount of debt securities at a set price for
delivery on a future date.
The purpose of the acquisition or sale of a futures contract by Government
Fund is to hedge against fluctuations in the value of its portfolio without
actually buying or selling securities. For example, if the Fund owns long-term
U.S. Government Securities and interest rates are expected to increase, the Fund
might sell futures contracts. If interest rates did increase, the value of the
U.S. Government Securities in the Fund's portfolio would decline, but the value
of the Fund's futures contracts would increase at approximately the same rate,
thereby keeping the net asset value of the Fund from declining as much as it
otherwise would have. If, on the other hand, the Fund held cash reserves and
short-term investments pending anticipated investment in long-term obligations
and interest rates were expected to decline, the Fund might purchase futures
contracts for U.S. Government Securities. Since the behavior of such contracts
would generally be similar to that of long-term securities, the Fund could take
advantage of the anticipated rise in the value of long-term securities without
actually buying them until the market had stabilized. At that time, the Fund
could accept delivery under the futures contracts or the futures contracts could
be liquidated and the Fund's reserves could then be used to buy long-term
securities in the cash market. Government Fund will engage in such transactions
only for hedging purposes, on either an asset-based or a liability-based basis,
in each case in accordance with the rules and regulations of the Commodity
Futures Trading Commission. See Appendix B to the Statement of Additional
Information.
Government Fund may purchase and sell put and call options on futures
contracts and enter into closing transactions with respect to such options to
terminate existing positions. The Fund may use such options on futures contracts
in connection with its hedging strategies in lieu of purchasing and writing
options directly on the underlying securities or purchasing and selling the
underlying futures contracts.
There are risks in using futures contracts and options on futures contracts
as hedging devices. The primary risks associated with the use of futures
contracts and options thereon are (a) the prices of futures contracts and
options may not correlate perfectly with the market value of the securities
subject to the hedge and (b) the possible lack of a liquid secondary market for
a futures contract and the resulting inability to close
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a futures position prior to its maturity date. The risk that a Fund will be
unable to close out a futures position will be minimized by entering into such
transactions on a national exchange with an active and liquid secondary market.
Additional information with respect to interest rate futures contracts,
together with information regarding options on such contracts, is set forth in
Appendix B to the Statement of Additional Information.
WHEN-ISSUED SECURITIES
Each Fund may purchase securities on a "when-issued" basis and may purchase
or sell securities on a "forward commitment" basis. When such transactions are
negotiated, the price is fixed at the time the commitment is made, but delivery
and payment for the securities take place at a later date. The Funds will not
accrue income with respect to when-issued or forward commitment securities prior
to their stated delivery date. Pending delivery of the securities, each Fund
maintains in a segregated account cash or liquid high-grade debt obligations in
an amount sufficient to meet its purchase commitments. To the extent Bond Fund
enters into such transactions, it will do so for the purpose of acquiring
portfolio securities consistent with its investment objective and policies and
not for the purpose of investment leverage.
The purchase of securities on a when-issued or forward commitment basis
exposes the Funds to risk because the securities may decrease in value prior to
their delivery. Purchasing securities on a when-issued or forward commitment
basis involves the additional risk that the return available in the market when
the delivery takes place will be higher than that obtained in the transaction
itself. A Fund's purchase of securities on a when-issued or forward commitment
basis while remaining substantially fully invested increases the amount of the
Fund's assets that are subject to market risk to an amount that is greater than
the Fund's net asset value, which could result in increased volatility of the
price of the Fund's shares. In order to avoid increasing the amount of Fund
assets that are subject to market risk when entering into such transactions,
Bond Fund will maintain in a segregated account cash or cash equivalent
securities in an amount sufficient to meet its purchase commitments, rather than
maintaining longer-term high grade debt obligations in such account. For
additional information concerning when-issued and forward commitment
transactions, see "Investment Objectives, Policies and Restrictions" in the
Statement of Additional Information.
MORTGAGE DOLLAR ROLLS
In connection with their ability to purchase securities on a when-issued or
forward commitment basis, each Fund may enter into mortgage "dollar rolls" in
which a Fund sells securities for delivery in the current month and
simultaneously contracts with the same counterparty to repurchase similar (same
type, coupon and maturity) but not identical securities on a specified future
date. The Fund gives up the right to receive principal and interest paid on the
securities sold. However, the Fund would benefit to the extent of any difference
between the price received for the securities sold and the lower forward price
for the future purchase plus any fee income received. Unless such benefits
exceed the income, capital appreciation and gain or loss due to mortgage
prepayments that would have been realized on the securities sold as part of the
mortgage dollar roll, the use of this technique will diminish the investment
performance of the Fund compared with what such performance would have been
without the use of mortgage dollar rolls. Each Fund will hold and maintain in a
segregated account until the settlement date cash or liquid high-grade debt
securities in an amount equal to the forward purchase price. Bond Fund will hold
only cash or cash equivalent securities in such account. The benefits derived
from the use of mortgage dollar rolls may depend upon the Adviser's ability to
predict correctly mortgage prepayments and interest rates. There is no assurance
that mortgage dollar rolls can be successfully employed. In addition, the use of
mortgage dollar rolls by Government Fund while remaining substantially fully
invested increases the amount of the Fund's assets that are subject to market
risk to an amount that is greater than the Fund's net asset value, which could
result in increased volatility of the price of the Fund's shares.
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For financial reporting and tax purposes, the Funds treat mortgage dollar
rolls as two separate transactions: one involving the purchase of a security and
a separate transaction involving a sale. The Funds do not currently intend to
enter into mortgage dollar rolls that are accounted for as a financing.
No more than one-third of either Fund's total assets may be committed to the
purchase of securities on a when-issued or forward commitment basis, including
mortgage dollar roll purchases.
ILLIQUID SECURITIES
As a nonfundamental investment restriction that may be changed at any time
without shareholder approval, neither Fund will invest more than 15% of its net
assets in illiquid securities. A security is considered illiquid if it cannot be
sold in the ordinary course of business within seven days at approximately the
price at which it is valued. Illiquid securities may offer a higher yield than
securities which are more readily marketable, but they may not always be
marketable on advantageous terms.
The sale of illiquid securities often requires more time and results in
higher brokerage charges or dealer discounts and other selling expenses than
does the sale of securities eligible for trading on national securities
exchanges or in the over-the-counter markets. A Fund may be restricted in its
ability to sell such securities at a time when the Adviser deems it advisable to
do so. In addition, in order to meet redemption requests, a Fund may have to
sell other assets, rather than such illiquid securities, at a time which is not
advantageous.
"Restricted securities" are securities which were originally sold in private
placements and which have not been registered under the Securities Act of 1933
(the "1933 Act"). Such securities generally have been considered illiquid, since
they may be resold only subject to statutory restrictions and delays or if
registered under the 1933 Act. In 1990, however, the Securities and Exchange
Commission adopted Rule 144A under the 1933 Act, which provides a safe harbor
exemption from the registration requirements of the 1933 Act for resales of
restricted securities to "qualified institutional buyers," as defined in the
rule. The result of this rule has been the development of a more liquid and
efficient institutional resale market for restricted securities. Thus,
restricted securities are no longer necessarily illiquid. The Funds may
therefore invest in Rule 144A securities and treat them as liquid when they have
been determined to be liquid by the Board of Directors of the Company or by the
Adviser subject to the oversight of and pursuant to procedures adopted by the
Board of Directors. See "Investment Objectives, Policies and
Restrictions--Illiquid Securities" in the Statement of Additional Information.
Similar determinations may be made with respect to commercial paper issued in
reliance on the so-called "private placement" exemption from registration under
Section 4(2) of the 1933 Act and with respect to IO, PO and inverse floating
classes of mortgage-backed securities issued by the U.S. Government or its
agencies and instrumentalities.
PORTFOLIO TURNOVER
The Funds may engage in short-term trading in attempting to achieve their
investment objectives and will actively use trading to benefit from yield
disparities among different issues of securities or otherwise to achieve their
investment objectives and policies. Bond Fund's policy of investing only in
securities with remaining maturities of no more than five years may also
increase portfolio turnover. Since the Funds engage in short-term trading, they
pay greater brokerage commission costs or other transaction costs. High
portfolio turnover also may increase short-term capital gains, which are taxable
as ordinary income when distributed to shareholders.
The method of calculating portfolio turnover rate is set forth in the
Statement of Additional Information under "Investment Objectives, Policies and
Restrictions--Portfolio Turnover." The portfolio turnover rate for each Fund is
set forth in "Financial Highlights."
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INVESTMENT RESTRICTIONS
Each Fund has adopted certain fundamental and nonfundamental investment
restrictions in addition to those set forth above. As a fundamental investment
restriction which may not be changed without shareholder approval, neither Fund
will invest 25% or more of its total assets in any one industry. (This
restriction does not apply to securities of the U.S. Government or its agencies
and instrumentalities and repurchase agreements relating thereto. As to utility
companies, gas, electric, telephone, telegraph, satellite and microwave
communications companies are considered as separate industries.) In addition, as
nonfundamental investment restrictions which may be changed at any time without
shareholder approval, neither Fund will invest more than 5% of its total assets
in the securities of issuers which, with their predecessors, have a record of
less than three years' continuous operation, Government Fund will not invest
more than 5% of its net assets in foreign securities and Bond Fund will not
invest in foreign securities, provided that it may invest in U.S.
dollar-denominated Yankee bonds. A list of each Fund's fundamental and
nonfundamental investment restrictions is set forth in the Statement of
Additional Information.
Except for each Fund's policy regarding borrowing, if a percentage
restriction set forth under "Investment Objectives and Policies" or under
"Special Investment Methods" is adhered to at the time of an investment, a later
increase or decrease in percentage resulting from changes in values or assets
will not constitute a violation of such restriction.
MANAGEMENT
BOARD OF DIRECTORS
The Company's Board of Directors has the primary responsibility for
overseeing the overall management of the Company and electing its officers.
INVESTMENT ADVISER
Piper Capital Management Incorporated (the "Adviser") has been retained
under an Investment Advisory and Management Agreement with the Company to act as
the Funds' investment adviser subject to the authority of the Board of
Directors.
In addition to acting as the investment adviser for the other series of the
Company, the Adviser also serves as investment adviser to a number of other
open-end and closed-end investment companies and to various other concerns,
including pension and profit sharing funds, corporate funds and individuals. As
of November 1, 1995, the Adviser rendered investment advice regarding
approximately $9 billion of assets. The Adviser is a wholly owned subsidiary of
Piper Jaffray Companies Inc., a publicly held corporation which is engaged
through its subsidiaries in various aspects of the financial services industry.
The address of the Adviser is Piper Jaffray Tower, 222 South Ninth Street,
Minneapolis, Minnesota 55402-3804.
The Adviser furnishes each Fund with investment advice and supervises the
management and investment programs of the Funds. The Adviser furnishes at its
own expense all necessary administrative services, office space, equipment and
clerical personnel for servicing the investments of the Funds. The Adviser also
provides investment advisory facilities and executive and supervisory personnel
for managing the investments and effecting the portfolio transactions of the
Funds. In addition, the Adviser pays the salaries and fees of all officers and
directors of the Company who are affiliated with the Adviser.
Under the Investment Advisory and Management Agreement, the Funds pay the
Adviser monthly fees. The fee for Government Fund is paid at an annual rate of
.50% on average daily net assets up to $250 million, .45% on net assets of over
$250 million and up to $500 million, and .40% on net assets of over $500
million. The fee for Bond Fund is paid at an annual rate of .40% of average
daily net assets.
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PORTFOLIO MANAGEMENT
Bruce D. Salvog, David M. Steele and J. Bradley Stone have been primarily
responsible for the day-to-day management of Government Fund's portfolio since
March 1995. Mr. Salvog, Mr. Steele and Nancy S. Olsen have been primarily
responsible for the day-to-day management of Bond Fund's portfolio since the
Fund's inception. Mr. Salvog has been a Senior Vice President of the Adviser
since 1992 and was a Portfolio Manager at Kennedy Associates, Inc. in Seattle
from 1984 to 1992. He has an AB from Harvard University and 25 years of
financial experience. Mr. Steele has been a Senior Vice President of the Adviser
since 1992 and was a portfolio manager at Kennedy Associates, Inc. in Seattle
from 1987 to 1992. He has an MBA from the University of Southern California and
16 years of financial experience. Mr. Stone has been a Vice President of the
Adviser since 1991 and a fixed-income analyst of the Adviser since 1990. He has
an MBA from Dartmouth Tuck School of Business and seven years of financial
experience. Ms. Olsen has been a Senior Vice President of the Adviser since
1991, prior to which she had been a Vice President of the Adviser since May
1987. Ms. Olsen has an MBA from the University of Minnesota and has 16 years of
financial experience.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN
Investors Fiduciary Trust Company ("IFTC"), 127 West Tenth Street, Kansas
City, Missouri 64105, (800) 874-6205, serves as Custodian for the Funds'
portfolio securities and cash and as Transfer Agent and Dividend Disbursing
Agent for the Funds.
The Company has entered into Shareholder Account Servicing Agreements with
the Distributor and Piper Trust Company, an affiliate of the Distributor and the
Adviser. Under these agreements the Distributor and Piper Trust Company provide
transfer agent and dividend disbursing agent services for certain shareholder
accounts. For more information, see "Investment Advisory and Other
Services--Transfer Agent and Dividend Disbursing Agent" in the Statement of
Additional Information.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
The Adviser selects brokers and futures commission merchants to use for the
Funds' portfolio transactions. In making its selection, the Adviser may consider
a number of factors, which are more fully discussed in the Statement of
Additional Information, including, but not limited to, research services, the
reasonableness of commissions and quality of services and execution. A broker's
sales of shares of any series of the Company may also be considered a factor if
the Adviser is satisfied that a Fund would receive from that broker the most
favorable price and execution then available for a transaction. Portfolio
transactions for the Funds may be effected through the Distributor on a
securities exchange in compliance with Section 17(e) of the Investment Company
Act of 1940, as amended (the "1940 Act"). For more information, see "Portfolio
Transactions and Allocation of Brokerage" in the Statement of Additional
Information.
DISTRIBUTION OF FUND SHARES
Piper Jaffray acts as the principal distributor of the Funds' shares. The
Company has adopted a Distribution Plan (the "Plan") as required by Rule 12b-1
under the 1940 Act. Under the Plan, the Distributor is paid a total fee in
connection with the servicing of each Fund's shareholder accounts and in
connection with distribution related services provided with respect to each
Fund. This fee is calculated and paid monthly at an annual rate equal to .50% of
the average daily net assets of Government Fund and .20% of the average daily
net assets of Bond Fund.
A portion of Government Fund's total fee equal to .25% of each Fund's
average daily net assets is categorized as a distribution fee intended to
compensate the Distributor for its expenses incurred in connection with the sale
of Fund shares. The remaining portion of the fee, equal to .25% of Government
23
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Fund's average daily net assets, is categorized as a servicing fee intended to
compensate the Distributor for ongoing servicing and/or maintenance of
shareholder accounts. The entire fee payable by Bond Fund is categorized as a
servicing fee. The Distributor has voluntarily agreed to limit the total fee
payable by Government Fund under the Plan to .32% of such Fund's average daily
net assets. This limitation may be revised or terminated at any time after
fiscal 1996 year end. Payments made under the Plan are not tied exclusively to
expenses actually incurred by the Distributor and may exceed such expenses. The
Adviser and the Distributor, out of their own assets, may pay for certain
expenses incurred in connection with the distribution of shares of the Funds. In
particular, the Adviser may make payments out of its own assets to Piper Jaffray
Investment Executives and other broker dealers in connection with their sales of
shares of the Funds. See "How to Purchase Shares--Purchase Price." Further
information regarding the Plan is contained in the Statement of Additional
Information.
The Distributor uses all or a portion of its Rule 12b-1 fee to make payments
to Investment Executives of the Distributor and broker-dealers which have
entered into sales agreements with the Distributor. If shares of a Fund are sold
by a representative of a broker-dealer other than the Distributor, the
broker-dealer is paid .30% of the average daily net assets of Government Fund or
.20% of the average daily net assets of Bond Fund attributable to shares sold by
the broker-dealer's representative. If shares of a Fund are sold by an
Investment Executive of the Distributor, compensation is paid to the Investment
Executive in the manner set forth in a written agreement, in an amount not to
exceed .30% of the average daily net assets of Government Fund or .20% of the
average daily net assets of Bond Fund attributable to shares sold by the
Investment Executive.
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HOW TO PURCHASE SHARES
GENERAL
The Funds' shares may be purchased at the public offering price from the
Distributor and from other broker-dealers who have sales agreements with the
Distributor. The address of the Distributor is that of the Funds. The
Distributor reserves the right to reject any purchase order. You should be aware
that, because the Funds do not issue stock certificates, Fund shares must be
kept in an account with the Distributor or with IFTC. All investments must be
arranged through your Piper Jaffray Investment Executive or other broker-dealer.
PURCHASE PRICE
You may purchase shares of the Funds at the net asset value per share next
calculated after receipt of your order by your Piper Jaffray Investment
Executive or other broker-dealer, plus a front-end sales charge as follows:
<TABLE>
<CAPTION>
Government Fund Bond Fund
---------------------------------------- ----------------------------------------
Sales Charge Sales Charge Sales Charge Sales Charge
as a Percentage of as a Percentage of as a Percentage of as a Percentage of
Amount of Transaction at Offering Price Offering Price Net Asset Value Offering Price Net Asset Value
- ---------------------------------------- ------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Less than $100,000...................... 4.00% 4.17% 1.50% 1.52%
$100,000 but less than $250,000......... 3.25% 3.36% 1.25% 1.27%
$250,000 but less than $500,000......... 2.50% 2.56% 1.00% 1.01%
$500,000 and over....................... 0.00% 0.00% 0.00% 0.00%
</TABLE>
This table sets forth total sales charges or underwriting commissions. The
Distributor may reallow up to the entire sales charge to broker-dealers in
connection with their sales of shares. These broker-dealers may, by virtue of
such reallowance, be deemed to be "underwriters" under the 1933 Act.
The Distributor will make certain payments to its Investment Executives and
to other broker-dealers in connection with their sales of Fund shares. See
"Distribution of Fund Shares" above. In addition, the Distributor or the
Adviser, at their own expense, provide promotional incentives to Investment
Executives of the Distributor and to broker-dealers who have sales agreements
with the Distributor in connection with sales of shares of the Funds, other
series of the Company and other mutual funds for which the Adviser acts as
investment adviser. In some instances, these incentives may be made available
only to certain Investment Executives or broker-dealers who have sold or may
sell significant amounts of such shares. The incentives may include payment for
travel expenses, including lodging at luxury resorts, incurred in connection
with sales seminars.
PURCHASES OF $500,000 OR MORE
If you make a purchase of $500,000 or more (including purchases made under a
Letter of Intent), a contingent deferred sales charge will be assessed in the
event you redeem shares within 24 months following the purchase. This sales
charge of 1% in the case of Government Fund and .2% in the case of Bond Fund
will be paid to the Distributor. For more information, please refer to the
Contingent Deferred Sales Charge
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section of "How To Redeem Shares." The Distributor currently pays its Investment
Executives and other broker-dealers fees in connection with these purchases as
follows:
<TABLE>
<CAPTION>
Fee as a Percentage
of Offering Price
----------------------------------
Amount of Transaction Government Fund Bond Fund
- --------------------------------------------------------------- ------------------- -------------
<S> <C> <C>
First $1,000,000............................................... 1.00 % 0.20 %
Next $2,000,000................................................ 0.75 % 0.20 %
Next $2,000,000................................................ 0.50 % 0.15 %
Next $5,000,000................................................ 0.25 % 0.10 %
Above $10,000,000.............................................. 0.15 % 0.05 %
</TABLE>
Piper Jaffray Investment Executives and other broker-dealers generally will
not receive a fee in connection with purchases on which the contingent deferred
sales charge is waived. However, the Distributor, in its discretion, may pay a
fee out of its own assets to its Investment Executives and other broker-dealers
in connection with purchases by employee benefit plans on which no sales charge
is imposed. Please see the Special Purchase Plans section of "Reducing Your
Sales Charge."
MINIMUM INVESTMENTS
A minimum initial investment of $250 is required. There is no minimum for
subsequent investments. The Distributor, in its discretion, may waive the
minimum.
REDUCING YOUR SALES CHARGE
You may qualify for a reduced sales charge through one or more of several
plans. You must notify your Piper Jaffray Investment Executive or broker-dealer
at the time of purchase to take advantage of these plans.
AGGREGATION
Front-end or initial sales charges may be reduced or eliminated by
aggregating your purchase with purchases of certain related personal accounts.
In addition, purchases made by members of certain organized groups will be
aggregated for purposes of determining sales charges. Sales charges are
calculated by adding the dollar amount of your current purchase to the higher of
the cost or current value of shares of any Piper fund sold with a sales charge
that are currently held by you and your related accounts or by other members of
your group.
QUALIFIED GROUPS. You may group purchases in the following personal
accounts together:
-Your individual account.
-Your spouse's account.
-Your children's accounts (if they are under the age of 21).
-Your employee benefit plan accounts if they are exclusively for your
benefit. This includes accounts such as IRAs, individual 403(b) plans or
single-participant Keogh-type plans.
-A single trust estate or single fiduciary account if you are the trustee or
fiduciary.
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Additionally, purchases made by members of any organized group meeting the
requirements listed below may be aggregated for purposes of determining sales
charges:
-The group has been in existence for more than six months.
-It is not organized for the purpose of buying redeemable securities of a
registered investment company.
-Purchases must be made through a central administration, or through a
single dealer, or by other means that result in economy of sales effort or
expense.
An organized group does not include a group of individuals whose sole
organizational connection is participation as credit card holders of a company,
policyholders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser.
RIGHT OF ACCUMULATION
Sales charges for purchases of Fund shares into Piper Jaffray accounts will
be automatically calculated taking into account the dollar amount of any new
purchases along with the higher of current value or cost of shares previously
purchased in any other mutual fund managed by the Adviser (except Hercules Funds
Inc.) that was sold with a sales charge. For other broker-dealer accounts, you
should notify your Investment Executive at the time of purchase of additional
Piper fund shares you may own.
LETTER OF INTENT
Your sales charge may be reduced by signing a non-binding Letter of Intent.
This Letter of Intent will state your intention to invest $100,000 or more in
any of the mutual funds managed by the Adviser that are sold with a sales charge
(except Hercules Funds Inc.) over a 13-month period, beginning not earlier than
90 days prior to the date you sign the Letter. You will pay the lower sales
charge applicable to the total amount you plan to invest over the 13-month
period. Part of your shares will be held in escrow to cover additional sales
charges that may be due if you do not invest the planned amount. Please see
"Purchase of Shares" in the Statement of Additional Information for more
details. You can contact your Piper Jaffray Investment Executive or other
broker-dealer for an application.
SPECIAL PURCHASE PLANS
For more information on any of the following special purchase plans, contact
your Piper Jaffray Investment Executive or other broker-dealer.
PURCHASES BY PIPER JAFFRAY COMPANIES INC., ITS SUBSIDIARIES AND ASSOCIATED
PERSONS
Piper Jaffray Companies Inc. and its subsidiaries may buy shares of the
Funds without incurring a sales charge. The following persons associated with
such entities also may buy Fund shares without paying a sales charge:
-Officers, directors and partners.
-Employees and retirees.
-Sales representatives.
-Spouses or children under the age of 21 of any of the above.
-Any trust, pension, profit-sharing or other benefit plan for any of the
above.
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PURCHASES BY BROKER-DEALERS
Employees of broker-dealers who have entered into sales agreements with the
Distributor, and spouses and children under the age of 21 of such employees, may
buy shares of the Funds without incurring a sales charge.
PURCHASES BY OTHER INDIVIDUALS WITHOUT A SALES CHARGE
The following other individuals and entities may also buy Fund shares
without paying a sales charge:
-Clients of the Adviser buying shares of the Funds in their advisory
accounts.
-Discretionary accounts at Piper Trust Company and participants in
investment companies exempt from registration under the 1940 Act that are
managed by the Adviser.
-Trust companies and bank trust departments using funds over which they
exercise exclusive discretionary investment authority and which are held in
a fiduciary, agency, advisory, custodial or similar capacity.
-Investors purchasing shares through a Piper Jaffray Investment Executive if
the purchase of such shares is funded by the proceeds from the sale of
shares of any non-money market open-end mutual fund. This privilege is
available for 30 days after the sale.
PURCHASES BY EMPLOYEE BENEFIT PLANS AND TAX-SHELTERED ANNUITIES
-Shares of the Funds will be sold at net asset value, without a sales
charge, to employee benefit plans containing an actively maintained
qualified cash or deferred arrangement under Section 401(k) of the Internal
Revenue Code of 1986, as amended (the "Code") (a "401(k) Plan"). In the
event a 401(k) Plan of an employer has purchased shares in the Funds or any
other series of the Company (other than a money market fund) during any
calendar quarter, any other employee benefit plan of such employer that is
a qualified plan under Section 401(a) of the Code also may purchase shares
of the Funds during such quarter without incurring a sales charge.
-Custodial accounts under Section 403(b) of the Code (known as tax-sheltered
annuities) also may buy shares of the Funds without incurring a sales
charge.
HOW TO REDEEM SHARES
NORMAL REDEMPTION
You may redeem all or a portion of your shares on any day that a Fund values
its shares. (Please refer to "Valuation of Shares" below for more information.)
Your shares will be redeemed at the net asset value next calculated after the
receipt of your instructions in good form by your Piper Jaffray Investment
Executive or other broker-dealer as explained below.
PIPER JAFFRAY INC. ACCOUNTS. To redeem your shares, please contact your
Piper Jaffray Investment Executive with an oral request to redeem your shares.
OTHER BROKER-DEALER ACCOUNTS. To redeem your shares, you may either contact
your broker-dealer with an oral request or send a written request directly to
the Funds' transfer agent, IFTC. This request should contain: the dollar amount
or number of shares to be redeemed, your Fund account number and either a social
security or tax identification number (as applicable). You should sign your
request in exactly the same way the account is registered. If there is more than
one owner of the shares, all owners must sign. A signature
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guarantee is required for redemptions over $25,000. Please contact IFTC or refer
to "Redemption of Shares" in the Statement of Additional Information for more
details.
CONTINGENT DEFERRED SALES CHARGE
If you invest $500,000 or more and, as a result, pay no front-end sales
charge, you may incur a contingent deferred sales charge if you redeem within 24
months. This charge will be equal to 1%, in the case of Government Fund, or .2%,
in the case of Bond Fund, of the lesser of the net asset value of the shares at
the time of purchase or at the time of redemption. This charge does not apply to
amounts representing an increase in the value of Fund shares due to capital
appreciation or to shares acquired through reinvestment of dividend or capital
gain distributions. In determining whether a contingent deferred sales charge is
payable, shares that are not subject to any deferred sales charge will be
redeemed first, and other shares will then be redeemed in the order purchased.
LETTER OF INTENT. In the case of a Letter of Intent, the 24-month period
begins on the date the Letter of Intent is completed.
SPECIAL PURCHASE PLANS. If you purchased your shares through one of the
plans described above under "Special Purchase Plans," the contingent deferred
sales charge will be waived. In addition, the contingent deferred sales charge
will be waived in the event of:
-The death or disability (as defined in Section 72(m)(7) of the Code) of the
shareholder. (This waiver will be applied to shares held at the time of
death or the initial determination of disability of either an individual
shareholder or one who owns the shares as a joint tenant with the right of
survivorship or as a tenant in common.)
-A lump sum distribution from an employee benefit plan qualified under
Section 401(a) of the Code, an individual retirement account under Section
408(a) of the Code or a simplified employee pension plan under Section
408(k) of the Code.
-Systematic withdrawals from any such plan or account if the shareholder is
at least 59 1/2 years old.
-A tax-free return of the excess contribution to an individual retirement
account under Section 408(a) of the Code.
-Involuntary redemptions effected pursuant to the right to liquidate
shareholder accounts having an aggregate net asset value of less than $200.
EXCHANGES. If you exchange your shares, no contingent deferred sales charge
will be imposed. However, the charge will apply if you subsequently redeem the
new shares within 24 months of the original purchase.
REINSTATEMENT PRIVILEGE. If you elect to use the Reinstatement Privilege
(please see "Shareholder Services" below), any contingent deferred sales charge
you paid will be credited to your account (proportional to the amount
reinvested). Please see "Redemption of Shares" in the Statement of Additional
Information for more details.
PAYMENT OF REDEMPTION PROCEEDS
After your shares have been redeemed, the cash proceeds will normally be
sent to you or your broker-dealer within three business days. In no event will
payment be made more than seven days after receipt of your order in good form.
However, payment may be postponed or the right of redemption suspended for
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more than seven days under unusual circumstances, such as when trading is not
taking place on the New York Stock Exchange. Payment of redemption proceeds may
also be delayed if the shares to be redeemed were purchased by a check drawn on
a bank which is not a member of the Federal Reserve System, until such checks
have cleared the banking system (normally up to 15 days from the purchase date).
INVOLUNTARY REDEMPTION
Each Fund reserves the right to redeem your account at any time the net
asset value of the account falls below $200 as the result of a redemption or
exchange request. You will be notified in writing prior to any such redemption
and will be allowed 30 days to make additional investments before the redemption
is processed.
SHAREHOLDER SERVICES
AUTOMATIC MONTHLY INVESTMENT PROGRAM
You may arrange to make additional automated purchases of shares of the
Funds or certain other mutual funds managed by the Adviser. You can
automatically transfer $100 or more per month from your bank, savings and loan
or other financial institution to purchase additional shares. In addition, if
you hold your shares in a Piper Jaffray account you may arrange to make such
additional purchases by having $25 or more automatically transferred each month
from any of the money market fund series of the Company. You should contact your
Piper Jaffray Investment Executive or IFTC to obtain authorization forms or for
additional information.
REINSTATEMENT PRIVILEGE
If you have redeemed shares of either Fund, you may be eligible to reinvest
in shares of any fund managed by the Adviser (except Hercules Funds Inc.)
without payment of an additional sales charge. The reinvestment request must be
made within 30 days of the redemption. This privilege is subject to the
eligibility of share purchases in your state as well as the minimum investment
requirements and any other applicable terms in the prospectus of the fund being
acquired.
EXCHANGE PRIVILEGE
If your investment goals change, you may prefer a fund with a different
objective. If you are considering an exchange into another mutual fund managed
by the Adviser, you should carefully read the appropriate prospectus for
additional information about that fund. A prospectus may be obtained through
your Piper Jaffray Investment Executive, your broker-dealer or the Distributor.
To exchange your shares, please contact your Piper Jaffray Investment Executive,
your broker-dealer or IFTC.
You may exchange your shares for shares of any other mutual fund managed by
the Adviser that is open to new investors (except Hercules Funds Inc.). All
exchanges are subject to the eligibility of share purchases in your state as
well as the minimum investment requirements and any other applicable terms in
the prospectus of the fund being acquired. Exchanges are made on the basis of
the net asset values of the funds involved, except that investors exchanging
into a fund which has a higher sales charge must pay the difference.
You may make four exchanges per year without payment of a service charge.
Thereafter, you will pay a $5 service charge for each exchange. The Company
reserves the right to change or discontinue the exchange privilege, or any
aspect of the privilege, upon 60 days' written notice.
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TELEPHONE TRANSACTION PRIVILEGES
PIPER JAFFRAY INC. ACCOUNTS. If you hold your shares in a Piper Jaffray
account, you may telephone your Investment Executive to execute any transaction
or to apply for many shareholder services. In some cases, you may be required to
complete a written application.
OTHER BROKER-DEALER ACCOUNTS. If you hold your shares in an account with
your broker-dealer or at IFTC, you may authorize telephone privileges by
completing the Account Application and Services Form. Please contact your
broker-dealer or IFTC (800-874-6205) for an application or for more details. The
Funds will employ reasonable procedures to confirm that a telephonic request is
genuine, including requiring that payment be made only to the address of record
or the bank account designated on the Account Application and Services Form and
requiring certain means of telephonic identification. A Fund employing such
procedures will not be liable for following instructions communicated by
telephone that it reasonably believes to be genuine. If a Fund does not employ
such procedures, it may be liable for any losses due to unauthorized or
fraudulent telephone transactions. It may be difficult to reach the Funds by
telephone during periods when market or economic conditions lead to an unusually
large volume of telephone requests. If you cannot reach the Funds by telephone,
you should contact your broker-dealer or issue written instructions to IFTC at
the address set forth herein. See "Management--Transfer Agent, Dividend
Disbursing Agent and Custodian." The Funds reserve the right to suspend or
terminate their telephone services at any time without notice.
DIRECTED DIVIDENDS
You may direct income dividends and capital gains distributions to be
invested in any other mutual fund managed by the Adviser (other than a money
market fund or Hercules Funds Inc.) that is offered in your state. This
investment will be made at net asset value. It will not be subject to a minimum
investment amount except that you must hold shares in such fund (including the
shares being acquired with the dividend or distribution) with a value at least
equal to such fund's minimum initial investment amount.
SYSTEMATIC WITHDRAWAL PLAN
If your account has a value of $5,000 or more, you may establish a
Systematic Withdrawal Plan for either of the Funds. This plan will allow you to
receive regular periodic payments by redeeming as many shares from your account
as necessary. As with other redemptions, a redemption to make a withdrawal is a
sale for federal income tax purposes. Payments made under a Systematic
Withdrawal Plan cannot be considered as actual yield or income since part of the
payments may be a return of capital.
A request to establish a Systematic Withdrawal Plan must be submitted in
writing to your Piper Jaffray Investment Executive or other broker-dealer. There
are no service charges for maintenance; the minimum amount that you may withdraw
each period is $100. You will be required to have any income dividends and any
capital gains distributions reinvested. You may choose to have withdrawals made
monthly, quarterly or semiannually. Please contact your Piper Jaffray Investment
Executive, other broker-dealer or IFTC for more information.
You should be aware that additional investments in an account that has an
active Systematic Withdrawal Plan may be inadvisable due to sales charges and
tax liabilities. Please refer to "Redemption of Shares" in the Statement of
Additional Information for additional details.
ACCOUNT PROTECTION
If you purchased your shares of either of the Funds through a Piper Jaffray
Investment Executive, you may choose from several account options. Your
investments in any of the Funds held in a Piper Jaffray
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account (except for non-"PAT" accounts) would be protected up to $25 million.
Investments held in non-"PAT" Piper Jaffray accounts are protected up to $2.5
million. In each case, the Securities Investor Protection Corporation ("SIPC")
provides $500,000 of protection; the additional coverage is provided by The
Aetna Casualty & Surety Company. This protection does not cover any declines in
the net asset value of Fund shares.
CONFIRMATION OF TRANSACTIONS AND REPORTING OF OTHER INFORMATION
Each time there is a transaction involving your Fund shares, such as a
purchase, redemption or dividend reinvestment, you will receive a confirmation
statement describing that activity. This information will be provided to you
from either Piper Jaffray, your broker-dealer or IFTC. In addition, you will
receive various IRS forms after the first of each year detailing important tax
information and each Fund is required to supply annual and semiannual reports
that list securities held by the Fund and include the current financial
statements of the Fund.
HOUSEHOLDING. If you have multiple accounts with Piper Jaffray, you may
receive some of the above information in combined mailings. This will not only
help to reduce Fund expenses, it will help the environment by saving paper.
Please contact your Piper Jaffray Investment Executive for more information.
DIVIDENDS AND DISTRIBUTIONS
The net investment income of each Fund will be declared as dividends daily
and will be paid monthly. Net realized capital gains, if any, will be
distributed at least once annually. Each daily dividend is payable to Fund
shareholders of record at the time of its declaration. "Shareholders of record"
includes holders of shares purchased for which payment has been received by the
Distributor or IFTC, as appropriate, and excludes holders of shares redeemed on
that day. Shares redeemed will earn dividends through the day prior to
settlement of the redemption.
Each Fund may at times pay out less than the entire amount of net investment
income earned in any particular period in order to permit the Fund to maintain a
more stable level of distributions. Any such amount retained by a Fund would be
available to stabilize future distributions. As a result, the distributions paid
by either Fund for any particular period may be more or less than the amount of
net investment income earned by that Fund during such period.
DISTRIBUTION OPTIONS. All net investment income dividends and net realized
capital gains distributions for a Fund generally will be payable in additional
shares of that Fund at net asset value ("Reinvestment Option"). If you wish to
receive your distributions in cash, you must notify your Piper Jaffray
Investment Executive or other broker-dealer. You may elect either to receive
income dividends in cash and capital gains distributions in additional shares of
the Fund at net asset value ("Split Option"), or to receive both income
dividends and capital gains distributions in cash ("Cash Option"). You may also
direct income dividends and capital gains distributions to be invested in
another mutual fund managed by the Adviser. See "Shareholder Services--Directed
Dividends" above. The taxable status of income dividends and/or net capital
gains distributions is not affected by whether they are reinvested or paid in
cash.
CAPITAL LOSS CARRYOVER. For federal income tax purposes, Government Fund
had a capital loss carryover at September 30, 1995 of $16,870,235. Such capital
loss carryover, if not offset by subsequent capital gains, will expire by
September 30, 2003. It is unlikely that the Board of Directors will authorize a
distribution of any net realized capital gains until the available capital loss
carryover has been offset or has expired.
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VALUATION OF SHARES
The Funds compute their net asset value on each day the New York Stock
Exchange (the "Exchange") is open for business. The calculation is made as of
the regular close of the Exchange (currently 4:00 p.m. New York time) after the
Funds have declared any applicable dividends.
The net asset value per share for each Fund is determined by dividing the
value of the securities owned by the Fund plus any cash and other assets
(including interest accrued and dividends declared but not collected) less all
liabilities by the number of Fund shares outstanding. For the purposes of
determining the aggregate net assets of the Funds, cash and receivables will be
valued at their face amounts. Interest will be recorded as accrued.
The value of certain fixed-income securities will be provided by an
independent pricing service, which determines these valuations at a time earlier
than the close of the Exchange. Pricing services consider such factors as
security prices, yields, maturities, call features, ratings and developments
relating to specific securities in arriving at securities valuations. Fixed
income securities for which prices are not available from an independent pricing
service but where an active market exists will be valued using market quotations
obtained from one or more dealers that make markets in the securities.
Occasionally events affecting the value of such securities may occur between the
time valuations are determined and the close of the Exchange. If events
materially affecting the value of such securities occur during such period, or
if the Company's management determines for any other reason that valuations
provided by the pricing service are inaccurate, such securities will be valued
at their fair value according to procedures decided upon in good faith by the
Company's Board of Directors. In addition, any securities or other assets of a
Fund for which market prices are not readily available will be valued at their
fair value in accordance with such procedures.
TAX STATUS
Each Fund is treated as a separate corporation for federal income tax
purposes under the Internal Revenue Code of 1986, as amended (the "Code").
Therefore, each Fund is treated separately in determining whether it qualifies
as a regulated investment company under the Code and for purposes of determining
the net ordinary income (or loss), net realized capital gains (or losses) and
distributions necessary to relieve such Fund of any federal income tax
liability. Each Fund qualified as a regulated investment company during its last
taxable year and each Fund intends to so qualify during the current taxable
year. If so qualified, a Fund will not be liable for federal income taxes to the
extent it distributes its taxable income to shareholders.
Distributions by a Fund are generally taxable to the shareholders, whether
received in cash or additional shares of the Fund (or shares of another mutual
fund managed by the Adviser). Distributions of net capital gains (designated as
"capital gain dividends") are taxable to shareholders as long-term capital
gains, regardless of the length of time the shareholder has held the shares of
the Fund.
A shareholder will recognize a capital gain or loss upon the sale or
exchange of shares in a Fund if, as is normally the case, the shares are capital
assets in the shareholder's hands. This capital gain or loss will be long-term
if the shares have been held for more than one year.
The foregoing relates to federal income taxation as in effect as of the date
of this Prospectus. For a more detailed discussion of the federal income tax
consequences of investing in shares of the Funds, see "Taxation" in the
Statement of Additional Information. Before investing in either of the Funds,
you should check the consequences of your local and state tax laws.
33
<PAGE>
PERFORMANCE COMPARISONS
Advertisements and other sales literature for Bond Fund and Government Fund
may refer to a Fund's "average annual total return" and "cumulative total
return." In addition, each Fund may provide yield calculations in advertisements
and other sales literature. When a Fund advertises its yield, it will also
advertise its total return as required by the rules of the Securities and
Exchange Commission. All such yield and total return quotations are based upon
historical earnings and are not intended to indicate future performance. The
return on and principal value of an investment in any of the Funds will
fluctuate, so that an investor's shares, when redeemed, may be worth more or
less than their original cost.
Yield calculations will be based upon a 30-day period stated in the
advertisement and will be calculated by dividing the net investment income per
share (as defined under Securities and Exchange Commission rules and
regulations) earned during the advertised period by the offering price per share
(including the maximum sales charge) on the last day of the period. The result
will then be "annualized" using a formula that provides for semi-annual
compounding of income.
Average annual total return is the average annual compounded rate of return
on a hypothetical $1,000 investment made at the beginning of the advertised
period. Cumulative total return is calculated by subtracting a hypothetical
$1,000 payment to a Fund from the redeemable value of such payment at the end of
the advertised period, dividing such difference by $1,000 and multiplying the
quotient by 100. In calculating average annual and cumulative total return, the
maximum sales charge is deducted from the hypothetical investment and all
dividends and distributions are assumed to be reinvested. Such total return
quotations may be accompanied by quotations which do not reflect the reduction
in value of the initial investment due to the sales charge, and which thus will
be higher.
Comparative performance information also may be used from time to time in
advertising the Funds' shares. For example, advertisements may compare the
Funds' performance to that of various unmanaged market indices, or may include
performance data from Lipper Analytical Services, Inc., Morningstar, Inc. or
other entities or organizations which track the performance of investment
companies.
For additional information regarding comparative performance information and
the calculation of yield, average annual total return and cumulative total
return, see "Performance Comparisons" in the Statement of Additional
Information.
GENERAL INFORMATION
The Company, which was organized under the laws of State of Minnesota in
1986, is authorized to issue a total of 10 trillion shares of common stock, with
a par value of $.01 per share. Four hundred billion of these shares have been
authorized by the Board of Directors to be issued in thirteen separate series,
as follows: Growth Fund (formerly Value Fund), Emerging Growth Fund, Growth and
Income Fund, Equity Strategy Fund, Balanced Fund, Government Income Fund,
Short-Intermediate Bond Fund, Institutional Government Income Portfolio,
National Tax-Exempt Fund and Minnesota Tax-Exempt Fund, each of which has ten
billion authorized shares, and Money Market Fund, Tax-Exempt Money Market Fund
and U.S. Government Money Market Fund, each of which has one hundred billion
authorized shares.
The Board of Directors is empowered under the Company's Articles of
Incorporation to issue additional series of the Company's common stock without
shareholder approval. In addition, the Board of Directors may, without
shareholder approval, create and issue one or more additional classes of shares
within each Fund, as well as within any series of the Company created in the
future. See "Capital Stock and Ownership of Shares" in the Statement of
Additional Information.
34
<PAGE>
All shares, when issued, will be fully paid and nonassessable and will be
redeemable. All shares have equal voting rights. They can be issued as full or
fractional shares. A fractional share has pro-rata the same kind of rights and
privileges as a full share. The shares possess no preemptive or conversion
rights.
Each share of a series has one vote (with proportionate voting for
fractional shares) irrespective of the relative net asset value of the series'
shares. On some issues, such as the election of directors, all shares of the
Company vote together as one series. On an issue affecting only a particular
series, the shares of the affected series vote separately. Cumulative voting is
not authorized. This means that the holders of more than 50% of the shares
voting for the election of directors can elect 100% of the directors if they
choose to do so, and, in such event, the holders of the remaining shares will be
unable to elect any directors.
The Bylaws of the Company provide that shareholder meetings be held only
with such frequency as required under Minnesota law. Minnesota corporation law
requires only that the Board of Directors convene shareholder meetings when it
deems appropriate. In addition, Minnesota law provides that if a regular meeting
of shareholders has not been held during the immediately preceding 15 months, a
shareholder or shareholders holding 3% or more of the voting shares of the
Company may demand a regular meeting of shareholders by written notice given to
the chief executive officer or chief financial officer of the Company. Within 30
days after receipt of the demand, the Board of Directors shall cause a regular
meeting of shareholders to be called, which meeting shall be held no later than
90 days after receipt of the demand, all at the expense of the Company. In
addition, the 1940 Act requires a shareholder vote for all amendments to
fundamental investment policies and restrictions and for all amendments to
investment advisory contracts and Rule 12b-1 distribution plans. The 1940 Act
also provides that Directors of the Company may be removed by action of the
record holders of two-thirds or more of the outstanding shares of the Company.
The Directors are required to call a meeting of shareholders for the purpose of
voting upon the question of removal of any Director when so requested in writing
by the record holders of at least 10% of the Company's outstanding shares.
PENDING LEGAL PROCEEDINGS
Complaints have been brought against the Adviser and the Distributor
relating to another series of the Company and to other investment companies for
which the Adviser acts or has acted as investment adviser or subadviser. These
lawsuits do not involve the Funds. A number of complaints have been brought in
federal and state court against the Institutional Government Income Portfolio
("PJIGX") series of the Company, the Adviser, the Distributor, and certain
individuals affiliated or formerly affiliated with the Adviser and the
Distributor. In addition, complaints have been filed in federal court relating
to a number of closed-end investment companies managed by the Adviser and two
open-end investment companies for which the Adviser has acted as sub-adviser.
The complaints, which ask for rescission of plaintiff shareholders' purchases or
compensatory damages, plus interest, costs and expenses, generally allege, among
other things, certain violations of federal and/or state securities laws,
including the making of materially misleading statements in prospectuses
concerning investment policies and risks. See "Pending Litigation" in the
Statement of Additional Information.
A settlement agreement has been reached with respect to one of the
complaints involving PJIGX. An Amended Consolidated Class Action Complaint,
which represents a consolidation of claims previously brought by 11 persons or
entities, was filed on October 5, 1994 in the United States District Court,
District of Minnesota. The named plaintiffs in this putative class action (the
"PJIGX action") purport to represent a class of individuals and groups who
purchased shares of PJIGX during the period from July 1, 1991 through May 9,
1994. The named plaintiffs and defendants have entered into a settlement
agreement which has received preliminary approval from the Court. The terms of
the settlement are set forth in a Settlement
35
<PAGE>
Agreement dated July 20, 1995 (as modified by an Addendum filed on July 28,
1995). The Settlement Agreement contained a provision which would have permitted
the defendants to cancel the Agreement if shareholders who had incurred a
cumulative "loss" (as defined under the Agreement) of more than 10% of the loss
sustained by the entire class had opted out. The October 2, 1995 deadline for
requesting exclusion from the class has passed, and the loss sustained by
persons requesting exclusion is less than 10%. If granted final approval by the
Court, the settlement agreement would provide up to approximately $70 million to
class members in payments scheduled over approximately three years. Such
payments would be made by Piper Jaffray Companies and the Adviser and would not
be an obligation of the Company. Six additional complaints have been brought and
a number of actions have been commenced in arbitration relating to PJIGX. The
complaints generally have been consolidated with the PJIGX action for pretrial
purposes and the arbitrations and litigations have been stayed pending entry of
an order by the Court permitting those class members who have requested
exclusion to proceed with their actions.
The Adviser and the Distributor to not believe that the PJIGX settlement or
any outstanding complaint or action in arbitration will have a material adverse
effect on their ability to perform under their agreements with the Company or a
material adverse effect on the Funds, and they intend to defend such lawsuits
and actions vigorously.
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS (AND/OR IN THE STATEMENT OF ADDITIONAL INFORMATION REFERRED TO ON THE
COVER PAGE OF THIS PROSPECTUS,), AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS
OR PIPER JAFFRAY INC. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION.
36
<PAGE>
PIPER FUNDS INC.
INVESTMENT ADVISER
Piper Capital Management Incorporated
DISTRIBUTOR
Piper Jaffray Inc.
CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
LEGAL COUNSEL
Dorsey & Whitney P.L.L.P.
Table of Contents
<TABLE>
<CAPTION>
PAGE
<S> <C>
Introduction......................... 2
Fund Expenses........................ 4
Financial Highlights................. 6
Investment Objectives and Policies... 7
Characteristics and Risks of
Securities and Special Investment
Methods............................. 11
Management........................... 22
Distribution of Fund Shares.......... 23
SHAREHOLDER GUIDE TO INVESTING
How to Purchase Shares............. 25
Reducing Your Sales Charge......... 26
Special Purchase Plans............. 27
How to Redeem Shares............... 28
Shareholder Services............... 30
Dividends and Distributions........ 32
Valuation of Shares.................. 33
Tax Status........................... 33
Performance Comparisons.............. 34
General Information.................. 34
</TABLE>
XIF-05
PIPER
INCOME
FUNDS
[LOGO]
PROSPECTUS
GOVERNMENT
INCOME FUND
SHORT-INTERMEDIATE
BOND FUND
NOVEMBER 27, 1995
<PAGE>
PROSPECTUS DATED NOVEMBER 27, 1995
PIPER FUNDS INC.
NATIONAL TAX-EXEMPT FUND
MINNESOTA TAX-EXEMPT FUND
PIPER JAFFRAY TOWER
222 SOUTH NINTH STREET
MINNEAPOLIS, MINNESOTA 55402-3804
(800) 866-7778 (TOLL FREE)
National Tax-Exempt Fund and Minnesota Tax-Exempt Fund (the "Funds")
are series of Piper Funds Inc. (the "Company"), an open-end mutual fund
whose shares are currently offered in thirteen series.
NATIONAL TAX-EXEMPT FUND ("National Fund") has an investment objective
of maximum current income that is exempt from federal income taxes,
consistent with prudent investment risk and preservation of capital. During
periods of normal market conditions, National Fund will invest at least 80%
of its net assets in securities that generate interest that is not includable
in gross income for federal income tax purposes and is not an item of tax
preference for purposes of the federal alternative minimum tax. Such
securities include, but are not limited to, securities of states, territories
and possessions of the United States and the District of Columbia and their
agencies, instrumentalities and political subdivisions, and may also include
derivative tax-exempt securities.
MINNESOTA TAX-EXEMPT FUND ("Minnesota Fund") has an investment
objective of maximum current income that is exempt from both federal and
State of Minnesota income taxes, consistent with prudent investment risk and
preservation of capital. During periods of normal market conditions,
Minnesota Fund will invest at least 80% of its net assets in securities that
generate interest that is not includable in federal gross income or in State
of Minnesota taxable net income (except for State of Minnesota franchise tax
on corporations and financial institutions, which is measured by income) and
is not an item of tax preference for purposes of the federal or State of
Minnesota alternative minimum tax. Such securities include, but are not
limited to, securities of the State of Minnesota, its agencies,
instrumentalities and political subdivisions, and certain securities of United
States territories and possessions, and may also include derivative
tax-exempt securities. At least 95% of the exempt-interest dividends paid by
Minnesota Fund will be derived from such sources.
This Prospectus concisely describes the information about the Funds that
you ought to know before investing. Please read it carefully and retain it
for future reference.
A Statement of Additional Information about the Funds dated November 27,
1995 is available free of charge. Write to the Funds at Piper Jaffray Tower,
222 South Ninth Street, Minneapolis, Minnesota 55402 or telephone (800)
866-7778 (toll free). The Statement of Additional Information has been filed
with the Securities and Exchange Commission and is incorporated in its
entirety by reference in this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
INTRODUCTION
Piper Funds Inc. (the "Company") is an open-end management investment
company, or mutual fund, whose shares may be issued in separate diversified
and nondiversified series. Each series in effect represents a separate fund
with its own investment objective and policies. This Prospectus relates to
National Tax-Exempt Fund ("National Fund") and Minnesota Tax-Exempt Fund
("Minnesota Fund") (collectively, the "Funds"), which are classified as
diversified and nondiversified funds, respectively. A nondiversified fund
such as Minnesota Fund may have a larger position in a single issuer than
would be the case if it were diversified. The share price of such a fund may
therefore be subject to greater fluctuation as a result of changes in the
financial condition or the market's assessment of an individual issuer.
THE INVESTMENT ADVISER
The Company is managed by Piper Capital Management Incorporated (the
"Adviser"), a wholly owned subsidiary of Piper Jaffray Companies Inc. Each
Fund pays the Adviser a fee for managing its investment portfolio at an
annual rate of .50% on net assets up to $250 million. For each Fund, the fee
is scaled downward as assets increase in size above $250 million. See
"Management -- Investment Adviser."
THE DISTRIBUTOR
Piper Jaffray Inc. ("Piper Jaffray"), a wholly owned subsidiary of Piper
Jaffray Companies Inc. and an affiliate of the Adviser, serves as Distributor
of the Funds' shares.
OFFERING PRICE
Shares of the Funds are offered to the public at the next determined net
asset value after receipt of an order by a shareholder's Piper Jaffray
Investment Executive or other broker-dealer, plus a maximum sales charge of
4% of the offering price (4.17% of the net asset value) on purchases of less
than $100,000. The sales charge is reduced on a graduated scale on purchases
of $100,000 or more. In connection with purchases of $500,000 or more, there
is no initial sales charge; however, a 1% contingent deferred sales charge
will be imposed in the event of a redemption transaction occurring within 24
months following such a purchase. See "How to Purchase Shares -- Public
Offering Price."
MINIMUM INITIAL AND SUBSEQUENT INVESTMENTS
The minimum initial investment for each Fund is $250. There is no minimum
for subsequent investments. See "How to Purchase Shares -- Minimum
Investments."
EXCHANGES
You may exchange your shares for shares of any other mutual fund managed by
the Adviser (except Hercules Funds Inc.) which is open to new investors and
eligible for sale in your state of residence. All exchanges are subject to
the minimum investment requirements and other applicable terms set forth in
the prospectus of the fund whose shares you acquire. You may make four
exchanges per year without payment of a service charge. Thereafter, there
is a $5 service charge for each exchange. See "Shareholder Services --
Exchange Privilege."
<PAGE>
REDEMPTION PRICE
Shares of either fund may be redeemed at any time at their net asset value
next determined after a redemption request is received by your Piper Jaffray
Investment Executive or other broker-dealer. A contingent deferred sales
charge will be imposed upon the redemption of certain shares initially
purchased without a sales charge. See "How to Redeem Shares -- Contingent
Deferred Sales Charge." Each Fund reserves the right, upon 30 days' written
notice, to redeem your account if the net asset value of the shares falls
below $200. See "How to Redeem Shares -- Involuntary Redemption."
CERTAIN RISK FACTORS TO CONSIDER
An investment in either Fund is subject to certain risks, as set forth in
detail under "Investment Objectives and Policies" and "Special Investment
Methods." As with other mutual funds, there can be no assurance that either
Fund will achieve its objective. Each Fund is also subject to interest rate
risk (the risk that rising interest rates will make bonds issued at lower
interest rates worth less). As a result, the value of each Fund's shares will
vary. Each Fund is also subject to credit risk (the risk that a bond issuer
will fail to make timely payments of interest or principal). In addition, if
the bonds in a Fund's portfolio contain call provisions that are currently
exercisable, these securities are likely to be redeemed during a period of
declining interest rates and the Fund most likely will have to reinvest the
proceeds in lower yielding securities. Each Fund, to the extent set forth
under "Special Investment Methods," may engage in the following investment
practices: the use of repurchase agreements and reverse repurchase
agreements, the purchase and sale of securities on a when-issued or delayed
delivery basis, which may increase the volatility of a Fund's net asset
value, and the use of futures contracts and options on futures contracts for
hedging purposes. Each Fund may purchase derivative tax-exempt securities,
including inverse floating obligations, which may be more volatile than
traditional fixed-rate tax-exempt securities. Recent market experience has
shown that certain derivative securities may be extremely sensitive to
changes in interest rates and, as a result, the prices of such securities may
be extremely sensitive to changes in interest rates and, as a result, the
prices of such securities may be highly volatile. All of these techniques may
increase the volatility of a Fund's net asset value. All of these
transactions involve certain special risks, as set forth under "Investment
Objectives and Policies" and "Special Investment Methods."
SHAREHOLDER INQUIRES
Any questions or communications regarding a shareholder account should be
directed to your Piper Jaffray Investment Executive or, in the case of shares
held through another broker-dealer, to IFTC at (800) 874-6205. General
inquiries regarding the Funds should be directed to the Funds at the telephone
number set forth on the cover page of this Prospectus.
<PAGE>
FUND EXPENSES
<TABLE>
<CAPTION>
National Tax- Minnesota Tax-
Exempt Fund Exempt Fund
------------- --------------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) .......... 4.00% 4.00%
Exchange Fee* .................................. $ 0 $ 0
ANNUAL FUND OPERATING EXPENSES (as a percentage
of average net assets)
Management Fees ................................ .50% .50%
12b-1 Fees (after voluntary limitation)** ...... .22% .22%
Other Expenses ................................. .29% .19%
----- -----
Total Fund Operating Expenses (after
voluntary limitations) .................... 1.01% .91%
</TABLE>
- --------------
* There is a $5.00 fee for each exchange in excess of four exchanges per year.
See "How to Purchase Shares -- Exchange Privilege."
** See the discussion below for an explanation of voluntary Rule 12b-1 fee
limitations.
EXAMPLE
For each of the Funds, you would pay the following expenses on a $1,000
investment assuming (1) a 5% annual return and (2) redemption at the end of
each time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
National Fund ..................... $50 $71 $94 $159
Minnesota Fund .................... $49 $68 $88 $147
</TABLE>
The purpose of the above Fund Expenses table is to assist you in
understanding the various costs and expenses that investors in the Funds will
bear directly or indirectly. THE EXAMPLE CONTAINED IN THE TABLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. The information set forth in the table
is based on actual expenses incurred by the Funds during the fiscal year
ended September 30, 1995. The expenses for both Funds reflect a voluntary
limitation by the Distributor of the fee payable to it under each Fund's Rule
12b-1 Plan to .22% of each Fund's average daily net assets. Absent such
limitation, Total Fund Operating Expenses for National Fund and Minnesota
Fund for the fiscal year ended September 30, 1995 would have been 1.09% and
0.99%, respectively, of average daily net assets. After fiscal 1996, such
voluntary limitation may be revised or terminated at any time. The Adviser
may or may not assume additional expenses of the Funds from time to time, in
its discretion, while retaining the ability to be reimbursed by the Funds for
expenses assumed during a fiscal year prior to the end of such year. The
foregoing policy will have the effect of lowering a Fund's overall expense
ratio and increasing yield to investors when such amounts are assumed or the
inverse when such amounts are reimbursed. For additional information,
including a more complete explanation of management and Rule 12b-1 fees, see
"Management -- Investment Adviser" and "Distribution of Fund Shares."
4
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial highlights show certain per share data and
selected information for a share of capital stock outstanding during the
indicated periods for each Fund. This information has been audited by KPMG
Peat Marwick LLP, independent auditors, and should be read in conjunction
with the financial statements of each Fund contained in its annual report. An
annual report of each Fund is available without charge by contacting the
Funds at 800-866-7778 (toll free). In addition to financial statements, the
annual reports contain further information about the performance of the Funds.
NATIONAL FUND
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988*
------- ------- ------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ........ $10.22 11.76 10.94 10.51 9.91 9.99 10.03 10.00
------ ----- ----- ----- ----- ----- ----- -----
Operations:
Net investment income ..................... 0.60 0.57 0.61 0.66 0.68 0.68 0.71 0.12
Net realized and unrealized gains (losses)
on investments .......................... 0.47 (1.21) 0.94 0.43 0.60 (0.08) (0.04) 0.03
------ ----- ----- ----- ----- ----- ----- -----
Total from operations ................. 1.07 (0.64) 1.55 1.09 1.28 0.60 0.67 0.15
------ ----- ----- ----- ----- ----- ----- -----
Distributions from net investment income++ .. (0.60) (0.57) (0.61) (0.66) (0.68) (0.68) (0.71) (0.12)
Distributions from realized capital
gains -- net .............................. -- (0.33) (0.12) -- -- -- -- --
------ ----- ----- ----- ----- ----- ----- -----
Total distributions ................... (0.60) (0.90) (0.73) (0.66) (0.68) (0.68) (0.71) (0.12)
------ ----- ----- ----- ----- ----- ----- -----
Net asset value, end of period .............. $10.69 10.22 11.76 10.94 10.51 9.91 9.99 10.03
------ ----- ----- ----- ----- ----- ----- -----
------ ----- ----- ----- ----- ----- ----- -----
Total return+ ............................... 10.30% (5.72)% 14.76% 10.68% 13.31% 6.15% 6.82% 1.50%
Net assets, end of period (in millions) ..... $ 57 68 79 59 46 36 36 5
Ratio of expenses to average daily net
assets+++ ................................. 1.01% 0.93% 0.94% 0.94% 0.92% 0.86% 0.80% 0.80%**
Ratio of net investment income to average
daily net assets+++ ....................... 5.37% 5.25% 5.42% 6.13% 6.59% 6.78% 6.56% 5.90%**
Portfolio turnover rate (excluding
short-term securities ..................... 28% 65% 43% 35% 59% 80% 57% 10%
</TABLE>
- ------------------
* Period from 7/11/88, (commencement of operations) to 9/30/88.
** Adjusted to an annual basis.
+ Total return is based on the change in net asset value during the year,
assumes reinvestment of all distributions and does not reflect a sales
charge.
++ Amounts included in distributions from net investment income that are
taxable for federal income tax purposes are $0.001, $0.002, $0.013 and
$0.03 per share for the years ended September 30, 1991, 1990 and 1989 and
the period ended September 30, 1988, respectively.
+++ During the periods reflected above, the Adviser and the Distributor
voluntarily waived fees and expenses. Had the maximum Rule 12b-1 fee of
.30% been in effect and had the Fund paid all fees and expenses, the ratios
of expenses and net investment income to average daily net assets would
have been: 1.09%/5.29% in fiscal 1995, 1.03%/5.15% in fiscal 1994,
1.04%/5.32% in fiscal 1993, 1.10%/5.97% in fiscal 1992, 1.15%/6.36% in
fiscal 1991, 1.13%/6.51% in fiscal 1990, 1.62%/5.74% in fiscal 1989 and
2.76%/3.94% in fiscal 1988. Beginning in fiscal 1995, the expense ratio
reflects the effect of gross expenses paid indirectly by the Fund. Prior
period expense ratios have been adjusted.
5
<PAGE>
MINNESOTA FUND
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988*
------- ------- ------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ........ $10.28 11.43 10.79 10.46 9.92 10.06 9.94 10.00
------ ----- ----- ----- ----- ----- ----- -----
Operations:
Net investment income ..................... 0.66 0.61 0.62 0.64 0.66 0.66 0.68 0.12
Net realized and unrealized gains (losses)
on investments .......................... 0.53 (0.95) 0.68 0.33 0.54 (0.14) 0.12 (0.06)
------ ----- ----- ----- ----- ----- ----- -----
Total from operations ................. 1.19 (0.34) 1.30 0.97 1.20 0.52 0.80 0.06
------ ----- ----- ----- ----- ----- ----- -----
Distributions from net investment income++ .. (0.66) (0.61) (0.62) (0.64) (0.66) (0.66) (0.68) (0.12)
Distributions from realized capital
gains -- net .............................. -- (0.20) (0.04) -- -- -- -- --
------ ----- ----- ----- ----- ----- ----- -----
Total distributions ................... (0.66) (0.81) (0.66) (0.64) (0.66) (0.66) (0.68) (0.12)
------ ----- ----- ----- ----- ----- ----- -----
Net asset value, end of period .............. $10.81 10.28 11.43 10.79 10.46 9.92 10.06 9.94
------ ----- ----- ----- ----- ----- ----- -----
------ ----- ----- ----- ----- ----- ----- -----
Total return+ ............................... 11.38% (3.14)% 12.52% 9.56% 12.49% 5.30% 8.23% 0.58%
Net assets, end of period (in millions) ..... $ 134 162 169 132 83 63 51 9
Ratio of expenses to average daily net
assets+++ ................................. 1.91% 0.89% 0.91% 0.93% 0.92% 0.87% 0.80% 0.80%**
Ratio of net investment income to average
daily net assets+++ ....................... 5.80% 5.61% 5.62% 6.00% 6.44% 6.58% 6.45% 5.91%**
Portfolio turnover rate (excluding
short-term securities ..................... 30% 44% 29% 35% 22% 41% 54% 12%
</TABLE>
- ------------------
* Period from 7/11/88, (commencement of operations) to 9/30/88.
** Adjusted to an annual basis.
+ Total return is based on the change in net asset value during the year,
assumes reinvestment of all distributions and does not reflect a sales
charge.
++ Amounts included in distributions from net investment income that are
taxable for federal income tax purposes are $0.003, $0.001, $0.012 and
$0.011 and $0.020 per share for the years ended September 30, 1992, 1991,
1990 and 1989 and the period ended September 30, 1988, respectively.
+++ During the periods reflected above, the Adviser and the Distributor
voluntarily waived fees and expenses. Had the maximum Rule 12b-1 fee of
.30% been in effect and had the Fund paid all fees and expenses, the ratios
of expenses and net investment income to average daily net assets would
have been: 0.99%/5.72% in fiscal 1995, 0.99%/5.51% in fiscal 1994,
1.00%/5.53% in fiscal 1993, 1.01%/5.92% in fiscal 1992, 1.05%/6.31% in
fiscal 1991, 1.06%/6.39% in fiscal 1990, 1.33%/5.92% in fiscal 1989 and
1.97%/4.74% in fiscal 1988. Beginning in fiscal 1995, the expense ratio
reflects the effect of gross expenses paid indirectly by the Fund. Prior
period expense ratios have been adjusted.
6
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
GENERAL
The investment objectives listed below cannot be changed without
shareholder approval. The investment policies and techniques employed in
pursuit of the Funds' objectives may be changed without shareholder approval,
unless such policy or technique is designated as "fundamental," in which case
shareholder approval is required.
National Fund has an investment objective of maximum current income that is
exempt from federal income taxes, consistent with prudent investment risk and
preservation of capital. During periods of normal market conditions, National
Fund will invest at least 80% of its net assets in Tax-Exempt Securities (as
defined in the following section) the interest payable on which, in the opinion
of bond counsel, is not includable in gross income for federal income tax
purposes under existing laws and is not an item of tax preference for purposes
of the federal alternative minimum tax. Such securities include, but are not
limited to, securities issued by states, territories and possessions of the
United States and the District of Columbia and their agencies, instrumentalities
and political subdivisions.
Minnesota Fund has an investment objective of maximum current income that
is exempt from both federal and State of Minnesota income taxes, consistent with
prudent investment risk and preservation of capital. During periods of normal
market conditions, Minnesota Fund will invest at least 80% of its assets in Tax-
Exempt Securities the interest payable on which, in the opinion of bond counsel,
is not includable in federal gross income or in State of Minnesota taxable net
income under existing laws (except for State of Minnesota franchise tax on
corporations and financial institutions, which is measured by income) and is not
an item of tax preference for purposes of the federal or State of Minnesota
alternative minimum tax. Such securities include, but are not limited to,
securities issued by the State of Minnesota, its agencies, instrumentalities and
political subdivisions, and certain securities issued by United States
territorial possessions. Ninety-five percent or more of the exempt-interest
dividends paid by Minnesota Fund will be derived from interest income on
obligations of the State of Minnesota or its political or governmental
subdivisions, municipalities, governmental agencies or instrumentalities.
There are risks in any investment program, and there is no assurance that
the investment objective of either Fund will be achieved. The net asset value
of the shares issued by each Fund will fluctuate with changes in the market
values of each Fund's investments. See "Investment Objectives and Policies --
Investment Risks," below.
Both Funds intend to emphasize investments in Tax-Exempt Securities
with long-term maturities. The Tax-Exempt Securities purchased by each Fund
will be securities rated, at the time of purchase, within the following
grades assigned by either Moody's Investors Services, Inc. ("Moody's") (Aaa,
Aa, A or Baa for long-term bonds; MIG-1 or MIG-2 for notes and other
short-term obligations having fixed maturities; VMIG-1 or VMIG-2 for notes
and other short-term obligations having a demand feature; and Prime-1 and
Prime-2 for commercial paper) or Standard & Poor's Ratings Services
("Standard & Poor's") (AAA, AA, A or BBB for municipal bonds; SP-1 and SP-2
for state and municipal notes; and A-1 and A-2 for commercial paper) or will
be unrated Tax-Exempt Securities which, at the time of purchase, are judged
by the Adviser to be of comparable quality. Securities rated Baa or BBB have
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade bonds. If
the rating of a bond held by one of the Funds drops below Baa or BBB, the
Fund will conduct a credit analysis of the bond prior to determining whether
to retain or dispose of it. In no event, however, will more than 5% of a
Fund's net assets consist of securities that have been down-graded to a
rating lower than BBB or Baa or, if unrated, that
7
<PAGE>
are no longer of a quality comparable to at least a BBB or Baa rating, as
determined by the Adviser. The ratings of Moody's and Standard & Poor's
represent their opinions as to the quality of the Tax-Exempt Securities which
they undertake to rate. It should be emphasized, however, that ratings are
general, and not absolute, standards of quality. Consequently, Tax-Exempt
Securities of the same maturity, interest rate and rating may have different
yields, while Tax-Exempt Securities of the same maturity and interest rate with
different ratings may have the same yield. For a discussion of the various
ratings assigned by Moody's and Standard & Poor's see Appendix A to the
Statement of Additional Information.
Rated as well as unrated Tax-Exempt Securities will be analyzed by the
Adviser on the basis of available information as to creditworthiness and with a
view to various qualitative factors and trends affecting Tax-Exempt Securities
generally. It should be noted, however, that the amount of information about
the financial condition of an issuer of Tax-Exempt Securities may not be as
extensive as that which is made available by many issuers whose securities are
more actively traded.
During normal market conditions, each Fund may invest up to 20% of its
net assets in taxable obligations. Additionally, during periods of abnormal
market conditions when a defensive investment posture is warranted, each Fund
temporarily may invest up to 100% of its net assets in taxable obligations.
Such taxable obligations, whether purchased for liquidity or temporary
defensive purposes, may include the following: Tax-Exempt Securities rated
within the grades set forth above (or unrated and of comparable quality) that
generate interest that is an item of tax preference for purposes of the
federal or State of Minnesota alternative minimum tax; taxable municipal
obligations rated within the grades set forth above for Tax-Exempt Securities
(or unrated and of comparable quality); obligations of the United States
government, its agencies or instrumentalities (such as Treasury bills, notes
and bonds); corporate bonds rated within the three highest grades by either
Moody's or Standard & Poor's; commercial paper rated within the two highest
grades by either of such rating services; certificates of deposit and
bankers' acceptances of domestic banks and savings institutions having total
assets at the time of investment in excess of $1 billion or certificates of
deposit of other domestic banks or savings institutions which are fully
insured by the Bank Insurance Fund or the Savings Association Insurance Fund
administered by the Federal Deposit Insurance Corporation; and repurchase
agreements with respect to any of the securities in which the Fund may
invest. The Funds may also hold their assets in cash.
National Fund does not intend to invest more than 25% of its total assets
in securities of governmental units located in any one state, territory or
possession of the United States. In addition, neither Fund will invest more
than 25% of its total assets in limited obligation bonds payable only from
revenues derived from facilities or projects within a single industry. As to
utility companies, gas, electric, water and telephone companies will be
considered as separate industries.
TAX-EXEMPT SECURITIES
Tax-Exempt Securities, as the term is used in this prospectus, include
Municipal Obligations, Derivative Municipal Obligations and Municipal Lease
Obligations, as defined below.
MUNICIPAL OBLIGATIONS. Municipal Obligations include debt obligations
issued by states, cities, local authorities, and possessions and certain
territories of the United States, to obtain funds for various public purposes,
including the construction of such public facilities as airports, bridges,
highways, housing, hospitals, mass transportation, schools, streets and water
and sewer works. Other public purposes for which Municipal Obligations may be
issued include the refinancing of outstanding obligations and the obtaining of
funds for general operating expenses and for loans to other public institutions
and facilities. In addition, certain industrial development, private activity
and pollution control bonds may be included within the term Municipal
Obligations if the interest paid thereon qualifies as exempt from federal income
tax.
8
<PAGE>
Municipal Obligations include long-term obligations, often called municipal
bonds, as well as short-term municipal notes and tax-exempt commercial paper.
As noted above, however, the Funds intend to emphasize investments in Tax-Exempt
Securities with long-term maturities.
The two principal classifications of municipal bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise tax or other specific revenue source.
Industrial development, private activity and pollution control bonds are in most
cases revenue bonds and do not generally constitute the pledge of the credit or
taxing power of the issuer of such bonds. There are, of course, variations in
the security of Municipal Obligations, both within a particular classification
and between classifications, depending on numerous factors.
Certain Municipal Obligations may carry variable or floating rates of
interest whereby the rate of interest is not fixed but varies with changes in
specified market rates or indexes, such as a bank prime rate or a tax-exempt
money market index. Accordingly, the yield on such obligations can be expected
to fluctuate with changes in prevailing interest rates.
Other Municipal Obligations are zero coupon securities, which are debt
obligations which do not entitle the holder to any periodic payments prior to
maturity and are issued and traded at a discount from their face amounts. The
discount varies depending on the time remaining until maturity, prevailing
interest rates, liquidity of the security and perceived credit quality of the
issuer. The market prices of zero coupon securities are generally more volatile
than the market prices of securities that pay interest periodically and are
likely to respond to changes in interest rates to a greater degree than do
securities having similar maturities and credit quality that do pay periodic
interest.
DERIVATIVE MUNICIPAL OBLIGATIONS. Each Fund may also acquire Derivative
Municipal Obligations, which are custodial receipts or certificates
underwritten by securities dealers or banks that evidence ownership of future
interest payments, principal payments or both on certain Municipal
Obligations. The underwriter of these certificates or receipts typically
purchases Municipal Obligations and deposits the securities in an irrevocable
trust or custodial account with a custodian bank, which then issues receipts
or certificates that evidence ownership of the periodic unmatured coupon
payments and the final principal payment on the obligations. Although under
the terms of a custodial receipt a Fund typically would be authorized to
assert its rights directly against the issuer of the underlying obligation,
the Fund could be required to assert through the custodian bank those rights
as may exist against the underlying issuer. Thus, in the event the
underlying issuer fails to pay principal and/or interest when due, a Fund may
be subject to delays, expenses and risks that are greater than those that
would have been involved if the Fund had purchased a direct obligation of the
issuer. In addition, in the event that the trust or custodial account in
which the underlying security has been deposited is determined to be an
association taxable as a corporation, instead of a non-taxable entity, it
would be subject to state income tax (but not federal income tax) on the
income it earned on the underlying security, and the yield on the security
paid to the Fund and its shareholders would be reduced by the amount of taxes
paid. Furthermore, amounts paid by the trust or custodial account to a Fund
would lose their tax-exempt character and become taxable, for federal and
state purposes, in the hands of the Fund and its shareholders. However,
custodial receipts in which the Funds will invest will be accompanied by a
tax opinion stating that interest payable on the receipts is tax exempt. If
a Fund invests in custodial receipts, it is possible that a portion of the
discount at which the Fund purchases the receipts might have to be accrued as
taxable income during the period that the Fund holds the receipts. See "Tax
Status -- Federal Taxation."
9
<PAGE>
The principal and interest payments on the Municipal Obligations underlying
custodial receipts may be allocated in a number of ways. For example, payments
may be allocated such that certain custodial receipts may have variable or
floating interest rates and others may be stripped securities which pay only the
principal or interest due on the underlying Municipal Obligations. The Funds
currently do not invest in "interest only" or "principal only" custodial
receipts. The Funds may invest in floating rate custodial receipts without
limitation. Each Fund may also invest up to 20% of its total assets in
custodial receipts which are "inverse floating obligations" (also sometimes
referred to as "residual interest bonds"). These securities pay interest rates
that vary inversely to changes in the interest rates of specified short-term
Municipal Obligations or an index of short-term Municipal Obligations. The
interest rates on inverse floating obligations will typically decline as short-
term market interest rates increase and increase as short-term market rates
decline. Such securities have the effect of providing a degree of investment
leverage, since the interest rates on such securities will generally change at a
rate which is a multiple (typically two) of the change in the interest rates of
the specified short-term Municipal Obligations or index. As a result, the
market values of inverse floating obligations will generally be more volatile
than the market values of fixed-rate Municipal Obligations and investments in
these types of obligations will increase the volatility of the net asset value
of shares of the Funds.
Types of Derivative Municipal Obligations other than those described above
can be expected to be developed and marketed from time to time. Consistent with
their investment limitations, the Funds expect to invest in those new types of
Derivative Municipal Obligations that the Adviser believes may assist the Funds
in achieving their investment objectives. Each Fund will notify its
shareholders to the extent that it intends to invest more than 5% of its net
assets in such obligations.
MUNICIPAL LEASE OBLIGATIONS. Also included within the general category
of Tax-Exempt Securities are lease obligations or installment purchase
contract obligations and participations therein issued by tax-exempt issuers
such as state and local governments and their agencies and instrumentalities
to finance the acquisition of equipment and facilities (hereinafter
collectively called "Municipal Lease Obligations"). Each Fund may invest up
to 20% of the value of its net assets in Municipal Lease Obligations.
Although Municipal Lease Obligations do not constitute general obligations of
the issuer for which such issuer's taxing power is pledged, a Municipal Lease
Obligation is ordinarily backed by the issuer's covenant to budget for,
appropriate and make the payments due under the obligation. However, certain
Municipal Lease Obligations contain "non-appropriation" clauses which provide
that the issuer has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. In the case of a "non-appropriation" lease, the Funds ability
to recover under the lease in the event of non-appropriation or default will
be limited solely to the repossession of the leased property, without
recourse to the general credit of the lessee, and disposition of the property
in the event of foreclosure might prove difficult. In determining Municipal
Lease Obligations in which the Funds will invest, the Adviser will carefully
evaluate the outstanding credit rating of the issuer (and the probable
secondary market acceptance of such credit rating). Additionally, the
Adviser may require that certain municipal lease obligations be issued or
backed by a letter of credit or put arrangement with an independent financial
institution.
SPECIAL CONSIDERATIONS REGARDING INVESTMENTS IN MINNESOTA TAX-EXEMPT SECURITIES
As described herein, except during temporary defensive periods, Minnesota
Fund will invest in Minnesota Tax-Exempt Securities. The Fund is therefore
susceptible to political, economic or regulatory factors affecting issuers of
Minnesota Tax-Exempt Securities. The following information provides only a
brief summary of the complex factors affecting the financial situation in
Minnesota. This information is derived from sources that are generally
available to investors and is based in part on information obtained
10
<PAGE>
from various State and local agencies in Minnesota. It should be noted that the
creditworthiness of obligations issued by local Minnesota issuers may be
unrelated to the creditworthiness of obligations issued by the State of
Minnesota, and that there is no obligation on the part of the State to make
payment on such local obligations in the event of default. For further
information, see "Investment Objectives, Policies and Restrictions" in the
Statement of Additional Information.
Minnesota's constitutionally prescribed fiscal period is a biennium, and
Minnesota operates on a biennial budget basis. Legislative appropriations
for each biennium are prepared and adopted during the final legislative
session of the immediately preceding biennium. Prior to each fiscal year of
a biennium, the State's Department of Finance allots a portion of the
applicable biennial appropriation to each agency or other entity for which an
appropriation has been made. An agency or other entity may not expend monies
in excess of its allotment. If revenues are insufficient to balance total
available resources and expenditures, the State's Commissioner of Finance,
with the approval of the Governor, is required to reduce allotments to the
extent necessary to balance expenditures and forecasted available resources
for the then current biennium. The Governor may prefer legislative action
when a large reduction in expenditures appears necessary, and if the State's
legislature is not in session the Governor is empowered to convene a special
session.
Frequently in recent years, legislation has been required to eliminate
projected budget deficits by raising additional revenue, reducing
expenditures, including aids to political subdivisions and higher education,
reducing the State's budget reserve, imposing a sales tax on purchases by
local governmental units, and making other budgetary adjustments. The
Minnesota Department of Finance has projected that the State will complete
its current biennium June 30, 1997 with a $350 million cash flow account
balance plus a $204 million budget reserve. Total General Fund expenditures
and transfers for the biennium were projected to be $18.2 billion. State
expenditures for education finance (K-12), post-secondary education, and
human services in the biennium ending June 30, 1997 are not anticipated to be
sufficient to maintain, current program levels. Although it is not possible
to anticipate economic performance four years into the future, planning
estimates (extrapolations) for the biennium ending June 30, 1999 show a
substantial General Fund deficit of $812 million, after funding a $350
million cash flow account plus a $204 million budget reserve, if current law
is not changed. This indicates the likelihood of additional revenue
increases or spending cuts relative to current law. The State is party to a
variety of civil actions that could adversely affect the State's General
Fund. In addition, substantial portions of State and local revenues are
derived from federal expenditures, and reductions in federal aid to the State
and its political subdivisions and other federal spending cuts may have
substantial adverse effects on the economic and fiscal condition of the State
and its local governmental units. Risks are inherent in making revenue and
expenditure forecasts. Economic or fiscal conditions less favorable than
those reflected in state budget forecasts and planning estimates may create
additional budgetary pressures.
State grants and aids represent a large percentage of the total revenues of
cities, towns, counties and school districts in Minnesota. Even with respect to
bonds that are revenue obligations of the issuer and not general obligations of
the State, there can be no assurance that the fiscal problems referred to above
will not adversely affect the market value or marketability of the bonds or the
ability of the respective obligors to pay interest on and principal of the
bonds.
Both possible future changes in federal and State income tax laws,
including rate reductions, and recent Minnesota tax legislation could adversely
affect the value and marketability of Minnesota municipal bonds that are held by
the Fund. See "Tax Status -- Minnesota Taxation" below.
INVESTMENT RISKS
As mutual funds investing in debt securities, each Fund is subject to
interest rate risk, which is the potential for a decline in the prices of
fixed-income securities in which the Funds invest due to rising
11
<PAGE>
interest rates. When interest rates rise, the prices of long-term
fixed-income securities generally fall. Conversely, when interest rates
fall, the prices of such securities generally rise. The magnitude of these
fluctuations will generally be greater at times when a Fund's average
maturity is longer. Each Fund is also subject to credit risk. Credit risk,
also known as default risk, is the possibility that an issuer of a security
will fail to make timely payments of interest or principal. Changes by
recognized rating services in the credit ratings of Tax-Exempt Securities, as
well as changes in the perception of the ability of an issuer to make
payments of interest and principal, will also affect the value of the Funds'
investments. Changes in the value of a Fund's portfolio securities will not
affect interest income derived from those securities but will affect the
Fund's net asset value.
The Funds are also subject to call risk. Certain Tax-Exempt Securities
which may be held by the Funds permit the issuer at its option to "call," or
redeem, its securities. If an issuer were to redeem Tax-Exempt Securities held
by a Fund during a time of declining interest rates, the Fund might not be able
to reinvest the proceeds in Tax-Exempt Securities providing as high a level of
investment return as the securities redeemed.
Investments in inverse floating obligations also subject the Funds to
risk. Interest rates on these securities typically decline as short-term
market interest rates increase and increase as short-term market rates
decline. As discussed above, such securities have the effect of providing a
degree of investment leverage and, as a result, the market values of such
securities will generally be more volatile than the market values of
fixed-rate Tax-Exempt Securities. See "Investment Objectives and Policies --
Tax-Exempt Securities -- Derivative Municipal Obligations."
Each Fund may invest in unrated Tax-Exempt Securities determined by the
Adviser, at the time of investment, to be of comparable quality to the rated
securities in which the Fund invests. The Funds will be more dependent upon the
Adviser's investment analysis of such non-rated Tax-Exempt Securities than in
the case of rated securities.
The Adviser believes that, in general, the secondary market for
Tax-Exempt Securities is less liquid than that for taxable fixed-income
securities. Consequently, the ability of a Fund to buy and sell Tax-Exempt
Securities may, at any particular time and with respect to any particular
securities, be limited. The amount of information about the financial
condition of an issuer of Tax-Exempt Securities may not be as extensive as
information about corporations whose securities are publicly traded.
Obligations of issuers of Tax-Exempt Securities may be subject to provisions
of bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the United States Bankruptcy Code and applicable state
laws, which could limit the ability of a Fund to recover payments of
principal or interest on such obligations.
Minnesota Fund is a "non-diversified" fund under the 1940 Act. This
means that it may invest its assets in the securities of a limited number of
issuers. Under the Internal Revenue Code, however, the Fund generally may not
invest more than 25% of its assets in securities of any one issuer, other
than U.S. Government securities. Also with respect to 50% of its total
assets, the Fund may not invest more than 5% of its total assets in the
securities on any one issuer (other than U.S. Government securities).
Because of the relatively small number of issuers of Minnesota Tax-Exempt
Securities, Minnesota Fund is more likely to invest a higher percentage of
its assets in the securities of a single issuer or of a limited number of
issuers than a diversified investment company that invests in a broader range
of securities. This practice involves an increased risk of loss to the Fund
if the issuers were to be unable to make interest or principal payments or if
the market values of such securities were to decline.
The investment techniques used by each Fund also pose certain risks. See
"Special Investment Methods."
12
<PAGE>
Because of the risks associated with fixed-income investments, the Funds
are intended to be long-term investment vehicles and are not designed to
provide investors with a means of speculating on short-term interest rate
movements. No assurance can be given that the Funds will achieve their
objectives or that shareholders will be protected from the risk of loss that
is inherent in fixed-income investing.
SPECIAL INVESTMENT METHODS
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with respect to
securities issued or guaranteed as to payment of principal and interest by
the U.S. Government, its agencies or instrumentalities. A repurchase
agreement involves the purchase by a Fund of securities with the condition
that after a stated period of time the original seller (a member bank of the
Federal Reserve System or a recognized securities dealer) will buy back the
same securities ("collateral") at a predetermined price or yield. Repurchase
agreements involve certain risks not associated with direct investments in
securities. In the event the original seller defaults on its obligation to
repurchase, as a result of its bankruptcy or otherwise, the Fund will seek to
sell the collateral, which action could involve costs or delays. In such
case, the Fund's ability to dispose of the collateral to recover such
investment may be restricted or delayed. While collateral will at all times
be maintained in an amount equal to the repurchase price under the agreement
(including accrued interest due thereunder), to the extent proceeds from the
sale of collateral were less than the repurchase price a Fund would suffer a
loss. Repurchase agreements maturing in more than seven days are considered
illiquid and subject to each Fund's restriction on investing in illiquid
securities. See "-- Illiquid Securities" below. Additionally, interest earned
by a Fund from repurchase agreements will not be treated for federal or State
of Minnesota income tax purposes as tax-exempt interest. For additional
information concerning repurchase agreements, see "Investment Objectives,
Policies and Restrictions" in the Statement of Additional Information.
REVERSE REPURCHASE AGREEMENTS
The Funds may engage in "reverse repurchase agreements" with banks and
securities dealers. Reverse repurchase agreements are ordinary repurchase
agreements in which the Fund is the seller of, rather than the investor in,
securities and agrees to repurchase them at an agreed upon time an price. Use
of a reverse repurchase agreement may be preferable to a regular sale and
later repurchase of the securities because it avoids certain market risks and
transaction costs. Because certain of the incidents of ownership of the
security are retained by the Fund, reverse repurchase agreements are
considered a form of borrowing by the Fund from the buyer, collateralized by
the security. At the time a Fund enters into a reverse repurchase agreement,
cash, U.S. government securities or other liquid high-grade debt obligations
having a value sufficient to make payments for the securities to be
repurchased will be segregated, and will be maintained throughout the period
of the obligation. Reverse repurchase agreements may be used as a means of
borrowing for investment purposes. This speculative technique is referred to
as leveraging. Leveraging may exaggerate the effect on net asset value of any
increase or decrease in the market value of a Fund's portfolio. Money
borrowed for leveraging will be subject to interest costs which may not be
deductible for tax purposes and which could possibly exceed interest income
earned by the Fund on the investment of such borrowed money. No more than 25%
of the total assets of either Fund will at any time be subject to reverse
repurchase agreements.
BORROWING
Each Fund may borrow money from banks for temporary or emergency purposes in
an amount up to 10% of the value of its total assets. Interest paid by a Fund
on borrowed funds would decrease the net
13
<PAGE>
earnings of that Fund. Neither Fund will purchase portfolio securities while
outstanding borrowings (other than reverse repurchase agreements) exceed 5%
of the value of the Fund's total assets. Each Fund may mortgage, pledge or
hypothecate its assets in an amount not exceeding 10% of the value of its
total assets to secure temporary or emergency borrowing. The policies set
forth in this paragraph are fundamental and may not be changed without the
approval of a majority of a Fund's shares.
WHEN-ISSUED SECURITIES
Each Fund may purchase and sell Tax-Exempt Securities on a when-issued
or delayed delivery basis. When-issued and delayed delivery transactions
arise when securities are purchased or sold with payment and delivery beyond
the regular settlement date. (When-issued transactions normally settle within
30-45 days.) On such transactions the payment obligations and the interest
rate are fixed at the time the buyer enters into the commitment. Pending
delivery of the securities, each Fund maintains in a segregated account cash
or liquid high-grade debt obligations in an amount sufficient to meet its
purchase commitments. The commitment to purchase securities on a when-issued
or delayed delivery basis involves an element of risk because the value of
the securities is subject to market fluctuation. No interest accrues to the
purchaser prior to the settlement of the transaction and at the time of
delivery the market value of the securities may be less than cost. Purchasing
securities on a when-issued or delayed delivery basis involves the additional
risk that the return available in the market when the delivery takes place
will be higher than that obtained in the transaction itself. These risks
could result in increased volatility of a Fund's net asset value to the
extent that the Fund purchases securities on a when-issued or delayed
delivery basis while remaining substantially fully invested. Although the
Funds will only make commitments to purchase such obligations with the
intention of actually acquiring the securities, the Funds may each sell these
securities before the settlement date. If a Fund sells a when-issued or
delayed delivery security before the settlement date, any gain or loss would
not be exempt from federal or Minnesota income tax. For purposes of the
Funds' investment policies, the purchase of securities with a settlement date
occurring on the Public Securities Association approved settlement date is
considered a normal delivery and not a when-issued or delayed delivery
purchase. For additional information concerning when-issued and delayed
delivery transactions, see "Investment Objectives, Policies and Restrictions"
in the Statement of Additional Information.
PUTS
Each Fund may purchase Tax-Exempt Securities which provide for the right
to resell them to the issuer, a bank or a broker-dealer at a specified price
within a specified period of time prior to the maturity date of such
obligations. Such a right to resell, which is commonly known as a "put," may
be sold, transferred or assigned only with the underlying security or
securities. Each Fund may pay a higher price for a Tax-Exempt Security with a
put than would be paid for the same security without a put. The primary
purpose of purchasing Tax-Exempt Securities with puts is to permit each Fund
to be as fully invested as practicable in Tax-Exempt Securities while at the
same time providing the Fund with appropriate liquidity. For additional
information concerning puts, see "Investment Objectives, Policies and
Restrictions" in the Statement of Additional Information.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The Funds may purchase and sell municipal bond index futures contracts
and interest rate futures contracts. The futures contracts in which the Funds
may invest have been developed by and are traded on national commodity
exchanges. Municipal bond index futures contracts are based upon The Bond
Buyer Municipal Bond Index, an index comprised of tax-exempt bonds rated A-
or higher by Standard & Poor's or A or higher by Moody's, with remaining
maturities of 19 years or more. A buyer entering into a municipal bond index
futures contracts will, on a specified future date, pay or receive a final
cash payment
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equal to the difference between the actual value of the index on the last day
of the contract and the value of the index established by the contract. An
interest rate futures contract is an agreement to purchase or sell an agreed
amount of debt securities at a set price for delivery on a future date.
The purpose of the acquisition or sale of a futures contract by a Fund
is to hedge against fluctuations in the value of its portfolio without
actually buying or selling securities. For example, if interest rates are
expected to increase, a Fund might sell futures contracts. If interest rates
did increase, the value of the securities in the Fund's portfolio would
decline, but the value of the Fund's futures contracts would increase at
approximately the same rate, thereby keeping the net asset value of the Fund
from declining as much as it otherwise would have. If, on the other hand, the
Fund held cash reserves and short-term investments pending anticipated
investment in long-term obligations and interest rates were expected to
decline, the Fund might purchase interest rate or municipal bond index
futures contracts. Since the behavior of such contracts would generally be
similar to that of long-term securities, the Fund could take advantage of the
anticipated rise in the value of long-term securities without actually buying
them until the market had stabilized. At this time, the Fund could accept
delivery under the futures contracts or the futures contracts could be
liquidated and the Fund's reserves could then be used to buy long-term
securities in the cash market. The Funds will engage in such transactions
only for hedging purposes, on either an asset-based or a liability-based
basis, in each case in accordance with the rules and regulations of the
Commodity Futures Trading Commission. See Appendix B to the Statement of
Additional Information.
The Funds may also purchase and sell put and call options on futures
contracts and enter into closing transactions with respect to such options to
terminate existing positions. The Funds may use such options on futures
contracts in connection with their hedging strategies in lieu of purchasing
and selling the underlying futures contracts.
There are risks in using futures contracts and options on futures
contracts as hedging devices. The primary risks associated with the use of
futures contracts and options thereon are (a) the prices of futures contracts
and options may not correlate perfectly with the market value of the
securities subject to the hedge and (b) the possible lack of liquid secondary
market for a futures contract and the resulting inability to close a futures
position prior to its maturity date. With respect to municipal bond index
futures contracts, the degree of correlation will depend, among other things,
upon the differences between the municipal securities being hedged and the
municipal securities underlying the municipal bond index futures contract.
The risk that a Fund will be unable to close out a futures position will be
minimized by entering into such transactions on a national exchange with an
active and liquid secondary market.
Additional information with respect to futures contracts and options on
futures contracts is set forth in Appendix B to the Statement of Additional
Information.
OTHER HEDGING INSTRUMENTS
The Funds expect the new types of futures contracts, options thereon,
and put and call options on municipal securities and indexes may be developed
in the future that will further enable the Funds to hedge against changes in
the value of their portfolio securities. As new types of hedging futures and
options instruments are developed and offered to investors, the Adviser will,
consistent with each Fund's investment objective, policies and quality
standards, be permitted to invest in such new types of instruments, provided
that any decision to so invest will be followed by supplementation of this
Prospectus.
ILLIQUID SECURITIES
As a nonfundamental investment restriction which may be changed at any
time without shareholder approval, each Fund may invest up to 15%, of its net
assets in illiquid securities. A security is considered
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illiquid if it cannot be sold in the ordinary course of business within seven
days at approximately the price at which it is valued. Illiquid securities may
offer a higher yield than securities which are more readily marketable, but
they may not always be marketable on advantageous terms.
The sale of illiquid securities often requires more time and results in
higher brokerage charges or dealer discounts than does the sale of securities
eligible for trading on national securities exchanges or in the over-the-counter
markets. A Fund may be restricted in its ability to sell such securities at a
time when the Adviser deems it advisable to do so. In addition, in order to
meet redemption requests, a Fund may have to sell other assets, rather than such
illiquid or restricted securities, at a time which is not advantageous.
"Restricted securities" are securities which were originally sold in
private placements and which have not been registered under the Securities
Act of 1933 (the "1933 Act"). Such securities generally have been considered
illiquid, since they may be resold only subject to statutory restrictions and
delays or if registered under the 1933 Act. In 1990, however, the SEC
adopted Rule 144A under the 1933 Act, which provides a safe harbor exemption
from the registration requirements of the 1933 Act for resales of restricted
securities to "qualified institutional buyers," as defined in the rule. The
result of this rule has been the development of a more liquid and efficient
institutional resale market for restricted securities. Thus, restricted
securities are no longer necessarily illiquid. Neither Fund is subject to
any limitation on its ability to invest in securities simply because such
securities are restricted. The Funds may therefore invest in Rule 144A
securities and treat them as liquid when they have been determined to be
liquid by the Board of Directors of the Company or by the Adviser subject to
the oversight of and pursuant to procedures adopted by the Board of
Directors. See "Investment Objectives, Policies and Restrictions -- Illiquid
Securities" in the Statement of Additional Information. Similar
determinations may be made with respect to commercial paper issued in
reliance upon the so-called "private placement" exemption from registration
under Section 4 (2) of the 1933 Act and with respect to municipal lease
obligations.
PORTFOLIO TURNOVER
While it is not the policy of either Fund to trade actively for
short-term profits, each Fund will dispose of securities without regard to
the time they have been held when such action appears advisable to the
Adviser. In the case of each Fund, frequent changes may result in higher
transaction and other costs for the Fund. The method of calculating
portfolio turnover rate is set forth in the Statement of Additional
Information under "Investment Objectives, Policies and Restrictions --
Portfolio Turnover." Portfolio turnover rates for the Funds are set forth in
"Financial Highlights."
INVESTMENT RESTRICTIONS
Each Fund has adopted certain investment restrictions in addition to
those set forth above. Included among these restrictions are the following
nonfundamental investment restrictions which may be changed at any time
without shareholder approval: (1) Neither Fund will invest more than 5% of
its total assets in the securities of other investment companies except as
part of a merger, consolidation or acquisition of assets. (2) Neither Fund
will invest more than 5% of its total assets in the securities of issuers
which, with their predecessors, have a record of less than three years'
continuous operation. (3) Neither Fund will invest more than 5% of its total
assets in foreign securities. A list of each Fund's fundamental and
nonfundamental investment restrictions is set forth in the Statement of
Additional Information.
Except for each Fund's policy regarding borrowing, if a percentage
restriction set forth under "Investment Objectives and Policies" or under
"Special Investment Methods" is adhered to at the time of an investment, a
later increase or decrease in percentage resulting from changes in values or
assets will not constitute a violation of such restriction.
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MANAGEMENT
BOARD OF DIRECTORS
The Company's Board of Directors has the primary responsibility for
overseeing the overall management of the Company and electing its officers.
INVESTMENT ADVISER
Piper Capital Management Incorporated has been retained under an Investment
Advisory and Management Agreement with the Company to act as the Funds'
investment adviser subject to the authority of the Board of Directors.
In addition to acting as the investment adviser for the other series of the
Company, the Adviser furnishes investment advice to a number of other open-end
and closed-end investment companies and to various other concerns including
pension and profit sharing funds, corporate funds and individuals. As of
November 1, 1995, the Adviser rendered investment advice regarding approximately
$9 billion of assets. The Adviser is a wholly owned subsidiary of Piper Jaffray
Companies Inc., a publicly held corporation which is engaged through its
subsidiaries in various aspects of the financial services industry. The address
of the Adviser is Piper Jaffray Tower, 222 South Ninth Street, Minneapolis,
Minnesota 55402.
The Adviser furnishes each Fund with investment advice and supervises the
management and investment programs of the Funds. The Adviser furnishes at its
own expense all necessary administrative services, office space, equipment and
clerical personnel for servicing the investments of the Funds. The Adviser also
provides investment advisory facility and executive and supervisory personnel
for managing the investments and effecting the portfolio transactions of the
Funds. In addition, the Adviser pays the salaries and fees of all officers and
directors of the Company who are affiliated with the Adviser.
Under the Investment Advisory and Management Agreement, the Funds pay the
Adviser monthly advisory fees. The fee for each Fund is paid at an annual rate
of .50% on average daily net assets up to $250 million, .45% on average daily
net assets over $250 million and up to $500 million and .40% on average daily
net assets over $500 million.
PORTFOLIO MANAGEMENT
Ronald R. Reuss and Douglas J. White have shared primary responsibility for
the day-to-day management of the Funds since they commenced operations in 1988.
Mr. Reuss has been a Senior Vice President of the Adviser since 1989, prior to
which he had been a Vice President since 1986. He is the Adviser's chief
economist and also manages other open-end and closed-end mutual funds and
private accounts. Mr. Reuss earned an MA from Cleveland State University and
has approximately 26 years of investment experience.
Mr. White has been a Senior Vice President of the Adviser since 1991, prior
to which he had been a Vice President since 1989 and a portfolio manager since
1987. Mr. White manages other open-end and closed-end mutual funds and private
accounts. He is a Chartered Financial Analyst, earned an MBA from the
University of Minnesota and has approximately 12 years of investment experience.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN
Investors Fiduciary Trust Company ("IFTC"), 127 West Tenth Street, Kansas
City, Missouri 64105, (800) 874-6205, serves as Custodian for the Funds'
portfolio securities and cash and as Transfer Agent and Dividend Disbursing
Agent for the Funds.
The Company has entered into Shareholder Account Servicing Agreements with
the Distributor and Piper Trust Company, an affiliate of the Distributor and the
Adviser. Under these agreements the
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Distributor and Piper Trust Company provide transfer agent and dividend
disbursing agent services for certain shareholder accounts. For more
information, see "Investment Advisory and Other Services -- Transfer Agent
and Dividend Disbursing Agent" in the Statement of Additional Information.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
The Adviser selects brokers or futures commission merchants to use for the
Funds' portfolio transactions. In making its selection, the Adviser may
consider a number of factors, which are more fully discussed in the Statement of
Additional Information, including, but not limited to, research services,
favorableness of net price, the reasonableness of commissions, and quality of
services and execution. A broker's sales of shares of any series of the Company
may also be considered a factor if the Adviser is satisfied that a Fund would
receive from that broker the most favorable price and execution then available
for a transaction. Transactions in Tax-Exempt Securities will generally be with
the issuer or with dealers acting on a principal basis. However, portfolio
transactions for the Funds which are executed on an agency basis may be effected
through the Distributor. For more information, see "Portfolio Transactions and
Allocation of Brokerage" in the Statement of Additional Information.
DISTRIBUTION OF FUND SHARES
Piper Jaffray acts as the principal distributor of the Funds' shares. The
Company has adopted a Distribution Plan (the "Plan") as required by Rule 12b-1
under the 1940 Act. Under the Plan, the Distributor is paid a total fee in
connection with the servicing of each Fund's shareholder accounts and in
connection with distribution related services provided with respect to each
Fund. This fee is calculated and paid monthly at an annual rate equal to .30%
of the average daily net assets of each Fund.
A portion of the total fee equal to 0.05% of each Fund's average daily
net assets is categorized as a distribution fee intended to compensate the
Distributor for its expenses incurred in connection with the sale of Fund
shares. The remaining portion of the fee, equal to .25% of each Fund's
average daily net assets, is categorized as a servicing fee intended to
compensate the Distributor for ongoing servicing and/or maintenance of
shareholder accounts. The Distributor has voluntarily agreed to limit the
total fee payable under the Plan to .22% of each Fund's average daily net
assets. This limitation may be revised or terminated at any time after
fiscal 1996 year end. Payments made under the Plan are not tied exclusively
to expenses actually incurred by the Distributor and may exceed such
expenses. The Adviser and the Distributor, out of their own assets, may pay
for certain expenses incurred in connection with the distribution of shares
of the Funds. In particular, the Adviser may make payments out of its own
assets to Piper Jaffray Investment Executives and other broker dealers in
connection with their sales of shares of the Funds. See "How to Purchase
Shares -- Purchase Price." Further information regarding the Plan is
contained in the Statement of Additional Information.
The Distributor uses all or a portion of its servicing fee to make
payments to Investment Executives of the Distributor and broker-dealers which
have entered into sales agreements with the Distributor. If shares of a Fund
are sold by a representative of a broker-dealer other than the Distributor,
the broker-dealer is paid .20% of the average daily net assets of the Fund
attributable to shares sold by the broker-dealer's representative. If shares
of a Fund are sold by an Investment Executive of the Distributor,
compensation is paid to the Investment Executive in the manner set forth in a
written agreement, in an amount not to exceed .20% of the average daily net
assets of the Fund attributable to shares sold by the Investment Executive.
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HOW TO PURCHASE SHARES
GENERAL
The Funds' shares may be purchased at the public offering price from the
Distributor and from other broker-dealers who have sales agreements with the
Distributor. The address of the Distributor is that of the Funds. The
Distributor reserves the right to reject any purchase order. You should be
aware that, because the Funds do not issue stock certificates, Fund shares
must be kept in an account with the Distributor or with IFTC. All
investments must be arranged through your Piper Jaffray Investment Executive
or other broker-dealer.
PURCHASE PRICE
You may purchase shares of the Funds at the net asset value per share next
calculated after receipt of your order by your Piper Jaffray Investment
Executive or other broker-dealer, plus a front-end sales charge as follows:
<TABLE>
<CAPTION> Sales Charge Sales Charge
as a Percentage of as a Percentage of
Amount of Transaction at Offering Price Offering Price Net Asset Value
--------------------------------------- ------------------ ------------------
<S> <C> <C>
Less than $100,000..................... 4.00% 4.17%
$100,000 but less than $250,000........ 3.25% 3.36%
$250,000 but less than $500,000........ 2.50% 2.56%
$500,000 and over...................... 0.00% 0.00%
</TABLE>
This table sets forth total sales charges or underwriting commissions. The
Distributor may reallow up to the entire sales charge to broker-dealers in
connection with their sales of shares. These broker-dealers may, by virtue of
such reallowance, be deemed to be "underwriters" under the 1933 Act.
The Distributor will make certain payments to its Investment Executives
and to other broker-dealers in connection with their sales of Fund shares.
See "Distribution of Fund Shares" above. In addition, the Distributor or the
Adviser, at their own expense, provide promotional incentives to Investment
Executives of the Distributor and to broker-dealers who have sales agreements
with the Distributor in connection with sales of shares of the Funds, other
series of the Company and other mutual funds for which the Adviser acts as
investment adviser. In some instances, these incentives may be made
available only to certain Investment Executives or broker-dealers who have
sold or may sell significant amounts of such shares. The incentives may
include payment for travel expenses, including lodging at luxury resorts,
incurred in connection with sales seminars.
PURCHASES OF $500,000 OR MORE
If you make a purchase of $500,000 or more (including purchases made
under a Letter of Intent), a 1% contingent deferred sales charge will be
assessed in the event you redeem shares within 24 months following the
purchase. This sales charge will be paid to the Distributor. For more
information, please refer to the Contingent Deferred Sales Charge section of
"How To Redeem Shares." The Distributor currently pays its Investment
Executives and other broker-dealers fees in connection with these purchases
as follows:
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Fee as
a Percentage
Amount of Transaction of Offering Price
--------------------- -----------------
First $1,000,000....................... 1.00%
Next $2,000,000....................... 0.75%
Next $2,000,000....................... 0.50%
Next $5,000,000....................... 0.25%
Above $10,000,000...................... 0.15%
Piper Jaffray Investment Executives and other broker-dealers generally will
not receive a fee in connection with purchases on which the contingent deferred
sales charge is waived. However, the Distributor, in its discretion, may pay a
fee out of its own assets to its Investment Executives and other broker-dealers
in connection with purchases by employee benefit plans on which no sales charge
is imposed. Please see the Special Purchase Plans section of "Reducing Your
Sales Charge."
MINIMUM INVESTMENTS
A minimum initial investment of $250 is required. There is no minimum
for subsequent investments. The Distributor, in its discretion, may waive
the minimum.
REDUCING YOUR SALES CHARGE
You may qualify for a reduced sales charge through one or more of several
plans. You must notify your Piper Jaffray Investment Executive or broke-dealer
at the time of purchase to take advantage of these plans.
AGGREGATION
Front-end or initial sales charges may be reduced or eliminated by
aggregating your purchase with purchases of certain related personal
accounts. In addition, purchases made by members of certain organized groups
will be aggregated for purposes of determining sales charges. Sales charges
are calculated by adding the dollar amount of your current purchase to the
higher of the cost or current value of shares of any Piper fund sold with a
sales charge that are currently held by you and your related accounts or by
other members of your group.
QUALIFIED GROUPS. You may group purchases in the following personal
accounts together:
- Your individual account.
- Your spouse's account.
- Your children's accounts (if they are under the age of 21).
- Your employee benefit plan accounts if they are exclusively for
your benefit. This includes accounts such as IRAs, individual
403(b) plans or single-participant Keogh-type plans.
- A single trust estate or single fiduciary account if you are the
trustee or fiduciary.
Additionally, purchases made by members of any organized group meeting
the requirements listed below may be aggregated for purposes of determining
sales charges:
- The group has been in existence for more than six months.
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- It is not organized for the purpose of buying redeemable securities
of a registered investment company.
- Purchases must be made through a central administration, or through
a single dealer, or by other means that result in economy of sales
effort or expense.
An organized group does not include a group of individuals whose sole
organizational connection is participation as credit card holders of a
company, policyholders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser.
RIGHT OF ACCUMULATION
Sales charges for purchases of Fund shares into Piper Jaffray accounts will
be automatically calculated taking into account the dollar amount of any new
purchases along with the higher of current value or cost of shares previously
purchased in any other mutual fund managed by the Adviser (except Hercules Funds
Inc.) that was sold with a sales charge. For other broker-dealer accounts, you
should notify your Investment Executive at the time of purchase of additional
Piper fund shares you may own.
LETTER OF INTENT
Your sales charge may be reduced by signing a non-binding Letter of
Intent. This Letter of Intent will state your intention to invest $100,000 or
more in any of the mutual funds managed by the Adviser that are sold with a
sales charge (except Hercules Funds Inc.) over a 13-month period, beginning
not earlier than 90 days prior to the date you sign the Letter. You will pay
the lower sales charge applicable to the total amount you plan to invest over
the 13-month period. Part of your shares will be held in escrow to cover
additional sales charges that may be due if you do not invest the planned
amount. Please see "Purchase of Shares" in the Statement of Additional
Information for more details. You can contact your Piper Jaffray Investment
Executive or other broker-dealer for an application.
SPECIAL PURCHASE PLANS
For more information on any of the following special purchase plans,
contact your Piper Jaffray Investment Executive or other broker-dealer.
PURCHASE BY PIPER JAFFRAY COMPANIES INC., ITS SUBSIDIARIES AND ASSOCIATED
PERSONS
Piper Jaffray Companies Inc. and its subsidiaries may buy shares of the
Funds without incurring a sales charge. The following persons associated
with such entities also may buy Fund shares without paying a sales charge:
- Officers, directors and partners.
- Employees and retirees.
- Sales representatives.
- Spouses or children under the age of 21 of any of the above.
- Any trust, pension, profit-sharing or other benefit plan for any of
the above.
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PURCHASES BY BROKER-DEALERS
Employees of broker-dealers who have entered into sales agreements with the
Distributor, and spouses and children under the age of 21 of such employees, may
buy shares of the Funds without incurring a sales charge.
PURCHASES BY OTHER INDIVIDUALS WITHOUT A SALES CHARGE
The following other individuals and entities may buy Fund shares without
paying a sales charge:
- Clients of the Adviser buying shares of the Funds in their advisory
accounts.
- Discretionary accounts at Piper Trust Company and participants in
investment companies exempt from registration under the 1940 Act that
are managed by the Adviser.
- Trust companies and bank trust departments using funds over which
they exercise exclusive discretionary investment authority and which
are held in a fiduciary, agency, advisory, custodial or similar
capacity.
- Investors purchasing shares through a Piper Jaffray Investment
Executive if the purchase of such shares is funded by the proceeds
from the sale of shares of any non-money market open-end mutual fund.
This privilege is available for 30 days after the sale.
HOW TO REDEEM SHARES
NORMAL REDEMPTION
You may redeem all or a portion of your shares on any day that a Fund
values its shares. (Please refer to "Valuation of Shares" below for more
information.) Your shares will be redeemed at the net asset value next
calculated after the receipt of your instructions in good form by your Piper
Jaffray Investment Executive or other broker-dealer as explained below.
PIPER JAFFRAY INC. ACCOUNTS. To redeem your shares, please contact your
Piper Jaffray Investment Executive with an oral request to redeem your shares.
OTHER BROKER-DEALER ACCOUNTS. To redeem your shares, you may either
contact your broker-dealer with an oral request or send a written request
directly to the Funds' transfer agent, IFTC. This request should contain: the
dollar amount or number of shares to be redeemed, your Fund account number and
either a social security or tax identification number (as applicable). You
should sign your request in exactly the same way the account is registered. If
there is more than one owner of the shares, all owners must sign. A signature
guarantee is required for redemptions over $25,000. Please contact IFTC or
refer to "Redemption of Shares" in the Statement of Additional Information for
more details.
CONTINGENT DEFERRED SALES CHARGE
If you invest $500,000 or more and, as a result, pay no front-end sales
charge, you may incur a contingent deferred sales charge if you redeem within
24 months. This charge will be equal to 1% of the lesser of the net asset value
of the shares at the time of purchase or at the time of redemption. This charge
does not apply to amounts representing an increase in the value of Fund shares
due to capital appreciation or to shares acquired through reinvestment of
dividend or capital gain distributions. In determining
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whether a contingent deferred sales charge is payable, shares that are not
subject to any deferred sales charge will be redeemed first, and other shares
will then be redeemed in the order purchased.
LETTER OF INTENT. In the case of a Letter of Intent, the 24-month
period begins on the date the Letter of Intent is completed.
SPECIAL PURCHASE PLANS. If you purchased your shares through one of the
plans described above under "Special Purchase Plans," the contingent deferred
sales charge will be waived. In addition, the contingent deferred sales
charge will be waived in the event of:
- The death or disability (as defined in Section 72(m)(7) of the Code)
of the shareholder. (This waiver will be applied to shares held at
the time of death or the initial determination of disability of either
an individual shareholder or one who owns the shares as a joint tenant
with the right of survivorship or as a tenant in common.)
- Involuntary redemptions effected pursuant to the right to liquidate
shareholder accounts having an aggregate net asset value of less than
$200.
EXCHANGES. If you exchange your shares, no contingent deferred sales
charge will be imposed. However, the charge will apply if you subsequently
redeem the new shares within 24 months of the original purchase.
REINSTATEMENT PRIVILEGE. If you elect to use the Reinstatement Privilege
(please see "Shareholder Services" below), any contingent deferred sales charge
you paid will be credited to your account (proportional to the amount
reinvested). Please see "Redemption of Shares" in the Statement of Additional
Information for more details.
PAYMENT OF REDEMPTION PROCEEDS
After your shares have been redeemed, proceeds will normally be sent to you
or your broker-dealer within three business days. In no event will payment be
made more than seven days after receipt of your order in good form. However,
payment may be postponed or the right of redemption suspended for more than
seven days under unusual circumstances, such as when trading is not taking place
on the New York Stock Exchange. Payment of redemption proceeds may also be
delayed if the shares to be redeemed were purchased by a check drawn on a bank
which is not a member of the Federal Reserve System, until such checks have
cleared the banking system (normally up to 15 days from the purchase date).
INVOLUNTARY REDEMPTION
Each Fund reserves the right to redeem your account at any time the net
asset value of the account falls below $200 as the result of a redemption or
exchange request. You will be notified in writing prior to any such redemption
and will be allowed 30 days to make additional investments before the redemption
is processed.
SHAREHOLDER SERVICES
AUTOMATIC MONTHLY INVESTMENT PROGRAM
You may arrange to make additional automated purchases of shares of the
Funds or certain other mutual funds managed by the Adviser. You can
automatically transfer $100 or more per month from your
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bank, savings and loan or other financial institution to purchase additional
shares. In addition, if you hold your shares in a Piper Jaffray account you may
arrange to make such additional purchases by having $25 or more automatically
transferred each month from any of the money market fund series of the Company.
You should contact your Piper Jaffray Investment Executive or IFTC to obtain
authorization forms or for additional information.
REINSTATEMENT PRIVILEGE
If you have redeemed shares of a Fund, you may be eligible to reinvest in
shares of any fund managed by the Adviser (except Hercules Funds Inc.) without
payment of an additional sales charge. The reinvestment request must be made
within 30 days of the redemption. This privilege is subject to the eligibility
of share purchases in your state as well as the minimum investment requirements
and any other applicable terms in the prospectus of the fund being acquired.
EXCHANGE PRIVILEGE
If your investment goals change, you may prefer a fund with a different
objective. If you are considering an exchange into another mutual fund managed
by the Adviser, you should carefully read the appropriate prospectus for
additional information about that fund. A prospectus may be obtained through
your Piper Jaffray Investment Executive, your broker-dealer or the Distributor.
To exchange your shares, please contact your Piper Jaffray Investment Executive,
your broker-dealer or IFTC.
You may exchange your shares for shares of any other mutual fund managed
by the Adviser (except Hercules Funds Inc.) that is open to new investors.
All exchanges are subject to the eligibility of share purchases in your state
as well as the minimum investment requirements and any other applicable terms
in the prospectus of the fund being acquired. Exchanges are made on the
basis of the net asset values of the funds involved, except that investors
exchanging into a fund which has a higher sales charge must pay the
difference.
You may make four exchanges per year without payment of a service charge.
Thereafter, you will pay a $5 service charge for each exchange. The Company
reserves the right to change or discontinue the exchange privilege, or any
aspect of the privilege, upon 60 day's written notice.
TELEPHONE TRANSACTION PRIVILEGES
PIPER JAFFRAY INC. ACCOUNTS. If you hold your shares in a Piper Jaffray
account, you may telephone your Investment Executive to execute any transaction
or to apply for many shareholder services. In some cases, you may be required
to complete a written application.
OTHER BROKER-DEALER ACCOUNTS. If you hold your shares in an account
with your broker-dealer or at IFTC, you may authorize telephone privileges by
completing the Account Application and Services Form. Please contact your
broker-dealer or IFTC (800-874-6205) for an application or for more details.
The Funds will employ reasonable procedures to confirm that a telephonic
request is genuine, including requiring that payment to be made only to the
address of record or the bank account designated on the Account Application
and Services Form and requiring certain means of telephonic identification.
A Fund employing such procedures will not be liable for following
instructions communicated by telephone that it reasonably believes to be
genuine. If a Fund does not employ such procedures, it may be liable for any
losses due to unauthorized or fraudulent telephone transactions. It may be
difficult to reach the Funds by telephone during periods when market or
economic conditions lead to an unusually large volume of
24
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER GUIDE TO INVESTING
- --------------------------------------------------------------------------------
telephone requests. If you cannot reach the Funds by telephone, you should
contact your broker-dealer or issue written instructions to IFTC at the
address set forth herein. See "Management -- Transfer Agent, Dividend
Disbursing Agent and Custodian." The Funds reserve the right to suspend or
terminate their telephone services at any time without notice.
DIRECTED DIVIDENDS
You may direct income dividends and capital gains distributions to be
invested in any other mutual fund managed by the Adviser (Other than a money
market fund or Hercules Funds Inc.) that is offered in your state. This
investment will be made at net asset value. It will not be subject to a
minimum investment amount except that you must hold shares in such fund
(including the shares being acquired with the dividend or distribution) with
a value at least equal to such fund's minimum initial investment amount.
SYSTEMATIC WITHDRAWAL PLAN
If your account has a value of $5,000 or more, you may establish a
Systematic Withdrawal Plan for any of the Funds. This plan will allow you to
receive regular periodic payments by redeeming as many shares from your
account as necessary. As with other redemptions, a redemption to make a
withdrawal is a sale for federal income tax purposes. Payments made under a
Systematic Withdrawal Plan cannot be considered as actual yield or income
since part of the payments may be a return of capital.
A request to establish a Systematic Withdrawal Plan must be submitted in
writing to your Piper Jaffray Investment Executive or other broker-dealer.
There are no service charges for maintenance; the minimum amount that you may
withdraw each period is $100. You will be required to have any income
dividends and any capital gains distributions reinvested. You may choose to
have withdrawals made monthly, quarterly or semiannually. Please contact
your Piper Jaffray Investment Executive, other broker-dealer or IFTC for more
information.
You should be aware that additional investments in an account that has
an active Systematic Withdrawal Plan may be inadvisable due to sales charges
and tax liabilities. Please refer to "Redemption of Shares" in the Statement
of Additional Information for additional details.
ACCOUNT PROTECTION
If you purchased your shares of any of the Funds through a Piper Jaffray
Investment Executive, you may choose from several account options. Your
investments in any of the Funds held in a Piper Jaffray account (except for
non-"PAT" accounts) would be protected up to $25 million. Investments held
in non-"PAT" Piper Jaffray accounts are protected up to $2.5 million. In each
case, the Securities Investor Protection Corporation ("SPIC") provides
$500,000 of protection; the additional coverage is provided by The Aetna
Casualty & Surety Company. This protection does not cover any declines in
the net asset value of Fund shares.
CONFIRMATION OF TRANSACTIONS AND REPORTING OF OTHER INFORMATION
Each time there is a transaction involving your Fund shares, such as a
purchase, redemption or dividend reinvestment, you will receive a
confirmation statement describing that activity. This information will be
provided to you from either Piper Jaffray, your broker-dealer or IFTC. In
addition, you will receive various IRS forms after the first of each year
detailing important tax information and each Fund is required to supply
annual and semiannual reports that list securities held by the Fund and
include the current financial statements of the Fund.
25
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER GUIDE TO INVESTING
- --------------------------------------------------------------------------------
HOUSEHOLDING. If you have multiple accounts with Piper Jaffray, you
may receive some of the above information in combined mailings. This will
not only help to reduce Fund expenses, it will help the environment by saving
paper. Please contact your Piper Jaffray Investment Executive for more
information.
DIVIDENDS AND DISTRIBUTIONS
The net investment income of each Fund will be declared as dividends
daily. Dividends will be reinvested in additional Fund shares monthly. Each
daily dividend is payable to Fund shareholders of record at the time of its
declaration. "Shareholders of record" includes holders of shares purchased
for which payment has been received by the Distributor or IFTC, as
appropriate, and excludes holders of shares redeemed on that day. Shares
redeemed will earn dividends through the day prior to the day of redemption.
Each Fund may at times pay out less than the entire amount of net
investment income earned in any particular period in order to permit the Fund
to maintain a more stable level of distributions. Any such amount retained
by a Fund would be available to stabilize future distributions. As a result,
the distributions paid by a Fund for any particular period may be more or
less than the amount of net investment income earned by the Fund during such
period.
DISTRIBUTIONS OPTIONS. All net investment income dividends and net
realized capital gains distributions for a Fund generally will be payable in
additional shares of that Fund at net asset value ("Reinvestment Option").
If you wish to receive your distributions in cash, you must notify your Piper
Jaffray Investment Executive or other broker-dealer. You may elect either to
receive income dividends in cash and capital gains distributions in
additional shares of the Fund at net asset value ("Split Option"), or to
receive both income dividends and capital gains distributions in cash ("Cash
Option"). You may also direct income dividends and capital gains
distributions to be invested in another mutual fund managed by the Adviser.
See "Shareholder Services -- Directed Dividends," above. The taxable status
of income dividends and/or net capital gains distribution is not affected by
whether they are reinvested or paid in cash.
CAPITAL LOSS CARRYOVER. For federal income tax purposes, National Fund
and Minnesota Fund had capital loss carryovers at September 30, 1995 of
$1,177,851 and $1,588,089, respectively. Such capital loss carryovers, if not
offset by subsequent capital gains, will expire September 30, 2003 and 2004
for National Fund and September 30, 2003 for Minnesota Fund. It is unlikely
that the Board of Directors will authorize a distribution of any net realized
capital gains until the available capital loss carryovers have been offset or
have expired.
26
<PAGE>
VALUATION OF SHARES
The Funds compute their net asset value on each day the New York Stock
Exchange (the "Exchange") is open for business. The calculation is made as
of the regular close of the Exchange (currently 4:00 p.m., New York time)
after the Funds have declared any applicable dividends.
The net asset value per share for each Fund is determined by dividing
the value of the securities owned by the Fund plus any cash and other assets
(including interest accrued and dividends declared but not collected) less
all liabilities by the number of Fund shares outstanding. For purposes of
determining the aggregate net assets of the Funds, cash and receivables will
be valued at their face amounts. Interest will be recorded as accrued.
Financial futures are valued at the settlement price established each day by
the board of trade or exchange on which they are traded.
The value of certain fixed-income securities will be provided by an
independent pricing service, which determines these valuations at a time
earlier than the close of the Exchange. Pricing services consider such
factors as security prices, yields, maturities, call features, ratings and
developments relating to specific securities in arriving at securities
valuations. Fixed-income securities for which prices are not available from
an independent pricing service but where an active market exists will be
valued using market quotations obtained from one or more dealers that make
markets in the securities. Occasionally events affecting the value of such
securities may occur between the time valuations are determined and the close
of the Exchange. If events materially affecting the value of such securities
occur during such period, or if the Company's management determines for any
other reason that valuations provided by the pricing service are inaccurate,
such securities will be valued at their fair value according to procedures
decided upon in good faith by the Company's Board of Directors. In addition,
any securities or other assets of a fund for which market prices are not
readily available will be valued at their fair value in accordance with such
procedures.
TAX STATUS
FEDERAL TAXATION
Each Fund is treated as a separate corporation for federal income tax
purposes under the Internal Revenue Code of 1986, as amended (the "Code").
Therefore, each Fund is treated separately in determining whether it
qualifies as a regulated investment company under the Code and for purposes
of determining the net ordinary income (or loss), net realized capital gains
(or losses) and distributions necessary to relieve such Fund of any federal
income tax liability. Both Funds qualified as regulated investment companies
during the last taxable year and both Funds intend to qualify as regulated
investment companies during the current taxable year. If so qualified, a
Fund will not be liable for federal income taxes to the extent it distributes
its taxable income to shareholders.
Each Fund intends to take all actions required under the Code to ensure
that it may pay "exempt interest dividends." If a Fund meets these
requirements, distributions of net interest income from tax-exempt
obligations that are designated by the Fund as exempt-interest dividends will
be excludable from the gross income of the Fund's shareholders. Each Fund's
present policy is to designate exempt-interest dividends annually.
Shareholders are required for information purposes to report exempt-interest
dividends and other tax-exempt interest on their tax returns. Distributions
paid from other interest income and from any net realized capital gains will
be taxable to shareholders whether received in cash or in additional shares.
Capital gains from the sale or exchange of shares are also subject to tax.
Exempt interest dividends attributable to interest income on certain
tax-exempt obligations issued after August 7, 1986 to finance private
activities are treated as an item of tax preference for purposes of
27
<PAGE>
computing the alternative minimum tax for individuals, estates and trusts.
Each Fund may invest in such obligations, provided that at least 80% of the
value of each Fund's net assets will at all times be invested in tax-exempt
obligations the interest on which is not an item of tax preference. See
"Taxation" in the Statement of Additional Information.
If a Fund invests in custodial receipts (see "Investment Objectives and
Policies -- Tax-Exempt Securities -- Derivative Municipal Obligations"), it
is possible that a portion of the discount at which the Fund purchases the
receipts might have to be accrued as taxable income during the period that
the Fund holds the receipts. Because of the requirement that each Fund
distribute 90% of its net investment income to maintain its status as a
regulated investment company, the Fund would be obligated to distribute
taxable income to shareholders in the amount of its accrued taxable income.
The Tax Reform Act of 1986 imposed new requirements on certain
tax-exempt bonds which, if not satisfied, could result in loss of tax
exemption for interest on such bonds, even retroactively to the date of
issuance of the bonds. Proposals may be introduced before Congress in the
future, the purpose of which will be to further restrict or eliminate the
federal income tax exemption for Tax-Exempt Securities. The Funds cannot
predict what additional legislation may be enacted that may affect
shareholders. The Funds will avoid investment in Tax-Exempt Securities
which, in the opinion of the Adviser, pose a material risk of the loss of tax
exemption. Further, if a Tax-Exempt Security in a Fund's portfolio loses its
exempt status, the Fund will make every effort to dispose of such investment
on terms that are not detrimental to the Fund.
The exclusion from federal gross income of exempt-interest dividends
will not necessarily result in exclusion under the income tax laws of any
state or local governmental unit.
MINNESOTA TAXATION
The portion of exempt-interest dividends that is derived from interest
income on obligations of the State of Minnesota or its political or
governmental subdivisions, municipalities, governmental agencies or
instrumentalities is excluded from the Minnesota taxable net income of
individuals, estates and trusts, provided that the portion of the
exempt-interest dividends from such Minnesota sources paid to all
shareholders represents 95% or more of the exempt-interest dividends paid by
the Fund. The remaining portion of such dividends, and dividends that are
not exempt-interest dividends or capital gain dividends, are included in the
Minnesota taxable net income of individuals, estates and trusts. Minnesota
Fund intends to meet this 95% requirement, so that the dividends it pays that
are attributable to interest on Minnesota obligations will be excludable from
the Minnesota taxable income of shareholders that are individuals, estates
and trusts. National Fund, however, will not meet the 95% requirement, and
accordingly all exempt interest dividends paid by the National Fund will be
taxable in Minnesota. Exempt-interest dividends are not excluded from the
Minnesota taxable income of corporations and financial institutions.
Dividends qualifying for federal income tax purposes as capital gain
dividends are to be treated by shareholders as long-term capital gains under
Minnesota law. However, Minnesota has repealed the favorable treatment of
long-term capital gains, while retaining restrictions on the deductibility of
capital losses. As under federal law, the portion of Social Security
benefits subject to Minnesota income tax may be affected by the amount of
exempt-interest dividends received by the shareholders. Exempt-interest
dividends attributable to interest on certain private activity bonds issued
after August 7, 1986 will be included in Minnesota alternative minimum
taxable income of individuals, estates and trusts for purposes of computing
Minnesota's alternative minimum tax.
The 1995 Minnesota Legislature has enacted a statement of intent that
interest on obligations of Minnesota governmental units and Indian tribes be
included in net income of individuals, estates and trusts for Minnesota
income tax purposes if a court determines that Minnesota's exemption of such
interest
28
<PAGE>
unlawfully discriminates against interstate commerce because interest on
obligations of governmental issuers located in other states is so included.
This provision applies to taxable years that begin during or after the
calendar year in which any such court decision becomes final, irrespective of
the date on which the obligations were issued. Minnesota Fund is not aware
of any decision in which a court has held that a state's exemption of
interest on its own bonds or those of its political subdivisions or Indian
tribes, but not of interest on the bonds of other states or their political
subdivisions or Indian tribes, unlawfully discriminates against interstate
commerce or otherwise contravenes the United States Constitution.
Nevertheless, Minnesota Fund cannot predict the livelihood that interest on
the Minnesota Tax-Exempt Securities held by the Fund would become taxable
under this Minnesota statutory provision.
The foregoing discussion relates to federal and Minnesota income
taxation as of the date of this Prospectus. For a more detailed discussion
of the income tax consequences of investing in shares of the Funds, see
"Taxation" in the Statement of Additional Information. Before investing in
either of the Funds, you should check for any further consequences under
applicable local and state tax laws.
PERFORMANCE COMPARISONS
Advertisements and other sales literature for the Funds may refer to
their "yield," "tax equivalent yield," "average annual total return" and
"cumulative total return." When a Fund advertises its yield, it will also
advertise its total return as required by the rules of the Securities and
Exchange Commission. All such figures are based on historical earnings and
arc not intended to indicate future performance. The return on and principal
value of an investment in the Funds will fluctuate, so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
The advertised "yield" of a Fund will be based upon a 30-day period
stated in the advertisement. Yield is calculated by dividing the net
investment income per share (as defined under Securities and Exchange
Commission rules and regulations) earned during the period by the maximum
offering price per share on the last day of the period. The result is then
"annualized" using a formula that provides for semiannual compounding of
income.
"Tax equivalent yield" is calculated by applying the stated income tax
rate only to that portion of the yield that is exempt from taxation. The
tax-exempt portion of the yield is divided by the number 1 minus the stated
income tax rate (E.G., 1- 28% = 72%). The result is then added to that
portion of the yield, if any, that is not tax-exempt.
The "average annual total return" is the average annual compounded rate
of return on a hypothetical $1,000 investment made at the beginning of the
advertised period. "Cumulative total return" is calculated by subtracting a
hypothetical $1,000 payment to a Fund from the redeemable value of such
payment at the end of the advertised period, dividing such difference by
$1,000 and multiplying the quotient by 100. In calculating average annual
and cumulative total return, the maximum sales charge is deducted from the
hypothetical investment and all dividends and distributions are assumed to be
reinvested. Such total return quotations may be accompanied by quotations
which do not reflect the reduction in value of the initial investment due to
the sales charge, and which thus will be higher.
Comparative performance information may also be used from time to
time in advertising the Funds' shares. For example, advertisements may
compare a Fund's performance to that of various unmanaged market indices, or
may include performance data from Lipper Analytical Services, Inc.,
Morningstar, Inc. or other entities or organizations that track the
performance of investment companies.
29
<PAGE>
For additional information regarding comparative performance information
and the calculation of a Fund's yield, tax equivalent yield and total return,
see "Performance Comparisons" in the Statement of Additional Information.
Advertisements and other sales literature may also refer to a Fund's
effective duration. Effective duration estimates the interest rate risk
(price volatility) of a security, I.E., how much the value of the security is
expected to change with a given change in interest rates. The longer a
security's effective duration, the more sensitive its price is to changes in
interest rates. For example, if interest rates were to increase by 1%, the
market value of a bond with an effective duration of five years would
decrease by about 5%, with all other factors being constant. It is important
to understand that, while a valuable measure, effective duration is based
upon certain assumptions and has several limitations. It is most effective
as a measure of interest rate risk when interest rate changes are small,
rapid and occur equally across all the different points of the yield curve.
In addition, effective duration is difficult to calculate precisely,
especially in the case of a bond that is callable prior to maturity.
GENERAL INFORMATION
The Company, which was organized under the laws of the State of
Minnesota in 1986, is authorized to issue a total of 10 trillion shares of
common stock, with a par value of $.0l per share. Four hundred billion of
these shares have been authorized by the Board of Directors to be issued in
thirteen separate series, as follows: Growth Fund (formerly known as Value
Fund), Emerging Growth Fund, Growth and Income Fund, Equity Strategy Fund,
Balanced Fund, Government Income Fund, Short-Intermediate Bond Fund,
Institutional Government Income Portfolio, National Tax-Exempt Fund and
Minnesota Tax-Exempt Fund, each of which has ten billion authorized shares,
and Money Market Fund, Tax-Exempt Money Market Fund and U.S. Government Money
Market Fund, each of which has one hundred billion authorized shares.
The Board of Directors is empowered under the Company's Articles of
Incorporation to issue additional series of the Company's common stock
without shareholder approval. In addition, the Board of Directors may,
without shareholder approval, create and issue one or more additional classes
of shares within each Fund, as well as within any series of the Company
created in the future. See "Capital Stock and Ownership of Shares" in the
Statement of Additional Information.
All shares, when issued, will be fully paid and nonassessable and will
be redeemable. All shares have equal voting rights. They can be issued as
full or fractional shares. A fractional share has pro rata the same kind of
rights and privileges as a full share. The shares possess no preemptive or
conversion rights.
Each share of a series has one vote (with proportionate voting for
fractional shares) irrespective of the relative net asset value of the
series' shares. On some issues, such as the election of directors, all
shares of the Company vote together as one series. Cumulative voting is not
authorized. This means that the holders of more than 50% of the shares
voting for the election of directors can elect 100% of the directors if they
choose to do so, and, in such event, the holders of the remaining shares will
be unable to elect any directors.
The Bylaws of the Company provide that shareholder meetings be held only
with such frequency as required under Minnesota law. Minnesota corporation
law requires only that the Board of Directors convene shareholder meetings
when it deems appropriate. In addition, Minnesota law provides that if a
regular meeting of shareholders has not been held during the immediately
preceding 15 months, a shareholder or shareholders holding 3% or more of
the voting shares of the Company may demand a regular meeting of shareholders
by written notice given to the chief executive officer or chief financial
officer of the Company within 30 days after receipt of the demand, the Board
of Directors shall cause a regular
30
<PAGE>
meeting of shareholders to be called, which meeting shall be held no later
than 90 days after receipt of the demand, all at the expense of the Company.
In addition, the 1940 Act requires a shareholder vote for all amendments to
fundamental investment policies and restrictions and for all amendments to
investment advisory contracts and Rule 12b-1 distribution plans. The 1940
Act also provides that Directors of the Company may be removed by action of
the record holders of two-thirds or more of the outstanding shares of the
Company. The Directors are required to call a meeting of shareholders for
the purpose of voting upon the question of removal of any Director when so
requested in writing by the record holders of at least 10% of the Company's
outstanding shares.
PENDING LEGAL PROCEEDINGS
Complaints have been brought against the Adviser and the Distributor
relating to another series of the Company and to other investment companies
for which the Adviser acts or has acted as investment adviser or sub-adviser.
These lawsuits do not involve the Funds. A number of complaints have been
brought in federal and state court against the Institutional Government
Income Portfolio ("PJIGX") series of the Company, the Adviser, the
Distributor, and certain individuals affiliated or formerly affiliated with
the Adviser and the Distributor. In addition, complaints have been filed in
federal court relating to a number of closed-end investment companies managed
by the Adviser and two open-end investment companies for which the Adviser
has acted as sub-adviser. The complaints, which ask for rescission of
plaintiff shareholders' purchases or compensatory damages, plus interest,
costs and expenses, generally allege, among other things, certain violations
of federal and/or state securities laws, including the making of materially
misleading statements in prospectuses concerning investment policies and
risks. See "Pending Litigation" in the Statement of Additional Information.
A settlement agreement has been reached with respect to one of the
complaints involving PJIGX, An Amended Consolidated Class Action Complaint,
which represents a consolidation of claims previously brought by 11 persons
or entities, was filed on October 5, 1994 in the United States District
Court, District of Minnesota. The named plaintiffs in this putative class
action (the "PJIGX action") purport to represent a class of individuals and
groups who purchased shares of PJIGX dumping the period from July 1, 1991
through May 9, 1994. The named plaintiff and defendants have entered into a
settlement agreement which has received preliminary approval from the Court.
The terms of the settlement are set forth in a Settlement Agreement dated
July 20, 1995 (as modified by an Addendum filed on July 28, 1995). The
Settlement Agreement contained a provision which would have permitted the
defendants to cancel the Agreement if shareholders who had incurred a
cumulative "loss" (as defined under the Agreement) of more than 10% of the
loss sustained by the entire class had opted out. The October 2, 1995
deadline for requesting exclusion from the class has passed, and the loss
sustained by persons requesting exclusion is less than 10%. If granted final
approval by the Court, the settlement agreement would provide up to
approximately $70 million to class members in payments scheduled over
approximately three years. Such payments would be made by Piper Jaffray
Companies and the Adviser and would not be an obligation of the Company. Six
additional complaints have been brought and a number of actions have been
commenced in arbitration relating to PJIGX. The complaints generally have
been consolidated with the PJIGX action for pretrial purposes and the
arbitrations and litigations have been stayed pending entry of an order by
the Court permitting those class members who have requested exclusion to
proceed with their actions.
The Adviser and the Distributor do not believe that the PJIGX settlement
or any outstanding complaint or action in arbitration will have a material
adverse effect on their ability to perform under their agreements with the
Company or a material adverse effect on the funds, and they intend to defend
such lawsuits and actions vigorously.
31
<PAGE>
TAX-EXEMPT VS. TAXABLE INCOME
The tables below show the approximate yields that taxable securities
must earn to equal federally tax-exempt yields and yields that are exempt
from both federal and Minnesota income taxes under selected combined
federal/Minnesota income tax brackets, which reflect effective combined rates
after deducting Minnesota taxes from federal income. The combined
federal/Minnesota tax brackets assume the federal rate listed in the column
above each combined bracket and a Minnesota income tax rate of 8.5% (except
the 33.8% combined rate, which assumes a Minnesota rate of 8%). The 39.6%
federal rate and the 8.5% Minnesota rate are the highest rates in effect for
individuals in 1995.
NATIONAL TAX-EXEMPT FUND
<TABLE>
<CAPTION>
Equivalent Taxable Yield
------------------------------------------------------------------
Tax-Free 28% 31% 36% 39.6%
Yield Federal Bracket Federal Bracket Federal Bracket Federal Bracket
-------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
4.00% 5.56% 5.80% 6.25% 6.62%
4.50 6.25 6.52 7.03 7.45
5.00 6.94 7.25 7.81 8.28
5.50 7.64 7.97 8.59 9.11
6.00 8.33 8.70 9.38 9.93
6.50 9.03 9.42 10.16 10.76
7.00 9.72 10.14 10.94 11.59
7.50 10.42 10.87 11.72 12.42
8.00 11.11 11.59 12.50 13.25
</TABLE>
MINNESOTA TAX-EXEMPT FUND
<TABLE>
<CAPTION>
Equivalent Taxable Yield
--------------------------------------------------------------------------
33.8% Combined 36.9% Combined 41.4% Combined 44.7% Combined
Tax-Free Federal/Minnesota Federal/Minnesota Federal/Minnesota Federal/Minnesota
Yield Bracket Bracket Bracket Bracket
-------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
4.00% 6.04% 6.34% 6.83% 7.23%
4.50 6.80 7.13 7.68 8.14
5.00 7.55 7.92 8.53 9.04
5.50 8.31 8.72 9.39 9.95
6.00 9.06 9.51 10.24 10.85
6.50 9.82 10.30 11.09 11.75
7.00 10.57 11.09 11.95 12.66
7.50 11.33 11.89 12.80 13.56
8.00 12.08 12.68 13.65 14.47
</TABLE>
These charts do not take into consideration any federal or Minnesota
alternative minimum tax. In addition, each chart is based upon yields that
are derived solely from tax-exempt income. To the extent a Fund's advertised
yield is derived from taxable income, the Funds equivalent taxable yield will
be less than set forth in the chart. The tax-free yields used in these
charts should not be considered as representations of any particular rates of
return and are for purposes of illustration only.
32
<PAGE>
COMPARISON OF THE EFFECT OF COMPOUNDING
ON TAXABLE AND TAX-EXEMPT INVESTMENTS
The graphs below demonstrate the effect that compounding has on taxable
and tax-exempt investments with similar dividend yields for selected federal
tax brackets and selected combined federal/Minnesota tax brackets. Dividends
on an after-tax basis are assumed to be invested and compounded monthly.
[graph]
[graph]
Each graph assumes that dividend yield and taxable income remain
constant and that taxable dividend income earned does not put an investor
into a higher tax bracket. The assumed dividend yields used in these graphs
should not be considered as representations of any particular rates of return
and are for purposes of illustration only.
33
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS (AND/OR IN THE STATEMENT OF ADDITIONAL
INFORMATION REFERRED TO ON THE COVER PAGE OF THIS PROSPECTUS), AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUNDS OR PIPER JAFFRAY INC. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN THE STATE IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
34
<PAGE>
PIPER FUNDS INC.
INVESTMENT ADVISER
Piper Capital Management Incorporated PIPER
DISTRIBUTOR TAX-EXEMPT
Piper Jaffray Inc.
FUNDS
CUSTODIAN AND TRANSFER AGENT [LOGO]
Investors Fiduciary Trust Company PROSPECTUS
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
LEGAL COUNSEL
Dorsey & Whitney P.L.L.P.
Table of Contents
Page
----
Introduction....................... 2
Fund Expenses...................... 4
Financial Highlights............... 5
Investment Objectives and Policies. 7
Special Investment Methods......... 13
Management......................... 17
Distribution of Fund Shares........ 18
SHAREHOLDER GUIDE TO INVESTING
How to Purchase Shares......... 19
Reducing Your Sales Charge..... 20
Special Purchase Plans......... 21
How to Redeem Shares........... 22
Shareholder Services........... 23 NATIONAL
Dividends and Distributions.... 26 TAX-EXEMPT FUND
Valuation of Shares................ 27
Tax Status......................... 27 MINNESOTA
Performance Comparisons............ 29 TAX-EXEMPT FUND
General Information................ 30
Tax-Exempt vs. Taxable Income...... 32 NOVEMBER 27, 1995
Comparison of the Effect of
Compounding on Taxable and
Tax-Exempt Investments........... 33
XTE-05
<PAGE>
PROSPECTUS DATED NOVEMBER 27, 1995
PIPER FUNDS INC.
INSTITUTIONAL GOVERNMENT INCOME PORTFOLIO
PIPER JAFFRAY TOWER
222 SOUTH NINTH STREET
MINNEAPOLIS, MINNESOTA 55402-3804
(800) 866-7778 (TOLL FREE)
Institutional Government Income Portfolio (the "Fund") is a series of Piper
Funds Inc. (the "Company"), an open-end mutual fund whose shares are currently
offered in thirteen series. The Fund is classified as a diversified mutual fund.
The Fund has an investment objective of a high level of current income
consistent with preservation of capital. In seeking to achieve this objective,
the Fund invests exclusively in securities which are issued or guaranteed as to
payment of principal and interest by the United States government or its
agencies or instrumentalities and repurchase agreements fully secured by such
obligations. The Fund invests a significant portion of its assets in
mortgage-related U.S. Government securities, which include derivative mortage
securities.
This Prospectus concisely describes the information about the Fund that you
ought to know before investing. Please read it carefully before investing and
retain it for future reference.
Shares of the Fund are not available to new investors. Current Fund
shareholders may continue to buy additional shares of the Fund without
restriction and may reinvest dividends and other distributions on all or any
shares owned.
A Statement of Additional Information about the Fund dated November 27, 1995
has been filed with the Securities and Exchange Commission and is incorporated
in its entirety by reference in this Prospectus. Copies may be obtained without
charge by calling or writing the Fund at the address or telephone number listed
above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
INTRODUCTION
Institutional Government Income Portfolio (the "Fund") is a series of Piper
Funds Inc. (the "Company"), an open-end management investment company organized
under the laws of the State of Minnesota in 1986, the shares of which are
currently issued in thirteen separate series. The Fund is classified as a
diversified mutual fund.
THE INVESTMENT ADVISER
The Company is managed by Piper Capital Management Incorporated (the
"Adviser"), a wholly owned subsidiary of Piper Jaffray Companies Inc. The Fund
pays the Adviser a fee for managing its investment portfolio at an annual rate
of .30% on average daily net assets up to $100 million. The fee is scaled
downward as net assets increase in size above $100 million.
THE DISTRIBUTOR
Piper Jaffray Inc. ("Piper Jaffray"), a wholly owned subsidiary of Piper
Jaffray Companies Inc. and an affiliate of the Adviser, serves as Distributor of
the Fund's shares.
OFFERING PRICE
Shares of the Fund are offered to current Fund shareholders at the next
determined net asset value after receipt of an order by a shareholder's Piper
Jaffray Investment Executive or other broker-dealer, plus a maximum sales charge
of 1.5% of the offering price (1.52% of the net asset value) on purchases of
less than $100,000. The sales charge is reduced on a graduated scale on
purchases of $100,000 or more, with no sales charge on purchases of $500,000 or
more. See "Purchase of Shares--Public Offering Price." Shares of the Fund are
not available to new investors.
MINIMUM INITIAL INVESTMENT
The minimum initial investment for the Fund is $25,000. The minimum with
respect to subsequent investments is $2,500. The minimum initial investment
amount may be lowered by the Distributor in certain instances. See "Purchase of
Shares--Minimum Investment."
EXCHANGES
Shares of the Fund purchased through a Piper Jaffray Investment Executive
may be exchanged for shares of any other open-end mutual fund managed by the
Adviser (except Hercules Funds Inc.), provided the shares to be acquired are
eligible for sale in the shareholder's state of residence. Shares of the Fund
purchased through another broker-dealer may be exchanged for shares of any other
open-end mutual fund managed by the Adviser (except Hercules Funds Inc.) for
which that broker-dealer has a signed dealer agreement. Exchanges are made on
the basis of the net asset values of the funds involved, except that investors
exchanging into a fund which has a higher sales charge must pay the difference.
All exchanges are subject to the minimum investment requirements and any other
applicable terms set forth in the prospectus of the fund whose shares are being
acquired. An investor may make four exchanges per year without payment of a
service charge. Thereafter, there is a $5 service charge for each exchange.
Shareholders exchanging all of their Fund shares for shares of another mutual
fund will no longer be eligible to purchase shares of the Fund, whether through
the exchange privilege or otherwise. See "Purchase of Shares-- Exchange
Privilege."
REDEMPTION PRICE
Shares of the Fund may be redeemed at any time at their net asset value next
determined after a redemption request is received by a shareholder's Piper
Jaffray Investment Executive or other broker-dealer. The Fund reserves the
right, upon 30 days' written notice, to redeem an account if the net asset value
of the shares in that account falls below $500. See "Redemption of
Shares--Involuntary Redemption."
2
<PAGE>
CERTAIN RISK FACTORS TO CONSIDER
An investment in the Fund is subject to certain risks, as set forth in
detail under "Investment Objective and Policies." As with other mutual funds,
there can be no assurance that the Fund will achieve its objective. The Fund is
subject to interest-rate risk (the risk that rising interest rates will make
bonds issued at lower interest rates worth less) and, as a result, the value of
the Fund's shares will vary. The Fund is also subject to prepayment risk as a
result of its investments in mortgage-related securities, which include
derivative mortgage securities. Recent market experience has shown that certain
derivative mortgage securities may be extremely sensitive to changes in interest
rates and in prepayment rates on the underlying mortgage assets and, as a
result, the prices of such securities may be highly volatile. The Fund, to the
extent set forth under "Investment Objective and Policies," may engage in the
following investment practices which involve certain special risks: the use of
repurchase agreements and the purchase or sale of securities on a "when-issued"
or "forward commitment" basis, including the use of mortgage dollar rolls. These
techniques may increase the volatility of the Fund's net asset value. The Fund
may engage in short-term trading in attempting to achieve its investment
objective, which will increase transaction costs of the Fund.
REPORTING TO SHAREHOLDERS
Each shareholder of the Fund receives semiannual and annual reports which
include information regarding diversification of the Fund's investments,
securities owned by the Fund, financial statements and other information
regarding the Fund's activities. In addition, the Fund prepares a list of its
investments at the end of each month. Shareholders may receive a copy of this
list, without charge, by calling the Fund. Any questions or communications
regarding a shareholder account should be directed to your Piper Jaffray
Investment Executive or, in the case of shares held through another
broker-dealer, to the Fund's custodian and transfer agent, Investors Fiduciary
Trust Company ("IFTC"), at (800) 874-6205. General inquiries regarding the Fund
should be directed to the Fund at the telephone number set forth on the cover
page of this Prospectus.
3
<PAGE>
FUND EXPENSES
<TABLE>
<CAPTION>
Shareholder Transaction Expenses
- ----------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)..... 1.50%
Exchange Fee*..................................................................... $0
Annual Fund Operating Expenses (as a percentage of average net assets)
- ----------------------------------------------------------------------------------
Management Fees................................................................... .25%
12b-1 Fees (after voluntary limitation)**......................................... .20%
Other Expenses.................................................................... .27%
Federal Excise Tax......................................................... .12%
Other...................................................................... .15%
Total Fund Operating Expenses (after voluntary limitation)........................ .72%
</TABLE>
- ---------
* There is a $5.00 fee for each exchange in excess of four exchanges per year.
See "Purchase of Shares-- Exchange Privilege."
** See the discussion below for an explanation of voluntary Rule 12b-1 fee
limitations.
EXAMPLE
- -------
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
You would pay the following expenses on a hypothetical $1,000 investment in
the Fund assuming (1) 5% annual return and (2) redemption at the end of
each time period........................................................... $ 22 $ 38 $ 54 $ 103
</TABLE>
The purpose of the above Fund Expenses table is to assist the investor in
understanding the various costs and expenses that investors in the Fund will
bear directly or indirectly. THE EXAMPLE CONTAINED IN THE TABLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN. The information set forth in the table is
based on actual expenses incurred by the Fund during the fiscal year ended
September 30, 1995, except that other expenses have been estimated to reflect an
excise tax payment that the Fund will be required to make during fiscal 1996 and
Rule 12b-1 fees reflect the Distributor's voluntary Rule 12b-1 fee limitation.
The Fund has adopted a Rule 12b-1 Plan under which the Fund pays the Distributor
a fee equal, on an annual basis, to .30% of the Fund's average daily net assets
in connection with the servicing of Fund shareholder accounts and the provision
of distribution-related services to the Fund. The Distributor has voluntarily
limited the fee payable under the Plan to .20% of the Fund's average daily net
assets for fiscal 1996. After fiscal 1996, such voluntary limitation may be
revised or terminated at any time. For the fiscal year ended September 30, 1995,
the Distributor voluntarily limited the fee payable under the Plan to .20% of
the Fund's average daily net assets, resulting in Total Fund Operating Expenses
of .97% of average daily net assets. Absent such voluntary limitation, Total
Fund Operating Expenses for fiscal 1995 would have been 1.07% of average daily
net assets. The Adviser may or may not assume additional expenses of the Fund
from time to time, in its discretion, while retaining the ability to be
reimbursed by the Fund for expenses assumed during a fiscal year prior to the
end of such year. The foregoing policy will have the effect of lowering a Fund's
overall expense ratio and increasing yield to investors when such amounts are
assumed or the inverse when such amounts are reimbursed. For additional
information, including a more complete explanation of management and Rule 12b-1
fees, see "Management--Investment Adviser" and "Distribution of Fund Shares."
4
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial highlights show certain per share data and selected
information for a share of capital stock outstanding during the indicated
periods. This information has been audited by KPMG Peat Marwick LLP, independent
auditors, and should be read in conjunction with the financial statements of the
Fund contained in its annual report. An annual report is available without
charge by contacting the Fund at 800-866-7778 (toll free). In addition to
financial statements, the annual report contains further information about the
performance of the Fund.
<TABLE>
<CAPTION>
Fiscal year ended September 30, 11/1/88
---------------------------------------------------------------- to
1995 1994 1993 1992 1991 1990 9/30/89
--------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period........ $ 7.98 12.22 11.51 10.71 10.02 9.96 10.08
--------- --------- --------- --------- --------- --------- -----------
Operations
Net investment income..................... 0.88 0.90 1.29 1.07 0.94 0.91 0.82
Net realized and unrealized gains
(losses) on investments................. 0.31 (3.96) 0.56 0.73 0.67 0.08 (0.12)
--------- --------- --------- --------- --------- --------- -----------
Total from operations................. 1.19 (3.06) 1.85 1.80 1.61 0.99 0.70
--------- --------- --------- --------- --------- --------- -----------
Distributions
From net investment income................ (1.05) (0.95) (0.90) (0.91) (0.90) (0.90) (0.81)
From net realized gains................... -- (0.23) (0.24) (0.09) (0.02) (0.03) (0.01)
--------- --------- --------- --------- --------- --------- -----------
Total distributions................... (1.05) (1.18) (1.14) (1.00) (0.92) (0.93) (0.82)
--------- --------- --------- --------- --------- --------- -----------
Net asset value, end of period.............. $ 8.12 7.98 12.22 11.51 10.71 10.02 9.96
--------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- -----------
Total return+............................... 16.15% (26.65%) 17.04% 17.70% 16.80% 10.30% 7.38%
Net assets, end of period (in millions)..... $ 319 564 792 470 132 36 28
Ratio of expenses to average daily net
assets++, +++.............................. 0.97% 0.78% 0.70% 0.65% 0.75% 0.78% 0.85%**
Ratio of net investment income to
average daily net assets++................. 8.02% 9.33% 12.51% 11.01% 9.29% 9.00% 9.03%**
Portfolio turnover rate (excluding
short-term securities)..................... 136% 169% 109% 64% 29% 76% 23%
<CAPTION>
7/11/88*
to
10/31/88
-----------
<S> <C>
Net asset value, beginning of period........ 10.00
-----------
Operations
Net investment income..................... 0.21
Net realized and unrealized gains
(losses) on investments................. 0.08
-----------
Total from operations................. 0.29
-----------
Distributions
From net investment income................ (0.21)
From net realized gains................... --
-----------
Total distributions................... (0.21)
-----------
Net asset value, end of period.............. 10.08
-----------
-----------
Total return+............................... 3.09%
Net assets, end of period (in millions)..... 18
Ratio of expenses to average daily net
assets++, +++.............................. 0.75%**
Ratio of net investment income to
average daily net assets++................. 7.91%**
Portfolio turnover rate (excluding
short-term securities)..................... 14%
</TABLE>
- ---------
* Commencement of operations.
** Adjusted to an annual basis.
+ Total return is based on the change in net asset value during the period,
assumes reinvestment of all distributions and does not reflect a sales
charge.
++ During the years reflected above, the Fund's Rule 12b-1 fee was voluntarily
limited. In addition, the adviser waived various fees and expenses during
fiscal periods 1990, 1989 and 1988. Had the maximum Rule 12b-1 fee been in
effect and had the Fund paid all fees and expenses, the ratios of expenses
and net investment income to average daily net assets would have been:
1.07%/7.92% in fiscal 1995, 0.85%/9.26% in fiscal 1994, 0.77%/12.44% in
fiscal 1993, 0.72%/10.94% in fiscal 1992, 0.82%/9.22% in fiscal 1991,
0.91%/8.87% in fiscal 1990, 1.40%/8.48% in fiscal 1989 and 1.53%/7.13% in
fiscal 1988. Beginning in fiscal 1995, the expense ratio reflects the effect
of gross expenses paid indirectly by the Fund. Prior period expense ratios
have not been adjusted.
+++ Includes federal excise taxes of 0.37%, 0.23%, 0.09% and 0.02% for the
fiscal years ended 9/30/95, 9/30/94, 9/30/93 and 9/30/92, respectively.
5
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective set forth below cannot be changed without
shareholder approval. The investment policies and techniques employed in pursuit
of the Fund's investment objective may be changed without shareholder approval,
unless otherwise noted.
INVESTMENT OBJECTIVE
The Fund's investment objective is a high level of current income consistent
with preservation of capital. In view of the risks inherent in an investment in
securities, there is no assurance that this objective will be achieved. The Fund
may be subject to significant volatility. See "Investment Policies and
Techniques-- Investment Risks" below. From time to time the Fund may quote its
effective duration, which estimates interest rate risk or price volatility. See
"Performance Comparisons."
INVESTMENT POLICIES AND TECHNIQUES
As a fundamental policy which may not be changed without shareholder
approval, the Fund may invest only in securities which are issued or guaranteed
as to payment of principal and interest by the U.S. government or its agencies
or instrumentalities ("U.S. Government securities"), and in repurchase
agreements fully secured by such securities. The Fund invests a significant
portion of its assets in mortgage-related U.S. Government securities, which
include derivative mortgage securities. Recent market experience has shown that
certain derivative mortgage securities may be extremely sensitive to changes in
interest rates and in prepayment rates on the underlying mortgage assets and, as
a result, the prices of such securities may be highly volatile.
The U.S. Government securities in which the Fund invests are issued or
guaranteed as to payment of principal and interest by the U.S. Government or its
agencies or instrumentalities. THE CURRENT MARKET PRICES FOR SUCH SECURITIES ARE
NOT GUARANTEED AND WILL FLUCTUATE. The Fund may invest in direct obligations of
the U.S. Treasury, such as U.S. Treasury bills, notes and bonds, and in
obligations of U.S. Government agencies or instrumentalities, including, but not
limited to, Federal Home Loan Banks, the Farmers Home Administration, Federal
Farm Credit Banks, the Federal National Mortgage Association, the Government
National Mortgage Association, the Federal Home Loan Mortgage Corporation, the
Financing Corporation and the Student Loan Marketing Association.
Obligations of U.S. Government agencies or instrumentalities are backed in a
variety of ways by the U.S. Government or its agencies or instrumentalities.
Some of these obligations, such as Government National Mortgage Association
mortgage-backed securities, are backed by the full faith and credit of the U.S.
Treasury. Others, such as obligations of the Federal Home Loan Banks, are backed
by the right of the issuer to borrow from the Treasury. Still others, such as
those issued by the Federal National Mortgage Association, are backed by the
discretionary authority of the U.S. Government to purchase certain obligations
of the agency or instrumentality. Finally, obligations of other agencies or
instrumentalities are backed only by the credit of the agency or instrumentality
issuing the obligations.
MORTGAGE-RELATED SECURITIES. The Fund's investments in U.S. Government
securities include mortgage-related securities. Mortgage-related securities are
securities that, directly or indirectly, represent participations in, or are
secured by and payable from, loans secured by real property. Mortgage-related
securities, as the term is used in this Prospectus, include mortgage
pass-through securities, adjustable rate mortgage securities and derivative
mortgage securities such as collateralized mortgage obligations and stripped
mortgage-backed securities. Mortgage-related securities fall into three
categories: (a) those issued or guaranteed by the United States Government or
one of its agencies or instrumentalities, such as Government National Mortgage
Association ("GNMA"), Federal National Mortgage Association ("FNMA") and Federal
Home Loan Mortgage Corporation ("FHLMC"); (b) those issued by non-governmental
issuers that represent
6
<PAGE>
interests in, or are collateralized by, mortgage-related securities issued or
guaranteed by the United States Government or one of its agencies or
instrumentalities; and (c) those issued by non-governmental issuers that
represent an interest in, or are collateralized by, whole mortgage loans or
mortgage-related securities without a government guarantee but usually with
over-collateralization or some other form of private credit enhancement.
Non-governmental issuers referred to in (b) and (c) above include originators of
and investors in mortgage loans, including savings and loan associations,
mortgage bankers, commercial banks, investment banks and special purpose
subsidiaries of the foregoing. The Fund does not invest in securities in
categories (b) and (c), which are not considered U.S. Government securities for
purposes of this Prospectus.
(a) MORTGAGE PASS-THROUGH SECURITIES. The government guaranteed mortgage
pass-through securities in which the Fund invests will include certificates
issued or guaranteed by GNMA, FNMA and FHLMC, which represent interests in
underlying residential mortgage loans. These mortgage pass-through securities
provide for the pass-through to investors of their pro-rata share of monthly
payments (including any prepayments) made by the individual borrowers on the
pooled mortgage loans, net of any fees paid to the guarantor of such securities
and the servicer of the underlying mortgage loans. Each of GNMA, FNMA and FHLMC
guarantee timely distributions of interest to certificate holders. GNMA and FNMA
guarantee timely distributions of scheduled principal. FHLMC generally
guarantees only ultimate collection of principal of the underlying mortgage
loans. For a further description of these securities, see "Investment Objective,
Policies and Restrictions--Mortgage-Related Securities" in the Statement of
Additional Information.
(b) ADJUSTABLE RATE MORTGAGE SECURITIES. The Fund may also invest in
adjustable rate mortgage securities ("ARMS") which are issued by agencies or
instrumentalities of the U.S. Government. ARMS are pass-through mortgage
securities collateralized by mortgages with interest rates that are adjusted
from time to time. The adjustments usually are determined in accordance with a
predetermined interest rate index and may be subject to certain limits. While
the values of ARMS, like other debt securities, generally vary inversely with
changes in market interest rates (increasing in value during periods of
declining interest rates and decreasing in value during periods of increasing
interest rates), the values of ARMS should generally be more resistant to price
swings than other debt securities because the interest rates of ARMS move with
market interest rates. The adjustable rate feature of ARMS will not, however,
eliminate fluctuations in the prices of ARMS, particularly during periods of
extreme fluctuations in interest rates. Also, since many adjustable rate
mortgages only reset on an annual basis, it can be expected that the prices of
ARMS will fluctuate to the extent that changes in prevailing interest rates are
not immediately reflected in the interest rates payable on the underlying
adjustable rate mortgages.
(c) COLLATERALIZED MORTGAGE OBLIGATIONS. The Fund may invest in CMOs
(collateralized mortgage obligations and multiclass pass-through securities
unless the context otherwise indicates), which are derivative mortgage
securities. Collateralized mortgage obligations are debt instruments issued by
special purpose entities which are secured by pools of mortgage loans or other
mortgage-related securities. Multi-class pass-through securities are equity
interests in a trust composed of mortgage loans or other mortgage-related
securities. Payments of principal and interest on underlying collateral provide
the funds to pay debt service on the collateralized mortgage obligation or make
scheduled distributions on the multi-class pass-through security. The Fund will
only invest in CMOs issued by agencies or instrumentalities of the U.S.
Government.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMO, often referred to as a "tranche," is issued at a specific
coupon rate and has a stated maturity or final distribution date. Principal
prepayments on collateral underlying a CMO may cause it to be retired
substantially earlier than the stated maturities or final distribution dates.
The principal and interest on the underlying mortgages may be allocated
among the several tranches of a CMO in many ways. For example, certain tranches
may have variable or floating interest rates and others
7
<PAGE>
may be stripped securities which provide only the principal or interest feature
of the underlying security. See "Stripped Mortgage-Backed Securities," below.
Generally, the purpose of the allocation of the cash flow of a CMO to the
various tranches is to obtain a more predictable cash flow to certain of the
individual tranches than exists with the underlying collateral of the CMO. As a
general rule, the more predictable the cash flow is on a CMO tranche, the lower
the anticipated yield will be on that tranche at the time of issuance relative
to prevailing market yields on mortgage-related securities. As part of the
process of creating more predictable cash flows on most of the tranches of a
CMO, one or more tranches generally must be created that absorb most of the
volatility in the cash flows on the underlying mortgage loans. The yields on
these tranches, which may include inverse floaters, IOs, POs, and Z tranches,
discussed below, are generally higher than prevailing market yields on
mortgage-related securities with similar maturities. As a result of the
uncertainty of the cash flows of these tranches, the market prices of and yield
on these tranches generally are more volatile.
The fund may invest in any CMO tranche, including "inverse floaters" and "Z
tranches." An inverse floater is a CMO tranche with a coupon rate that moves
inversely to a designated index, such as LIBOR (London InterBank Offered Rate)
or COFI (Cost of Funds Index). Like most other fixed-income securities, the
value of inverse floaters will decrease as interest rates increase. Inverse
floaters, however, exhibit greater price volatility than the majority of
mortgage pass-through securities or CMOs. Coupon rates on inverse floaters
typically change at a multiple of the changes in the relevant index rate. Thus,
any rise in the index rate (as a consequence of an increase in interest rates)
causes a correspondingly greater drop in the coupon rate of an inverse floater
while any drop in the index rate causes a correspondingly greater increase in
the coupon of an inverse floater. Some inverse floaters also exhibit extreme
sensitivity to changes in prepayments. Inverse floaters would be purchased by
the Fund to attempt to protect against a reduction in the income earned on the
Fund's investments due to a decline in interest rates.
Z tranches of CMOs defer interest and principal payments until one or more
other classes of the CMO have been paid in full. Interest accretes on the Z
tranche, being added to principal, and is compounded through the accretion
period. After the other classes have been paid in full, interest payments begin
and continue through maturity. Z tranches have characteristics similar to zero
coupon bonds. Like a zero coupon bond, during its accretion period a Z tranche
has the advantage of eliminating the risk of reinvesting interest payments at
lower rates during a period of declining market interest rates. At the same
time, however, and also like a zero coupon bond, the market value of a Z tranche
can be expected to fluctuate more widely with changes in market interest rates
than would the market value of a tranche which pays interest currently. In
addition, changes in prepayment rates on the underlying mortgage loans will
affect the accretion period of a Z tranche, and therefore also will influence
its market value.
(d) STRIPPED MORTGAGE-BACKED SECURITIES. The Fund may invest in stripped
mortgage-backed securities ("SMBS") issued by agencies or instrumentalities of
the U.S. Government. SMBS are derivative multi-class mortgage securities.
There are generally two classes of SMBS, one of which (the "IO class")
entitles the holders thereof to receive distributions consisting solely or
primarily of all or a portion of the interest on the underlying pool of mortgage
loans or mortgage-related securities ("Mortgage Assets") and the other of which
(the "PO class") entitles the holders thereof to receive distributions
consisting solely or primarily of all or a portion of the principal of the
underlying pool of Mortgage Assets. The cash flows and yields on IO and PO
classes are extremely sensitive to the rate of principal payments (including
prepayments) on the related underlying Mortgage Assets. For example, a rapid or
slow rate of principal payments may have a material adverse effect on the yield
to maturity of IOs or POs, respectively. If the underlying Mortgage Assets
experience greater than anticipated prepayments of principal, an IO investor may
incur substantial losses. Conversely, if the underlying Mortgage Assets
experience slower than anticipated prepayments of principal, the yield on a PO
class will be affected more severely than would be the case with a traditional
mortgage-related security.
8
<PAGE>
SHORT-TERM TRADING. The Fund will use short-term trading to benefit from
yield disparities among different issues of securities or otherwise to achieve
its investment objective. To the extent that the Fund engages in short-term
trading, such activities will cause the Fund to pay greater mark-up charges. The
Fund's portfolio turnover rate is set forth in "Financial Highlights." The
method of calculating portfolio turnover rate is set forth in the Statement of
Additional Information under "Investment Objective, Policies and
Restrictions--Portfolio Turnover."
FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES. The Fund may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. When such transactions are negotiated, the price is
fixed at the time the commitment is made, but delivery and payment for the
securities take place at a later date. The Fund will not accrue income with
respect to when-issued or forward commitment securities prior to their stated
delivery date. Pending delivery of the securities, the Fund maintains in a
segregated account cash or liquid high-grade debt obligations in an amount
sufficient to meet its purchase commitments. For additional information
concerning when-issued and forward commitment transactions, see "Investment
Objective, Policies and Restrictions" in the Statement of Additional
Information.
The purchase of securities on a when-issued or forward commitment basis
exposes the Fund to risk because the securities may decrease in value prior to
their delivery. Purchasing securities on a when-issued or forward commitment
basis involves the additional risk that the return available in the market when
the delivery takes place will be higher than that obtained in the transaction
itself. The Fund's purchase of securities on a when-issued or forward commitment
basis while remaining substantially fully invested increases the amount of the
Fund's assets that are subject to market risk to an amount that is greater than
the Fund's net asset value, which could result in increased volatility of the
price of the Fund's shares.
MORTGAGE DOLLAR ROLLS. In connection with its ability to purchase
securities on a when-issued or forward commitment basis, the Fund may enter into
mortgage "dollar rolls" in which the Fund sells securities for delivery in the
current month and simultaneously contracts with the same counterparty to
repurchase similar (same type, coupon and maturity) but not identical securities
on a specified future date. The Fund gives up the right to receive principal and
interest paid on the securities sold. However, the Fund would benefit to the
extent of any difference between the price received for the securities sold and
the lower forward price for the future purchase plus any fee income received.
Unless such benefits exceed the income, capital appreciation and gain or loss
due to mortgage prepayments that would have been realized on the securities sold
as part of the mortgage dollar roll, the use of this technique will diminish the
investment performance of the Fund compared with what such performance would
have been without the use of mortgage dollar rolls. The Fund will hold and
maintain in a segregated account until the settlement date cash or liquid
high-grade debt securities in an amount equal to the forward purchase price. The
benefits derived from the use of mortgage dollar rolls may depend upon the
Adviser's ability to predict correctly mortgage prepayments and interest rates.
There is no assurance that mortgage dollar rolls can be successfully employed.
In addition, the use of mortgage dollar rolls by the Fund while remaining
substantially fully invested increases the amount of the Fund's assets that are
subject to market risk to an amount that is greater than the Fund's net asset
value, which could result in increased volatility of the price of the Fund's
shares.
For financial reporting and tax purposes, the Fund treats mortgage dollar
rolls as two separate transactions; one involving the purchase of a security and
a separate transaction involving a sale. The Fund does not currently intend to
enter into mortgage dollar rolls that are accounted for as a financing.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
respect to U.S. government securities. A repurchase agreement involves the
purchase by the Fund of securities with the condition that after a stated period
of time the original seller (a member bank of the Federal Reserve System or a
9
<PAGE>
recognized securities dealer) will buy back the same securities ("collateral")
at a predetermined price or yield. Repurchase agreements involve certain risks
not associated with direct investments in securities. In the event the original
seller defaults on its obligation to repurchase, as a result of its bankruptcy
or otherwise, the Fund will seek to sell the collateral, which action could
involve costs or delays. In such case, the Fund's ability to dispose of the
collateral to recover such investment may be restricted or delayed. While
collateral will at all times be maintained in an amount equal to the repurchase
price under the agreement (including accrued interest due thereunder), to the
extent proceeds from the sale of collateral were less than the repurchase price,
the Fund would suffer a loss. The Fund will only enter into repurchase
agreements in which the underlying security meets the criteria of the Fund's
investment policies. The Fund will limit transactions involving repurchase
agreements to domestic commercial banks and/or recognized dealers in U.S.
government securities believed by the Adviser to present minimal credit risks.
In addition, the Fund will follow the collateral custody, protection and
perfection guidelines recommended by the Comptroller of the Currency for the use
of national banks in their direct repurchase agreement activities. As a
fundamental policy, the Fund will not invest in repurchase agreements maturing
in more than seven days.
INVESTMENT RESTRICTIONS. The Fund has adopted certain fundamental
investment restrictions that may not be changed without shareholder approval.
One such restriction provides that the Fund may not borrow money, except from
banks for temporary or emergency purposes in an amount not exceeding 5% of the
value of its total assets, and may not mortgage or pledge its assets, except to
secure such borrowing in an amount not exceeding 10% of its total assets. The
Fund may not purchase or sell commodities or commodity futures contracts and may
not loan its securities to other persons. In addition, as nonfundamental
policies that may be changed without shareholder approval, the Fund may not
invest in illiquid securities and may not purchase or sell put or call options.
A security is considered illiquid if it cannot be sold in the ordinary course of
business within seven days at approximately the price at which it is valued. In
determining the liquidity of interest-only, principal-only and inverse floating
rate securities, the Adviser, under guidelines established by the Board of
Directors, will take into account relevant factors including the frequency of
trades, the number of dealers willing to make a market in the security and the
nature of marketplace trades. A list of the Fund's fundamental and
nonfundamental investment restrictions is set forth in the Statement of
Additional Information.
INVESTMENT RISKS. The Fund is subject to interest rate risk, which is the
potential for a decline in bond prices due to rising interest rates. In general,
bond prices vary inversely with interest rates. When interest rates rise, bond
prices generally fall. Conversely, when interest rates fall, bond prices
generally rise. Interest rate risk applies to U.S. Government securities as well
as other bonds. U.S. Government securities are guaranteed only as to the payment
of interest and principal. The current market prices for such securities are not
guaranteed and will fluctuate.
The Fund invests a significant portion of its assets in mortgage-related
securities and, as a result, is subject to prepayment risk. Prepayment risk
results because, as interest rates fall, homeowners are more likely to refinance
their home mortgages. When home mortgages are refinanced, the principal on
mortgage-related securities held by the Fund is "prepaid" earlier than expected.
The Fund must then reinvest the unanticipated principal payments, just at a time
when interest rates on new mortgage investments are falling. Prepayment risk has
two important effects on the Fund:
- When interest rates fall and additional mortgage prepayments must be
reinvested at lower interest rates, the income of the Fund will be
reduced.
- When interest rates fall, prices on mortgage-backed securities may not
rise as much as comparable Treasury bonds because bond market investors
may anticipate an increase in mortgage prepayments and a likely decline in
income.
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<PAGE>
The Fund's investments in mortgage-related securities also subject the Fund
to extension risk. Extension risk is the possibility that rising interest rates
may cause prepayments to occur at a slower than expected rate. This particular
risk may effectively change a security which was considered short- or
intermediate-term at the time of purchase into a long-term security. Long-term
securities generally fluctuate more widely in response to changes in interest
rates than short- or intermediate-term securities.
The Fund's investments in mortgage-related securities include derivative
mortgage securities such as CMOs and stripped mortgage-backed securities which,
as discussed above, may involve risks in addition to those found in other
mortgage-related securities. Recent market experience has shown that certain
derivative mortgage securities may be highly sensitive to changes in interest
and prepayment rates and, as a result, the prices of such securities may be
highly volatile. In addition, recent market experience has shown that during
periods of rising interest rates, the market for certain derivative mortgage
securities may become more unstable and such securities may become more
difficult to sell as market makers either choose not to repurchase such
securities or offer prices, based on current market conditions, which are
unacceptable to the Fund. As discussed above, the investment techniques used by
the Fund also pose certain risks.
MANAGEMENT
BOARD OF DIRECTORS
The Company's Board of Directors has the primary responsibility for
overseeing the overall management of the Company and electing its officers.
INVESTMENT ADVISER
Piper Capital Management Incorporated (the "Adviser") has been retained
under an Investment Advisory and Management Agreement with the Company to act as
the Fund's investment adviser subject to the authority of the Board of
Directors.
In addition to acting as investment adviser for the other series of the
Company, the Adviser also serves as investment adviser to a number of other
open-end and closed-end investment companies and to various other concerns,
including pension and profit-sharing funds, corporate funds, and individuals. As
of November 1, 1995, the Adviser rendered investment advice with regard to
approximately $9 billion of assets. The Adviser is a wholly owned subsidiary of
Piper Jaffray Companies Inc., a publicly held corporation which is engaged
through its subsidiaries in various aspects of the financial services industry.
The address of the Adviser is Piper Jaffray Tower, 222 South Ninth Street,
Minneapolis, Minnesota 55402.
The Adviser furnishes the Fund with investment advice and supervises the
management and investment program of the Fund. The Adviser furnishes at its own
expense all necessary administrative services, office space, equipment and
clerical personnel for servicing the investments of the Fund. The Adviser also
provides investment advisory facilities and executive and supervisory personnel
for managing the investments and effecting the portfolio transactions of the
Fund. In addition, the Adviser pays the salaries and fees of all officers and
directors of the Company who are affiliated with the Adviser.
Under the Investment Advisory and Management Agreement, the Fund pays the
Adviser a fee calculated and paid monthly at an annual rate of .30% on average
daily net assets up to $100 million, .25% on average daily net assets of over
$100 and up to $250 million and .20% on average daily net assets in excess of
$250 million.
PORTFOLIO MANAGEMENT
Worth Bruntjen has been primarily responsible for the day-to-day management
of the Fund's portfolio since inception of the Fund in 1988. Mr. Bruntjen is a
Senior Vice President of the Adviser and a fixed income
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<PAGE>
manager for a variety of client portfolios including foundations, pensions and
profit-sharing plans. Mr. Bruntjen has approximately 28 years of financial
experience.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN
Investors Fiduciary Trust Company ("IFTC"), 127 West Tenth Street, Kansas
City, Missouri 64105, (800) 874-6205, serves as Custodian for the Fund's
portfolio securities and cash and as Transfer Agent and Dividend Disbursing
Agent for the Fund.
The Company has entered into Shareholder Account Servicing Agreements with
the Distributor and Piper Trust Company, an affiliate of the Distributor and the
Adviser. Under these agreements the Distributor and Piper Trust Company provide
transfer agent and dividend disbursing agent services for certain shareholder
accounts. For more information, see "Investment Advisory and Other
Services--Transfer Agent and Dividend Disbursing Agent" in the Statement of
Additional Information.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Portfolio transactions for the Fund are generally effected on a net basis
without payment of brokerage commissions. The Adviser may consider a number of
factors in determining which brokers to use for portfolio transactions. These
factors, which are more fully discussed in the Statement of Additional
Information, include, but are not limited to, research services, favorableness
of the net price and quality of services and execution. A broker's sales of
shares of any series of the Company may also be considered a factor if the
Adviser is satisfied that the Fund would receive from that broker the most
favorable price and execution then available for a transaction. Portfolio
transactions for the Fund will generally be with the issuer or with dealers
acting on a principal basis. In the event, however, that any portfolio
transactions are executed on an agency basis, such transactions may be effected
through the Distributor. For more information, see "Portfolio Transactions and
Allocation of Brokerage" in the Statement of Additional Information.
DISTRIBUTION OF FUND SHARES
Piper Jaffray acts as the principal distributor of the Fund's shares. The
Company has adopted a Distribution Plan (the "Plan") as required by Rule 12b-1
under the Investment Company Act of 1940 (the "1940 Act"). Under the Plan, the
Distributor is paid a total fee in connection with the servicing of Fund
shareholder accounts and in connection with distribution related services
provided with respect to the Fund. This fee is calculated and paid monthly at an
annual rate equal to .30% of the average daily net assets of the Fund.
A portion of the total fee equal to .05% of the Fund's average daily net
assets is categorized as a distribution fee intended to compensate the
Distributor for its expenses incurred in connection with the sale of Fund
shares. The remaining portion of the fee, equal to .25% of the Fund's average
daily net assets, is categorized as a servicing fee intended to compensate the
Distributor for ongoing servicing and/or maintenance of shareholder accounts.
The Distributor has voluntarily agreed to limit the total fee payable under the
Plan to .20% of the Fund's average daily net assets. This limitation may be
revised or terminated at any time after fiscal 1996 year end. Payments made
under the Plan are not tied exclusively to expenses actually incurred by the
Distributor and may exceed such expenses. The Adviser and the Distributor, out
of their own assets, may pay for certain expenses incurred in connection with
the distribution of shares of the Fund. In particular, the Adviser may make
payments out of its own assets to Piper Jaffray Investment Executives and other
broker dealers in connection with their sales of shares of the Fund. See
"Purchase of Shares--Public Offering Price." Further information regarding the
Plan is contained in the Statement of Additional Information.
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<PAGE>
The Distributor uses all or a portion of its servicing fee to make payments
to Investment Executives of the Distributor and broker-dealers which have
entered into sales agreements with the Distributor. If shares of the Fund are
sold by a representative of a broker-dealer other than the Distributor, the
broker-dealer is paid .20% of the average daily net assets of the Fund
attributable to shares sold by the broker-dealer's representative. If shares of
a Fund are sold by an Investment Executive of the Distributor, compensation is
paid to the Investment Executive in the manner set forth in a written agreement,
in an amount not to exceed .20% of the average daily net assets of the Fund
attributable to shares sold by the investment executive.
PURCHASE OF SHARES
GENERAL
The Fund closed to new investors on June 14, 1994. Current Fund shareholders
may continue to buy additional shares of the Fund without restriction and to
reinvest dividends and distributions on all or any shares owned.
The Fund's shares may be purchased at the public offering price from the
Distributor and from certain other broker-dealers who have sales agreements with
the Distributor. The address of the Distributor is that of the Fund.
Shareholders will receive written confirmation of their purchases. Stock
certificates will not be issued in order to facilitate redemptions and
exchanges. The Distributor reserves the right to reject any purchase order.
Shareholders should be aware that, because the Fund does not issue stock
certificates, Fund shares must be kept in an account with the Distributor or at
IFTC in the case of shares sold through a broker-dealer that has a sales
agreement with the Distributor.
PUBLIC OFFERING PRICE
Shares of the Fund are offered to current Fund shareholders at the net asset
value per share next determined following receipt of an order by a shareholder's
Piper Jaffray Investment Executive or other broker-dealer, plus a maximum sales
charge of 1.5% of the offering price (1.52% of the net asset value) on purchases
of less than $100,000. The sales charge is reduced on a graduated scale on
purchases of $100,000 or more. The following table sets forth total sales
charges or underwriting commissions. The Distributor may reallow up to the
entire sales charge to securities dealers in connection with sales of shares.
Such dealers may, by virtue of such reallowance, be deemed to be "underwriters"
under the Securities Act of 1933 (the "1933 Act").
<TABLE>
<CAPTION>
Sales Charge as Sales Charge as
Percentage of Percentage of
Amount of Transaction at Offering Price Offering Price Net Asset Value
- ------------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
Less than $100,000........................................... 1.50% 1.52%
$100,000 but less than $250,000.............................. 1.25% 1.27%
$250,000 but less than $500,000.............................. 1.00% 1.01%
$500,000 and over............................................ 0% 0%
</TABLE>
With respect to cumulative purchases of Fund shares in excess of $500,000,
the Distributor currently pays its Investment Executives and other
broker-dealers a fee of up to .20% of the first $3 million of the offering
price, .15% of the next $2 million of the offering price, .10% of the next $5
million of the offering price and .05% of the offering price in excess of $10
million. Such payments may be revised from time to time by the Distributor. The
Fund previously imposed a contingent deferred sales charge on Fund share
purchases of $500,000 and over. This sales charge has been discontinued and any
contingent deferred sales charges payable with respect to redemptions of Fund
shares will be waived. This waiver does not apply, however, to Fund shares that
have been acquired on or after September 23, 1994, through exercise of the
exchange privilege. See "Exchange Privilege" below.
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<PAGE>
The Distributor or the Adviser, at their expense, also provide promotional
incentives to Investment Executives of the Distributor and to broker-dealers who
have sales agreements with the Distributor in connection with sales of shares of
the Fund, other series of the Company and other mutual funds for which the
Adviser acts as investment adviser. In some instances, such incentives may be
made available only to certain investment executives or broker-dealers who have
sold or may sell significant amounts of such shares. The incentives may include
payment for travel expenses, including lodging at luxury resorts, incurred in
connection with sales seminars.
The foregoing schedule of sales charges applies to purchases made at any one
time by the following: (a) any individual; (b) any individual, his or her
spouse, and his or her children under the age of 21; (c) a trustee or fiduciary
of a single trust estate or single fiduciary account; or (d) any organized group
which has been in existence for more than six months, provided that it is not
organized for the purpose of buying redeemable securities of a registered
investment company, and provided that the purchase is made through a central
administration, or through a single dealer, or by other means which result in
economy of sales effort or expense. An organized group does not include a group
of individuals whose sole organizational connection is participation as credit
card holders of a company, policyholders of an insurance company, customers of
either a bank or broker-dealer or clients of an investment adviser.
The foregoing schedule applies to single purchases, concurrent purchases of
two or more series of the Company sold with a sales charge, and purchases made
pursuant to the Right of Accumulation.
RIGHT OF ACCUMULATION. Under the Right of Accumulation, the greater of the
original purchase price or the current value of an investor's existing shares in
any mutual fund managed by the Adviser (EXCEPT HERCULES FUNDS INC.) and sold
with a sales charge may be combined with the amount of the investor's current
purchase in determining the sales charge. In determining both the current value
of an investor's existing shares and the amount of the investor's current
purchase, shares held or purchased by the investor's spouse and his or her
children under the age of 21 are included. In order to receive the cumulative
quantity reduction, the previous purchases of shares of a mutual fund managed by
the Adviser must be called to the attention of your Piper Jaffray Investment
Executive or other broker-dealer at the time of the current purchase.
LETTER OF INTENT. An investor may qualify for a reduced sales charge
immediately by signing a nonbinding Letter of Intent stating the investor's
intention to invest within a 13-month period, beginning not earlier than 90 days
prior to the date of execution of the Letter, a specified amount which, if made
at one time, would qualify for a reduced sales charge. Reinvested dividends will
be treated as purchases of additional shares. Any redemptions made during the
term of the Letter of Intent will be subtracted from the amount of purchases in
determining whether the Letter of Intent has been completed. During the term of
a Letter of Intent, IFTC will hold shares representing 5% of the amount that the
investor intends to invest during the 13-month period in escrow for payment of a
higher sales charge if the full amount indicated in the Letter of Intent is not
purchased. Dividends on the escrowed shares will be paid to the shareholder. The
escrowed shares will be released when the full amount indicated has been
purchased. If the full indicated amount is not purchased within the 13-month
period, the investor will be required to pay, either in cash or by liquidating
escrowed shares, an amount equal to the difference in the dollar amount of sales
charge actually paid and the amount of sales charge the investor would have paid
on his or her aggregate purchases if the total of such purchases had been made
at a single time.
MINIMUM INVESTMENT
A minimum initial investment of $25,000 per account is required. The minimum
subsequent investment is $2,500. The Distributor, in its discretion, may waive
the minimum initial investment amount for purchases
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<PAGE>
by certain employee benefit plans. All investments must be arranged through your
Piper Jaffray Investment Executive or other broker-dealer.
SPECIAL PURCHASE PLANS
For information on any of the following special purchase plans, contact your
Investment Executive.
PURCHASES BY PIPER JAFFRAY COMPANIES INC., ITS SUBSIDIARIES, ASSOCIATED
PERSONS AND BROKER-DEALERS. Piper Jaffray Companies Inc. and its subsidiaries
may buy shares of the Fund without incurring a sales charge. The following
persons associated with such entities also may buy Fund shares without paying a
sales charge: (a) officers, directors and partners; (b) employees and retirees;
(c) sales representatives; (d) spouses, or children under the age of 21, of any
such persons set forth in (a) through (c); and (e) any trust, pension,
profit-sharing or other benefit plan for any of the persons set forth in (a)
through (d). In addition, employees of broker-dealers who have entered into
sales agreements with the Distributor, and spouses and children under the age of
21 of such employees, may buy shares of the Fund without incurring a sales
charge.
PURCHASES BY OTHER INDIVIDUALS WITHOUT A SALES CHARGE. Clients of the
Adviser may buy shares of the Fund in their advisory accounts without incurring
a sales charge. Discretionary accounts at Piper Trust Company and participants
in investment companies exempt from registration under the 1940 Act which are
managed by the Adviser also may buy shares of the Fund without incurring a sales
charge. In addition, investors purchasing shares through a Piper Jaffray
Investment Executive may buy shares of the Fund without paying a sales charge to
the extent the purchase of such shares is funded by the proceeds from the sale
of shares of any non-money market open-end mutual fund, provided that an order
for Fund shares is received by the Distributor within 30 days after the
redemption of shares of the other fund. Trust companies and bank trust
departments using funds over which they exercise exclusive discretionary
investment authority and which are held in a fiduciary, agency, advisory,
custodial or similar capacity also may buy Fund shares without incurring a sales
charge.
PURCHASES BY EMPLOYEE BENEFIT PLANS AND TAX-SHELTERED ANNUITIES. Shares of
the Fund will be sold at net asset value, without a sales charge, to employee
benefit plans containing an actively maintained qualified cash or deferred
arrangement under Section 401(k) of the Internal Revenue Code of 1986, as
amended (the "Code") (a "401(k) Plan"). In the event a 401(k) Plan of an
employer has purchased shares in the Fund or any other series of the Company
(other than a money market fund) during any calendar quarter, any other employee
benefit plan of such employer that is a qualified plan under Section 401(a) of
the Code may also purchase shares of the Fund during such quarter without
incurring a sales charge. Custodial accounts under Section 403(b) of the Code
(known as tax-sheltered annuities) also may buy shares of the Fund without
incurring a sales charge.
ACCOUNT PROTECTION. Shares of the Fund purchased through a Piper Jaffray
Investment Executive may, at the option of the investor, be held in a Piper
Automatic Transfer Account (PAT Account) or a Prime Account. In the unlikely
event of financial failure of the Distributor, investments in the Fund held in a
PAT Account or a Prime Account would be protected up to $25 million. Investments
held in other Piper Jaffray accounts are protected up to $2.5 million. In each
case, the Securities Investor Protection Corporation ("SIPC") provides $500,000
of protection; the additional coverage is provided by The Aetna Casualty &
Surety Company. This protection does not cover any declines in the net asset
value of Fund shares.
AUTOMATIC MONTHLY INVESTMENT PROGRAM. After satisfying the $25,000 minimum
initial purchase requirement, a shareholder may arrange to make additional
purchases of shares of the Fund or certain other mutual funds managed by the
Adviser by having $100 or more per month automatically transferred from his or
her bank, savings and loan, or other financial institution. In addition, clients
holding their shares in a Piper Jaffray account may arrange to make such
additional purchases by having $25 or more automatically
15
<PAGE>
transferred each month from any of the money market fund series of the Company.
Shareholders should contact their Piper Jaffray Investment Executive or IFTC to
obtain authorization forms or for additional information.
REINVESTMENT PRIVILEGE. A shareholder who has redeemed shares of the Fund
may reinvest all or part of the redemption proceeds in shares of the Fund within
120 days without payment of an additional sales charge. However, shareholders
who have redeemed all of their Fund shares will not be allowed to reinvest in
the Fund. Similarly, part or all of the redemption proceeds may be reinvested
within such time period, without payment of a sales charge, in shares of any
other mutual fund managed by the Adviser (except Hercules Funds Inc.) and
eligible for sale in the shareholder's state of residence. Such reinvestment
will be subject to the minimum investment requirements and any other applicable
terms set forth in the prospectus of the fund being acquired.
EXCHANGE PRIVILEGE
Shares of the Fund purchased through a Piper Jaffray Investment Executive
may be exchanged for shares of any other mutual fund managed by the Adviser
(except Hercules Funds Inc.) provided that the shares to be acquired in the
exchange are eligible for sale in the shareholder's state of residence. Shares
of the Fund purchased through another broker-dealer may be exchanged for shares
of any other mutual fund managed by the Adviser for which that broker-dealer has
a signed dealer agreement (except Hercules Funds Inc.). Exchanges of Fund shares
are made on the basis of the net asset values of the funds involved. An investor
considering an exchange into another mutual fund managed by the Adviser should
refer to the appropriate prospectus for additional information concerning such
fund. A prospectus may be obtained through an investor's Piper Jaffray
Investment Executive or other broker-dealer or through the Distributor. All
exchanges are subject to the minimum investment requirements and any other
applicable terms set forth in the prospectus of the fund being acquired.
Shareholders exchanging all of their Fund shares for shares of another mutual
fund will no longer be eligible to purchase shares of the Fund, whether through
the exchange privilege or otherwise.
A shareholder holding shares in a Piper Jaffray account may make an exchange
by contacting his or her Piper Jaffray Investment Executive. Other shareholders
must contact IFTC. Shareholders who have authorized telephone exchanges in their
Account Application and Services Form will be able to effect exchanges from the
Fund into an identically registered account in one of the other available funds
by calling IFTC at (800) 874-6205. Otherwise, exchanges must be made by mail by
following the procedures applicable to redemption of the Fund's shares (see
"Redemption of Shares--Normal Redemption" below) except that, with respect to an
exchange transaction between accounts registered in identical names, no
signature guarantee is required unless the amount being exchanged exceeds
$25,000.
An investor may make four exchanges per year without payment of a service
charge. Thereafter, there is a $5 service charge for each exchange. The Company
reserves the right to change or discontinue the exchange privilege, or any
aspect of the privilege, upon 60 days' written notice.
REDEMPTION OF SHARES
NORMAL REDEMPTION
Shares of the Fund, in any amount, may be redeemed at any time at their
current net asset value next determined after a request is received by a
shareholder's Piper Jaffray Investment Executive or other broker-dealer. A
written redemption request (discussed below) will not be considered received
unless it is in proper form. To redeem shares of the Fund, an investor may make
an oral redemption request through his or her Piper Jaffray Investment Executive
or other broker-dealer. Immediately following the receipt of such a request, the
Investment Executive or broker-dealer will wire a redemption request to the
Distributor or
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<PAGE>
IFTC, respectively. Shareholders redeeming all of their Fund shares will no
longer be eligible to purchase shares of the Fund.
Shareholders who purchased shares through a broker-dealer other than the
Distributor may also redeem such shares by written request to IFTC at the
address set forth above. See "Management--Transfer Agent, Dividend Disbursing
Agent and Custodian." To be considered in proper form, written requests for
redemption should indicate the dollar amount or number of shares to be redeemed,
refer to the shareholder's Fund account number, and give either a social
security or tax identification number (as applicable). The request should be
signed in exactly the same way the account is registered. If there is more than
one owner of the shares, all owners must sign. If shares to be redeemed have a
value of $10,000 or more or redemption proceeds are to be paid to someone other
than the shareholder at such shareholder's address of record, the signature(s)
must be guaranteed by an "eligible guarantor institution," which includes a
commercial bank that is a member of the Federal Deposit Insurance Corporation, a
trust company, a member firm of a domestic stock exchange, a savings association
or a credit union that is authorized by its charter to provide a signature
guarantee. IFTC may reject redemption instructions if the guarantor is neither a
member of nor a participant in a signature guarantee program. Signature
guarantees by notaries public are not acceptable. The purpose of a signature
guarantee is to protect shareholders against the possibility of fraud. Further
documentation will be requested from corporations, administrators, executors,
personal representatives, trustees and custodians. Redemption requests given by
facsimile will not be accepted. Unless other instructions are given in proper
form, a check for the proceeds of the redemption will be sent to the
shareholder's address of record.
EXPEDITED REDEMPTION
Shareholders who have authorized expedited redemptions in their Account
Application and Services Form may elect to have redemption proceeds transmitted
by wire in the case of redemptions of $25,000 or more. Such redemptions can be
made by contacting a shareholder's Piper Jaffray Investment Executive or other
broker-dealer. The proceeds of redeemed shares normally will be transmitted the
following day by Federal Funds wire to the shareholder's designated bank account
(which must be at a domestic commercial bank which is a member of the Federal
Reserve System), assuming proper wire instructions have been provided by the
shareholder. Transfer wire fees, if any, will be deducted from the redemption
proceeds. The Fund will employ reasonable procedures to confirm that telephone
instructions are genuine, including requiring that payment be made only to the
bank account designated and requiring certain means of telephonic
identification. If the Fund employs such procedures it will not be liable for
following instructions communicated by telephone that it reasonably believes to
be genuine. If the Fund fails to employ such procedures, it may be liable for
any losses due to unauthorized or fraudulent telephone transactions. It may be
difficult to reach the Fund by telephone during periods when market or economic
conditions lead to an unusually large volume of telephone requests. If you
cannot reach the Fund by telephone, you should contact your broker-dealer or
issue written instructions to IFTC at the address set forth herein. See
"Management-- Transfer Agent, Dividend Disbursing Agent and Custodian." The Fund
reserves the right to suspend or terminate its telephone services at any time
without notice.
SYSTEMATIC WITHDRAWAL PLAN
If your account has a value of $5,000 or more, you may establish a
Systematic Withdrawal Plan for the Fund and receive regular periodic payments. A
request to establish a Systematic Withdrawal Plan must be submitted in writing
to an investor's Piper Jaffray Investment Executive or other broker-dealer.
There are no service charges for maintenance; the minimum amount that you may
withdraw each period is $100. (This is merely the minimum amount allowed and
should not be interpreted as a recommended amount.) The holder of a Systematic
Withdrawal Plan will have any income dividends and any capital gains
distributions reinvested in full and fractional shares at net asset value. To
provide funds for payment, the Fund will redeem as
17
<PAGE>
many full and fractional shares as necessary at the redemption price, which is
net asset value. Redemption of shares may reduce or possibly exhaust the shares
in your account, particularly in the event of a market decline. As with other
redemptions, a redemption to make a withdrawal payment is a sale for federal
income tax purposes. Payments made pursuant to a Systematic Withdrawal Plan
cannot be considered as actual yield or income since part of such payments may
be a return of capital.
The maintenance of a Systematic Withdrawal Plan concurrent with purchases of
additional shares of the Fund may be unadvisable due to sales charges and tax
liabilities. You will receive a confirmation of each transaction showing the
sources of the payment and the share and cash balance remaining in your account.
The plan may be terminated on written notice by the shareholder or the Fund and
it will terminate automatically if all shares are liquidated or withdrawn from
the account or upon the death or incapacity of the shareholder. You may change
the amount and schedule of withdrawal payments or suspend such payments by
giving written notice to your Piper Jaffray Investment Executive or other
broker-dealer at least seven business days prior to the end of the month
preceding a scheduled payment.
PAYMENT OF REDEMPTION PROCEEDS
Normally, the Fund will make payment for all shares redeemed within three
business days, but in no event will payment be made more than seven days after
receipt by the Distributor or IFTC of a redemption request in proper order.
However, payment may be postponed or the right of redemption (by each of the
methods described above) suspended for more than seven days under unusual
circumstances, such as when trading is not taking place on the New York Stock
Exchange. Payment of redemption proceeds may also be delayed if the shares to be
redeemed were purchased by a check drawn on a bank which is not a member of the
Federal Reserve System, until such check has cleared the banking system
(normally up to 15 days).
REDEMPTION IN KIND
Although it is the Fund's current policy to make payment of redemption
proceeds in cash, redemption proceeds for redemption requests of $100,000 or
more may be paid, at the sole option of the Fund, in whole or in part by a
distribution in kind of securities or other assets held by the Fund. The
determination of which of the Fund's assets will be distributed to meet such
redemption requests will be made by the Adviser, in consultation with the
redeeming shareholder. Securities or other assets so distributed will be valued
in the same manner as the Fund's securities. In order to dispose of such
securities or other assets, the redeeming shareholder would most likely be
required to bear transaction costs.
INVOLUNTARY REDEMPTION
The Fund reserves the right to redeem a shareholder's account at any time
the net asset value of the account falls below $500 as the result of a
redemption or exchange request. Shareholders will be notified in writing that
the value of their account is less than $500 and will be allowed 30 days to make
additional investments before the redemption is processed.
VALUATION OF SHARES
The Fund determines its net asset value on each day the New York Stock
Exchange (the "Exchange") is open for business, provided that the net asset
value need not be determined for the Fund on days on which changes in the value
of its portfolio securities will not materially affect the current net asset
value of the Fund's shares and days when no Fund shares are tendered for
redemption and no order for Fund shares is received. The calculation is made as
of the primary closing time of the Exchange (currently 4:00 p.m., New York time)
after the Fund has declared any applicable dividends.
The net asset value per share for the Fund is determined by dividing the
value of the securities owned by the Fund plus any cash and other assets
(including interest accrued and dividends declared but not collected)
18
<PAGE>
less all liabilities by the number of Fund shares outstanding. For the purposes
of determining the aggregate net assets of the Fund, cash and receivables will
be valued at their face amounts. Interest will be recorded as accrued.
The value of certain fixed-income securities will be provided by an
independent pricing service, which determines these valuations at a time earlier
than the close of the Exchange. Pricing services consider such factors as
security prices, yields, maturities, call features, ratings and developments
relating to specific securities in arriving at securities valuations.
Fixed-income securities for which prices are not available from an independent
pricing service but where an active market exists will be valued using market
quotations obtained from one or more dealers that make markets in the
securities. Occasionally events affecting the value of such securities may occur
between the time valuations are determined and the close of the Exchange. If
events materially affecting the value of such securities occur during such
period, or if the Fund's management determines for any other reason that
valuations provided by the pricing service are inaccurate, such securities will
be valued at their fair value according to procedures decided upon in good faith
by the Company's Board of Directors. In addition, any securities or other assets
of the Fund for which market prices are not readily available will be valued at
their fair value in accordance with such procedures.
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
DIVIDENDS AND DISTRIBUTIONS
All net investment income dividends and net realized capital gains
distributions with respect to the shares of the Fund will be payable in
additional shares of the Fund at net asset value unless the shareholder notifies
his or her Piper Jaffray investment executive or other broker-dealer of an
election to receive cash. Shareholders may elect either to receive income
dividends in cash and capital gains in shares of the Fund at net asset value, or
to receive both income dividends and capital gains in cash. The taxable status
of income dividends and/or net capital gains distributions is not affected by
whether they are reinvested or paid in cash. Fund shareholders may also direct
that income dividends and capital gains distributions from the Fund be invested
in any other mutual fund managed by the Adviser (other than a money market fund
or Hercules Funds Inc.) that is offered in a shareholder's state. Any such
investment will be made at net asset value and will not be subject to a minimum
investment amount except that, in order to invest dividends and distributions in
another fund, an investor must hold shares in such fund (including shares being
acquired with such dividend or distribution) with a value at least equal to such
fund's minimum initial investment amount as of the date of the dividend or
distribution.
The net investment income of the Fund will be declared as dividends daily.
Dividends will be reinvested in additional shares of the Fund (or, at the
shareholder's option, shares of another mutual fund managed by the Adviser) on a
monthly basis, except that, with respect to shareholders who have elected to
receive cash, dividends will be distributed monthly into the Piper Jaffray
accounts of shareholders who purchased through Piper Jaffray Investment
Executives and mailed monthly to shareholders who purchased through other
broker-dealers. Each daily dividend is payable to Fund shareholders of record at
the time of its declaration. "Shareholders of record" is defined to include
holders of shares purchased for which payment has been received by the
Distributor or IFTC, as appropriate, and to exclude holders of shares redeemed
on that day. A shareholder will not be credited with a daily dividend until
payment for shares purchased has been received by the Distributor or IFTC.
Shares redeemed will earn dividends through the day prior to settlement of the
redemption.
The Fund may at times pay out less than the entire amount of net investment
income earned in any particular period in order to permit the Fund to maintain a
more stable level of distributions and to increase investment flexibility. As a
result, the distributions paid by the Fund for any particular period may be more
or
19
<PAGE>
less than the amount of net investment income earned by the Fund during such
period. The Fund retained income during the 1995, 1994, 1993 and 1992 excise tax
years and was subject to a 4% excise tax on that retained income. See "Taxes,"
below.
The Fund will distribute net realized capital gains, if any, to its
shareholders at least once annually. For federal income tax purposes, the Fund
had capital loss carryovers at September 30, 1995 of $262,276,703. Such capital
loss carryovers, if not offset by subsequent capital gains, will expire
September 30, 2003 and 2004. It is unlikely that the Board of Directors will
authorize a distribution of any net realized capital gains until the available
capital loss carryovers have been offset or has expired.
TAXES
Each series of the Company is treated as a separate corporation for federal
income tax purposes under the Internal Revenue Code of 1986, as amended (the
"Code"). Therefore, the Fund is treated separately in determining whether it
qualifies as a regulated investment company under the Code and for purposes of
determining the net ordinary income (or loss), net realized capital gains (or
losses) and distributions necessary to relieve the Fund of any federal income
tax liability. The Fund qualified as a regulated investment company during its
last taxable year and intends to qualify as a regulated investment company
during the current taxable year. If so qualified, the Fund will not be liable
for federal income taxes to the extent it distributes its taxable income to
shareholders. The Fund will, however, be subject to a nondeductible excise tax
equal to 4% of the excess, if any, of the amount required to be distributed
pursuant to the Code for each calendar year over the amount actually
distributed. In order to avoid the imposition of this excise tax, the Fund
generally must declare dividends by the end of a calendar year representing 98%
of the Fund's ordinary income for the calendar year and 98% of its capital gain
net income (both long-term and short-term capital gains) for the 12-month period
ending October 31 of the calendar year. As discussed above, the Fund retained
income subject to the 4% excise tax for the 1995, 1994, 1993 and 1992 excise tax
years. The Fund anticipates that it will also pay excise tax in the 1996 excise
tax year.
Distributions by the Fund are generally taxable to the shareholders, whether
received in cash or additional shares of the Fund (or shares of another mutual
fund managed by the Adviser). Since none of the income of the Fund will consist
of dividends from domestic corporations, the dividends-received deduction for
corporations will not be applicable to distributions by the Fund. Distributions
designated as capital gain dividends will be taxable to shareholders as
long-term capital gains, regardless of the length of time the shareholder has
held the shares of the Fund.
When a shareholder sells or exchanges shares in the Fund, the shareholder
will recognize a capital gain or loss if, as is normally the case, the shares
are capital assets in the hands of the shareholder. The capital gain or loss
will be long-term if the shareholder has held the shares more than one year.
The foregoing relates to federal income taxation as in effect as of the date
of this Prospectus. For a more detailed discussion of the federal income tax
consequences of investing in shares of the Fund, see "Taxation" in the Statement
of Additional Information. Before investing in the Fund, you should check the
consequences of your local and state tax laws.
PERFORMANCE COMPARISONS
Advertisements and other sales literature for the Fund may refer to its
"yield," its "average annual total return" and its cumulative total return. When
the Fund advertises its yield, it will also advertise its total return as
required by the rules of the Securities and Exchange Commission. All such
figures are based on historical earnings and are not intended to indicate future
performance. The return on and principal value of an investment in the Fund will
fluctuate, so that an investor's shares, when redeemed, may be worth more or
less than their original cost.
20
<PAGE>
The advertised "yield" of the Fund will be based upon a 30-day period stated
in the advertisement. Yield is calculated by dividing the net investment income
per share (as defined under Securities and Exchange Commission rules and
regulations) earned during the period by the maximum offering price per share on
the last day of the period. The result is then "annualized" using a formula that
provides for semiannual compounding of income.
"Average annual total return" is the average annual compounded rate of
return on a hypothetical $1,000 investment made at the beginning of the
advertised period. Cumulative total return is calculated by subtracting a
hypothetical $1,000 payment to the Fund from the redeemable value of such
payment at the end of the advertised period, dividing such difference by $1,000
and multiplying the quotient by 100. In calculating average annual and
cumulative total return, the maximum sales charge is deducted from the
hypothetical investment and all dividends and distributions are assumed to be
reinvested. Such total return quotations may be accompanied by quotations which
do not reflect the reduction in value of the initial investment due to sales
charge, and which thus will be higher.
Comparative performance information also may be used from time to time in
advertising the Fund's shares. For example, advertisements may compare the
Fund's performance to that of various unmanaged market indices, or may include
performance data from Lipper Analytical Services, Inc., Morningstar, Inc. or
other entities or organizations which track the performance of investment
companies.
For additional information regarding comparative performance information and
calculation of the Fund's yield, average annual total return and cumulative
total return, see "Performance Comparisons" in the Statement of Additional
Information.
Advertisements and other sales literature may also refer to the Fund's
effective duration. Effective duration estimates the interest rate risk (price
volatility) of a security, I.E., how much the value of the security is expected
to change with a given change in interest rates. The longer a security's
effective duration, the more sensitive its price is to changes in interest
rates. For example, if interest rates were to increase by 1%, the market value
of a bond with an effective duration of five years would decrease by about 5%,
with all other factors being constant. It is important to understand that, while
a valuable measure, effective duration is based on certain assumptions and has
several limitations. It is most useful as a measure of interest rate risk when
interest rate changes are small, rapid and occur equally across all the
different points of the yield curve. In addition, effective duration is
difficult to calculate precisely for bonds with prepayment options, such as
mortgage-backed securities, because the calculation requires assumptions about
prepayment rates. For example, when interest rates go down, homeowners may
prepay their mortgages at a higher rate than assumed in the initial effective
duration calculation, thereby shortening the effective duration of the Fund's
mortgage-backed securities. Conversely, if rates increase, prepayments may
decrease to a greater extent than assumed, extending the effective duration of
such securities. For these reasons, the effective durations of funds which
invest a significant portion of their assets in mortgage-backed securities,
particularly mortgage derivative securities, can be greatly affected by changes
in interest rates.
GENERAL INFORMATION
The Company is authorized to issue a total of 10 trillion shares of common
stock, with a par value of $.01 per share. Four hundred billion of these shares
have been authorized by the Board of Directors to be issued in thirteen separate
series, as follows: Growth Fund (formerly Value Fund), Emerging Growth Fund,
Growth and Income Fund, Equity Strategy Fund, Balanced Fund, Government Income
Fund, Short-Intermediate Bond Fund, Institutional Government Income Portfolio,
National Tax-Exempt Fund and Minnesota Tax-Exempt Fund, each of which has ten
billion authorized shares, and Money Market Fund, Tax-Exempt
21
<PAGE>
Money Market Fund and U.S. Government Money Market Fund, each of which has one
hundred billion authorized shares.
The Board of Directors is empowered under the Company's Articles of
Incorporation to issue additional series of the Company's common stock without
shareholder approval. In addition, the Board of Directors may, without
shareholder approval, create and issue one or more additional classes of shares
within each Fund, as well as within any series of the Company created in the
future. See "Capital Stock and Ownership of Shares" in the Statement of
Additional Information.
All shares, when issued, will be fully paid and nonassessable and will be
redeemable. All shares have equal voting rights. They can be issued as full or
fractional shares. A fractional share has pro rata the same kind of rights and
privileges as a full share. The shares possess no preemptive or conversion
rights.
Each share of a series has one vote (with proportionate voting for
fractional shares) irrespective of the relative net asset value of the series'
shares. On some issues, such as the election of directors, all shares of the
Company vote together as one series. On an issue affecting only a particular
series, the shares of the affected series vote separately. Cumulative voting is
not authorized. This means that the holders of more than 50% of the shares
voting for the election of directors can elect 100% of the directors if they
choose to do so, and, in such event, the holders of the remaining shares will be
unable to elect any directors.
The Bylaws of the Company provide that shareholder meetings be held only
with such frequency as required under Minnesota law. Minnesota corporation law
requires only that the Board of Directors convene shareholder meetings when it
deems appropriate. In addition, Minnesota law provides that if a regular meeting
of shareholders has not been held during the immediately preceding 15 months, a
shareholder or shareholders holding 3% or more of the voting shares of the
Company may demand a regular meeting of shareholders by written notice given to
the chief executive officer or chief financial officer of the Company. Within 30
days after receipt of the demand, the Board of Directors shall cause a regular
meeting of shareholders to be called, which meeting shall be held no later than
90 days after receipt of the demand, all at the expense of the Company. In
addition, the 1940 Act requires a shareholder to vote for all amendments to
fundamental investment policies and restrictions and for all amendments to
investment advisory contracts and Rule 12b-1 distribution plans. The 1940 Act
also provides that Directors of the Company may be removed by action of the
record holders of two-thirds or more of the outstanding shares of the Company.
The Directors are required to call a meeting of shareholders for the purpose of
voting upon the question of removal of any Director when so requested in writing
by the record holders of at least 10% of the Company's outstanding shares.
The Fund periodically sends financial and other reports and communications
(including, but not limited to, annual and semi-annual financial statements) to
its shareholders. Unless otherwise required by law, the Fund intends to mail one
of each such report or communication to each individual mailing address, which
may be the address of one or multiple shareholders of record. However,
shareholders have the right to receive additional copies of each such report or
communication without charge upon written request to the Fund.
PENDING LITIGATION
A number of complaints have been brought in federal and state court against
the Fund, the Adviser, the Distributor, and certain individuals affiliated or
formerly affiliated with the Adviser and the Distributor. In addition,
complaints have been filed in federal court relating to a number of closed-end
investment companies managed by the Adviser and two open-end investment
companies for which the Adviser has acted as subadviser. The complaints, which
ask for rescission of plaintiff shareholders' purchases or compensatory damages,
plus interest, costs and expenses, generally allege, among other things, certain
violations of federal
22
<PAGE>
and/or state securities laws, including the making of materially misleading
statements in prospectuses concerning investment policies and risks. See
"Pending Litigation" in the Statement of Additional Information.
A settlement agreement has been reached with respect to one of the
complaints involving the Fund. An Amended Consolidated Class Action Complaint,
which represents a consolidation of claims previously brought by 11 persons or
entities, was filed on October 5, 1994 in the United States District Court,
District of Minnesota. The named plaintiffs in this putative class action (the
"Amended Class Action") purport to represent a class of individuals and groups
who purchased shares of the Fund during the period from July 1, 1991 through May
9, 1994. The named plaintiffs and defendants have entered into a settlement
agreement which has received preliminary approval from the Court. The terms of
the settlement are set forth in a Settlement Agreement dated July 20, 1995 (as
modified by an Addendum filed on July 28, 1995). The Settlement Agreement
contained a provision which would have permitted the defendants to cancel the
Agreement if shareholders who had incurred a cumulative "loss" (as defined under
the Agreement) of more than 10% of the loss sustained by the entire class had
opted out. The October 2, 1995 deadline for requesting exclusion from the class
has passed, and the loss sustained by persons requesting exclusion is less than
10%. If granted final approval by the Court, the settlement agreement would
provide up to approximately $70 million to class members in payments scheduled
over approximately three years. Such payments would be made by Piper Jaffray
Companies and the Adviser and would not be an obligation of the Fund or the
Company. Six additional complaints have been brought and a number of actions
have been commenced in arbitration relating to the Fund. The complaints
generally have been consolidated with the Amended Class Action for pretrial
purposes and the arbitrations and litigations have been stayed pending entry of
an order by the Court permitting those class members who have requested
exclusion to proceed with their actions.
The Adviser and the Distributor to not believe that the Amended Class Action
settlement or any outstanding complaint or action in arbitration will have a
material adverse effect on their ability to perform under their agreements with
the Company and they intend to defend such lawsuits and actions vigorously.
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS (AND/OR IN THE STATEMENT OF ADDITIONAL INFORMATION REFERRED TO ON THE
COVER PAGE OF THIS PROSPECTUS), AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR
PIPER JAFFRAY INC. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION
BY ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR
IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO,
OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
23
<PAGE>
PIPER FUNDS INC.
INVESTMENT ADVISER
Piper Capital Management Incorporated
DISTRIBUTOR
Piper Jaffray Inc.
CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company
AUDITORS
KPMG Peat Marwick LLP
LEGAL COUNSEL
Dorsey & Whitney P.L.L.P.
Table of Contents
<TABLE>
<CAPTION>
PAGE
<S> <C>
Introduction......................... 2
Fund Expenses........................ 4
Financial Highlights................. 5
Investment Objective and Policies.... 6
Management........................... 11
Distribution of Fund Shares.......... 12
Purchase of Shares................... 13
Redemption of Shares................. 16
Valuation of Shares.................. 18
Dividends, Distributions and Tax
Status............................. 19
Performance Comparisons.............. 20
General Information.................. 21
Pending Litigation................... 22
</TABLE>
PJIGX-05
INSTITUTIONAL
GOVERNMENT
INCOME
PORTFOLIO
[LOGO]
PROSPECTUS
NOVEMBER 27, 1995
<PAGE>
PROSPECTUS DATED NOVEMBER 27, 1995
PIPER FUNDS INC.
MONEY MARKET FUND
U.S. GOVERNMENT MONEY MARKET FUND
TAX-EXEMPT MONEY MARKET FUND
PIPER JAFFRAY TOWER
222 SOUTH NINTH STREET
MINNEAPOLIS, MINNESOTA 55402-3804
(800) 866-7778 (TOLL FREE)
Money Market Fund, U.S. Government Money Market Fund and Tax-Exempt Money
Market Fund (the "Funds") are series of Piper Funds Inc. (the "Company"), an
open-end mutual fund whose shares are currently offered in thirteen series.
MONEY MARKET FUND AND U.S. GOVERNMENT MONEY MARKET FUND both have an
investment objective of maximum current income consistent with preservation of
capital and maintenance of liquidity. Money Market Fund invests in a variety of
high quality money market instruments such as high grade domestic and U.S.
dollar denominated foreign commercial paper, repurchase agreements, obligations
of domestic and foreign banks (time deposits, certificates of deposit and
bankers' acceptances), U.S. Government securities and short-term corporate
obligations. U.S. Government Money Market Fund invests only in U.S. Government
securities and repurchase agreements with respect to such securities.
TAX-EXEMPT MONEY MARKET FUND has an investment objective of a high level of
current income exempt from federal income taxes consistent with preservation of
capital and maintenance of liquidity. The Fund seeks to achieve this objective
by investing primarily in high quality tax-exempt securities with short-term
maturities, including municipal bonds, municipal notes and municipal commercial
paper.
INVESTMENTS IN THE FUNDS ARE NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE IS NO ASSURANCE THAT THE FUNDS WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE.
This Prospectus concisely describes the information about the Funds that you
ought to know before investing. Please read it carefully before investing and
retain it for future reference.
A Statement of Additional Information about the Funds dated November 22,
1995, is available free of charge. Write to the Funds at Piper Jaffray Tower,
222 South Ninth Street, Minneapolis, Minnesota 55402 or telephone (800) 866-7778
(toll free). The Statement of Additional Information has been filed with the
Securities and Exchange Commission and is incorporated in its entirety by
reference in this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
INTRODUCTION
Money Market Fund, U.S. Government Money Market Fund and Tax-Exempt Money
Market Fund (sometimes referred to herein as a "Fund" or, collectively, as the
"Funds") are series of Piper Funds Inc. (the "Company"). The Company is an
open-end management investment company organized under the laws of the State of
Minnesota in 1986, the shares of which are currently offered in thirteen series.
Each Fund has its own investment objective and policies, and each is classified
as a diversified fund.
THE INVESTMENT ADVISER
The Company is managed by Piper Capital Management Incorporated (the
"Adviser"), a wholly owned subsidiary of Piper Jaffray Companies Inc. Each Fund
pays the Adviser a fee for managing its investment portfolio at an annual rate
of .50% on net assets up to $500 million. For each Fund the fee is scaled
downward as assets increase in size above $500 million. See
"Management--Investment Adviser."
THE DISTRIBUTOR
Piper Jaffray Inc. ("Piper Jaffray"), a wholly owned subsidiary of Piper
Jaffray Companies Inc. and an affiliate of the Adviser, serves as Distributor of
the Funds' shares.
OFFERING PRICE
Shares of the Funds are offered to the public at their net asset value of
$1.00 per share with no sales charge. There can be no assurance, however, that
the net asset value per share of any Fund will always be maintained at $1.00.
MINIMAL INVESTMENTS
The minimum initial investment for each Fund is $250. There is no minimum
for subsequent investments. See "How to Purchase Shares--Minimum Investments."
EXCHANGES
You may exchange your shares for shares of any other mutual fund managed by
the Adviser (except Hercules Funds Inc.) which is open to new investors and
eligible for sale in your state of residence. All exchanges are subject to the
minimum investment requirements and other applicable terms set forth in the
prospectus of the fund whose shares you acquire. You may make four exchanges per
year without payment of a service charge. Thereafter, there is a $5 service
charge for each exchange. See "Shareholder Services-- Exchange Privilege."
REDEMPTION PRICE
Shares of any Fund may be redeemed at any time at their net asset value next
determined after a redemption request is received by your Piper Jaffray
Investment Executive or other broker-dealer. The Funds reserve the right, upon
30 days' written notice, to redeem your account if the net asset value of the
shares falls below $200. See "How to Redeem Shares--Involuntary Redemption."
CERTAIN RISK FACTORS TO CONSIDER
As with other mutual funds, there can be no assurance that any Fund will
achieve its objective. As set forth in detail under "Investment Objectives and
Policies" and "Special Investment Methods and Risk Factors," an investment in
any of the Funds is subject to certain risks and some or all of the Funds may
engage in the following investment practices which involve certain special
risks: the use of repurchase agreements and reverse repurchase agreements and
the purchase or sale of securities on a "when-issued" or "forward commitment"
basis.
SHAREHOLDER INQUIRIES
Any questions or communications regarding a shareholder account should be
directed to your Piper Jaffray Investment Executive or, in the case of shares
held through another broker-dealer, to IFTC at (800) 874-6205. General inquiries
regarding the Funds should be directed to the Funds at the telephone number set
forth on the cover page of this Prospectus.
2
<PAGE>
FUND EXPENSES
<TABLE>
<CAPTION>
U.S. Tax- Exempt
Money Government Money
Market Money Market Market
Shareholder Transaction Expenses Fund Fund Fund
---------- ------------- ----------
<S> <C> <C> <C>
Exchange Fee*................................................... $0 $0 $0
Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees................................................ .42 % .50 % .50 %
12b-1 Fees (after voluntary limitation)........................ .20 % .20 % .20 %
Other Expenses................................................. .30 % .21 % .21 %
--- --- ---
Total Fund Operating Expenses (after voluntary limitation)..... .92 % .91 % .91 %
</TABLE>
- ---------
*There is a $5.00 fee for each exchange in excess of four exchanges per year. In
addition, exchanges made for shares of other funds managed by the Adviser and
subject to a sales charge generally require payment of the applicable sales
charge. See "Shareholder Services--Exchange Privilege."
EXAMPLE
For each of the Funds, you would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and (2) redemption at the end of each
time period:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Money Market Fund........................................................... $ 9 $ 29 $ 51 $ 113
U.S. Government Money Market Fund.......................................... $ 9 $ 29 $ 50 $ 112
Tax-Exempt Money Market Fund............................................... $ 9 $ 29 $ 50 $ 112
</TABLE>
The examples contained in the table should not be considered a
representation of past or future expenses. Actual expenses may be greater or
less than those shown. The purpose of the above Fund Expenses table is to assist
you in understanding the various costs and expenses that investors in the Funds
will bear directly or indirectly. The information in the table reflects actual
expenses incurred during the fiscal year ended September 30, 1995. The Funds
have adopted a Rule 12b-1 Plan under which each Fund pays the Distributor a fee
equal, on an annual basis, to .30% of such Fund's average daily net assets in
connection with the servicing of Fund shareholder accounts and the provision of
distribution-related services to the Funds. The Distributor has voluntarily
agreed to limit fees payable under the Plan to .20% of each Fund's average daily
net assets. After fiscal 1996, this limitation may be revised or terminated at
any time. For additional information, including a more complete explanation of
management and Rule 12b-1 fees, see "Management--Investment Adviser" and
"Distribution of Fund Shares." The Adviser may or may not assume expenses of the
Funds from time to time, in its discretion, while retaining the ability to be
reimbursed by the Funds for expenses assumed by it during a fiscal year prior to
the end of such year. The foregoing policy will have the effect of lowering a
Fund's overall expense ratio and of increasing yield to investors when such
amounts are assumed or the inverse when such amounts are reimbursed.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial highlights show certain per share data and selected
information for a share of capital stock outstanding during the indicated
periods for the Funds. This information has been audited by KPMG Peat Marwick
LLP, independent auditors, and should be read in conjunction with the financial
statements of each Fund contained in its annual report. An annual report of each
Fund is available without charge by contacting the Funds at 800-866-7778 (toll
free). In addition to financial statements, the annual reports contain further
information about the performance of the Funds.
MONEY MARKET FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30, Period from
--------------------------------------------------------------------------- 11/1/87 to
1995 1994 1993 1992 1991 1990 1989 9/30/88
--------- --------- --------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period......................... $ 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
--------- --------- --------- --------- --------- --------- --------- -----
Operations:
Net investment income.......... 0.05 0.03 0.02 0.04 0.06 0.08 0.08 0.06
Distributions from net investment
income......................... (0.05) (0.03) (0.02) (0.04) (0.06) (0.08) (0.08) (0.06)
--------- --------- --------- --------- --------- --------- --------- -----
Net asset value, end of
period......................... $ 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
--------- --------- --------- --------- --------- --------- --------- -----
--------- --------- --------- --------- --------- --------- --------- -----
Total return***.................. 5.05% 2.98% 2.45% 3.87% 6.34% 7.88% 8.60% 6.02%
Net assets, end of period
(in millions).................. $ 1,703 1,185 1,106 1,096 1,242 1,176 1,004 583
Ratio of expenses to average
daily net assets(1)............ 0.92% 0.93% 0.96% 0.90% 0.89% 0.91% 1.00% 1.05%**
Ratio of net investment income to
average daily
net assets(1).................. 4.94% 2.90% 2.42% 3.66% 6.06% 7.56% 8.32% 6.45%**
<CAPTION>
Period from
3/16/87* to
10/31/87
-------------
<S> <C>
Net asset value, beginning of
period......................... 1.00
-----
Operations:
Net investment income.......... 0.04
Distributions from net investment
income......................... (0.04)
-----
Net asset value, end of
period......................... 1.00
-----
-----
Total return***.................. 3.70%
Net assets, end of period
(in millions).................. 215
Ratio of expenses to average
daily net assets(1)............ 0.74%**
Ratio of net investment income to
average daily
net assets(1).................. 6.29%**
</TABLE>
- ----------
U.S. GOVERNMENT MONEY MARKET FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30, Period from
--------------------------------------------------------------------------- 7/5/88* to
1995 1994 1993 1992 1991 1990 1989 9/30/88
--------- --------- --------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period.................. $ 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
--------- --------- --------- --------- --------- --------- --------- -----
Operations:
Net investment income...... 0.05 0.03 0.02 0.04 0.06 0.08 0.08 0.01
Distributions from net
investment income.......... (0.05) (0.03) (0.02) (0.04) (0.06) (0.08) (0.08) (0.01)
--------- --------- --------- --------- --------- --------- --------- -----
Net asset value, end of
period..................... $ 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
--------- --------- --------- --------- --------- --------- --------- -----
--------- --------- --------- --------- --------- --------- --------- -----
Total return***.............. 4.99% 2.98% 2.51% 3.78% 6.05% 7.80% 8.37% 1.28%
Net assets, end of period
(in millions).............. $ 256 185 195 191 199 112 46 17
Ratio of expenses to average
daily net assets(2)........ .91% 0.92% 0.93% 0.90% 0.88% 0.91% 0.90% 0.90%**
Ratio of net investment
income to average daily net
assets(2).................. 4.90% 2.88% 2.41% 3.58% 5.84% 7.35% 8.17% 7.16%**
</TABLE>
- ----------
See Notes to Financial Highlights
4
<PAGE>
TAX-EXEMPT MONEY MARKET FUND
<TABLE>
<CAPTION>
Fiscal year ended September 30, Period from
--------------------------------------------------------------------------- 7/5/88* to
1995 1994 1993 1992 1991 1990 1989 9/30/88
--------- --------- --------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period.................. $ 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
--------- --------- --------- --------- --------- --------- --------- -----
Operations:
Net investment income...... 0.03 0.02 0.02 0.03 0.04 0.05 0.06 0.01
Distributions from net
investment income(3)....... (0.03) (0.02) (0.02) (0.03) (0.04) (0.05) (0.06) (0.01)
--------- --------- --------- --------- --------- --------- --------- -----
Net asset value, end of
period..................... $ 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
--------- --------- --------- --------- --------- --------- --------- -----
--------- --------- --------- --------- --------- --------- --------- -----
Total return***.............. 3.02% 1.82% 1.87% 3.07% 4.54% 5.41% 5.76% 1.21%
Net assets, end of period
(in millions).............. $ 206 178 169 158 134 116 84 36
Ratio of expenses to average
daily net assets (4)....... 0.91% 0.90% 0.92% 0.88% 0.87% 0.89% 0.90% 0.90%**
Ratio of net investment
income to average daily net
assets (4)................. 2.97% 1.80% 1.83% 2.91% 4.37% 5.34% 5.63% 4.99%**
</TABLE>
- ----------
Notes to Financial Highlights
* Commencement of operations.
** Adjusted to an annual basis.
*** Total return is based on the change in net asset value during the period and
assumes reinvestment of all distributions.
(1)During the periods reflected above, Money Market Fund's distribution fee was
voluntarily limited by the Distributor. In addition, other various fees and
expenses were voluntarily waived or absorbed by the Adviser during fiscal
1987. Had the maximum distribution fee been in effect and the fund paid all
fees and expenses, the ratios of expenses and net investment income to
average daily net assets would have been: 1.02%/4.84% in fiscal 1995,
1.03%/2.80% in fiscal 1994, 1.06%/2.32% in fiscal 1993, 1.00%/3.56% in
fiscal 1992, 0.98%/5.97% in fiscal 1991, 1.00%/7.47% in fiscal 1990,
1.10%/8.22% in fiscal 1989, 1.10%/6.40% in fiscal 1988 and 1.35%/5.68% in
fiscal 1987.
(2)During the periods reflected above, U.S. Government Money Market Fund's
distribution fee was voluntarily limited by the Distributor. Prior to fiscal
year 1991, other various fees and expenses were voluntarily waived or
absorbed by the Adviser. Had the maximum distribution fee been in effect and
the fund paid all fees and expenses, the ratios of expenses and net
investment income to average daily net assets would have been: 1.01%/4.80%
in fiscal 1995, 1.02%/2.78% in fiscal 1994, 1.03%/2.31% in fiscal 1993,
1.00%/3.48% in fiscal 1992, 0.97%/5.75% in fiscal 1991, 1.05%/7.25% in
fiscal 1990, 1.29%/8.36% in fiscal 1989 and 2.08%/6.76% in fiscal 1988.
(3)Tax-Exempt Money Market Fund distributions from net investment income that
are taxable for federal and state income tax purposes were $0.0001, $0.0000,
$0.0000, $0.0001, $0.0002, $0.0003, $0.0010 and $0.0030 per share for the
years ended September 30, 1995, 1994, 1993, 1992, 1991, 1990 and 1989, and
for the period ended September 30, 1988, respectively.
(4)During the periods reflected above, Tax-Exempt Money Market Fund's
distribution fee was voluntarily limited by the Distributor. Prior to fiscal
year 1990, other various fees and expenses were voluntarily waived or
absorbed by the Adviser. Had the maximum distribution fee been in effect and
the fund paid all fees and expenses, the ratios of expenses and net
investment income to average daily net assets would have been: 1.01%/2.87%
in fiscal 1995, 1.00%/1.70% in fiscal 1994, 1.02%/1.73% in fiscal 1993,
0.98%/2.81% in fiscal 1992, 0.96%/4.28% in fiscal 1991, 0.98%/5.25% in
fiscal 1990, 0.84%/5.49% in fiscal 1989 and 1.44%/4.45% in fiscal 1988.
5
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives listed below cannot be changed without shareholder
approval. In view of the risks inherent in all investments in securities, there
is no assurance that these objectives will be achieved. The investment policies
and techniques employed in pursuit of the Funds' objectives may be changed
without shareholder approval, unless otherwise noted.
RULE 2A-7. As money market funds attempting to maintain a stable net asset
value of $1.00 per share, each Fund is subject to the investment restrictions of
Rule 2a-7 under the Investment Company Act of 1940, as amended (the "1940 Act"),
in addition to its other policies and restrictions discussed below. Rule 2a-7
requires that each of the Funds invest exclusively in securities that mature
within 397 days and maintain an average weighted maturity of not more than 90
days. Rule 2a-7 also requires that all investments by the Funds be limited to
United States dollar-denominated investments that: (1) present "minimal credit
risks," and (2) are at the time of acquisition "Eligible Securities." Eligible
Securities include, among others, (a) securities rated in one of the two highest
short-term rating categories by at least two nationally recognized statistical
rating organizations ("NRSROs"), (b) securities that at the time of issuance
were long-term securities but that have remaining maturities of 397 calendar
days or less, provided the issuer has comparable outstanding short-term debt
rated in one of the two highest categories, and (c) unrated securities of
comparable quality. See Appendix A to the Statement of Additional Information
for an explanation of the ratings issued by NRSROs. It is the responsibility of
the Adviser to determine that the Funds' investments present only "minimal
credit risks" and are Eligible Securities, pursuant to the oversight of, and
written guidelines and procedures established by, the Company's Board of
Directors.
Under Rule 2a-7, 95% of the assets of non-tax-exempt money funds (such as
Money Market Fund and U.S. Government Money Market Fund) must be invested in
Eligible Securities that are deemed First Tier Securities, which include, among
others, securities rated by at least two NRSROs in the highest category for
short-term debt obligations. Rule 2a-7 requires that a non-tax-exempt money fund
(1) may not invest (with certain limited exceptions) more than 5% of its total
assets in securities of a single issuer, other than U.S. Government securities,
(2) may not invest more than 5% of its total assets in Second Tier Securities
(I.E., Eligible Securities that are not First Tier Securities) and (3) may not
invest more than the greater of 1% of the fund's total assets or $1,000,000 in
Second Tier Securities of a single issuer.
MONEY MARKET FUND
INVESTMENT OBJECTIVE. Money Market Fund has an investment objective of
maximum current income consistent with preservation of capital and maintenance
of liquidity.
INVESTMENT POLICIES AND TECHNIQUES. Money Market Fund may invest in any
combination of the money market securities described below and it may invest in
repurchase agreements and enter into reverse repurchase agreements with respect
to such securities. See "Special Investment Methods and Risk Factors--
Repurchase Agreements" and "--Reverse Repurchase Agreements."
U.S. Government Securities--These obligations are issued or guaranteed as to
principal and interest by the U.S. Government or one of its agencies or
instrumentalities. U.S. Government securities are more fully described below.
See "Investment Objectives and Policies--U.S. Government Money Market Fund."
Foreign Government Obligations--Money Market Fund may invest in U.S. dollar
denominated obligations issued or guaranteed by one or more foreign governments
or any of their political subdivisions, agencies or instrumentalities that are
determined by the Adviser to be of comparable quality to the other obligations
in which the Fund may invest. Such securities also include debt obligations of
supranational
6
<PAGE>
entities. Supranational entities include international organizations designated
or supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the "World Bank"), the European Coal and Steel Community, the Asian
Development Bank and the InterAmerican Development Bank. The percentage of Money
Market Fund's assets invested in securities issued by foreign governments will
vary depending upon the relative yields of such securities, the economic and
financial markets of the countries in which the investments are made, and the
interest rate climate of such countries.
COMMERCIAL PAPER--Investments in commercial paper, are limited to direct
obligations issued by domestic and foreign entities which, at the time of their
purchase, are Eligible Securities. Commercial paper in which Money Market Fund
invests includes variable amount master demand notes, which are demand
obligations that permit the investment of fluctuating amounts at varying market
rates of interest pursuant to arrangements between the issuer and a commercial
bank acting as agent for the payees of such notes, whereby both parties have the
right to vary the amount of the outstanding indebtedness on the notes. Money
Market Fund may also invest in asset-backed commercial paper. This type of
commercial paper is issued by an entity which does not have a corporate purpose
other than that of financing a specific asset or pool of assets with some common
characteristics. Assets include, for example, loans or retail and trade
receivables. Although payment of principal and interest on asset-backed
securities is generally dependent upon the cash flows generated by the assets
backing the securities, the asset-backed commercial paper purchased by Money
Market Fund will generally contain elements of credit support.
BANK OBLIGATIONS--Money Market Fund will invest in certificates of deposit,
bank notes, time deposits and bankers' acceptances issued by domestic banks,
foreign branches of domestic banks, foreign subsidiaries of domestic banks, and
domestic and foreign branches of foreign banks. See "Risks of Investing in
Foreign Securities," below. Certificates of deposit are certificates evidencing
the obligation of a bank to repay funds deposited with it for a specified period
of time. Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time at a stated interest rate. Time
deposits are not transferable and are therefore illiquid prior to their
maturity. The Fund will not invest more than 10% of its net assets in time
deposits and other illiquid securities. See "Special Investment
Methods--Illiquid Securities." Bankers' acceptances are credit instruments
evidencing the obligation of a bank to pay a draft drawn on it by a customer.
These instruments reflect the obligation both of the bank and of the drawer to
pay the face amount of the instrument upon maturity. Certificates of deposit,
bank notes, time deposits and bankers' acceptances issued by foreign branches of
domestic banks, foreign subsidiaries of domestic banks and foreign branches of
foreign banks will not benefit from insurance from the Bank Insurance Fund or
the Savings Association Insurance Fund administered by the Federal Deposit
Insurance Corporation.
PARTICIPATION INTERESTS--Money Market Fund may purchase from banks and
securities dealers participation interests in securities in which the Fund may
invest. A participation interest gives the Fund an undivided interest in the
security in the proportion that the Fund's participation interest bears to the
total principal amount of the security. These instruments may have fixed,
floating or variable rates of interest, with remaining maturities of one year or
less. If the participation interest is unrated, or has been given a rating below
that which is permissible for purchase by the Fund, the participation interest
will be backed by an irrevocable letter of credit or guarantee of a bank, or the
payment obligation otherwise will be collateralized by U.S. Government
securities, or, in the case of unrated participation interests, the Adviser must
have determined that the instrument is of comparable quality to those
instruments in which the Fund may invest. For certain participation interests,
the Fund will have the right to demand payment, on not more than seven days'
notice, for all or any part of the Fund's participation interest in the
security, plus accrued interest. As to
7
<PAGE>
these instruments, the Fund intends to exercise its right to demand payment only
upon a default under the terms of the security, as needed to provide liquidity
to meet redemptions, or to maintain or improve the quality of its investment
portfolio. The Fund will not invest more than 10% of its net assets in
participation interests that do not have this demand feature and in other
illiquid securities. See "Special Investment Methods--Illiquid Securities."
CORPORATE DEBT--Money Market Fund may invest in non-convertible corporate
debt securities of domestic and foreign entities (for example, bonds and
debentures) with no more than 397 calendar days remaining to maturity, provided
such obligations are Eligible Securities. Corporate debt securities with a
remaining maturity of 397 calendar days or less tend to be liquid and are traded
as money market securities. Such issues tend to have greater liquidity and
considerably less market value fluctuations than longer term issues.
RISKS OF INVESTING IN FOREIGN SECURITIES--Since Money Market Fund's
portfolio may contain securities issued by foreign governments, or any of their
political subdivisions, agencies or instrumentalities, and by foreign branches
of domestic banks, foreign subsidiaries of domestic banks, domestic and foreign
branches of foreign banks, and commercial paper issued by foreign issuers, the
Fund will be subject to additional investment risks with respect to such
securities that are different in some respects from those incurred by a fund
which invests only in debt obligations of U.S. domestic issuers, although such
obligations may be higher yielding when compared to the securities of U.S.
domestic issuers. In making foreign investments, therefore, Money Market Fund
will give appropriate considerations to the following factors:
Foreign securities markets generally are not as developed or efficient as
those in the United States. Securities of some foreign issuers are less liquid
and more volatile than securities of comparable U.S. issuers. Similarly, volume
and liquidity in most foreign securities markets are less than in the United
States and, at times, volatility of price can be greater than in the United
States. The issuers of some of these securities, such as bank obligations, may
be subject to less stringent or different regulation than are U.S. issuers. In
addition, there may be less publicly available information about a non-U.S.
issuer, and non-U.S. issuers are not subject to uniform accounting and financial
reporting standards, practices and requirements comparable to those applicable
to U.S. issuers.
Because evidences of ownership of such securities usually are held outside
the United States, Money Market Fund will be subject to additional risks which
include possible adverse political and economic developments, possible seizure
or nationalization of foreign deposits and possible adoption of governmental
restrictions which might adversely affect the payment of principal and interest
on the foreign securities or might restrict the payment of principal and
interest to investors located outside the country of the issuer, whether from
currency blockage or otherwise.
Furthermore, some of these securities are subject to brokerage taxes levied
by foreign governments, which have the effect of increasing the cost of such
investment and reducing the realized gain or increasing the realized loss on
such securities at the time of sale. Income earned or received by Money Market
Fund from sources within foreign countries may be reduced by withholding and
other taxes imposed by such countries. Tax conventions between certain countries
and the United States, however, may reduce or eliminate such taxes. The Adviser
will attempt to minimize such taxes by the timing of transactions and other
strategies, but there can be no assurance that such efforts will be successful.
All such taxes paid by Money Market Fund will reduce its net income available
for distribution to shareholders. The Adviser will consider available yields,
net of any required taxes, in selecting foreign securities.
8
<PAGE>
U.S. GOVERNMENT MONEY MARKET FUND
INVESTMENT OBJECTIVE. U.S. Government Money Market Fund has an investment
objective of maximum current income consistent with preservation of capital and
maintenance of liquidity.
INVESTMENT POLICIES AND TECHNIQUES. U.S. Government Money Market Fund may
invest in U.S. Government securities, as described below, and it may invest in
repurchase agreements and enter into reverse repurchase agreements with respect
to such securities. See "Special Investment Methods and Risk Factors--
Repurchase Agreements" and "--Reverse Repurchase Agreements."
U.S. GOVERNMENT SECURITIES--U.S. Government securities are obligations
issued or guaranteed as to payment of principal and interest by the U.S.
Government or its agencies or instrumentalities. These securities include direct
obligations of the U.S. Treasury, such as U.S. Treasury bills, notes and bonds,
and obligations of U.S. Government agencies or instrumentalities, including, but
not limited to, Federal Home Loan Banks, the Farmers Home Administration,
Federal Farm Credit Banks, the Federal National Mortgage Association, the
Government National Mortgage Association, the Federal Home Loan Mortgage
Corporation, the Financing Corporation and the Student Loan Marketing
Association. Obligations of U.S. Government agencies or instrumentalities are
backed in a variety of ways by the U.S. Government or its agencies or
instrumentalities. Some of these obligations, such as Government National
Mortgage Association mortgage-backed securities, are backed by the full faith
and credit of the U.S. Treasury. Others, such as those of the Federal Home Loan
Banks, are backed by the right of the issuer to borrow from the Treasury. Still
others, such as those issued by the Federal National Mortgage Association, are
backed by the discretionary authority of the U.S. Government to purchase certain
obligations of the agency or instrumentality. Finally, obligations of other
agencies or instrumentalities, such as the Student Loan Marketing Association,
are backed by the credit of the agency or instrumentality issuing the
obligations.
TAX-EXEMPT MONEY MARKET FUND
INVESTMENT OBJECTIVE. Tax-Exempt Money Market Fund's investment objective
is to obtain a high level of current income exempt from federal income taxes,
consistent with the preservation of capital and the maintenance of liquidity.
INVESTMENT POLICIES AND TECHNIQUES. Tax-Exempt Money Market Fund pursues
its investment objective by investing at least 80% of its total assets, under
normal circumstances, in high quality Tax-Exempt Securities (as defined below),
the income from which is not includable in federal gross income and is not an
item of tax preference for purposes of the federal alternative minimum tax.
(Income from Tax-Exempt Securities is, however, includable in the adjusted
current earnings of corporations for purposes of determining their alternative
minimum taxable income.) All Tax-Exempt Securities in which the Fund invests
will be, at the time of purchase, Eligible Securities, as discussed above.
The balance of the Fund's total assets in an amount, under normal
circumstances, not to exceed 20% of the value of the Fund's total assets, may be
invested in any combination of the taxable money market securities set forth
above under "Money Market Fund--Investment Policies and Techniques" (subject to
the Fund's limitation on investments in foreign securities set forth below under
"Investment Restrictions") and in Tax-Exempt Securities the income on which is
an item of tax preference for purposes of the federal alternative minimum tax.
The circumstances in which the Fund will invest in taxable securities include,
but are not limited to, (a) pending investment of proceeds of the sale of Fund
shares or of Fund securities, (b) pending settlement of purchase of Fund
securities, and (c) maintaining liquidity to satisfy anticipated redemption
requests.
9
<PAGE>
For defensive purposes, the Fund may temporarily invest more than 20% of the
value of its total assets in taxable money market securities and Tax-Exempt
Securities the income on which is an item of tax preference for purposes of the
federal alternative minimum tax when, in the opinion of the Adviser, it is
advisable to do so in light of prevailing market and economic conditions for
purposes of preserving liquidity or capital.
Tax-Exempt Money Market Fund may invest in repurchase agreements and enter
into reverse repurchase agreements with respect to the securities in which the
Fund may invest, may purchase and sell securities on a when-issued or delayed
delivery basis and may purchase Tax-Exempt Securities which provide for the
right to resell them at an agreed upon price or yield within a specified period
of time prior to the maturity date of such obligations. See "Special Investment
Methods and Risk Factors."
TAX-EXEMPT SECURITIES--Tax-Exempt Securities include obligations issued by
or on behalf of states, territories and possessions of the United States, the
District of Columbia and their political subdivisions, agencies or
instrumentalities, the interest on which, in the opinion of bond counsel, is not
includable in federal gross income. Tax-Exempt Securities are issued to obtain
funds for various public purposes, including the construction or improvement of
a wide range of public facilities such as bridges, docks and wharves, highways,
hospitals, housing, jails, mass transportation, parks, public buildings,
recreational facilities, school facilities, streets, and water and sewer
systems. Other public purposes for which Tax-Exempt Securities may be issued
include the refunding of outstanding obligations, the anticipation of taxes or
federal or state grants or aids, the payment of judgments, community
redevelopment, district heating or cooling facilities, the purchase of street
maintenance and firefighting equipment, and any authorized corporate purpose of
the issuer. In addition, certain types of industrial development or private
activity bonds have been or may be issued by or on behalf of public corporations
to finance privately owned and/or operated housing facilities, hospitals,
nursing homes, air or water pollution control facilities and certain local
facilities for water supply, gas, electricity or sewage or solid waste disposal.
Such obligations are included within the term Tax-Exempt Securities if the
interest payable thereon, in the opinion of bond counsel, is not includable in
federal gross income. Other types of industrial development or private activity
bonds, the proceeds of which are used for the construction, equipment, repair or
improvement of privately owned and/or operated industrial, commercial or office
facilities, may constitute Tax-Exempt Securities, although current federal
income tax laws place substantial limitations on the size and volume of such
issues.
The two principal classifications of Tax-Exempt Securities are general
obligation securities and limited obligation (or revenue) securities. General
obligation securities are obligations involving the credit of an issuer which
are secured by its taxing power without limitation as to rate or amount and are
payable from the issuer's general unrestricted revenues and not from any
particular fund or revenue source. The characteristics and methods of
enforcement of general obligation securities vary according to the law
applicable to the particular issuer. Limited obligation securities are payable
only from the revenues derived from a particular facility or class of
facilities, from a specific limited tax or, in some cases, from the proceeds of
a specific revenue source, such as the user of the facility. Industrial
development or private activity bonds are in most cases limited obligation bonds
payable solely from specific revenues of the project to be financed, which are
pledged to their payment. The credit quality of industrial development or
private activity bonds is usually directly related to the credit standing of the
owner and/or user of the facilities financed (or the credit standing of a
third-party guarantor or other credit enhancement participant, if any).
Tax-Exempt Securities include municipal bonds, notes and commercial paper.
Municipal bonds are debt obligations issued to obtain funds for various public
purposes which have maturities at the time of issuance generally ranging from
one to twenty years or more. Municipal notes are short-term obligations,
generally with maturities ranging from six months to three years. Municipal
notes include grant anticipation notes, tax
10
<PAGE>
anticipation notes, revenue anticipation notes, bond anticipation notes and
construction loan notes. Municipal commercial paper refers to short-term
obligations with maturities of 365 days or less issued by state and local
governments to finance seasonal working capital needs or as short-term financing
in anticipation of longer-term financing.
Tax-Exempt Money Market Fund does not intend to invest more than 25% of its
total assets in securities of governmental units located in any one state,
territory or possession of the United States. In addition, the Fund will not
invest more than 25% of its total assets in limited obligation bonds payable
only from revenues derived from facilities or projects within a single industry.
As to utility companies, gas, electric, water and telephone companies will be
considered as separate industries.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal securities, some of which have been enacted. Additional
proposals may be introduced in the future which, if enacted, could affect the
availability of municipal securities for investment by the Fund and the value of
the Fund's portfolio. In such event, the Fund may discontinue the issuance of
shares to new investors and it may reevaluate its investment objective and
policies and submit possible changes in the structure of the Fund for the
approval of its shareholders.
SPECIAL INVESTMENT METHODS AND RISK FACTORS
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with respect to the
securities in which it may invest. A repurchase agreement involves the purchase
by a Fund of securities with the condition that after a stated period of time
the original seller (a member bank of the Federal Reserve System or a recognized
securities dealer) will buy back the same securities ("collateral") at a
predetermined price or yield. Repurchase agreements involve certain risks not
associated with direct investments in securities. In the event the original
seller defaults on its obligation to repurchase, as a result of its bankruptcy
or otherwise, the Fund will seek to sell the collateral, which action could
involve costs or delays. In such case, the Fund's ability to dispose of the
collateral to recover such investment may be restricted or delayed. While
collateral will at all times be maintained in an amount equal to the repurchase
price under the agreement (including accrued interest due thereunder), to the
extent proceeds from the sale of collateral were less than the repurchase price,
a Fund would suffer a loss. Repurchase agreements maturing in more than seven
days are considered illiquid and subject to each Fund's restriction on investing
in illiquid securities. See "--Illiquid Securities" below. Interest earned by a
Fund from repurchase agreements with respect to Tax-Exempt Securities will not
be treated for federal income tax purposes as tax-exempt interest. For
additional information concerning repurchase agreements, see "Investment
Objectives, Policies and Restrictions" in the Statement of Additional
Information.
REVERSE REPURCHASE AGREEMENTS
The Funds may engage in "reverse repurchase agreements" with banks and
securities dealers. Reverse repurchase agreements are ordinary repurchase
agreements in which the Fund is the seller of, rather than the investor in,
securities and agrees to repurchase them at an agreed upon time and price. Use
of a reverse repurchase agreement may be preferable to a regular sale and later
repurchase of the securities because it avoids certain market risks and
transaction costs. Because certain of the incidents of ownership of the security
are retained by the Fund, reverse repurchase agreements are considered a form of
borrowing by the Fund from the buyer, collateralized by the security. At the
time a Fund enters into a reverse repurchase
11
<PAGE>
agreement, cash, U.S. Government securities or other liquid high-grade debt
obligations having a value sufficient to make payments for the securities to be
repurchased will be segregated, and will be maintained throughout the period of
the obligation. Reverse repurchase agreements may be used as a means of
borrowing for investment purposes. This speculative technique is referred to as
leveraging. Money borrowed for leveraging will be subject to interest costs
which could possibly exceed interest income earned by the Fund on the investment
of such borrowed money, and therefore could adversely affect yield. With respect
to Tax-Exempt Money Market Fund, money borrowed for leveraging will be subject
to interest costs which may not be deductible for tax purposes and which could
possibly exceed interest income earned by the Fund on the investment of such
borrowed money. No more than 25% of the total assets of any Fund will be subject
to reverse repurchase agreements.
BORROWING
Each Fund may borrow money from banks for temporary or emergency purposes in
an amount up to one-third of the value of its total assets in order to meet
redemption requests without immediately selling any money market instruments.
If, for any reason, the current value of any Fund's total assets falls below an
amount equal to three times the amount of its indebtedness from money borrowed,
such Fund will, within three days, reduce its indebtedness to the extent
necessary. To do this, the Fund may have to sell a portion of its investments at
a time when it may be disadvantageous to do so. Interest paid by a Fund on
borrowed funds would decrease the net earnings of that Fund. None of the Funds
will purchase portfolio securities while outstanding borrowings (other than
reverse repurchase agreements) exceed 5% of the value of the Fund's total
assets. The Funds may mortgage, pledge or hypothecate their assets in an amount
not exceeding 10%, with respect to Money Market Fund and U.S. Government Money
Market Fund, or 20% with respect to Tax-Exempt Money Market Fund, of the value
of their total assets to secure temporary or emergency borrowing. The policies
set forth in this paragraph are fundamental and may not be changed without the
approval of a majority of a Fund's shares.
WHEN-ISSUED SECURITIES
Tax-Exempt Money Market Fund may purchase and sell Tax-Exempt Securities on
a when-issued or forward commitment basis. When-issued and forward commitment
transactions arise when securities are purchased or sold with payment and
delivery beyond the regular settlement date. (When-issued transactions normally
settle within 30-45 days.) On such transactions the payment obligation and the
interest rate are fixed at the time the buyer enters into the commitment. The
commitment to purchase securities on a when-issued or forward commitment basis
may involve an element of risk because the value of the securities is subject to
market fluctuation. No interest accrues to the purchaser prior to the settlement
of the transaction and at the time of delivery the market value may be less than
cost. Although the Fund will only make commitments to purchase such obligations
with the intention of actually acquiring the securities, the Fund may sell these
securities before the settlement date. If the Fund sells a when-issued or
forward commitment security before the settlement date, any gain or loss would
not be exempt from federal income tax. For purposes of Tax-Exempt Money Market
Fund's investment policies, the purchase of securities with a settlement date
occurring on the Public Securities Association approved settlement date is
considered a normal delivery and not a when-issued or forward commitment
purchase. For additional information concerning when-issued and forward
commitment transactions, see "Investment Objectives, Policies and Restrictions"
in the Statement of Additional Information.
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PUTS
Tax-Exempt Money Market Fund may purchase Tax-Exempt Securities which
provide for the right to resell them to the issuer, a bank or a broker-dealer at
a specified price within a specified period of time prior to the maturity date
of such obligations. Such a right to resell, which is commonly known as a "put,"
may be sold, transferred or assigned only with the underlying security or
securities. The Fund may pay a higher price for a Tax-Exempt Security with a put
than would be paid for the same security without a put. The primary purpose of
purchasing Tax-Exempt Securities with puts is to permit the Fund to be as fully
invested as practicable in Tax-Exempt Securities while at the same time
providing the Fund with appropriate liquidity. For additional information
concerning puts, see "Investment Objectives, Policies and Restrictions" in the
Statement of Additional Information.
VARIABLE AND FLOATING RATE OBLIGATIONS
Certain of the obligations in which the Funds may invest may be variable or
floating rate obligations in which the interest rate is adjusted either at
predesignated periodic intervals (variable rate) or when there is a change in
the index rate of interest on which the interest rate payable on the obligation
is based (floating rate). Variable or floating rate obligations may include a
demand feature which is a put that entitles the holder to receive the principal
amount of the underlying security or securities and which may be exercised
either at any time on no more than 30 days' notice or at specified intervals not
exceeding 397 calendar days on no more than 30 days' notice. Variable or
floating rate instruments with a demand feature enable the Funds to purchase
instruments with a stated maturity in excess of 397 calendar days. The Funds
determine the maturity of variable or floating rate instruments in accordance
with Securities and Exchange Commission rules which allow the Funds to consider
certain of such instruments as having maturities that are less than the maturity
date on the face of the instrument.
ILLIQUID SECURITIES
As a nonfundamental investment restriction which may be changed at any time
without shareholder approval, each Fund may invest up to 10% of its net assets
in illiquid securities. Illiquid securities may offer a higher yield than
securities which are more readily marketable, but they may not always be
marketable on advantageous terms.
The sale of illiquid securities often requires more time and results in
higher brokerage charges or dealer discounts than does the sale of securities
eligible for trading on national securities exchanges or in the over-the-counter
markets. A Fund may be restricted in its ability to sell such securities at a
time when the Adviser deems it advisable to do so. In addition, in order to meet
redemption requests, a Fund may have to sell other assets, rather than such
illiquid or restricted securities, at a time which is not advantageous.
"Restricted securities" are securities which were originally sold in private
placements and which have not been registered under the Securities Act of 1933
(the "1933 Act"). Such securities generally have been considered illiquid, since
they may be resold only subject to statutory restrictions and delays or if
registered under the 1933 Act. In 1990, however, the SEC adopted Rule 144A under
the 1933 Act, which provides a safe harbor exemption from the registration
requirements of the 1933 Act for resales of restricted securities to "qualified
institutional buyers," as defined in the rule. The result of this rule has been
the development of a more liquid and efficient institutional resale market for
restricted securities. Thus, restricted securities are no longer necessarily
illiquid. The Funds are not subject to any limitation on their ability to invest
in securities simply because such securities are restricted. The Funds may
therefore invest in Rule 144A securities and treat them as liquid when they have
been determined to be liquid by the Board of Directors of
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the Company or by the Adviser subject to the oversight of and pursuant to
procedures adopted by the Board of Directors. See "Investment Objectives,
Policies and Restrictions--Illiquid Securities" in the Statement of Additional
Information. Similar determinations may be made with respect to commercial paper
issued in reliance upon the so-called "private placement" exemption from
registration under Section 4(2) of the 1933 Act.
INVESTMENT RESTRICTIONS
Each Fund has adopted certain fundamental and nonfundamental investment
restrictions in addition to those set forth above. As a fundamental investment
restriction which may not be changed without shareholder approval, no Fund will
invest 25% or more of its total assets in any one industry. (This restriction
does not apply to securities of the U.S. Government or its agencies and
instrumentalities and repurchase agreements relating thereto, to Tax-Exempt
Securities, or to obligations of United States banks, domestic branches thereof
and United States branches of foreign banks subject to United States regulation.
As to utility companies, gas, electric, telephone, telegraph, satellite and
microwave communications companies are considered separate industries.) In
addition, the following are nonfundamental investment restrictions which may be
changed at any time without shareholder approval: (1) No Fund will invest more
than 5% of its total assets in the securities of issuers which, with their
predecessors, have a record of less than three years' continuous operation. (2)
No Fund will purchase the securities of other investment companies except as
part of a merger, consolidation or acquisition of assets, provided that
Tax-Exempt Money Market Fund may invest up to 5% of its total assets in the
securities of other investment companies. (3) Tax-Exempt Money Market Fund may
not invest more than 5% of the value of its total assets in foreign securities.
A list of each Fund's fundamental and nonfundamental investment restrictions is
set forth in the Statement of Additional Information.
Except for each Fund's policy regarding borrowing, if a percentage
restriction set forth under "Investment Objectives and Policies" or under
"Special Investment Methods and Risk Factors" is adhered to at the time of an
investment, a later increase or decrease in percentage resulting from changes in
values or assets will not constitute a violation of such restriction.
MANAGEMENT
BOARD OF DIRECTORS
The Company's Board of Directors has the primary responsibility for
overseeing the overall management of the Company and electing its officers.
INVESTMENT ADVISER
Piper Capital Management Incorporated (the "Adviser") has been retained
under an Investment Advisory and Management Agreement with the Company to act as
the Funds' investment adviser subject to the authority of the Board of
Directors.
In addition to acting as the investment adviser for the other series of the
Company, the Adviser also serves as investment adviser to a number of other
open-end and closed-end investment companies and to various other concerns,
including pension and profit sharing funds, corporate funds and individuals. As
of November 1, 1995, the Adviser rendered investment advice regarding
approximately $9 billion of assets. The Adviser is a wholly owned subsidiary of
Piper Jaffray Companies Inc., a publicly held corporation which
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is engaged through its subsidiaries in various aspects of the financial services
industry. The address of the Adviser is Piper Jaffray Tower, 222 South Ninth
Street, Minneapolis, Minnesota 55402.
The Adviser furnishes each of the Funds with investment advice and
supervises the management and investment programs of the Funds. The Adviser
furnishes at its own expense all necessary administrative services, office
space, equipment and clerical personnel for servicing the investments of the
Funds. The Adviser also provides investment advisory facilities and executive
and supervisory personnel for managing the investments and effecting the
portfolio transactions of the Funds. In addition, the Adviser pays the salaries
and fees of all officers and directors of the Company who are affiliated with
the Adviser.
Under the Investment Advisory and Management Agreement, the Funds pay the
Adviser monthly advisory fees equal on an annual basis to a certain percentage
of each Fund's average net assets as set forth in the following table.
<TABLE>
<CAPTION>
Annual Advisory Fee
as Percentage of
Average Net Asset Values of the Fund Average Net Assets
- ------------------------------------------------------------------------- ---------------------
<S> <C>
On the first $500,000,000................................................ .50 %
On the next $250,000,000................................................. .425 %
On the next $250,000,000................................................. .375 %
On the next $500,000,000................................................. .35 %
On the next $500,000,000................................................. .325 %
On the next $500,000,000................................................. .30 %
On average assets of over $2,500,000,000................................. .275 %
</TABLE>
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN
Investors Fiduciary Trust Company ("IFTC"), 127 West Tenth Street, Kansas
City, Missouri 64105, (800) 874-6205, serves as Custodian for the Funds'
portfolio securities and cash and as Transfer Agent and Dividend Disbursing
Agent for the Funds.
The Company has entered into a Shareholder Account Servicing Agreement with
the Distributor. Under this agreement the Distributor provides certain transfer
agent and dividend disbursing agent services for accounts held at the
Distributor. For more information, see "Investment Advisory and Other Services--
Transfer Agent and Dividend Disbursing Agent" in the Statement of Additional
Information.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Portfolio transactions for the Funds are generally effected on a net basis
without payment of brokerage commissions. The Adviser may consider a number of
factors in determining which brokers to use for the Funds' portfolio
transactions. These factors, which are more fully discussed in the Statement of
Additional Information, include, but are not limited to, research services,
favorableness of the net price and quality of services and execution. A broker's
sales of shares of any series of the Company may also be considered a factor if
the Adviser is satisfied that a Fund would receive from that broker the most
favorable price and execution then available for a transaction. Portfolio
transactions for the Funds will generally be with the issuer or with dealers
acting on a principal basis. In the event, however, that any portfolio
transactions are
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<PAGE>
executed on an agency basis, these transactions may be effected through the
Distributor. For more information, see "Portfolio Transactions and Allocation of
Brokerage" in the Statement of Additional Information.
DISTRIBUTION OF FUND SHARES
Piper Jaffray acts as the principal distributor of the Funds' shares. The
Company has adopted a Distribution Plan (the "Plan") as required by Rule 12b-1
under the 1940 Act. Under the Plan, the Distributor is paid a total fee in
connection with the servicing of each Fund's shareholder accounts and in
connection with distribution-related services provided to each Fund. This fee is
calculated and paid monthly at an annual rate equal to .30% of the average daily
net assets of each Fund.
A portion of the total fee equal to .05% of each Fund's average daily net
assets is categorized as a distribution fee intended to compensate the
Distributor for its expenses incurred in connection with the sale of Fund
shares. The remaining portion of the fee, equal to .25% of each Fund's average
daily net assets, is categorized as a servicing fee intended to compensate the
Distributor for ongoing servicing and/or maintenance of shareholder accounts.
The Distributor has voluntarily agreed to limit the total fee payable under the
Plan to .20% of each Fund's average daily net assets. This limitation may be
revised or terminated at any time after fiscal 1996 year end. Payments made
under the Plan are not tied exclusively to expenses actually incurred by the
Distributor and may exceed such expenses. The Adviser and the Distributor may,
out of their own assets, pay for certain expenses incurred in connection with
the distribution of shares of the Funds. In particular, the Adviser may make
payments out of its own assets to Piper Jaffray Investment Executives and other
broker dealers in connection with their sales of shares of the Funds. See "How
to Purchase Shares-- Purchase Price." Further information regarding the Plan is
contained in the Statement of Additional Information.
The Distributor uses all or a portion of its servicing fee to make payments
to Investment Executives of the Distributor and broker-dealers which have
entered into sales agreements with the Distributor. If shares of a Fund are sold
by a representative of a broker-dealer other than the Distributor, the
broker-dealer is paid .20% of the average daily net assets of the Fund
attributable to shares sold by the broker-dealer's representative. If shares of
a Fund are sold by an Investment Executive of the Distributor, compensation is
paid to the Investment Executive in the manner set forth in a written agreement,
in an amount not to exceed .20% of the average daily net assets of the Fund
attributable to shares sold by the Investment Executive.
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SHAREHOLDER GUIDE TO INVESTING
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HOW TO PURCHASE SHARES
GENERAL
The Funds' shares may be purchased at the public offering price from the
Distributor and from other broker-dealers who have sales agreements with the
Distributor. The address of the Distributor is that of the Funds. The
Distributor reserves the right to reject any purchase order. You should be aware
that, because the Funds do not issue stock certificates, Fund shares must be
kept in an account with the Distributor or with IFTC. All investments must be
arranged through your Piper Jaffray Investment Executive or other broker-dealer.
PURCHASE PRICE
You may purchase shares of the Funds at the net asset value per share next
calculated after receipt of your order by your Piper Jaffray Investment
Executive or other broker-dealer. Each Fund's net asset value is normally
expected to be $1.00 per share. For more information on how the value of Fund
shares is determined, see "Valuation of Shares."
The Distributor will make certain payments to its Investment Executives and
to broker-dealers in connection with their sales of Fund shares. See
"Distribution of Fund Shares" above. In addition, the Distributor or the
Adviser, at their own expense, provide promotional incentives to Investment
Executives of the Distributor and to broker-dealers who have sales agreements
with the Distributor in connection with sales of shares of the Funds, other
series of the Company and other mutual funds for which the Adviser acts as
investment adviser. In some instances, these incentives may be made available
only to certain Investment Executives or broker-dealers who have sold or may
sell significant amounts of such shares. The incentives may include payment for
travel expenses, including lodging at luxury resorts, incurred in connection
with sales seminars.
MINIMUM INVESTMENTS
A minimum initial investment of $250 is required for each Fund. There is no
minimum for subsequent investments. The Distributor, in its discretion, may
waive the minimum. This minimum does not apply to the Cash Management Program
described below.
CASH MANAGEMENT PROGRAM
You may purchase shares of the Funds through your Piper Automatic Transfer
(PAT) account. The PAT account is a conventional securities account that may be
used to buy and sell securities, paying all customary transactional fees
incurred in the use of a securities account. When available cash in a PAT
account reaches a certain level, it is automatically invested in shares of the
Fund you specify. Shares of the Fund are redeemed automatically at their net
asset value as cash is needed to pay debits in your account. Operational details
of the PAT account are covered by your PAT account agreement, not this
Prospectus. Other broker-dealers may offer similar programs in the future. These
programs will be governed and explained by that brokerage firm's account
agreements, brochures or other documents.
HOW TO REDEEM SHARES
NORMAL REDEMPTION
You may redeem all or a portion of your shares on any day that a Fund values
its shares (Please refer to "Valuation of Shares" below for more information).
Your shares will be redeemed at the net asset value next calculated after
receipt of your instructions by your Piper Jaffray Investment Executive or other
broker-dealer in good form as explained below. Each Fund's net asset value is
normally expected to be $1.00 per share.
PIPER JAFFRAY INC. ACCOUNTS. To redeem your shares, please contact your
Piper Jaffray Investment Executive with an oral request to redeem your shares.
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SHAREHOLDER GUIDE TO INVESTING
- --------------------------------------------------------------------------------
OTHER BROKER-DEALER ACCOUNTS. To redeem your shares, you may either contact
your broker-dealer with an oral request or send a written request directly to
the Funds' transfer agent, IFTC. This request should contain: the dollar amount
or number of shares to be redeemed, your Fund account number and either a social
security or tax identification number (as applicable). You should sign your
request in exactly the same way the account is registered. If there is more than
one owner of the shares, all owners must sign. A signature guarantee is required
for redemptions over $25,000. Please contact IFTC or refer to the Statement of
Additional Information for more details.
PAYMENT OF REDEMPTION PROCEEDS
After your shares have been redeemed, proceeds will normally be paid on the
next business day. In no event will payment be made more than seven days after
receipt of your order in good form. However, payment may be postponed or the
right of redemption suspended for more than seven days under unusual
circumstances, such as when trading is not taking place on the New York Stock
Exchange. Payment of redemption proceeds may also be delayed if the shares to be
redeemed were purchased by a check drawn on a bank which is not a member of the
Federal Reserve System, until such check has cleared the banking system
(normally up to 15 days from the purchase date).
INVOLUNTARY REDEMPTION
Each Fund reserves the right to redeem your account at any time the net
asset value of the account falls below $200 as the result of a redemption or
exchange request. You will be notified in writing prior to any such redemption
and will be allowed 30 days to make additional investments before the redemption
is processed.
SHAREHOLDER SERVICES
AUTOMATIC MONTHLY INVESTMENT PROGRAM
You may arrange to make additional automated purchases of shares of the
Funds or certain other mutual funds managed by the Adviser. You can
automatically transfer $100 or more per month from your bank, savings and loan
or other financial institution to purchase additional shares. You should contact
your Piper Jaffray Investment Executive or IFTC to obtain authorization forms or
for additional information.
EXCHANGE PRIVILEGE
If your investment goals change, you may prefer a fund with a different
objective. If you are considering an exchange into another mutual fund managed
by the Adviser, you should carefully read the appropriate prospectus for
additional information about that fund. A prospectus may be obtained through
your Piper Jaffray Investment Executive, other broker-dealer or the Distributor.
To exchange your shares, please contact your Piper Jaffray Investment
Executive, your broker-dealer or IFTC. You may exchange your shares for shares
of any other mutual fund managed by the Adviser which is open to new investors
(except Hercules Funds Inc.). All exchanges are subject to the eligibility of
share purchases in your state as well as the minimum investment requirements and
any other applicable terms in the prospectus of the fund being acquired.
Exchanges between the money market funds covered by this Prospectus are made at
net asset value. Exchanges into another fund which imposes a sales charge will
generally require payment of the sales charge, except in some cases where you
originally purchased shares subject to a sales charge, and then exchanged into a
money market fund. In all cases, if the exchange purchase would generate a
higher sales charge than the original purchase, you will be required to pay a
sales charge equal to the difference. If you exchange less than all of your
shares of a fund, shares which may be exchanged at net asset value without
payment of any sales charge will considered to be exchanged first.
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SHAREHOLDER GUIDE TO INVESTING
- --------------------------------------------------------------------------------
You may make four exchanges per year without payment of a service charge.
Thereafter, you will pay a $5 service charge for each exchange. The Company
reserves the right to change or discontinue the exchange privilege, or any
aspect of the privilege, upon 60 days' written notice.
TELEPHONE TRANSACTION PRIVILEGES
PIPER JAFFRAY INC. ACCOUNTS. If you hold your shares in a Piper Jaffray
account, you may telephone your Investment Executive to execute any transaction
or to apply for many Shareholder Services. In some cases, you may be required to
complete a written application.
OTHER BROKER-DEALER ACCOUNTS. If you hold your shares in an account with
your broker-dealer or at IFTC, you may authorize telephone privileges by
completing the Account Application and Services Form. Please contact your
broker-dealer or IFTC (800-874-6205) for an application or for more details. The
Funds will employ reasonable procedures to confirm that a request is genuine,
including requiring that payment be made only to the address of record or the
bank account designated on the Account Application and Services Form and
requiring certain means of telephonic identification. A Fund employing such
procedures will not be liable for following instructions communicated by
telephone that it reasonably believes to be genuine. If a Fund does not employ
such procedures, it may be liable for any losses due to unauthorized or
fraudulent telephone transactions. It may be difficult to reach the Funds by
telephone during periods when market or economic conditions lead to an unusually
large volume of telephone requests. If you cannot reach the Funds by telephone,
you should contact your broker-dealer or issue written instructions to IFTC at
the address set forth herein. See "Management--Transfer Agent, Dividend
Disbursing Agent and Custodian." The Funds reserve the right to suspend or
terminate their telephone services at any time without notice.
ACCOUNT PROTECTION
Your investment in any of the Funds held in a Piper Jaffray account (except
for non-"PAT" accounts) would be protected up to $25 million. Investments held
in non-"PAT" Piper Jaffray accounts are protected up to $2.5 million. In each
case, the Securities Investor Protection Corporation ("SIPC") provides $500,000
of protection; the additional coverage is provided by The Aetna Casualty &
Surety Company. This protection does NOT cover any declines in the net asset
value of Fund shares.
CONFIRMATION OF TRANSACTIONS AND REPORTING OF OTHER INFORMATION
Each time there is a transaction involving your Fund shares such as a
purchase, redemption or dividend reinvestment, it will be reported to you on
your next regular account statement. This information will be provided to you
from either Piper Jaffray, your broker-dealer or IFTC. In addition, you will
receive various IRS forms after the first of each year detailing important tax
information and each Fund is required to supply annual and semiannual reports
that list securities held by the Fund and include the current financial
statements of the Fund.
HOUSEHOLDING. If you have multiple accounts with Piper Jaffray, you may
receive some of the above information in combined mailings. This will not only
help reduce Fund expenses, it will also help the environment by saving paper.
Please contact your Piper Jaffray Investment Executive for more information.
DIVIDENDS AND DISTRIBUTIONS
The net investment income of each Fund will be declared as dividends daily.
Dividends will be reinvested in additional shares of the Fund monthly. Net
investment income for Saturdays, Sundays and other days on which the New York
Stock Exchange (the "Exchange") is closed will be declared as dividends on the
prior business day. Each daily dividend is payable to Fund shareholders of
record at the time of its declaration. Net realized capital gains of each Fund,
if any, will be declared and reinvested in additional Fund shares at least
annually.
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<PAGE>
VALUATION OF SHARES
The Funds compute their net asset value (or price per share) on each day the
Exchange is open for business. The calculation is made as of the regular close
of the Exchange (currently 4:00 p.m., New York time) after the Funds have
declared any applicable dividends.
It is the policy of each Fund to attempt to maintain a net asset value of
$1.00 per share. The securities held by the Funds are valued on the basis of
amortized cost, in accordance with the Funds' election to operate under the
provisions of Rule 2a-7 under the 1940 Act. The amortized cost method of
valuation involves valuing an instrument at its cost and thereafter assuming 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.
While this method provides certainty in valuation, it may result in periods
during which value, as determined by amortized cost, is higher or lower than the
price the Fund would receive if it sold the instrument.
Under the direction of the Board of Directors, procedures have been adopted
to monitor and stabilize each Fund's price per share. Calculations are made to
compare the value of each Fund's portfolio valued at amortized cost with market
values. In the event that a deviation of one-half of 1% or more exists between
the $1.00 per share net asset value for a Fund and the net asset value
calculated by reference to market quotations, or if there is any other deviation
which the Board of Directors believes would result in a material dilution to
shareholders or purchasers, the Board of Directors will promptly consider what
action, if any, should be initiated. See "Net Asset Value and Public Offering
Price" in the Statement of Additional Information.
TAX STATUS
TAXES
Each Fund is treated as a separate corporation for federal income tax
purposes under the Internal Revenue Code of 1986, as amended (the "Code").
Therefore, each Fund is treated separately in determining whether it qualifies
as a regulated investment company under the Code and for purposes of determining
the net ordinary income (or loss), net realized capital gains (or losses) and
distributions necessary to relieve such Fund of any federal income tax
liability. Each Fund qualified as a regulated investment company during its last
taxable year and each intends to so qualify during the current taxable year. If
so qualified, a Fund will not be liable for federal income taxes to the extent
it distributes its taxable income to shareholders.
The following discussions relate to federal income taxation as of the date
of this Prospectus. For a more detailed discussion of the federal income tax
consequences of investing in shares of the Funds, see "Taxation" in the
Statement of Additional Information. Before investing in any of the Funds, you
should consult your tax adviser regarding the consequences of your local and
state tax laws.
MONEY MARKET FUND AND U.S. GOVERNMENT MONEY MARKET FUND. Distributions by
Money Market Fund and U.S. Government Money Market Fund are generally taxable to
shareholders as ordinary income.
Interest income from direct investment by noncorporate taxpayers in United
States Government obligations (but not repurchase agreements) generally is not
subject to state taxation. However, some states attempt to tax mutual fund
dividends attributable to such income. This treatment has been challenged in a
number of lawsuits. Shareholders are encouraged to consult their tax advisers
concerning this matter.
TAX-EXEMPT MONEY MARKET FUND. Tax-Exempt Money Market Fund intends to take
all actions required under the Code to ensure that it may pay "exempt-interest
dividends." If the Fund meets these requirements, distributions of net interest
income from tax-exempt obligations that are designated by the Fund as
exempt-interest dividends will be excludable from the gross income of the Fund's
shareholders. Distributions paid from other interest income will be taxable to
shareholders as ordinary income.
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Exempt-interest dividends attributable to interest income on certain tax
exempt obligations issued after August 7, 1986 to finance private activities are
treated as an item of tax preference for purposes of computing the alternative
minimum tax for individuals, estates and trusts. Tax-Exempt Money Market Fund
may invest up to 20% of its total assets in securities which generate interest
which is treated as an item of tax preference. See "Taxation" in the Statement
of Additional Information.
Some states may exclude from taxable income the portion of the dividends
paid by Tax-Exempt Money Market Fund that is attributable to interest on the
obligations of the state or its political subdivisions. In the case of
shareholders subject to Minnesota income tax, no portion of the dividends paid
by Tax-Exempt Money Market Fund will be exempt from their Minnesota taxable
income. The Fund will provide to shareholders annually information showing the
portion of the dividends they receive that is attributable to interest on the
obligations of each state.
PERFORMANCE COMPARISONS
From time to time, each Fund advertises its "yield" and "effective yield."
In addition, Tax-Exempt Money Market Fund may advertise its "tax equivalent
yield." These yield figures are based upon historical earnings and are not
intended to indicate future performance. The "yield" of a Fund refers to the
income generated by an investment in the Fund over a seven-day period (which
period will be stated in the advertisement). This income is then "annualized."
That is, the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment. The "effective yield" is calculated similarly but,
when annualized, the income earned by an investment in a Fund is assumed to be
reinvested. The "effective yield" will be slightly higher than the "yield"
because of the compounding effect of this assumed reinvestment.
"Tax equivalent yield" quotations will be calculated by applying the stated
income tax rate only to that portion of Tax-Exempt Money Market Fund's seven-day
yield or effective yield that is exempt from taxation. The stated income tax
rate is subtracted from the number 1 (e.g., 1-28% = 72%) and the tax-exempt
portion of the yield is divided by the difference. The result is then added to
that portion of the Fund's yield, if any, that is not tax-exempt.
For additional information regarding yield calculations, see "Calculation of
Yield" in the Statement of Additional Information.
GENERAL INFORMATION
The Company, which was organized under the laws of the State of Minnesota in
1986, is authorized to issue a total of 10 trillion shares of common stock, with
a par value of $.01 per share. Four hundred billion of these shares have been
authorized to be issued in thirteen separate series, as follows: Growth Fund,
Emerging Growth Fund, Growth and Income Fund, Equity Strategy Fund, Balanced
Fund, Government Income Fund, Short-Intermediate Bond Fund, Institutional
Government Income Portfolio, National Tax-Exempt Fund and Minnesota Tax-Exempt
Fund, each of which has ten billion authorized shares, and Money Market Fund,
Tax-Exempt Money Market Fund and U.S. Government Money Market Fund, each of
which has one hundred billion authorized shares.
The Board of Directors is empowered under the Company's Articles of
Incorporation to issue additional series of the Company's common stock without
shareholder approval. In addition, the Board of Directors may, without
shareholder approval, create and issue one or more additional classes of shares
within each Fund, as well as within any series of the Company created in the
future. See "Capital Stock and Ownership of Shares" in the Statement of
Additional Information.
21
<PAGE>
All shares, when issued, will be fully paid and nonassessable and will be
redeemable. All shares have equal voting rights. They can be issued as full or
fractional shares. A fractional share has pro-rata the same kind of rights and
privileges as a full share. The shares possess no preemptive or conversion
rights.
Each share of a series has one vote (with proportionate voting for
fractional shares) irrespective of the relative net asset value of the series'
shares. On some issues, such as the election of directors, all shares of the
Company vote together as one series. Cumulative voting is not authorized. This
means that the holders of more than 50% of the shares voting for the election of
directors can elect 100% of the directors if they choose to do so, and, in such
event, the holders of the remaining shares will be unable to elect any
directors.
The Bylaws of the Company provide that shareholder meetings be held only
with such frequency as required under Minnesota law. Minnesota corporation law
requires only that the Board of Directors convene shareholder meetings when it
deems appropriate. In addition, Minnesota law provides that if a regular meeting
of shareholders has not been held during the immediately preceding 15 months, a
shareholder or shareholders holding 3% or more of the voting shares of the
Company may demand a regular meeting of shareholders by written notice given to
the chief executive officer or chief financial officer of the Company. Within 30
days after receipt of the demand, the Board of Directors shall cause a regular
meeting of shareholders to be called, which meeting shall be held no later than
90 days after receipt of the demand, all at the expense of the Company. In
addition, the 1940 Act requires a shareholder vote for all amendments to
fundamental investment policies and restrictions and for all amendments to
investment advisory contracts and Rule 12b-1 distribution plans. The 1940 Act
also provides that Directors of the Company may be removed by action of the
record holders of two-thirds or more of the outstanding shares of the Company.
The Directors are required to call a meeting of shareholders for the purpose of
voting upon the question of removal of any Director when so requested in writing
by the record holders of at least 10% of the Company's outstanding shares.
PENDING LEGAL PROCEEDINGS
Complaints have been brought against the Adviser and the Distributor
relating to another series of the Company and to other investment companies for
which the Adviser acts or has acted as investment adviser or subadviser. These
lawsuits do not involve the Funds. A number of complaints have been brought in
federal and state court against the Institutional Government Income Portfolio
("PJIGX") series of the Company, and against the Adviser, the Distributor, and
certain individuals affiliated or formerly affiliated with the Adviser and the
Distributor. In addition, complaints have been filed in federal court relating
to a number of closed-end investment companies managed by the Adviser and two
open-end investment companies for which the Adviser has acted as subadviser. The
complaints, which ask for rescission of plaintiff shareholders' purchases or
compensatory damages, plus interest, costs and expenses, generally allege, among
other things, certain violations of federal and/or state securities laws,
including the making of materially misleading statements in prospectuses
concerning investment policies and risks. See "Pending Litigation" in the
Statement of Additional Information.
A settlement agreement has been reached with respect to one of the
complaints involving PJIGX. An Amended Consolidated Class Action Complaint,
which represents a consolidation of claims previously brought by 11 persons or
entities, was filed on October 5, 1994 in the United States District Court,
District of Minnesota. The named plaintiffs in this putative class action (the
"PJIGX action") purport to represent a class of individuals and groups who
purchased shares of PJIGX during the period from July 1, 1991 through May 9,
1994. The named plaintiffs and defendants have entered into a settlement
agreement which has received preliminary approval from the Court. The terms of
the settlement are set forth in a Settlement Agreement dated July 20, 1995 (as
modified by an Addendum filed on July 28, 1995). The Settlement Agreement
contained a provision which would have permitted the defendants to cancel the
Agreement if
22
<PAGE>
shareholders who had incurred a cumulative "loss" (as defined under the
Agreement) of more than 10% of the loss sustained by the entire class had opted
out. The October 2, 1995 deadline for requesting exclusion from the class has
passed, and the loss sustained by persons requesting exclusion is less than 10%.
If granted final approval by the Court, the settlement agreement would provide
up to approximately $70 million to class members in payments scheduled over
approximately three years. Such payments would be made by Piper Jaffray
Companies and the Adviser and would not be an obligation of the Company. Six
additional complaints have been brought and a number of actions have been
commenced in arbitration relating to PJIGX. The complaints generally have been
consolidated with the PJIGX action for pretrial purposes and the arbitrations
and litigations have been stayed pending entry of an order by the Court
permitting those class members who have requested exclusion to proceed with
their actions.
The Adviser and the Distributor do not believe that the PJIGX settlement or
any outstanding complaint or action in arbitration will have a material adverse
effect on their ability to perform under their agreements with the Company or a
material adverse effect on the Funds, and they intend to defend such lawsuits
and actions vigorously.
TAX-EXEMPT VS. TAXABLE INCOME
The table below shows the approximate yields that taxable securities must
earn to equal tax-exempt yields under selected 1995 federal income tax brackets.
<TABLE>
<CAPTION>
Equivalent Taxable Yield
--------------------------------------------------------------------------
Tax-Free 28% 31% 36% 39.6%
Yield Federal Bracket Federal Bracket Federal Bracket Federal Bracket
- ------------ ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
2.00% 2.78% 2.90% 3.13% 3.31%
2.50 3.47 3.62 3.91 4.14
3.00 4.17 4.35 4.69 4.97
3.50 4.86 5.07 5.47 5.79
4.00 5.56 5.80 6.25 6.62
4.50 6.25 6.52 7.03 7.45
5.00 6.94 7.25 7.81 8.28
5.50 7.64 7.97 8.59 9.11
6.00 8.33 8.70 9.38 9.93
</TABLE>
This table does not take into consideration any federal alternative minimum
tax. In addition, the table is based upon yields that are derived solely from
tax-exempt income. To the extent a Fund's advertised yield is derived from
taxable income, the Fund's equivalent taxable yield will be less than set forth
in the table. The tax-free yields used in this table should not be considered as
representations of any particular rates of return and are for purposes of
illustration only. The table is based on federal tax rates in effect for
individuals in 1995 and currently scheduled to be in effect for individuals in
1996. To the extent that these rates are increased in 1996 or subsequent years,
the equivalent taxable yields shown above will also increase.
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS (AND/OR IN THE STATEMENT OF ADDITIONAL INFORMATION REFERRED TO
ON THE COVER PAGE OF THIS PROSPECTUS), AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
FUNDS OR PIPER JAFFRAY INC. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN THE STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION.
23
<PAGE>
PIPER FUNDS INC.
INVESTMENT ADVISER
Piper Capital Management Incorporated
DISTRIBUTOR
Piper Jaffray Inc.
CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
LEGAL COUNSEL
Dorsey & Whitney P.L.L.P.
Table of Contents
<TABLE>
<CAPTION>
PAGE
<S> <C>
Introduction......................... 2
Fund Expenses........................ 3
Financial Highlights................. 4
Investment Objectives and Policies... 6
Special Investment Methods and
Risk Factors....................... 11
Management........................... 14
Distribution of Fund Shares.......... 16
SHAREHOLDER GUIDE TO INVESTING
How to Purchase Shares............. 17
Cash Management Program............ 17
How To Redeem Shares............... 17
Shareholder Services............... 18
Dividends and Distributions........ 19
Valuation of Shares.................. 20
Tax Status........................... 20
Performance Comparisons.............. 21
General Information.................. 21
Tax-Exempt vs. Taxable Income........ 23
</TABLE>
XMM-05
PIPER
CASH
MANAGEMENT
FUNDS
[LOGO]
PROSPECTUS
MONEY MARKET FUND
U.S. GOVERNMENT
MONEY MARKET FUND
TAX-EXEMPT
MONEY MARKET FUND
NOVEMBER 27, 1995
<PAGE>
PART B
GROWTH FUND
GROWTH AND INCOME FUND
EMERGING GROWTH FUND
EQUITY STRATEGY FUND
BALANCED FUND
GOVERNMENT INCOME FUND
SHORT-INTERMEDIATE BOND FUND
Series of Piper Funds Inc.
STATEMENT OF ADDITIONAL INFORMATION
November 27, 1995
Table of Contents
Page
----
Investment Objectives, Policies and Restrictions . . . . . . . . 2
Directors and Executive Officers.. . . . . . . . . . . . . . . . 16
Investment Advisory and Other Services . . . . . . . . . . . . . 23
Portfolio Transactions and Allocation of Brokerage . . . . . . . 31
Capital Stock and Ownership of Shares. . . . . . . . . . . . . . 34
Net Asset Value and Public Offering Price. . . . . . . . . . . . 35
Performance Comparisons. . . . . . . . . . . . . . . . . . . . . 36
Purchase of Shares . . . . . . . . . . . . . . . . . . . . . . . 39
Redemption of Shares . . . . . . . . . . . . . . . . . . . . . . 40
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Financial Statements . . . . . . . . . . . . . . . . . . . . . . 43
General Information . . . . . . . . . . . . . . . . . . . . . . 43
Pending Litigation . . . . . . . . . . . . . . . . . . . . . . . 45
Appendix A - Corporate Bond, Preferred Stock and
Commercial Paper Ratings . . . . . . . . . . . . . . . . . . . A-1
Appendix B - Interest Rate Futures Contracts
and Related Options. . . . . . . . . . . . . . . . . . . . . . B-1
Appendix C - Stock Index Futures Contracts
and Related Options. . . . . . . . . . . . . . . . . . . . . . C-1
Appendix D - Industry Sectors. . . . . . . . . . . . . . . . . . D-1
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information relates to two Prospectuses each dated
November 27, 1995, one of which relates to Growth Fund (formerly known as Value
Fund, Growth & Income Fund, Emerging Growth Fund, Equity Strategy Fund and
Balanced Fund, and the other relates to Government Income Fund and Short-
Intermediate Bond Fund. This Statement of Additional Information should be read
in conjunction with each applicable Prospectus. Copies of these Prospectuses
may be obtained from the Funds at Piper Jaffray Tower, 222 South Ninth Street,
Minneapolis, Minnesota 55402-3804.
-1-
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The shares of Piper Funds Inc. (the "Company") are currently offered in
thirteen series. This Statement of Additional Information relates to seven of
these series: Growth Fund (formerly Value Fund), Emerging Growth Fund, Growth
and Income Fund, Equity Strategy Fund, Balanced Fund, Government Income Fund and
Short-Intermediate Bond Fund (sometimes referred to herein as a "Fund" or,
collectively, as the "Funds"). The investment objectives and policies of the
Funds are set forth in applicable Prospectuses. Certain additional investment
information is set forth below.
REPURCHASE AGREEMENTS
Each Fund may invest in repurchase agreements. The Funds' custodian will
hold the securities underlying any repurchase agreement or such securities will
be part of the Federal Reserve Book Entry System. The market value of the
collateral underlying the repurchase agreement will be determined on each
business day. If at any time the market value of the collateral falls below the
repurchase price of the repurchase agreement (including any accrued interest),
the respective Fund will promptly receive additional collateral (so the total
collateral is an amount at least equal to the repurchase price plus accrued
interest).
The Funds have received from the Securities and Exchange Commission an
exemptive order permitting the Funds, along with the other series of the
Company, closed-end and other open-end investment companies currently managed by
Piper Capital Management Incorporated (the "Adviser"), and all future series of
the Company and all future investment companies advised by the Adviser or its
affiliates, to deposit uninvested cash balances into a large single joint
account to be used to enter into one or more large repurchase agreements.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
Government Income Fund, Short-Intermediate Bond Fund, Balanced Fund and
Growth and Income Fund may purchase securities offered on a "when-issued" basis
and may purchase or sell securities on a "forward commitment" basis. When a
Fund purchases securities on a when-issued or forward commitment basis, it will
maintain in a segregated account with its custodian cash or liquid high-grade
debt obligations having an aggregate value equal to the amount of such purchase
commitments until payment is made; such Fund will likewise segregate securities
it sells on a forward commitment basis.
-2-
<PAGE>
SHORT-TERM MONEY MARKET SECURITIES
As set forth in the Prospectus, certain Funds may invest in short-term
money market securities including obligations of the U.S. Government and its
agencies and instrumentalities, bank certificates of deposit, bankers'
acceptances, high-grade commercial paper and other money market instruments.
Securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities include Treasury securities, which differ only in their
interest rates, maturities and times of issuance. Treasury Bills have initial
maturities of one year or less; Treasury Notes have initial maturities of one to
ten years; and Treasury Bonds generally have initial maturities of greater than
ten years. Some obligations issued or guaranteed by U.S. Government agencies
and instrumentalities, for example Government National Mortgage Association
pass-through certificates, are supported by the full faith and credit of the
U.S. Treasury; others, such as those of the Federal Home Loan Banks, by the
right of the issuer to borrow from the Treasury; others, such as those issued by
the Federal National Mortgage Association, by discretionary authority of the
U.S. Government to purchase certain obligations of the agency or
instrumentality; and others, such as those issued by the Student Loan Marketing
Association, only by the credit of the agency or instrumentality. While the
U.S. Government provides financial support to such U.S. Government-sponsored
agencies or instrumentalities, no assurance can be given that it will always do
so, since it is not so obligated by law. Securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities that mature within 397 days
are considered money market securities for purposes of the Funds' investment
policies.
Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time at a stated interest rate. Time
deposits are not transferable and are therefore illiquid prior to their
maturity. No Fund will invest more than 15% of its net assets in time deposits
and other illiquid securities. (Short-Intermediate Bond Fund will not invest
more than 5% of its net assets in such securities.) See "Investment
Restrictions." Certificates of deposit are certificates evidencing the
obligation of a bank to repay funds deposited with it for a specified period of
time. Bankers' acceptances are credit instruments evidencing the obligation of
a bank to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the full amount of the
instrument upon maturity.
Commercial paper consists of short-term, unsecured promissory notes issued
to finance short-term credit needs. The commercial paper purchased by the Funds
will consist only of direct obligations which, at the time of their purchase,
are (a) rated Prime-1 or Prime-2 by Moody's Investors Service, Inc. or A-1 or A-
2 by Standard & Poor's Ratings Services, (b) issued by companies having an
outstanding unsecured debt issue currently rated at least Aa by Moody's
Investors Service, Inc. or at least AA by Standard & Poor's Ratings Services, or
(c) if unrated, determined by
-3-
<PAGE>
the Adviser to be of comparable quality to those rated obligations which may be
purchased by the Funds.
Money market instruments in which the Funds may invest also include non-
convertible corporate debt securities (for example, bonds and debentures) with
no more than 397 days remaining to maturity, provided such obligations are rated
Aa or better by Moody's Investors Service, Inc. or AA or better by Standard &
Poor's Ratings Services.
MORTGAGE-RELATED SECURITIES
PASS-THROUGH SECURITIES --The investments of Government Income Fund, Short-
Intermediate Bond Fund, Balanced Fund and Growth and Income Fund in
mortgage-related securities include government guaranteed pass-through
securities. These obligations are described below.
(1 ) GNMA CERTIFICATES. Certificates of the Government National Mortgage
Association ("GNMA Certificates") are mortgage-backed securities which evidence
an ownership interest in a pool of mortgage loans. GNMA Certificates differ
from bonds in that principal is paid back monthly by the borrower over the term
of the loan rather than returned in a lump sum at maturity. GNMA Certificates
that Government Income Fund purchases are the "modified pass-through" type.
"Modified pass-through" GNMA Certificates entitle the holder to receive a share
of all interest and principal payments paid and owed on the mortgage pool, net
of fees paid to the "issuer" and GNMA, regardless of whether the mortgagor
actually makes the payment.
GNMA GUARANTEE -- The National Housing Act authorizes GNMA to guarantee the
timely payment of principal and interest on securities backed by a pool of
mortgages insured by the Federal Housing Administration ("FHA") or the Farmers'
Home Administration ("FHA") or guaranteed by the Veterans Administration ("VA").
The GNMA guarantee is backed by the full faith and credit of the United States.
GNMA is also empowered to borrow without limitation from the U.S. Treasury if
necessary to make any payments required under its guarantee.
Life of GNMA Certificates -- The average life of a GNMA Certificate is
likely to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the greater part of principal
investment long before the maturity of the mortgages in the pool. Foreclosures
impose no risk to principal investment because of the GNMA guarantee.
As prepayment rates of individual mortgage pools vary widely, it is not
possible to predict accurately the average life of a particular issue of GNMA
Certificates. However, statistics published by the FHA indicate that the
average life of single-family dwelling mortgages with 25- to 30-year maturities,
the type of
-4-
<PAGE>
mortgages backing the vast majority of GNMA Certificates, is approximately 12
years. Therefore, it is customary to treat GNMA Certificates as 30-year
mortgage-backed securities which prepay fully in the twelfth year.
Yield Characteristics of GNMA Certificates -- The coupon rate of interest
on GNMA Certificates is lower than the interest rate paid on the VA-guaranteed
or FHA-insured mortgages underlying the Certificates by the amount of the fees
paid to GNMA and the issuer.
The coupon rate by itself, however, does not indicate the yield which will
be earned on GNMA Certificates. First, Certificates may be issued at a premium
or discount, rather than at par, and, after issuance, Certificates may trade in
the secondary market at a premium or discount. Second, interest is earned
monthly, rather than semi-annually as with traditional bonds; monthly
compounding raises the effective yield earned. Finally, the actual yield of a
GNMA Certificate is influenced by the prepayment experience of the mortgage pool
underlying it. For example, if the higher yielding mortgages from the pool are
prepaid, the yield on the remaining pool will be reduced.
(2) FHLMC SECURITIES. The Federal Home Loan Mortgage Corporation
("FHLMC") was created in 1970 through enactment of Title III of the Emergency
Home Finance Act of 1970. Its purpose is to promote development of a nationwide
secondary market in conventional residential mortgages.
FHLMC issues two types of mortgage pass-through securities, mortgage
participation certificates ("PCs") and guaranteed mortgage certificates
("GMCs"). PCs resemble GNMA Certificates in that each PC represents a pro rata
share of all interest and principal payments made and owed on the underlying
pool. FHLMC guarantees timely payment of interest on PCs and the full return of
principal. Like GNMA Certificates, PCs are assumed to be prepaid fully in their
twelfth year.
GMCs also represent a pro rata interest in a pool of mortgages. However,
these instruments pay interest semi-annually and return principal once a year in
guaranteed minimum payments. The expected average life of these securities is
approximately ten years.
(3) FNMA SECURITIES. The Federal National Mortgage Association was
established in 1938 to create a secondary market in mortgages insured by the
FHA.
FNMA issues guaranteed mortgage pass-through certificates ("FNMA
Certificates"). FNMA Certificates resemble GNMA Certificates in that each FNMA
Certificate represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. FNMA guarantees timely payment of
interest on FNMA Certificates and the full return of principal. Like GNMA
Certificates, FNMA Certificates are assumed to be prepaid fully in their twelfth
year.
-5-
<PAGE>
CREDIT SUPPORT -- To lessen the effect of failures by obligors on
underlying mortgages to make payments, Mortgage-Backed Securities may contain
elements of credit support. Such credit support falls into two categories: (i)
liquidity protection and (ii) protection against losses resulting from ultimate
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pool of
assets, to ensure that the pass-through of payments due on the underlying pool
occurs in a timely fashion. Protection against losses resulting from ultimate
default enhances the likelihood of ultimate payment of the obligations on at
least a portion of the assets in the pool. Such protection may be provided
through guarantees, insurance policies or letters of credit obtained by the
issuer or sponsor from third parties, through various means of structuring the
transaction or through a combination of such approaches. The Funds will not pay
any additional fees for such credit support, although the existence of credit
support may increase the price of a security.
The ratings of securities for which third-party credit enhancement provides
liquidity protection or protection against losses from default are generally
dependent upon the continued creditworthiness of the enhancement provider. The
ratings of such securities could be subject to reduction in the event of
deterioration in the creditworthiness of the credit enhancement provider even in
cases where the delinquency and loss experience on the underlying pool of assets
is better than expected.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of "reserve
funds" (where cash or investments, sometimes funded from a portion of the
payments on the underlying assets, are held in reserve against future losses)
and "over-collateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceed those required to make payment on the
securities and pay any servicing or other fees). The degree of credit support
provided for each issue is generally based on historical information with
respect to the level of credit risk associated with the underlying assets.
Other information which may be considered includes demographic factors, loan
underwriting practices and general market and economic conditions. Delinquency
or loss in excess of that which is anticipated could adversely affect the return
on an investment in such a security.
HIGH RISK MORTGAGE-RELATED SECURITIES
As set forth in its Prospectus, Short-Intermediate Bond Fund will not
invest in mortgage-related securities that are considered "high risk" under
applicable supervisory policies of the Office of the Comptroller of the Currency
(the "OCC"). In OCC Banking Circular 228 (Rev.) (January 10, 1992), the OCC
defined a "high-risk
-6-
<PAGE>
mortgage security" as any mortgage derivative product that at the time of
purchase, or at a subsequent testing date, meets any of the following three
tests:
1. AVERAGE LIFE TEST. The mortgage derivative product has an expected
weighted average life greater than 10.0 years.
2 AVERAGE LIFE SENSITIVITY TEST. The expected weighted average life of
the mortgage derivative product:
a. Extends by more than 4.0 years, assuming an immediate and
sustained parallel shift in the yield curve of plus 300 basis points, or
b. Shortens by more than 6.0 years, assuming an immediate and
sustained parallel shift in the yield curve of minus 300 basis points.
3. PRICE SENSITIVITY TEST. The estimated change in the price of the
mortgage derivative product is more than 17%, due to an immediate and sustained
parallel shift in the yield curve of plus or minus 300 basis points.
Examples of certain "high-risk mortgage securities" include "IO" and "PO"
classes of stripped mortgage-backed securities, inverse floating CMOs and
certain zero coupon Treasury securities.
OPTIONS
As set forth in the Funds' respective Prospectuses, each Fund other than
Short-Intermediate Bond Fund may write covered options and purchase options on
securities. The principal reason for writing call or put options is to obtain,
through receipt of premiums, a greater current return than would be realized on
the underlying securities alone. The Funds receive premiums from writing call
or put options, which they retain whether or not the option is exercised. The
Funds will write only "covered" options. This means that so long as a Fund is
obligated as the writer of a call option, it will own the underlying securities
subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges). A Fund will be considered "covered" with
respect to a put option it writes if, so long as it is obligated as the writer
of a put option, it deposits and maintains with its custodian cash, U.S.
Government Securities or other liquid high-grade debt obligations having a value
equal to or greater than the exercise price of the option.
A Fund may wish to protect certain portfolio securities against a decline
in market value at a time when no put options on those particular securities are
available for purchase. That Fund may therefore purchase a put option on
securities other than those it wishes to protect even though it does not hold
such other securities in its portfolio. While the Funds will only purchase put
options on securities where, in the opinion of the Adviser, changes in the value
of the put option should generally offset changes in the value of the securities
to be hedged,
-7-
<PAGE>
the correlation will be less than in transactions in which the Funds purchase
put options on underlying securities they own.
The writing by the Funds of options on securities will be subject to
limitations established by each of the registered securities exchanges on which
such options are traded. Such limitations govern the maximum number of options
in each class which may be written by a single investor or group of investors
acting in concert, regardless of whether the options are written on the same or
different securities exchanges or are held or written on one or more accounts or
through one or more brokers. Thus, the number of options which a Fund may write
may be affected by options written by the other Funds and by other investment
companies managed by and other investment advisory clients of the Adviser. An
exchange may order the liquidation of positions found to be in excess of these
limits, and it may impose certain other sanctions.
OVER-THE-COUNTER OPTIONS. Government Income Fund may purchase and write
over-the-counter ("OTC") put and call options in negotiated transactions. The
staff of the Securities and Exchange Commission has previously taken the
position that the value of purchased OTC options and the assets used as "cover"
for written OTC options are illiquid securities and, as such, are to be included
in the calculation of a Fund's 15% limitation on illiquid securities. However,
the staff has eased its position somewhat in certain limited circumstances.
Government Income Fund will attempt to enter into contracts with certain dealers
with which it writes OTC options. Each such contract will provide that the Fund
has the absolute right to repurchase the options it writes at any time at a
repurchase price which represents the fair market value, as determined in good
faith through negotiation between the parties, but which in no event will exceed
a price determined pursuant to a formula contained in the contract. Although
the specific details of such formula may vary among contracts, the formula will
generally be based upon a multiple of the premium received by the Fund for
writing the option, plus the amount, if any, of the option's intrinsic value.
The formula will also include a factor to account for the difference between the
price of the security and the strike price of the option if the option is
written out-of-the-money. With respect to each OTC option for which such a
contract is entered into, the Fund will count as illiquid only the initial
formula price minus the option's intrinsic value.
The Fund will enter into such contracts only with primary U.S. Government
securities dealers recognized by the Federal Reserve Bank of New York.
Moreover, such primary dealers will be subject to the same standards as are
imposed upon dealers with which the Fund enters into repurchase agreements.
STOCK INDEX OPTIONS - GENERAL. Growth Fund, Emerging Growth Fund, Growth
and Income Fund, Equity Strategy Fund and Balanced Fund may purchase and write
put and call options on stock indexes listed on national securities exchanges.
Stock index options are purchased for the purpose of hedging against changes in
the value of a Fund's portfolio securities due to anticipated changes in
-8-
<PAGE>
the market. Stock index options are written for hedging purposes and to realize
income from the premiums received on the sale of such options.
Options on stock indexes are similar to options on stock except that,
rather than the right to take or make delivery of stock at a specified price, an
option on a stock index gives the holder the right to receive, upon exercise of
the option, an amount of cash if the closing level of the stock index upon which
the option is based is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option. This amount of cash is equal
to the difference between the closing price of the index and the exercise price
of the option expressed in dollars times a specified multiple (the
"multiplier"). The writer of the option is obligated, in return for the premium
received, to make delivery of this amount. Unlike stock options, all
settlements are in cash and gain or loss depends upon price movements in the
stock market generally (or in a particular industry or segment of the market)
rather than price movements in individual stocks.
Some stock indexes include stocks that are not limited to any particular
industry or segment of the market (a "broadly based stock market index").
Currently, options are traded on the following broadly based stock market
indexes: the S&P 100 Index and the S&P 500 Index (traded on the Chicago Board
Options Exchange); the Major Market Index and the AMEX Market Value Index
(traded on the American Stock Exchange); the NYSE Composite Index; and the
National OTC Index (traded on the Philadelphia Stock Exchange). Indexes may
also be based upon a designated industry or group of industries (an "industry"
or "market segment index"). Options are currently traded on the following
industry or market segment indexes: the Oil and Gas Index, the Computer
Technology Index and the Transportation Index (traded on the American Stock
Exchange); the Gold/Silver Index (traded on the Philadelphia Stock Exchange);
and the Technology Index (traded on the Pacific Coast Stock Exchange).
The multiplier for an index option performs a function similar to the unit
of trading for a stock option. It determines the total dollar value per
contract of each point in the difference between the exercise price of an option
and the current level of the underlying index. A multiplier of 100 means that a
one-point difference will yield $100. Options on different indexes may have
different multipliers.
Except as described below, Growth Fund, Emerging Growth Fund, Growth and
Income Fund, Equity Strategy Fund and Balanced Fund will write call options on
indexes only if on such date a Fund holds a portfolio of stocks at least equal
to the value of the index times the multiplier times the number of contracts.
When a Fund writes a call option on a broadly based stock market index, the Fund
will segregate or put into escrow with its custodian or pledge to a broker as
collateral for the option, cash, high grade liquid debt securities or "qualified
securities" with a market value determined on a daily basis of not less than
100% of the current index value times the multiplier times the number of
contracts.
-9-
<PAGE>
If a Fund has written an option on an industry or market segment index, it
will segregate, escrow or pledge at least five "qualified securities," all of
which are stocks of issuers in such industry or market segment, with a market
value at the time the option is written of not less than 100% of the current
index value times the multiplier times the number of contracts. Such stocks
will include stocks which represent at least 50% of the weighting of the
industry or market segment index and will represent at least 50% of the Fund's
holdings in that industry or market segment. No individual security will
represent more than 25% of the amount so segregated, pledged or escrowed in the
case of industry or market segment index options. If at the close of business
on any day the market value of such qualified securities so segregated, pledged
or escrowed falls below 100% of the current index value times the multiplier
times the number of contracts, the Fund will segregate, pledge or escrow an
amount in cash, Treasury bills, other high grade short-term obligations or
"qualified securities" equal in value to the difference. In addition, when a
Fund writes a call on an index which is in-the-money at the time the call is
written, the Fund will segregate with its custodian or pledge to the broker
short-term debt obligations equal in value to the amount by which the call is
in-the-money times the multiplier times the number of contracts. Any amount
segregated pursuant to the foregoing sentence may be applied to the Fund's
obligation to segregate additional amounts in the event the market value of the
qualified securities falls below 100% of the current index value times the
multiplier times the number of contracts. A "qualified security" is an equity
security which is listed on a national securities exchange or listed on the
National Association of Securities Dealers Automated Quotation System against
which the Fund has not written a stock call option.
A Fund may write a put on a stock index only if it is "secured." A put is
"secured" if the Fund maintains cash, U.S. Government securities or other high
grade liquid debt securities with a value equal to the exercise price in a
segregated account with the Custodian or holds a put on the same underlying
index at an equal or greater exercise price. The aggregate value of the
obligations underlying puts written by a Fund will not exceed 50% of its net
assets.
Growth Fund, Emerging Growth Fund, Growth and Income Fund, Equity Strategy
Fund and Balanced Fund are not subject to any limitations with respect to the
percentage of total assets that may be hedged. Accordingly, a Fund will not be
prohibited from purchasing or writing stock index options to hedge against
changes in the value of its entire portfolio.
The purchase and sale of options on stock indexes by a Fund are subject to
certain risks that are not present with options on securities. Because the
value of an index option depends upon movements in the level of the index rather
than the price of a particular stock, whether a Fund will realize a gain or loss
on the purchase or sale of an option on an index depends upon movements in the
level of stock prices in the stock market generally or in an industry or market
segment rather than movements in the price of a particular stock. Accordingly,
successful use by the
-10-
<PAGE>
Funds of options on indexes is subject to the Adviser's ability to correctly
predict movements in the direction of the stock market generally or of a
particular industry. This requires different skills and techniques than
predicting changes in the price of individual stocks. In the event the Adviser
is unsuccessful in predicting the movements of an index, the Funds could be in a
worse position than had no hedge been attempted.
Index prices may be distorted if trading of certain stocks included in the
index is interrupted. Trading in index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number of
stocks included in the index. If this occurred, a Fund would not be able to
close out options which it had purchased or written and, if restrictions on
exercise were imposed, might be unable to exercise an option it holds, which
could result in substantial losses to the Fund. However, it is the Funds'
policy to purchase or write options only on indexes which include a sufficient
number of stocks so that the likelihood of a trading halt in the index is
minimized.
Trading in index options commenced in April 1983 with the S&P 100 option
(formerly called the "CBOE 100"). Since that time a number of additional index
option contracts have been introduced, including options on industry indexes.
Although the markets for certain index option contracts have developed rapidly,
the markets for other index options are still relatively illiquid The ability
to establish and close out positions on such options will be subject to the
development and maintenance of a liquid secondary market. It is not certain
that the market will develop in all index option contracts. The Funds will not
purchase or sell any index option contracts unless and until, in the Adviser's
opinion, the market for such options has developed sufficiently that such risk
in connection with such transactions is no greater than such risk in connection
with options on stocks.
SPECIAL RISKS OF WRITING CALLS ON STOCK INDEXES. Because exercises of
index options are settled in cash, a call writer cannot determine the amount of
its settlement obligations in advance and, unlike call writing on specific
stocks, cannot provide in advance for, or cover, its potential settlement
obligations by acquiring and holding the underlying securities. However, the
Funds will write call options on indexes only under the circumstances described
above.
Price movements in a Fund's portfolio probably will not correlate perfectly
with movements in the level of the index and, therefore, each Fund bears the
risk that the price of the securities held by such Fund may not increase as much
as the index. In such event, the Fund would bear a loss on the call which is
not completely offset by movements in the price of such Fund's portfolio. It is
also possible that the index may rise when the Fund's portfolio of stocks does
not rise. If this occurred, the Fund would experience a loss on the call which
is not offset by an increase in the value of its portfolio and might also
experience a loss in its portfolio. However, because the value of a diversified
portfolio will, over time, tend to move in the same direction as the market,
movements in the value of a Fund in the opposite
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<PAGE>
direction as the market would be likely to occur for only a short period or to a
small degree.
Unless a Fund has other liquid assets which are sufficient to satisfy the
exercise of a call, the Fund would be required to liquidate portfolio securities
in order to satisfy the exercise. Because an exercise must be settled within
hours after receiving the notice of exercise, if a Fund fails to anticipate an
exercise it may have to borrow from a bank pending settlement of the sale of
securities in its portfolio and would incur interest charges thereon.
When a Fund has written a call, there is also a risk that the market may
decline between the time the Fund has a call exercised against it, at a price
which is fixed as of the closing level of the index on the date of exercise, and
the time the Fund is able to sell stocks in its portfolio. As with stock
options, a Fund will not learn that an index option has been exercised until the
day following the exercise date, but, unlike a call on stock where the Fund
would be able to deliver the underlying securities in settlement, the Fund may
have to sell part of its stock portfolio in order to make settlement in cash,
and the price of such stocks might decline before they can be sold.
SPECIAL RISKS OF PURCHASING PUTS AND CALLS ON STOCK INDEXES. If a Fund
holds an index option and exercises it before final determination of the closing
index value for that day, it runs the risk that the level of the underlying
index may change before closing. If such a change causes the exercise option to
fall out-of-the-money, i.e., the exercise price of the option rises above the
closing index value, the Fund will be required to pay the difference between the
closing index value and the exercise price of the option (multiplied by the
applicable multiplier) to the assigned writer. While a Fund may be able to
minimize this risk by withholding exercise instructions until just before the
daily cutoff time or by selling rather than exercising an option when the index
level is close to the exercise price, it may not be possible to eliminate this
risk entirely because the cutoff times for index options may be earlier than
those fixed for other types of options and may occur before definitive closing
index values are announced.
ILLIQUID SECURITIES
As set forth in the Prospectus, the Funds may invest in Rule 144A
securities, commercial paper issued pursuant to Rule 4(2) under the Securities
Act of 1933, and interest-only and principal-only classes of Mortgage-Backed
Securities issued by the U.S. Government or its agencies or instrumentalities,
and treat such securities as liquid when they have been determined to be liquid
by the Board of Directors of the Company or by the Adviser subject to the
oversight of and pursuant to procedures adopted by the Board of Directors.
Under these procedures, factors taken into account in determining the liquidity
of a security include (a) the frequency of trades and quotes for the security;
(b) the number of dealers willing to purchase or sell the security and the
number of other potential purchasers; (c) dealer undertakings to
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<PAGE>
make a market in the security; and (d) the nature of the security and the nature
of the marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer). With respect to
Rule 144A securities, investing in such securities could have the effect of
increasing the level of Fund illiquidity to the extent that qualified
institutional buyers become, for a time, uninterested in purchasing these
securities.
PORTFOLIO TURNOVER
Portfolio turnover is the ratio of the lesser of annual purchases or sales
of portfolio securities to the average monthly value of portfolio securities,
not including securities maturing in less than 12 months. A 100% portfolio
turnover rate would occur, for example, if the lesser of the value of purchases
or sales of portfolio securities for a particular year were equal to the average
monthly value of the portfolio securities owned during such year. For purposes
of calculating portfolio turnover, the maturity of investment purchases and
sales related to "rollover" transactions of Government Income Fund is considered
to be less than 12 months. See "Special Investment Methods--When Issued
Securities" in the Prospectus.
DIVERSIFICATION
Each Fund intends to operate as a "diversified" management investment
company, as defined in the Investment Company Act of 1940 (the"1940 Act"), which
means that at least 75% of its assets must be represented by cash and cash items
(including receivables), U.S. Government securities, securities of other
investment companies, and other securities for the purposes of this calculation
limited in respect of any one issuer to an amount not greater in value than 5%
of the value of total assets of each Fund and to not more than 10% of the
outstanding voting securities of such issuer.
INVESTMENT RESTRICTIONS
In addition to the investment objectives and policies set forth in the
Prospectus, each Fund is subject to certain fundamental and nonfundamental
investment restrictions, as set forth below. Fundamental investment
restrictions may not be changed without the vote of a majority of a Fund's
outstanding shares. "Majority," as used in the Prospectus and in this Statement
of Additional Information, means the lesser of (a) 67% of a Fund's outstanding
shares present at a meeting of the holders if more than 50% of the outstanding
shares are present in person or by proxy or (b) more than 50% of a Fund's
outstanding shares.
As fundamental investment restrictions, no Fund will:
1. Invest 25% or more of the value of its total assets in the securities
of issuers conducting their principal business activities in any one industry.
This restriction
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<PAGE>
does not apply to securities of the U.S. Government or its agencies and
instrumentalities and repurchase agreements relating thereto. The various types
of utilities companies, such as gas, electric, telephone, telegraph, satellite
and microwave communications companies, are considered as separate industries.
2. Issue any senior securities, as defined in the Investment Company Act
of 1940, as amended (the "1940 Act"), other than as set forth in restriction #3
below and except to the extent that using options and futures contracts or
purchasing or selling securities on a when-issued or forward commitment basis
may be deemed to constitute issuing a senior security.
3. Borrow money (provided that Government Income Fund may enter into
reverse repurchase agreements) except from banks for temporary or emergency
purposes. The amount of such borrowing may not exceed 10% of the value of the
Fund's total assets. With respect to each of the Funds, interest paid on
borrowed funds will decrease the net earnings of the Fund. None of the Funds
will purchase portfolio securities while outstanding borrowing exceeds 5% of the
value of the Fund's total assets. None of the Funds will borrow money for
leverage purposes (provided that Government Income Fund may enter into reverse
repurchase agreements for such purposes).
4. Mortgage, pledge or hypothecate its assets except in an amount not
exceeding 10% of the value of its total assets to secure temporary or emergency
borrowing. For purposes of this policy, collateral arrangements for margin
deposits on futures contracts or with respect to the writing of options are not
deemed to be a pledge of assets.
5. Purchase or sell commodities or commodity futures contracts, except
that the Funds may enter into financial futures contracts and engage in related
options transactions.
6. Purchase or sell real estate or real estate mortgage loans, except that
the Funds may invest in securities secured by real estate or interests therein
or issued by companies that invest in real estate or interests therein. Growth
and Income Fund will not invest in real estate limited partnerships.
7. Act as an underwriter of securities of other issuers, except insofar as
each Fund may be technically deemed an underwriter under the federal securities
laws in connection with the disposition of portfolio securities.
As nonfundamental investment restrictions that may be changed at any time
without shareholder approval, no Fund will:
1. Invest in warrants.
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<PAGE>
2. Invest more than 5% of the value of its total assets in the securities
of any issuers which, with their predecessors, have a record of less than three
years' continuous operation. (Securities of such issuers will not be deemed to
fall within this limitation if they are guaranteed by an entity in continuous
operation for more than three years. The value of all securities issued or
guaranteed by such guarantor and owned by a Fund shall not exceed 10% of the
value of the total assets of such Fund.)
3. Make short sales of securities, except that Equity Strategy Fund may
make short sales of securities, provided that the total market value of all
securities sold short does not exceed 5% of the value of the Fund's total
assets, and Equity Strategy Fund may make short sales "against the box."
4. Purchase any securities on margin except to obtain such short-term
credits as may be necessary for the clearance of transactions and except that
the Funds may make margin deposits in connection with futures contracts.
5. Write, purchase or sell puts, calls or combinations thereof, except
that Growth Fund, Emerging Growth Fund, Growth and Income Fund, Equity Strategy
Fund and Balanced Fund may purchase or write put and call options on stock
indexes listed on national securities exchanges; each of the Funds other than
Short-Intermediate Bond Fund may write put and call options with respect to the
securities in which it may invest; each of the Funds other than Short-
Intermediate Bond Fund may purchase put and call options; and each of the Funds
other than Short-Intermediate Bond Fund may engage in financial futures
contracts and related options transactions.
6. Purchase or retain the securities of any issuer if, to the Fund's
knowledge, those officers or directors of the Company or its affiliates or of
its investment adviser who individually own beneficially more than 0.5% of the
outstanding securities of such issuer, together own more than 5% of such
outstanding securities.
7. Invest for the purpose of exercising control or management.
8. Purchase or sell oil, gas or other mineral leases, rights or royalty
contracts, except that the Funds may purchase or sell securities of companies
investing in the foregoing.
9. Purchase the securities of other investment companies except as part of
a merger, consolidation or acquisition of assets.
10. Invest in real estate limited partnerships (see fundamental
restriction #6 relating to Growth and Income Fund).
11. Invest more than 5% (25% for Balanced Fund) of total assets in the
securities of foreign issuers, provided that Short-Intermediate Bond Fund will
not
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<PAGE>
invest in the securities of foreign issuers other than U.S. dollar-denominated
Yankee bonds.
12. Invest more than 15% of net assets in illiquid securities.
13. With respect to Short-Intermediate Bond Fund, purchase the securities
of any issuer if, as to 75% of the total assets of at the time of purchase, more
than 10% of the voting securities of any issuer would be held by such Fund.
Any investment restriction or limitation referred to above or in the
Prospectus, except the borrowing policy, which involves a maximum percentage of
securities or assets, shall not be considered to be violated unless an excess
over the percentage occurs immediately after an acquisition of securities or
utilization of assets and such excess results therefrom.
DIRECTORS AND EXECUTIVE OFFICERS
The names, addresses and principal occupations during the past five years
of the directors and executive officers of the Company are given below. The
officers and directors of the Company also serve as officers and directors of
various closed- and open-end investment companies managed by the Adviser.
<TABLE>
<CAPTION>
Name and Address Position with the Company
---------------- -------------------------
<S> <C>
William H. Ellis* Chairman of the Board of Directors
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
David T. Bennett Director
3400 City Center
33 South Sixth Street
Minneapolis, Minnesota 55402
Jaye F. Dyer Director
4670 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402
Karol D. Emmerich Director
7302 Claredon Drive
Edina, Minnesota 55439
Luella G. Goldberg Director
7019 Tupa Drive
Edina, Minnesota 55435
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name and Address Position with the Company
---------------- -------------------------
<S> <C>
George Latimer Director
754 Linwood Avenue
St. Paul, MN 55105
Paul A. Dow President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
David E. Rosedahl Secretary
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Charles N. Hayssen Treasurer
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Worth Bruntjen Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Richard W. Filippone Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Marijo A. Goldstein Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Steven V. Markusen Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Robert H. Nelson Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name and Address Position with the Company
---------------- -------------------------
<S> <C>
Edward P. Nicoski Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Nancy S. Olsen Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Ronald R. Reuss Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Bruce D. Salvog Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Sandra K. Shrewsbury Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
David M. Steele Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Douglas J. White Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
J. Bradley Stone Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Marcy K. Winson Vice President
Piper Jaffray Tower
222 South Ninth Street
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<PAGE>
Minneapolis, Minnesota 55402
</TABLE>
- -----------------
* Directors of the Company who are interested persons (as that term is
defined by the 1940 Act) of Piper Capital Management Incorporated and the
Funds.
William H. Ellis has been President of Piper Jaffray Companies Inc. and
Piper Jaffray Inc. (the "Distributor") since September 1982, Chief Operating
Officer of the same two companies since August 1983, Director and Chairman of
the Board of Piper Capital Management Incorporated ("the Adviser") since October
1985 and President of the Adviser since December 1994.
David T. Bennett is of counsel to the law firm of Gray, Plant, Mooty, Mooty
& Bennett, P.A., located in Minneapolis, Minnesota. Mr. Bennett is chairman of
a group of privately held companies and serves on the board of directors of a
number of nonprofit organizations.
Jaye F. Dyer has been President of Dyer Management Company, a private
management company, since January 1991. Prior to that he was President and
Chief Executive Officer of Dyco Petroleum Corporation, a Minneapolis based oil
and natural gas development company he founded, from 1971 to March 1, 1989, and
Chairman of the Board until December 31, 1990. Mr. Dyer serves on the board of
directors of Northwestern National Life Insurance Company, The ReliaStar
Financial Corp. (the holding company of Northwestern National Life Insurance
Company) and various privately held and nonprofit corporations.
Karol D. Emmerich has been President of The Paraclete Group, a consultant
to nonprofit organizations, since 1993. Prior to that she had been Vice
President, Chief Accounting Officer and Treasurer of Dayton Hudson Corporation
from 1980 to May 1993. Ms. Emmerich is an Executive Fellow at the University of
St. Thomas Graduate School of Business and serves on the board of directors of a
number of privately held and nonprofit organizations.
Luella G. Goldberg has served on the board of directors of Northwestern
National Life Insurance Company (since 1976), The ReliaStar Financial Corp.
(since 1989), TCF Financial Corporation (since 1988), the holding company of TCF
Bank Savings fsb, and Hormel Foods Corp. (since 1993). Ms. Goldberg also serves
as a Trustee of Wellesley College, and as a director of a number of other
organizations, including the University of Minnesota Foundation and the
Minnesota Orchestral Association. Ms. Goldberg was Chairman of the Board of
Trustees of Wellesley College from 1985 to 1993 and acting President from July
1, 1993 to October 1, 1993.
George Latimer is Director, Special Actions Office, Office of the
Secretary, Department of Housing and Urban Development since 1993, prior to
which he had been Dean of Hamline Law School, Saint Paul, Minnesota from 1990 to
1993. Mr. Latimer also serves on the board of directors of Digital Biometrics,
Inc. and Payless Cashways, Inc.
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<PAGE>
Paul A. Dow has been a Senior Vice President of the Adviser since 1989 and
Chief Investment Officer of the Adviser since 1989.
David E. Rosedahl has been Secretary and a Director of the Adviser since
1985, a Managing Director of the Distributor since 1986, a Managing Director of
Piper Jaffray Companies Inc. since 1987, Secretary of the Distributor since 1993
and General Counsel for the Distributor and Piper Jaffray Companies Inc. since
1979.
Charles N. Hayssen has been a Managing Director of the Distributor since
1986 and of Piper Jaffray Companies Inc. since 1987, Chief Financial Officer of
the Distributor since 1988, Director and Chief Financial Officer of the Adviser
since 1989 and Chief Operating Officer of the Adviser since 1994.
Worth Bruntjen has been a Senior Vice President of the Adviser since
January 1988.
Richard W. Filippone has been a Senior Vice President of the Adviser since
November 1991, prior to which he had been a Vice President of the Adviser from
1987 to 1991.
Marijo A. Goldstein has been a Senior Vice President of the Adviser since
November 1993, prior to which she was a Vice President of the Adviser from 1991
to 1993 and a fixed income analyst of the Adviser since 1988.
Steven V. Markusen has been a Senior Vice President of the Adviser since
December 1993, prior to which had been a senior vice president of Investment
Advisers, Inc., in Minneapolis, Minnesota from 1989 to 1993.
Robert H. Nelson has been a Senior Vice President of the Adviser since
November 1993, prior to which he had been a Vice President of the Adviser from
1991 to 1993 and Assistant Vice President from 1989 to 1991.
Edward P. Nicoski has been a Senior Vice President of the Adviser since
October 1985 and a Managing Director of the Distributor since November 1986.
Nancy S. Olsen has been a Senior Vice President of the Adviser since
November 1991, prior to which she had been a Vice President of the Adviser from
1987 to 1991.
Ronald R. Reuss has been a Senior Vice President of the Adviser since
January 1989.
Bruce D. Salvog has been a Senior Vice President of the Adviser since
January 1992, prior to which he had been a portfolio manager at Kennedy &
Associates in Seattle, Washington from 1984 to 1992.
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<PAGE>
Sandra K. Shrewsbury has been a Senior Vice President of the Adviser since
September 1993, prior to which she had been a Managing Director of Piper Jaffray
since November 1992, a Vice President of Piper Jaffray since November 1990.
David M. Steele has been a Senior Vice President of the Adviser since
January 1992, prior to which he had been a portfolio manager at Kennedy &
Associates in Seattle, Washington from 1987 to 1992.
Douglas J. White has been a Senior Vice President of the Adviser since
November 1991, prior to which he had been a Vice President of the Adviser from
1989 to 1991.
J. Bradley Stone has been a Vice President of the Adviser since November
1991 and a fixed-income analyst of the Adviser since March 1990.
Marcy K. Winson has been a Vice President of the Adviser since November
1993, prior to which she was an Assistant Vice President of the Adviser since
March 1993 and an educator from 1990 to 1992.
Ms. Goldberg, Ms. Emmerich and Mr. Dyer are members of the Company's Audit
Committee. Ms. Goldberg acts as the chairperson of such committee. The Audit
Committee oversees the Funds' financial reporting process, reviews audit results
and recommends annually to the Company a firm of independent certified public
accountants.
The functions to be performed by the Audit Committee are to recommend
annually to the Board a firm of independent certified public accountants to
audit the books and records of the Funds for the ensuing year; to monitor that
firm's performance; to review with the firm the scope and results of each audit
and determine the need, if any, to extend audit procedures; to confer with the
firm and representatives of the Funds on matters concerning the Funds' financial
statements and reports including the appropriateness of its accounting practices
and of its financial controls and procedures; to evaluate the independence of
the firm; to review procedures to safeguard portfolio securities; to review the
purchase by the Funds from the firm of non-audit services; to review all fees
paid to the firm; and to facilitate communications between the firm and the
Funds' officers and Directors.
The Board of Directors also has a Committee of the Independent Directors,
consisting of Mr. Bennett, who serves as chairperson, Messrs. Dyer, and Latimer,
Ms. Emmerich and Ms. Goldberg, and a Derivatives Committee consisting of Ms.
Emmerich, who serves as chairperson, Ms. Goldberg and Mr. Dyer.
The functions of the Committee of the Independent Directors are: (a)
recommendation to the full Board of approval of any management, advisory, sub-
advisory and/or administration agreements; (b) recommendation to the full Board
-21-
<PAGE>
of approval of any underwriting and/or distribution agreements; (c) review of
the fidelity bond and premium allocation; (d) review of errors and omissions and
any other joint insurance policies and premium allocation; (e) review of, and
monitoring of compliance with, procedures adopted pursuant to certain rules
promulgated under the 1940 Act; and (f) such other duties as the independent
directors shall, from time to time, conclude are necessary or appropriate to
carry out their duties under the 1940 Act. The functions of the Derivatives
Committee are: (a) to oversee practices, policies and procedures of the Adviser
in connection with the use of derivatives; (b) to receive periodic reports from
management and independent accountants; and (c) to report periodically to the
Committee of the Independent Directors and the Board of Directors.
The directors of the Company who are officers or employees of the Adviser
or any of its affiliates receive no remuneration from the Company. Each of the
other directors receives fees that are allocated among the series of the Company
on the basis of the total assets of each series. Each director receives from
the Company and Piper Institutional Funds Inc., collectively, an annual retainer
of $1,000, plus a fee of $250 for each regular quarterly Board of Directors
meeting attended. (The per-meeting fee is based on the total assets of the
Company and Piper Institutional Funds Inc. and will increase to $500 per meeting
in the event total assets exceed $200 million, with continuing increases to as
high as $1,500 per meeting in the event total assets reach $5 billion or more.
In addition, members of the Audit Committee not affiliated with the Adviser
receive $1,000 for each Audit Committee meeting attended ($2,000 with respect to
the chairperson of the Committee), with such fee being allocated among all open-
end and closed-end investment companies managed by the Adviser. Members of the
Committee of the Independent Directors and the Derivatives Committee currently
receive no additional compensation. Directors are also reimbursed for expenses
incurred in connection with attending meetings.
The following table sets forth the aggregate compensation received by each
director from the Company during the fiscal year ended September 30, 1995, as
well as the total compensation received by each director from the Company and
all other registered investment companies managed by the Adviser or affiliates
of the Adviser during the calendar year ended December 31, 1994. Directors who
are officers or employees of the Adviser or any of its affiliates did not
receive any such compensation and are not included in the table.
-22-
<PAGE>
<TABLE>
<CAPTION>
Pension or
Retirement Estimated Total
Aggregate Benefits Annual Benefits Compensation
Compensation Accrued as Part Upon from Fund
Director from the Company of Fund Expenses Retirement Complex*
- -------- ---------------- ---------------- ---------- --------
<S> <C> <C> <C> <C>
David T. Bennett $7,400 None None $57,500
Jaye F. Dyer $7,995 None None $68,250
Karol D. Emmerich $7,995 None None $68,250
Luella G. Goldberg $8,590 None None $71,250
George Latimer $7,400 None None $65,250
</TABLE>
- -------------------
* Consists of 21 registered investment companies managed by the Adviser or an
affiliate of the Adviser, including Piper Funds. Each director included in
the table, other than Mr. Bennett, serves on the board of each such registered
investment company. Mr. Bennett serves on the board of 20 such companies.
INVESTMENT ADVISORY AND OTHER SERVICES
The investment adviser for the Funds is Piper Capital Management
Incorporated (the "Adviser"). Its affiliate, Piper Jaffray Inc. (the
"Distributor"), acts as the Funds' distributor. Each acts as such pursuant to a
written agreement which is periodically approved by the directors or the
shareholders of the Funds. The address of both the Adviser and the Distributor
is Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402-
3804.
CONTROL OF THE ADVISER AND THE DISTRIBUTOR
The Adviser and the Distributor are both wholly owned subsidiaries of Piper
Jaffray Companies Inc., a publicly held corporation which is engaged through its
subsidiaries in various aspects of the financial services industry.
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
The Adviser acts as the investment adviser of the Funds under an Investment
Advisory and Management Agreement which has been approved by the Board of
Directors (including a majority of the directors who are not parties to the
agreement, or interested persons of any such party, other than as directors of
the Funds) and the shareholders of the Funds.
The Investment Advisory and Management Agreement will terminate
automatically in the event of its assignment. In addition, the agreement is
terminable at any time, without penalty, by the Board of Directors of the
Company or by vote of a majority of the Company's outstanding voting securities
on not more than 60 days' written notice to the Adviser, and by the Adviser on
60 days' written notice to the Company. The agreement may be terminated with
respect to a particular Fund at any time by a vote of the holders of a majority
of the outstanding voting securities of such Fund, upon 60 days' written notice
to the Adviser. Unless sooner terminated, the agreement shall continue in
effect for more than two years
-23-
<PAGE>
after its execution only so long as such continuance is specifically approved at
least annually by either the Board of Directors or by a vote of a majority of
the outstanding voting securities of the Company, provided that in either event
such continuance is also approved by a vote of a majority of the directors who
are not parties to such agreement, or interested persons of such parties, cast
in person at a meeting called for the purpose of voting on such approval. If a
majority of the outstanding voting securities of any of the Funds approves the
agreement, the agreement shall continue in effect with respect to such approving
Fund whether or not the shareholders of any other Fund approve the agreement.
Pursuant to the Investment Advisory and Management Agreement, the Funds pay
the Adviser monthly advisory fees equal on an annual basis to a certain
percentage of each Fund's average net assets as set forth in the following
table. Fees paid by Growth Fund, Emerging Growth Fund, Growth and Income Fund,
Equity Strategy Fund and Balanced Fund are higher than fees paid by most other
investment companies.
<TABLE>
<CAPTION>
Annual Advisory Fee
Average Net Asset Values as Percentage of
of the Fund Average Net Assets
-------------------------- ------------------
<S> <C> <C>
Growth Fund, On the first $100,000,000 .75%
Emerging Growth On the next $200,000,000 .65%
Fund, Growth and On the next $200,000,000 .55%
Income Fund, On average assets of over
Equity Strategy $500,000,000 .50%
Fund and
Balanced Fund
Government On the first $250,000,000 .50%
Income Fund On the next $250,000,000 .45%
On average assets of over
$500,000,000 .40%
Short-Intermediate On all assets .40%
Bond Fund
</TABLE>
The table below sets forth the advisory fees paid by each Fund other than
Short-Intermediate Bond Fund for the periods indicated. The Adviser waived all
fees and paid all expenses for Bond Fund from April 10, 1995 (inception) through
the fiscal period ended September 30, 1995.
-24-
<PAGE>
<TABLE>
<CAPTION>
Advisory fees Advisory fees Advisory fees
for the fiscal for the fiscal for the fiscal
year ended year ended year ended
Fund September 30, 1993 September 30, 1994 September 30, 1995
- ---- ------------------ ------------------ ------------------
<S> <C> <C> <C>
Growth Fund $1,602,957 $1,551,840 1,232,856
Emerging Growth Fund 1,069,899 1,489,006 1,525,105
Growth and Income Fund 701,821 635,999 512,370
Equity Strategy Fund 141,165 630,178 463,332
Balanced Fund 323,255 404,219 324,086
Government Income Fund 717,626 734,950 576,359
</TABLE>
The Adviser intends, although not required under the Investment Advisory
and Management Agreement, to reimburse Equity Strategy Fund, Balanced Fund and
Short-Intermediate Bond Fund for the amount, if any, by which the total
operating and management expenses of such Fund (including the Adviser's
compensation and amounts paid pursuant to the Company's Rule 12b-1 plan, but
excluding interest, taxes, dividends paid on short positions, brokerage fees and
commissions, and extraordinary expenses) for the fiscal year ending September
30, 1996, exceed 1.32% for Equity Strategy Fund and Balanced Fund, and 0.75% for
Short-Intermediate Bond Fund, of average net assets. This arrangement may be
modified or discontinued at any time after fiscal year end, at the Adviser's
discretion. In the event of discontinuance of this arrangement, the Company
will still be subject to the laws of certain states, which require that if a
mutual fund's expenses (including advisory fees but excluding interest, taxes,
brokerage commissions and extraordinary expenses) exceed certain percentages of
average net assets, the fund must be reimbursed for such excess expenses. The
Investment Advisory and Management Agreement provides that the Adviser must make
any expense reimbursements to the Funds required under state law. The laws of
California provide that aggregate annual expenses of a mutual fund shall not
normally exceed 2-1/2% of the first $30 million of the average net assets, 2% of
the next $70 million of the average net assets and 1-1/2% of the remaining
average net assets. Such expenses include the Adviser's compensation, but
exclude interest, taxes, brokerage fees and commissions, extraordinary expenses
and amounts paid under the Company's Rule 12b-1 plan. The Adviser does not
believe that the laws of any other state in which the Funds' shares may be
offered for sale contain expense reimbursement requirements.
Under the Investment Advisory and Management Agreement, the Adviser
provides each Fund with advice and assistance in the selection and disposition
of that Fund's investments. All investment decisions are subject to review by
the Board of Directors of the Company. The Adviser is obligated to pay the
salaries and fees of any affiliates of the Adviser serving as officers or
directors of the Funds.
The same security may be suitable for more than one of the Funds and/or for
other series of the Company or other funds or private accounts managed by the
Adviser or its affiliates. If and when two or more funds or accounts
simultaneously
-25-
<PAGE>
purchase or sell the same security, the transactions will be allocated as to
price and amount in accordance with arrangements equitable to each fund or
account. The simultaneous purchase or sale of the same securities by more than
one of the Funds or by any of the Funds and other series of the Company or other
funds or accounts may have a detrimental effect on a Fund, as this may affect
the price paid or received by that Fund or the size of the position obtainable
or able to be sold by that Fund.
EXPENSES
The expenses of each Fund are deducted from their income before dividends
are paid. These expenses include, but are not limited to, organizational costs,
fees paid to the Adviser, fees and expenses of officers and directors who are
not affiliated with the Adviser, taxes, interest, legal fees, transfer agent,
dividend disbursing agent and custodian fees, audit fees, brokerage fees and
commissions, fees and expenses of registering and qualifying the Funds and their
shares for distribution under federal and state securities laws, expenses of
preparing prospectuses and statements of additional information and of printing
and distributing prospectuses and statements of additional information annually
to existing shareholders, the expenses of reports to shareholders, shareholders'
meetings and proxy solicitations, distribution expenses pursuant to the Rule
12b-1 plan, and other expenses which are not expressly assumed by the Adviser
under the Investment Advisory and Management Agreement. Any general expenses of
the Company that are not readily identifiable as belonging to a particular
series of the Company will be allocated among the series based upon the relative
net assets of the series at the time such expenses were incurred.
DISTRIBUTION PLAN
Rule 12b-1(b) under the 1940 Act provides that any payments made by the
Funds in connection with financing the distribution of their shares may only be
made pursuant to a written plan describing all aspects of the proposed financing
of distribution, and also requires that all agreements with any person relating
to the implementation of the plan must be in writing. Because some of the
payments described below to be made by the Funds are distribution expenses
within the meaning of Rule 12b-1, the Company has entered into an Underwriting
and Distribution Agreement with the Distributor pursuant to a Distribution Plan
adopted in accordance with such Rule.
Rule 12b-1(b)(1) requires that such plan be approved by a majority of a
Fund's outstanding shares, and Rule 12b-1(b)(2) requires that such plan,
together with any related agreements, be approved by a vote of the Board of
Directors and of the directors who are not interested persons of the Company and
who have no direct or indirect interest in the operation of the plan or in the
agreements related to the plan, cast in person at a meeting called for the
purpose of voting on such plan or agreement. Rule 12b-1(b)(3) requires that the
plan or agreement provide, in substance:
-26-
<PAGE>
(a) that it shall continue in effect for a period of more than one
year from the date of its execution or adoption only so long as such
continuance is specifically approved at least annually in the manner
described in paragraph (b)(2) of Rule 12b-1;
(b) that any person authorized to direct the disposition of moneys
paid or payable by the Company pursuant to the plan or any related
agreement shall provide to the Company's Board of Directors, and the
directors shall review, at least quarterly, a written report of the amounts
so expended and the purposes for which such expenditures were made; and
(c) in the case of a plan, that it may be terminated at any time by a
vote of a majority of the members of the Board of Directors of the Company
who are not interested persons of the Company and who have no direct or
indirect financial interest in the operation of the plan or in any
agreements related to the plan or by a vote of a majority of the
outstanding voting securities of a Fund.
Rule 12b-1(b)(4) requires that such a plan may not be amended to increase
materially the amount to be spent for distribution without shareholder approval
and that all material amendments of the plan must be approved in the manner
described in paragraph (b)(2) of Rule 12b-1.
Rule 12b-1(c) provides that the Company may rely upon Rule 12b-1(b) only if
the selection and nomination of the Company's disinterested directors are
committed to the discretion of such disinterested directors. Rule 12b-1(e)
provides that the Company may implement or continue a plan pursuant to Rule
12b-1(b) only if the directors who vote to approve such implementation or
continuation conclude, in the exercise of reasonable business judgment and in
light of their fiduciary duties under state law, and under Sections 36(a) and
(b) of the Investment Company Act of 1940, that there is a reasonable likelihood
that the plan will benefit the Company and its shareholders. The Board of
Directors has concluded that there is a reasonable likelihood that the
Distribution Plan will benefit the Company and its shareholders.
Pursuant to the provisions of the Distribution Plan, each Fund other than
Short-Intermediate Bond Fund pays a fee to the Distributor at a monthly rate of
1/12 of .50% of such Fund's average daily net assets in connection with
servicing of the Fund's shareholder accounts and in connection with
distribution-related services provided with respect to the Funds. Short-
Intermediate Bond Fund's monthly fee under the Distribution Plan is paid at a
monthly rate of 1/12 of .20% of such Fund's average daily net assets. A portion
of each Fund's total fee (to be determined from time to time by the Board of
Directors) may be paid as a distribution fee and will be used by the Distributor
to cover expenses that are primarily intended to result in, or that are
primarily attributable to, the sale of shares of such Fund ("Distribution
Expenses"), and the remaining portion of the fee may be paid as a shareholder
servicing fee and will be used by the Distributor to provide compensation for
-27-
<PAGE>
ongoing servicing and/or maintenance of shareholder accounts with respect to
such Fund ("Shareholder Servicing Costs"). Distribution Expenses under the Plan
include, but are not limited to, initial and ongoing sales compensation (in
addition to sales charges) paid to Investment Executives of the Distributor and
to other broker-dealers; expenses incurred in the printing of prospectuses,
statements of additional information and reports used for sales purposes;
expenses of preparation and distribution of sales literature; expenses of
advertising of any type; an allocation of the Distributor's overhead; and
payments to and expenses of persons who provide support services in connection
with the distribution of Fund shares. Shareholder Servicing Costs include all
expenses of the Distributor incurred in connection with providing administrative
or accounting services to shareholders, including, but not limited to, an
allocation of the Distributor's overhead and payments made to persons, including
employees of the Distributor, who respond to inquiries of shareholders of the
Funds regarding their ownership of shares or their accounts with the Funds, or
who provide other administrative or accounting services not otherwise required
to be provided by the Funds' Adviser or transfer agent.
The table below sets forth the distribution fees paid by each Fund other
than Bond Fund for the periods indicated. The Adviser waived all fees and paid
all expenses for Bond Fund from April 10, 1995 (inception) through the fiscal
period ended September 30, 1995.
<TABLE>
<CAPTION>
Distribution fees Distribution fees Distribution fees
for the fiscal for the fiscal for the fiscal
year ended year ended year ended
September 30, 1993 September 30, 1994 September 30, 1995
------------------ ------------------ ------------------
<S> <C> <C> <C>
Growth Fund $ 751,481 $ 701,411 552,509
Emerging Growth Fund 447,651 641,080 692,842
Growth and Income Fund 299,443 244,091 216,333
Equity Strategy Fund 61,172 265,322 196,463
Balanced Fund 140,077 161,688 137,063
Government Income Fund 466,457 461,794 365,759
</TABLE>
For the fiscal year ended September 30, 1993, the Distributor voluntarily
limited amounts payable under the Distribution Plan to .30% of average daily net
assets for the Emerging Growth Fund and .32% for each of the other Funds other
than Short-Intermediate Bond Fund. The Distributor voluntarily limited the
amounts payable under the Distribution Plan to an annual rate of .31%, .30%,
.29%, .32%, .30% and .31% of average daily net assets for Growth Fund, Emerging
Growth Fund, Growth and Income Fund, Equity Strategy Fund, Balanced Fund and
Government Income Fund, respectively, for the fiscal year ended September 30
1994. The Distributor voluntarily limited the amounts payable under the
Distribution Plan to an annual rate of .32% of average daily net assets for each
of the Funds other than Short-Intermediate Bond Fund for fiscal 1995. The
Distributor has agreed to voluntarily limit the amounts payable under the
Distribution Plan to an annual rate
-28-
<PAGE>
of 0.32% of average daily net assets for each Fund (other than Bond Fund) for
fiscal 1996. The Distributor may terminate its voluntary fee limitation at any
time in its discretion.
Distribution fees for the fiscal year ended September 30, 1995, were used
by the Distributor as follows:
<TABLE>
<CAPTION>
Emerging Growth and Equity Balanced Government
Growth Fund Growth Fund Income Fund Strategy Fund Fund Income Fund
----------- ----------- ----------- ------------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Advertising $ -0- $ -0- $ -0- $ -0- $ -0- $ -0-
Printing and
mailing of
prospectuses
to other
than current
shareholders 34,532 43,303 13,521 12,279 8,566 22,860
Compensation to
underwriters (trail
fees to investment
executives) 517,977 649,539 202,812 184,184 128,497 342,899
Compensation to
dealers -0- -0- -0- -0- -0- -0-
Compensation to
sales personnel -0- -0- -0- -0- -0- -0-
Interest, carrying
or other financing
charge -0- -0- -0- -0- -0- -0-
Other (specify) -0- -0- -0- -0- -0- -0-
----------- ----------- ----------- ------------- --------- -----------
----------- ----------- ----------- ------------- --------- -----------
Total $552,509 $692,842 $216,333 $196,463 $137,063 $365,759
</TABLE>
UNDERWRITING AND DISTRIBUTION AGREEMENT
Pursuant to the Underwriting and Distribution Agreement, the Distributor
has agreed to act as the principal underwriter for the Funds in the sale and
distribution to the public of shares of the Funds, either through dealers or
otherwise. The Distributor has agreed to offer such shares for sale at all
times when such shares are available for sale and may lawfully be offered for
sale and sold. As compensation for its services, in addition to receiving its
distribution fees pursuant to the Distribution Plan discussed above, the
Distributor receives the sales load on sales of Fund shares set forth in the
Prospectus. The following table sets forth the aggregate dollar amount of
underwriting commissions paid by each of the Funds for the periods indicated and
the amount of such commissions retained by the Distributor. The Distributor
waived the payment of commissions for purchases of Growth and Income Fund shares
for the period from July 27, 1992 (commencement of operations) through
October 30, 1992.
-29-
<PAGE>
<TABLE>
<CAPTION>
Total Underwriting Commissions Underwriting Commissions Retained by Distributor
Fiscal year ended Fiscal year ended Fiscal year ended Fiscal year ended Fiscal year ended Fiscal year ended
Sept. 30, 1993 Sept. 30, 1994 Sept. 30, 1995 Sept. 30, 1993 Sept. 30, 1994 Sept. 30, 1995
-------------- -------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Growth Fund $ 629,626 $ 208,621 $ 133,585 $ 365,000 $ 121,000 $ 77,479
Emerging
Growth Fund 703,563 594,112 288,665 408,000 345,000 167,426
Growth and
Income Fund 302,763* 126,666 67,532 176,000 73,000 39,169
Equity Strategy
Fund 48,745 124,400 39,339 28,000 72,000 22,817
Balanced Fund 303,657 47,145 42,214 176,000 27,000 24,484
Government
Income Fund 1,254,145 439,716 111,536 727,000 255,000 64,691
Short-Intermed- N/A N/A 440** N/A N/A 255
iate Bond Fund
</TABLE>
- --------------
* From October 1, 1992 through October 31, 1992, the Distributor voluntarily
waived the sales charge for Growth and Income Fund.
** From April 10, 1995 through June 30, 1995, the Distributor voluntarily
waived the sales charge for Short-Intermediate Bond Fund.
For the same periods, in addition to retaining the underwriting commissions
set forth above, the Distributor received brokerage commissions from each Fund
as set forth below.
<TABLE>
<CAPTION>
Brokerage Commissions Paid to Distributor
----------------------------------------------------------
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
September 30, 1993 September 30, 1994 September 30, 1995
------------------ ------------------ ------------------
<S> <C> <C> <C>
Growth Fund $ 2,042 $ 6,36 $ 0
Emerging Growth Fund 2,508 1,200 15,314
Growth and Income Fund 0 0 0
Equity Strategy Fund 48,814 118,194 125,638
Balanced Fund 0 0 0
Government Income Fund 58,718 41,650 1,700
Short-Intermediate Bond Fund N/A N/A 0*
</TABLE>
- ----------------
* Period from April 10, 1995 (commencement of operations) to
September 30, 1995.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Investors Fiduciary Trust Company ("IFTC"), the transfer agent for the
Company, maintains certain omnibus shareholder accounts for each of the Funds.
Each such omnibus account represents the accounts of a number of individual
shareholders of a Fund. The Company has entered into a Shareholder Account
Servicing Agreement with the Distributor, pursuant to which the Distributor
provides certain transfer agent and dividend disbursing agent services for the
underlying individual shareholder accounts. Pursuant to such Agreement, the
Distributor has agreed to perform the usual and ordinary services of transfer
agent and dividend disbursing agent not performed by IFTC with respect to the
underlying individual shareholder accounts, including, without limitation, the
following: maintaining all shareholder accounts, preparing shareholder meeting
lists, mailing shareholder reports and prospectuses, tracking shareholder
accounts for blue sky and Rule l2b-1 purposes,
-30-
<PAGE>
withholding taxes on nonresident alien and foreign corporation accounts,
preparing and mailing checks for disbursement of income dividends and capital
gains distributions, preparing and filing U.S. Treasury Department Form 1099 for
all shareholders, preparing and mailing confirmation forms to shareholders and
dealers with respect to all purchases, exchanges and liquidations of series
shares and other transactions in shareholder accounts for which confirmations
are required, recording reinvestments of dividends and distributions in series
shares, recording redemptions of series shares, and preparing and mailing checks
for payments upon redemption and for disbursements to withdrawal plan holders.
As compensation for such services, the Distributor is paid an annual fee of
$6.00 per active shareholder account for each Fund (except $7.50 for Government
Income Fund and Short-Intermediate Bond Fund) (defined as an account that has
a balance of shares) and $1.60 per closed account for each Fund (defined as
an account that does not have a balance of shares but has had activity within
the past 12 months). Such fee is payable on a monthly basis at a rate of
1/12 of the annual per-account charge. Such fee covers all services listed
above, with the exception of preparing shareholder meeting lists and mailing
shareholder reports and prospectuses. These services, along with proxy
processing (if applicable) and other special service requests, are billable
as performed at a mutually agreed upon fee in addition to the annual fee
noted above, provided that such mutually agreed upon fee shall be fair and
reasonable in light of the usual and customary charges made by others for
services of the same nature and quality. During the fiscal year ended
September 30, 1995, Growth Fund paid $65,796, Growth and Income Fund paid
$31,041, Emerging Growth Fund paid $87,841, Equity Strategy Fund paid
$36,395, Balanced Fund paid $13,436, Government Income Fund paid $47,536, and
Short-Intermediate Bond Fund paid $51 to the Distributor under the Agreement.
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
The Adviser is responsible for decisions to buy and sell securities for the
Funds, the selection of broker-dealers to effect the transactions and the
negotiation of brokerage commissions, if any. In placing orders for securities
transactions, the primary criterion for the selection of a broker-dealer is the
ability of the broker-dealer, in the opinion of the Adviser, to secure prompt
execution of the transactions on favorable terms, including the reasonableness
of the commission and considering the state of the market at the time.
When consistent with these objectives, business may be placed with
broker-dealers who furnish investment research or services to the Adviser. Such
research or services include advice, both directly and in writing, as to the
value of securities; the advisability of investing in, purchasing or selling
securities; and the availability of securities, or purchasers or sellers of
securities; as well as analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts. This allows the Adviser to supplement its own investment research
activities and enables the Adviser to
-31-
<PAGE>
obtain the views and information of individuals and research staffs of many
different securities firms prior to making investment decisions for the Funds.
To the extent portfolio transactions are effected with broker-dealers who
furnish research services to the Adviser, the Adviser receives a benefit, not
capable of evaluation in dollar amounts, without providing any direct monetary
benefit to the Funds from these transactions. The Adviser believes that most
research services obtained by it generally benefit several or all of the
investment companies and private accounts which it manages, as opposed to solely
benefiting one specific managed fund or account. Normally, research services
obtained through managed funds or accounts investing in common stocks would
primarily benefit the managed funds or accounts which invest in common stock;
similarly, services obtained from transactions in fixed-income securities would
normally be of greater benefit to the managed funds or accounts which invest in
debt securities. The Funds will not purchase at a higher price or sell at a
lower price in connection with transactions effected with a director, acting as
principal, who furnishes research services to the Adviser than would be the case
if no weight were given by the Adviser to the dealer's furnishing of such
services.
The Adviser has not entered into any formal or informal agreements with any
broker-dealers, nor does it maintain any "formula" which must be followed in
connection with the placement of the Funds' portfolio transactions in exchange
for research services provided the Adviser, except as noted below. However, the
Adviser does maintain an informal list of broker-dealers, which is used from
time to time as a general guide in the placement of the Funds' business, in
order to encourage certain broker-dealers to provide the Adviser with research
services which the Adviser anticipates will be useful to it. Because the list
is merely a general guide, which is to be used only after the primary criterion
for the selection of broker-dealers (discussed above) has been met, substantial
deviations from the list are permissible and may be expected to occur. The
Adviser will authorize the Funds to pay an amount of commission for effecting a
securities transaction in excess of the amount of commission another
broker-dealer would have charged only if the Adviser determines in good faith
that such amount of commission is reasonable in relation to the value of the
brokerage and research services provided by such broker-dealer, viewed in terms
of either that particular transaction or the Adviser's overall responsibilities
with respect to the accounts as to which it exercises investment discretion.
Generally, the Funds pay higher than the lowest commission rates available.
Portfolio transactions for the Funds, including transactions in futures
contracts and options thereon, may be effected through the Distributor. In
determining the commissions to be paid to the Distributor in connection with
transactions effected on a securities exchange, it is the policy of the Funds
that such commissions will, in the judgment of the Adviser, subject to review by
the Board of Directors, be both (a) at least as favorable as those which would
be charged by other qualified brokers or futures commission merchants in
connection with comparable transactions involving similar securities or similar
futures contracts or options on futures
-32-
<PAGE>
contracts being purchased or sold on an exchange during a comparable period of
time, and (b) at least as favorable as commissions contemporaneously charged by
the Distributor on comparable transactions for its most favored comparable
unaffiliated customers. While the Funds do not deem it practicable and in their
best interest to solicit competitive bids for commission rates on each
transaction, consideration will regularly be given to posted commission rates as
well as to other information concerning the level of commissions charged on
comparable transactions by other qualified brokers and futures commission
merchants.
The Funds have paid the following brokerage commissions for the periods
indicated:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
September 30, 1993 September 30, 1994 September 30, 1995
------------------ ------------------ ------------------
<S> <C> <C> <C>
Growth Fund $ 279,166 $ 131,716 $ 451,281
Emerging Growth Fund 144,996 158,195 193,809
Growth and Income Fund 130,270 82,472 38,430
Equity Strategy Fund 101,014 305,429 325,156
Balanced Fund 43,829 34,191 16,115
Government Income Fund 105,453 65,620 12,750
Short-Intermediate Bond Fund N/A N/A -0-*
</TABLE>
- ------------
* Period from April 10, 1995 (commencement of operations) to September 30,
1995.
The following table sets forth additional information with respect to
brokerage commissions paid by each Fund during the fiscal year ended
September 30, 1995:
<TABLE>
<CAPTION>
% of Fund's aggregate
dollar amount of
transactions involving
% of Fund's payment of
Brokerage total brokerage commissions which
Total brokerage commissions paid commissions paid was effected through
commissions paid to Distributor to Distributor the Distributor
---------------- ---------------- ---------------- ---------------------
<S> <C> <C> <C> <C>
Growth Fund $ 451,281 $ -0- -0- -0-
Emerging Growth Fund 193,809 15,314 7.9 7.6
Growth and Income Fund 38,430 -0- -0- -0-
Equity Strategy Fund 325,156 125,638 38.6 45.0
Balanced Fund 16,115 -0- -0- -0-
Government Income Fund 15,300 1,700 11.1 11.1
Short-Intermediate
Bond Fund * -0- -0- -0- -0-
</TABLE>
- ---------------
* Period from April 10, 1995 (commencement of operations) to September 30,
1995.
From time to time the Funds may acquire the securities of their regular
brokers or dealers or parent companies of such brokers or dealers. Growth
Fund did not hold any such securities at fiscal year end and did not purchase
any such securities during fiscal 1995. Emerging Growth Fund held $4,393,125 of
securities issued by A.G. Edwards at fiscal year end. During the 1995 fiscal
year, Emerging Growth Fund purchased securities issued by A.G. Edwards.
Growth and Income Fund held $421,500 of securities issued by Bankers Trust and
$1,323,112 issued by J.P.
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<PAGE>
Morgan at fiscal year end. During the 1995 fiscal year, Growth and Income
Fund did not purchase any other such securities. Equity Strategy Fund held
$1,065,000 of securities issued A.G. Edwards, $541,625 of securities issued
by J. P. Morgan and $961,250 of securities issued by Morgan Stanley. During
the 1995 fiscal year, Equity Strategy Fund purchased securities issued by
A.G. Edwards, J.P. Morgan and Morgan Stanley. Balanced Fund held $590,064 of
securities issued by Lehman Brothers and $990,810 of securities issued by
Federal Home Loan Mortgage Corporation. During the 1995 fiscal year,
Balanced Fund purchased securities issued by Federal Home Loan Mortgage
Corporation. Government Income Fund did not hold any such securities at
fiscal year end and did not purchase any such securities during fiscal 1995.
Short-Intermediate Bond Fund did not hold any such securities at fiscal year
end and did not purchase any such securities during fiscal 1995.
OPTION TRADING LIMITS
The writing by the Funds of options on securities will be subject to
limitations established by each of the registered securities exchanges on which
such options are traded. Such limitations govern the maximum number of options
in each class which may be written by a single investor or group of investors
acting in concert, regardless of whether the options are written on the same or
different securities exchanges or are held or written in one or more accounts or
through one or more brokers. Thus, the number of options which one Fund may
write may be affected by options written by the other Funds and other series of
the Company and by other investment advisory clients of the Adviser. An
exchange may order the liquidation of positions found to be in excess of these
limits, and it may impose certain other sanctions.
CAPITAL STOCK AND OWNERSHIP OF SHARES
Each Fund's shares of common stock have a par value of $.01 per share, and
have equal rights to share in dividends and assets. The shares possess no
preemptive or conversion rights. Cumulative voting is not authorized. This
means that the holders of more than 50% of the shares voting for the election of
directors can elect 100% of the directors if they choose to do so, and in such
event the holders of the remaining shares will be unable to elect any directors.
As of November 27, 1995, no shareholder was known by the Funds to own
beneficially 5% or more of the outstanding shares of any of the Funds, except
Bond Fund. The directors and officers of all the Funds (except Bond Fund) as a
group owned less than 1% of the outstanding shares of each Fund as of such date.
The officers and directors of Bond Fund owned 46.1% of the outstanding shares.
With respect to Bond Fund, the following shareholders owned more than 5% of
the outstanding shares of such Fund as of November 24, 1995: Bruce D. Salvog
(an officer of the Fund), 2603 Woodbridge Road, Wayzata, MN 55391 (22.7%), David
M. Steele (an officer of the Fund), 15390 - 18th Avenue North, Apt. 1101,
Plymouth, MN 55447, (18.3%), Brian L. Patterson, 5000 Hampton Road, Golden
Valley, MN 55422 (12.3%), O. John Vetterli, 1865 Millcreek Way, Salt Lake
City, UT 84106
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<PAGE>
(7.1%), Robert F. Laplant and Lois M. Laplant, 71 Arbor Vitae Place, Verona, WI
53593 (5.1%) and Elaine L. Steele, 15390 - 18th Avenue North, Apt. 1101,
Plymouth, MN 55447 (5.1%).
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the public offering price of Fund shares is
summarized in the Prospectus in the text following the headings "How to Purchase
Shares--Public Offering Price" and "Valuation of Shares." The net asset value of
each Fund's shares is determined on each day on which the New York Stock
Exchange is open, provided that the net asset value need not be determined on
days when no Fund shares are tendered for redemption and no order for Fund
shares is received. The New York Stock Exchange is not open for business on the
following holidays (or on the nearest Monday or Friday if the holiday falls on a
weekend): New Year's Day, Presidents' Day, Good Friday, Memorial Day, July 4th,
Labor Day, Thanksgiving and Christmas.
The portfolio securities in which each Fund invests fluctuate in value, and
hence the net asset value per share of each Fund also fluctuates. On
September 30, 1995, the net asset value per share for each Fund other than
Short-Intermediate Bond Fund was calculated as follows:
Growth Fund
-----------
Net Assets ($172,485,282) = Net Asset Value Per Share
- ------------------------------------
Shares Outstanding (8,454,317) ($20.40)
Emerging Growth Fund
--------------------
Net Assets ($252,632,020) = Net Asset Value Per Share
- -------------------------------------
Shares Outstanding (9,738,623) ($25.94)
Growth and Income Fund
-----------------------
Net Assets ($73,430,985) = Net Asset Value Per Share
- ------------------------------------
Shares Outstanding (5,678,187) ($12.93)
Equity Strategy Fund
---------------------
Net Assets ($48,421,278) = Net Asset Value Per Share
- ------------------------------------
Shares Outstanding (2,487,738) ($19.46)
Balanced Fund
-------------
-35-
<PAGE>
Net Assets ($43,991,628) = Net Asset Value Per Share
- ------------------------------------
Shares Outstanding (3,202,512) ($13.74)
Government Income Fund
----------------------
Net Assets ($105,864,126) = Net Asset Value Per Share
- -------------------------------------
Shares Outstanding (11,775,112) ($8.99)
Short-Intermediate Bond Fund
----------------------------
Net Assets ($144,110) = Net Asset Value Per Share
- ---------------------------------
Shares Outstanding (14,283) ($10.09)
For each Fund a sales charge of 4.17% of the net asset value (in the case
of sales of less than $100,000) will be added to the net asset value per share
to determine the public offering price per share.
CALCULATION OF PERFORMANCE DATA
Advertisements and other sales literature for the Funds may refer to
"average annual total return" and "cumulative total return." Average annual
total return figures are computed by finding the average annual compounded rates
of return over the periods indicated in the advertisement that would equate the
initial amount invested to the ending redeemable value, according to the
following formula:
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of such
period.
This calculation deducts the maximum sales charge from the initial hypothetical
$1,000 investment, assumes all dividends and capital gains distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus, and includes all recurring fees, such as investment advisory
and management fees, charged to all shareholder accounts.
The following table sets forth the average annual total returns for each
Fund (except Bond Fund) for one year, five years and since inception for the
period ending September 30, 1995:
-36-
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Returns
----------------------------
1 Year 5 Years Since Inception
------ ------- ---------------
<S> <C> <C> <C>
Government Income Fund 10.27% 7.65% 6.88%*
Balanced Fund 16.91% 13.25% 8.19%*
Growth and Income Fund 23.66% N/A 9.59%**
Growth Fund 15.78% 14.95% 11.27%*
Emerging Growth Fund 29.30% 23.91% 18.46%***
Equity Strategy Fund 9.32% 15.71% 8.71%*
</TABLE>
- ------------
* Inception date: 3/16/87
** Inception date: 7/27/92
*** Inception date: 4/23/90
The Adviser has waived or paid certain expenses of some of the Funds,
thereby increasing total return and yield. These expenses may or may not waived
or paid in the future in the Adviser's discretion. Absent any voluntary expense
payments or waivers, the average annual total returns for one year, five years
and since inception for the period ending September 30, 1995 would have been:
<TABLE>
<CAPTION>
Average Annual Total Returns
----------------------------
(absent voluntary expense waivers)
1 Year 5 Years Since Inception
------ ------- ---------------
<S> <C> <C> <C>
Balanced Fund 16.74% 13.05% 7.88%*
Growth and Income Fund 23.56% N/A 9.46%**
Equity Strategy Fund 9.32% 15.37% 8.37%*
</TABLE>
- -------------
* Inception date: 3/16/87
** Inception date: 7/27/92
Cumulative total return is computed by finding the cumulative compounded
rate of return over the period indicated in the advertisement that would equate
the initial amount invested to the ending redeemable value, according to the
following formula:
-37-
<PAGE>
ERV-P
CTR = (-----) 100
P
Where: CTR = Cumulative total return;
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of such
period; and
P = initial payment of $1,000.
This calculation assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus and includes all recurring fees, such as investment advisory
and management fees, charged to all shareholder accounts.
The following table sets forth the cumulative total returns for the Funds
from inception to September 30, 1995:
<TABLE>
<CAPTION>
Cumulative Total Returns
Cumulative (absent voluntary
Total Returns expense waivers)
------------- ------------------------
<S> <C> <C>
Government Income Fund* 76.60% 76.60% +
Balanced Fund* 95.98% 95.67%
Growth and Income Fund** 33.79% 33.66%
Growth Fund* 149.10% 149.10%+
Emerging Growth Fund*** 151.38% 151.38%+
Equity Strategy Fund* 104.15% 103.81%
Short-Intermediate Bond Fund 2.17% (24.56)%
</TABLE>
* Inception date: 3/16/87
** Inception date: 7/27/92
*** Inception date: 4/23/90
**** Inception date: 4/10/95
+ There were no voluntary expense waivers or payments by the Adviser during
this period.
Balanced Fund, Government Income Fund, Short-Intermediate Bond Fund and
Growth and Income Fund may issue yield quotations. Yield is computed by
dividing the net investment income per share (as defined under Securities and
Exchange Commission rules and regulations) earned during the computation period
by the maximum offering price per share on the last day of the period, according
to the following formula:
-38-
<PAGE>
a-b 6
YIELD = 2[(--- + 1) - 1]
cd
Where: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends; and
d = the maximum offering price per share on the last day of the
period.
For the 30-day period ended September 30, 1995, Balanced Fund, Government
Income Fund, Growth and Income Fund and Short-Intermediate Bond Fund had yields
of 1.33%, 5.99%, 0.38% and 5.94%, respectively.
In addition to advertising total return and yield, comparative performance
information may be used from time to time in advertising the Funds' shares,
including data from Lipper Analytical Services, Inc. ("Lipper"), Morningstar,
other industry publications and other entities or organizations which track
the performance of investment companies. Performance in function for the
Funds may also be compared to various unmanaged indices, such as the Lehman
Brothers Government Mortgage-Backed Securities Index, the Merrill Lynch 1-5
Year Government Corporate Index, the S&P 500 Index, Nasdaq Composite Index,
Wilshire 5000 Index, Russell 2000 Index and Value Line Index. Unmanaged
indices do not reflect deductions for administrative and management costs and
expenses. The performance of Growth Fund, Emerging Growth Fund, Growth and
Income Fund, Equity Strategy Fund and Balanced Fund may be compared,
respectively to the performance of Growth Funds, Small Company Growth Funds,
Growth and Income Funds, Capital Appreciation Funds and Balanced Funds as
reported by Lipper. The performance of Bond Fund may be compared to the
performance of Short U.S. Government Funds and Short Investment Grade Debt
Funds, as reported by Lipper, and to the Lehman Brothers Mutual Fund 1-5 Year
Government/Corporate Index and the Merrill Lynch 1-5 Year
Government/Corporate Index. The performance of Government Fund may be
compared to the performance of U.S. Government Funds, as reported by Lipper
and the Lehman Brothers Government Mortgage-Backed Securities Index.
PURCHASE OF SHARES
An investor may qualify for a reduced sales charge immediately by signing a
nonbinding Letter of Intent stating the investor's intention to invest within a
13-month period, beginning not earlier than 90 days prior to the date of
execution of the Letter, a specified amount which, if made at one time, would
qualify for a reduced sales charge. Reinvested dividends will be treated as
purchases of additional shares. Any redemptions made during the term of the
Letter of Intent will be subtracted from the amount of purchases in determining
whether the Letter of Intent has been completed. During the term of a Letter of
Intent, IFTC will hold
-39-
<PAGE>
shares representing 5% of the amount that the investor intends to invest during
the 13-month period in escrow for payment of a higher sales charge if the full
amount indicated in the Letter of Intent is not purchased. Dividends on the
escrowed shares will be paid to the shareholder. The escrowed shares will be
released when the full amount indicated has been purchased. If the full
indicated amount is not purchased within the 13-month period, the investor will
be required to pay, either in cash or by liquidating escrowed shares, an amount
equal to the difference in the dollar amount of sales charge actually paid and
the amount of sales charge the investor would have paid on his or her aggregate
purchases if the total of such purchases had been made at a single time.
REDEMPTION OF SHARES
GENERAL
Redemption of shares, or payment, may be suspended at times (a) when the
New York Stock Exchange is closed for other than customary weekend or holiday
closings, (b) when trading on said Exchange is restricted, (c) when an emergency
exists, as a result of which disposal by the Funds of securities owned by them
is not reasonably practicable, or it is not reasonably practicable for the Funds
fairly to determine the value of their net assets, or (d) during any other
period when the Securities and Exchange Commission, by order, so permits,
provided that applicable rules and regulations of the Securities and Exchange
Commission shall govern as to whether the conditions prescribed in (b) or (c)
exist.
Shareholders who purchased shares through a broker-dealer other than the
Distributor may also redeem such shares by written request to IFTC at the
address set forth in the Prospectus. To be considered in proper form, written
requests for redemption should indicate the dollar amount or number of shares to
be redeemed, refer to the shareholder's Fund account number, and give either a
social security or tax identification number. The request should be signed in
exactly the same way the account is registered. If there is more than one owner
of the shares, all owners must sign. If shares to be redeemed have a value of
$10,000 or more or redemption proceeds are to be paid to someone other than the
shareholder at the shareholder's address of record, the signature(s) must be
guaranteed by an "eligible guarantor institution," which includes a commercial
bank that is a member of the Federal Deposit Insurance Corporation, a trust
company, a member firm of a domestic stock exchange, a savings association or a
credit union that is authorized by its charter to provide a signature guarantee.
IFTC may reject redemption instructions if the guarantor is neither a member of
nor a participant in a signature guarantee program. Signature guarantees by
notaries public are not acceptable. The purpose of a signature guarantee is to
protect shareholders against the possibility of fraud. Further documentation
will be requested from corporations, administrators, executors, personal
representatives, trustees and custodians. Redemption requests given by
facsimile will not be accepted. Unless other instructions are given in
-40-
<PAGE>
proper form, a check for the proceeds of the redemption will be sent to the
shareholder's address of record.
REINSTATEMENT PRIVILEGE
A shareholder who has redeemed shares of a Fund may reinvest all or part of
the redemption proceeds in shares of any Fund within 30 days without payment of
an additional sales charge. The Distributor will refund to any shareholder a
pro rata amount of any contingent deferred sales charge paid by such shareholder
in connection with a redemption of Fund shares if and to the extent that the
redemption proceeds are reinvested within 30 days of such redemption in any
mutual fund managed by the Adviser. Such refund will be based upon the ratio of
the net asset value of shares purchased in the reinvestment to the net asset
value of shares redeemed. Reinvestments will be allowed at net asset value
without the payment of a front-end sales charge, irrespective of the amounts of
the reinvestment, but shall be subject to the same pro rata contingent deferred
sales charge that was applicable to the earlier investment; however, the period
during which the contingent deferred sales charge shall apply on the newly
issued shares shall be the period applicable to the redeemed shares extended by
the number of days between the redemption and the reinvestment dates
(inclusive).
SYSTEMATIC WITHDRAWAL PLAN
To establish a Systematic Withdrawal Plan for any Fund and receive regular
periodic payments, an account must have a value of $5,000 or more. A request to
establish a Systematic Withdrawal Plan must be submitted in writing to an
investor's Piper Jaffray Investment Executive or other broker-dealer. There are
no service charges for maintenance; the minimum amount that may be withdrawn
each period is $100. (This is merely the minimum amount allowed and should not
be interpreted as a recommended amount.) The holder of a Systematic Withdrawal
Plan will have any income dividends and any capital gains distributions
reinvested in full and fractional shares at net asset value. To provide funds
for payment, the appropriate Fund will redeem as many full and fractional shares
as necessary at the redemption price, which is net asset value. Redemption of
shares may reduce or possibly exhaust the shares in your account, particularly
in the event of a market decline. As with other redemptions, a redemption to
make a withdrawal payment is a sale for federal income tax purposes. Payments
made pursuant to a Systematic Withdrawal Plan cannot be considered as actual
yield or income since part of such payments may be a return of capital.
The maintenance of a Systematic Withdrawal Plan for a Fund concurrent with
purchases of additional shares of that Fund would be disadvantageous because of
the sales commission involved in the additional purchases. A confirmation of
each transaction showing the sources of the payment and the share and cash
balance remaining in the account will be sent. The plan may be terminated on
written notice by the shareholder or the appropriate Fund, and it will terminate
-41-
<PAGE>
automatically if all shares are liquidated or withdrawn from the account or upon
the death or incapacity of the shareholder. The amount and schedule of
withdrawal payments may be changed or suspended by giving written notice to your
Piper Jaffray Investment Executive or other broker-dealer at least seven
business days prior to the end of the month preceding a scheduled payment.
TAXATION
Each Fund intends to qualify each year as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). To qualify as a regulated investment company a Fund must, among other
things, receive at least 90% of its gross income each year from dividends,
interest, gains from the sale or other disposition of securities and certain
other types of income, including income from options and futures contracts.
The Code also forbids a regulated investment company from earning 30% or
more of its gross income from the sale or other disposition of securities held
less than three months. This restriction may limit the extent to which a Fund
may purchase futures contracts and options. To the extent the Funds engage in
short-term trading and enter into futures and options transactions, the
likelihood of violating this 30% requirement is increased.
The Code requires a regulated investment company to diversify its holdings.
The Internal Revenue Service has not made its position clear regarding the
treatment of futures contracts and options for purposes of the diversification
test, and the extent to which a Fund can buy or sell futures contracts and
options may be limited by this requirement.
If for any taxable year one of the Funds does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to shareholders, and
such distributions will be taxable to the Fund's shareholders as ordinary
dividends to the extent of the Fund's current or accumulated earnings and
profits.
Each Fund will be subject to a nondeductible excise tax equal to 4% of the
excess, if any, of the amount required to be distributed pursuant to the Code
for each calendar year over the amount actually distributed. No amount of such
excess, however, will be subject to the excise tax to the extent it is subject
to the corporate-level income tax. In order to avoid the imposition of this
excise tax, each Fund generally must declare dividends by the end of a calendar
year representing 98% of the Fund's ordinary income for the calendar year and
98% of its capital gain net income (both long-term and short-term capital gains)
for the 12-month period ending October 31 of the calendar year.
Gain or loss on futures contracts and options is taken into account when
realized by entering into a closing transaction or by exercise. In addition,
with
-42-
<PAGE>
respect to many types of futures contracts and options held at the end of a
Fund's taxable year, unrealized gain or loss on such contracts is taken into
account at the then current fair market value thereof under a special
"marked-to-market, 60/40 system," and such gain or loss is recognized for tax
purposes. The gain or loss from such futures contracts and options (including
premiums on certain options that expire unexercised) is treated as 60% long-term
and 40% short-term capital gain or loss, regardless of their holding period.
The amount of any capital gain or loss actually realized by a Fund in a
subsequent sale or other disposition of such futures contracts will be adjusted
to reflect any capital gain or loss taken into account by the Fund in a prior
year as a result of the constructive sale under the "marked-to-market, 60/40
system." Notwithstanding the rules described above, with respect to certain
futures contracts, a Fund may make an election that will have the effect of
exempting all or a part of those identified futures contracts from being treated
for federal income tax purposes as sold on the last business day of the Fund's
taxable year. All or part of any loss realized by the Fund on any closing of a
futures contract may be deferred until all of the Fund's offsetting positions
with respect to the futures contract are closed.
Ordinarily, distributions and redemption proceeds earned by a Fund
shareholder are not subject to withholding of federal income tax. However, 31%
of a Fund shareholder's distributions and redemption proceeds must be withheld
if a Fund shareholder fails to supply the Fund or its agent with such
shareholder's taxpayer identification number or if a Fund shareholder who is
otherwise exempt from withholding fails to properly document such shareholder's
status as an exempt recipient.
Any loss on the sale or exchange of shares of a Fund generally will be
disallowed to the extent that a shareholder acquires or contracts to acquire
shares of the same Fund within 30 days before or after such sale or exchange.
In addition, if a shareholder disposes of shares within 90 days of acquiring
such shares and purchases other shares of the Company or of another mutual fund
managed by the Adviser at a reduced sales charge, the shareholder's tax basis
for determining gain or loss on the shares which are disposed of is reduced by
the lesser of the amount of the sales charge that was paid when the shares
disposed of were acquired or the amount by which the sales charge for the new
shares is reduced. If a shareholder's tax basis is so reduced, the amount of
the reduction is treated as part of the tax basis of the new shares.
Additionally, distributions may be subject to state and local income taxes,
and the treatment thereof may differ from the federal income tax consequences
discussed above.
-43-
<PAGE>
FINANCIAL STATEMENTS
The audited financial statements and supplementary schedules for the Funds
as of September 30, 1995, have been incorporated by reference into this
Statement of Additional Information from the Funds' annual report to
shareholders in reliance on the report of KPMG Peat Marwick LLP, 4200 Norwest
Center, Minneapolis, Minnesota 55402, independent auditors of the Funds, given
on the authority of such firm as experts in accounting and auditing.
GENERAL INFORMATION
The Board of Directors may, without shareholder approval, create and issue
one or more additional classes of shares within each Fund, as well as within any
series of the Company created in the future. All classes of shares in a Fund
would be identical except that each class of shares would be available through a
different distribution channel and certain classes might incur different
expenses for the provision of distribution services or the provision of
shareholder services or administration assistance by institutions. Shares of
each class would share equally in the gross income of a series, but any
variation in expenses would be charged separately against the income of the
particular class incurring such expenses. This would result in variations in
net investment income accrued and dividends paid by and in the net asset value
of the different classes of a series. This ability to create multiple classes
of shares within each series of the Company will allow the Company in the future
the flexibility to better tailor its methods of marketing, administering and
distributing shares of the Funds to the needs of particular investors and to
allocate expenses related to such marketing, administration and distribution
methods to the particular classes of shareholders of the Fund incurring such
expenses.
On an issue affecting only a particular series, the shares of the affected
series vote separately. An example of such an issue would be a fundamental
investment restriction pertaining to only one series. In voting on the
Investment Advisory and Management Agreement (the "Agreement"), approval of the
Agreement by the shareholders of a particular series would make the Agreement
effective as to that series whether or not it had been approved by the
shareholders of the other series.
The assets received by the Company for the issue or sale of shares of each
series, and all income, earnings, profits and proceeds thereof, subject only to
the rights of creditors, are allocated to such series, and constitute the
underlying assets of such series. The underlying assets of each series are
required to be segregated on the books of account, and are to be charged with
the expenses in respect to such series and with a share of the general expenses
of the Company. Any general expenses of the Company not readily identifiable as
belonging to a particular series shall be allocated among the series based upon
the relative net assets of the series at the time such expenses were accrued.
-44-
<PAGE>
Minnesota has enacted legislation which authorizes corporations to
eliminate or limit the personal liability of a director to the corporation or
its shareholders for monetary damages for breach of the fiduciary duty of "care"
(the duty to act with the care an ordinarily prudent person in a like position
would exercise under similar circumstances). Minnesota law does not, however,
permit a corporation to eliminate or limit the liability of a director (a) for
any breach of the director's duty of "loyalty" to the corporation or its
shareholders (the duty to act in good faith and in a manner reasonably believed
to be in the best interest of the corporation), (b) for acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of law,
(c) for authorizing a dividend, stock repurchase or redemption or other
distribution in violation of Minnesota law or for violation of certain
provisions of Minnesota securities laws, or (d) for any transaction from which
the director derived an improper personal benefit. Minnesota law does not
permit elimination or limitation of a director's liability under the 1933 Act or
the Securities Exchange Act of 1934, and the 1940 Act prohibits elimination or
limitation of a director's liability for acts involving willful malfeasance, bad
faith, gross negligence or reckless disregard of the duties of a director. The
Articles of Incorporation of Piper Global limit the liability of directors to
the fullest extent permitted by Minnesota law and the 1940 Act.
PENDING LITIGATION
Complaints have been brought in federal and state court relating to one
open-end and twelve closed-end investment companies managed by the Adviser and
to two open-end funds for which the Adviser has acted as sub-adviser. An
Amended Consolidated Class Action Complaint was filed on October 5, 1994 in the
United States District Court, District of Minnesota, against the Institutional
Government Income Portfolio (a series of the Company), the Adviser, the
Distributor, William H. Ellis and Edward J. Kohler alleging certain violations
of federal and state securities laws, including the making of materially
misleading statements in the prospectus, common law negligent misrepresentation
and breach of fiduciary duty. This is a consolidated putative class action in
which claims brought by 11 persons or entities have been consolidated under the
title IN RE: PIPER FUNDS INC. INSTITUTIONAL GOVERNMENT INCOME PORTFOLIO
LITIGATION. The named plaintiffs in the complaint purport to represent a class
of individuals and groups who purchased shares of Institutional Government
Income Portfolio during the putative class period of July 1, 1991 through May 9,
1994. The named plaintiffs and defendants have entered into a settlement
agreement which has received preliminary approval from the Court. The terms of
the settlement are set forth in a Settlement Agreement dated July 20, 1995 (as
modified by an Addendum filed on July 28, 1995). The Settlement Agreement
contained a provision which would have permitted the defendants to cancel the
Agreement if shareholders who had incurred a cumulative "Loss" (as defined under
the Agreement) of more than 10% of the Loss sustained by the entire class had
opted out. The deadline for requesting exclusion from the class has passed, and
the Loss sustained by persons requesting exclusion is less than 10%. If
granted final approval by the Court, the Settlement Agreement would provide up
to
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approximately $70 million, together with interest earned, less certain
disbursements and attorneys fees as approved by the Court, to class members in
payments scheduled over approximately three years. Such payments would be made
by Piper Jaffray Companies Inc. and the Adviser and would not be an obligation
of the Institutional Government Income Portfolio or the Company.
Six additional complaints, which are based on claims similar to those
asserted in the first complaint, have been brought relating to the Institutional
Government Income Portfolio series of the Company. The first of such complaints
was filed in the same court against the same parties on October 21, 1994, by
Eltrax Systems, Inc. A second additional complaint was filed against the
Company, the Adviser, the Distributor and Piper Jaffray Companies Inc. on
September 30, 1994 in the United States District Court, District of Colorado.
Plaintiffs in the complaint are Gary Pashel and Gregg S. Hayutin, Trustees of
the Mae Pashel Trust; Mae Pashel, individually; Gary Pashel and Michael H.
Feinstein, Trustees of the Robert Hayutin Insurance Trust; and Dennis E.
Hayutin, Gregg S. Hayutin and Gary Pashel, Trustees of the Marie Ellen Hayutin
Trust. The third additional complaint, a putative class action, was filed on
November 1, 1994 in the United States District Court, District of Idaho by the
Idaho Association of Realtors, Inc., a non-profit Idaho corporation. The
complaint was filed against the Institutional Government Income Portfolio series
of the Company, the Adviser, the Distributor, Piper Jaffray Companies Inc.,
William H. Ellis and Edward J. Kohler. The fourth complaint, also a putative
class action, was filed in the United States District Court for the District of
Minnesota, Third Division, on January 25, 1995. The Complaint was brought by
Louise S. Maher and John A. Raetz against the Company, the Institutional
Government Income Portfolio series of the Company, the Adviser, the Distributor,
Piper Jaffray Companies Inc., William H. Ellis and Edward J. Kohler. The fifth
complaint was brought on April 11, 1995, and in the future may be filed in the
Minnesota State District Court, Hennepin County. The plaintiff, Frank R.
Berman, Trustee of Frank R. Berman Professional CP Pension Plan Trust, sued
individually and not on behalf of any putative class. Defendants are the
Distributor, the Company, Morton Silverman and Worth Bruntjen. A sixth
complaint relating to the Institutional Government Income Portfolio series of
the Company was filed on June 22, 1995 in the Montana Thirteenth Judicial
District Court, Yellowstone County by Beverly Muth against the Distributor and
Teresa L. Darnielle. In addition to the above complaints, a number of actions
have been commenced in arbitration by individual investors in the Institutional
Government Income Portfolio. The complaints discussed in this paragraph
generally have been consolidated with the IN RE: PIPER FUNDS INC. action for
pretrial purposes and the arbitrations and litigation have been stayed pending
entry of an order by the Court permitting those class members who have requested
exclusion to proceed with their actions.
A complaint was filed by Herman D. Gordon on October 20, 1994, in the
United States District Court, District of Minnesota, against American Adjustable
Rate Term Trust Inc.--1998, American Adjustable Rate Term Trust Inc.--1999, the
Adviser, the Distributor, Piper Jaffray Companies Inc., Benjamin Rinkey, Jeffrey
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Griffin, Charles N. Hayssen and Edward J. Kohler. A second complaint was filed
by Frank Donio, I.R.A. and other plaintiffs on April 14, 1995, in the United
States District Court, District of Minnesota, against American Adjustable Rate
Term Trust Inc.--1996, American Adjustable Rate Term Trust Inc.--1997, American
Adjustable Rate Term Trust Inc.--1998, American Adjustable Rate Term Trust Inc.-
- -1999, the Adviser, the Distributor, Piper Jaffray Companies Inc. and certain
associated individuals. Plaintiffs in both actions filed a Consolidated Amended
Class Action Complaint on May 23, 1995 and by Order dated June 8, 1995, the
Court consolidated the two putative class actions. The consolidated amended
complaint, which purports to be a class action, alleges certain violations of
federal and state securities laws, breach of fiduciary duty and negligent
misrepresentation.
A complaint was filed by Carson H. Bradley on February 3, 1995 in the Sixth
Judicial District of the State of Idaho against American Government Income Fund
Inc., American Government Income Portfolio Inc., the Adviser, the Distributor
and Worth Bruntjen. The complaint alleges negligent misrepresentation, breach
of fiduciary duty and breach of contract. The action has been removed to
Federal District Court for the District of Idaho.
A complaint was filed by Gary E. Nelson on June 28, 1995 in the United
States District Court for the Western District of Washington at Seattle against
American Strategic Income Portfolio Inc. - II, the Adviser, the Distributor,
Piper Jaffray Companies Inc., Worth Bruntjen, Charles N. Hayssen, Michael
Jansen, William H. Ellis and Edward J. Kohler. A second complaint was filed by
the same individual in the same court on July 12, 1995 against American
Opportunity Income Fund Inc., the Adviser, the Distributor, Piper Jaffray
Companies Inc., Worth Bruntjen, Charles N. Hayssen, Michael Jansen, William H.
Ellis and Edward J. Kohler. On September 7, 1995, Christian Fellowship
Foundation Peace United Church of Christ, Gary E. Nelson and Lloyd Schmidt filed
an amended complaint purporting to be a class action in the United States
District Court for the District of Washington. The complaint was filed against
American Government Income Portfolio, Inc., American Government Income Fund
Inc., American Government Term Trust, Inc., American Strategic Income Portfolio
Inc., American Strategic Income Portfolio Inc. -- II, American Strategic Income
Portfolio Inc. -- III, American Opportunity Income Fund Inc., American Select
Portfolio Inc., Piper Jaffray Companies Inc., Piper Jaffray Inc., the Adviser
and certain associated individuals. By Order filed October 5, 1995, the
complaints were consolidated. The amended complaint alleges generally that the
prospectus and financial statements of each investment company were false and
misleading. Specific violations of various federal securities laws are alleged
with respect to each investment company. The complaint also alleges that the
defendants violated the Racketeer Influenced and Corrupt Organizations Act, the
Washington State Securities Act and the Washington Consumer Protection Act.
Complaints have also been filed relating to two open-end funds for which
the Adviser has acted as sub-adviser, Managers Intermediate Mortgage Fund and
Managers Short Government Fund. A complaint was filed on September 26, 1994 in
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the United States District Court, District of Connecticut, by Florence R. Hosea,
Bobby W. Hosea, Getrud B. Dale and Peter M. Dale, Andrew Poffel and Diane Poffel
as tenants by the Entireties, Myrone Sarone, Donna M. DiPalo, Bernard B. Geltner
and Gail Geltner and Paul Delman. The complaint was filed against The Managers
Funds, the Managers Funds, L.P., Robert P. Watson, the Adviser, the Distributor,
an individual associated with the Adviser, Evaluation Associates, Inc. and
Managers Intermediate Mortgage Fund. The complaint, which is a putative class
action, alleges certain violations of federal securities laws, including the
making of false and misleading statements in the prospectus, and alleges
negligent misrepresentation, breach of fiduciary duty and common law fraud. A
similar complaint was filed as a putative class action in the same court on
November 4, 1994. The complaint was filed by Karen E. Kopelman against The
Managers Fund, The Managers Funds, L.P., Robert P. Watson, the Adviser, the
Distributor, Worth Bruntjen, Evaluation Associates, Inc. and Managers
Intermediate Mortgage Fund. The two putative class actions were consolidated by
court order on December 13, 1994. Plaintiffs filed an Amended and Restated
Complaint on July 19, 1995. A complaint relating to the Managers Short
Government Fund was filed on November 18, 1994 in the United States District
Court, District of Minnesota. The complaint was filed by Robert Fleck as a
putative class action against The Managers Funds, The Managers Funds, L.P., the
Adviser, the Distributor, Worth Bruntjen, Evaluation Associates, Inc., Robert P.
Watson, John E. Rosati, William M. Graulty, Madeline H. McWhinney, Steven J.
Pasggioli, Thomas R. Schneeweis and Managers Short Government Fund, F/K/A/
Managers Short Government Income Fund. The complaint alleges certain violations
of federal securities laws, including the making of false and misleading
statements in the prospectus, and negligent misrepresentation.
The Adviser and Distributor do not believe that the settlement reached in
connection with the first lawsuit described above, or any other of the above
lawsuits, will have a material adverse effect upon their ability to perform
under their agreements with the Funds, and they intend to defend the remaining
lawsuits vigorously.
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APPENDIX A
CORPORATE BOND, PREFERRED STOCK AND
COMMERCIAL PAPER RATINGS
COMMERCIAL PAPER RATINGS
STANDARD & POOR'S RATINGS SERVICES. Commercial paper ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues assigned the A rating are regarded as having the
greatest capacity for timely payment. Issues in this category are further
refined with designation 1, 2 and 3 to indicate the relative degree of safety.
The "A-1" designation indicates that the degree of safety regarding timely
payment is very strong. Those issues determined to possess overwhelming safety
characteristics will be denoted with a plus sign designation.
MOODY'S INVESTORS SERVICE, INC. Moody's commercial paper ratings are
opinions of the ability of the issuers to repay punctually promissory
obligations not having an original maturity in excess of nine months. Moody's
makes no representation that such obligations are exempt from registration under
the Securities Act of 1933, nor does it represent that any specific note is a
valid obligation of a rated issuer or issued in conformity with any applicable
law. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime-1 Superior capacity for repayment of short-term promissory
obligations
Prime-2 Strong capacity for repayment of short-term promissory
obligations
Prime-3 Acceptable capacity for repayment of short-term promissory
obligations
CORPORATE BOND RATINGS
STANDARD & POOR'S RATINGS SERVICES. Standard & Poor's ratings for
corporate bonds have the following definitions:
Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in a small degree.
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Debt rated "A" has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
MOODY'S INVESTORS SERVICE, INC. Moody's ratings for corporate bonds
include the following:
Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Bonds which are 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. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities.
Bonds which are rated "A" possess many favorable attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Bonds which are rated "Baa" are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
PREFERRED STOCK RATING
STANDARD & POOR'S RATINGS SERVICES. Standard & Poor's ratings for
preferred stock have the following definitions:
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An issue rated "AAA" has the highest rating that may be assigned by
Standard & Poor's to a preferred stock issue and indicates an extremely strong
capacity to pay the preferred stock obligations.
A preferred stock issue rated "AA" also qualifies as a high-quality fixed
income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated "AAA."
An issue rated "A" is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
An issue rated "BBB" is regarded as backed by an adequate capacity to pay
the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the "A" category.
MOODY'S INVESTORS SERVICE, INC. Moody's ratings for preferred stock
include the following:
An issue which is rated "aaa" is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
An issue which is rated "aa" is considered a high grade preferred stock.
This rating indicates that there is reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
An issue which is rate "a" is considered to be an upper medium grade
preferred stock. While risks are judged to be somewhat greater than in the
"aaa" and "aa" classifications, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
An issue which is rated "baa" is considered to be medium grade, neither
highly protected nor poorly secured. Earnings and asset protection appear
adequate at present but may be questionable over any great length of time.
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APPENDIX B
INTEREST RATE FUTURES CONTRACTS AND RELATED OPTIONS
INTEREST RATE FUTURES CONTRACTS
Government Income Fund, Balanced Fund and Growth and Income Fund may
purchase and sell interest rate futures contracts and options thereon. An
interest rate futures contract creates an obligation on the part of the seller
(the "short") to deliver, and an offsetting obligation on the part of the
purchaser (the "long") to accept delivery of, the type of financial instrument
called for in the contract in a specified delivery month for a stated price. A
majority of transactions in interest rate futures contracts, however, do not
result in the actual delivery of the underlying instrument, but are settled
through liquidation, i.e., by entering into an offsetting transaction. The
interest rate futures contracts to be traded by the Funds are traded only on
commodity exchanges--known as "contract markets"--approved for such trading by
the Commodity Futures Trading Commission and must be executed through a futures
commission merchant or brokerage firm which is a member of the relevant contract
market. These contract markets, through their clearing corporations, guarantee
that the contracts will be performed. Presently, futures contracts are based
upon such debt securities as long-term U.S. Treasury bonds, Treasury notes,
Government National Mortgage Association modified pass-through mortgage-backed
securities, three-month U.S. Treasury bills and bank certificates of deposit.
In addition, futures contracts are traded in the Moody's Investment Grade
Corporate Bond Index and the Long Term Corporate Bond Index.
Although most futures contracts by their terms call for actual delivery or
acceptance of commodities or securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery.
Closing out a short position is effected by purchasing a futures contract for
the same aggregate amount of the specific type of financial instrument or
commodity and the same delivery month. If the price of the initial sale of the
futures contract exceeds the price of the offsetting purchase, the seller is
paid the difference and realizes a gain. Conversely, if the price of the
offsetting purchase exceeds the price of the initial sale, the trader realizes a
loss. Similarly, the closing out of a long position is effected by the
purchaser entering into a futures contract sale. If the offsetting sale price
exceeds the purchase price, the purchaser realizes a gain and, if the purchase
price exceeds the offsetting sale price, the purchaser realizes a loss.
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the Adviser and the relevant contract
market, which varies but is generally about 5% of the contract amount, must be
deposited with the custodian in the name of the broker. This amount is known as
"initial margin," and represents a "good faith" deposit assuring the performance
of both the purchaser and the seller under the futures contract. Subsequent
payments to and from the broker, known as "variation margin," are required to be
made on a daily
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basis as the price of the futures contract fluctuates, making the long or short
positions in the futures contract more or less valuable, a process known as
"marking to the market." Prior to the settlement date of the futures contract,
the position may be closed out by taking an opposite position which will operate
to terminate the position in the futures contract. A final determination of
variation margin is then made, additional cash is required to be paid to or
released by the broker, and the purchaser realizes a loss or gain. In addition,
a commission is paid on each completed purchase and sale transaction.
The purpose of the acquisition or sale of a futures contract by a Fund, as
the holder of long-term fixed-income securities, is to hedge against
fluctuations in rates on such securities without actually buying or selling
long-term fixed-income securities. For example, if a Fund owns long-term bonds
and interest rates are expected to increase, the Fund might sell futures
contracts. Such a sale would have much the same effect as selling some of the
long-term bonds in the Fund's portfolio. If interest rates increase as
anticipated by the Adviser, the value of certain long-term securities in the
portfolio would decline, but the value of the Fund's futures contracts would
increase at approximately the same rate, thereby keeping the net asset value of
the Fund from declining as much as it otherwise would have. Of course, since
the value of the securities in the Fund's portfolio will far exceed the value of
the futures contracts sold by the Fund, an increase in the value of the futures
contracts could only mitigate--but not totally offset--the decline in the value
of the portfolio.
Similarly, when it is expected that interest rates may decline, futures
contracts could be purchased to hedge against a Fund's anticipated purchases of
long-term fixed-income securities, such as bonds, at higher prices. Since the
rate of fluctuation in the value of futures contracts should be similar to that
of long-term bonds, the Fund could take advantage of the anticipated rise in the
value of long-term bonds without actually buying them until the market had
stabilized. At that time, the futures contracts could be liquidated and the
Fund's cash could then be used to buy long-term bonds on the cash market. The
Fund could accomplish similar results by selling bonds with long maturities and
investing in bonds with short maturities when interest rates are expected to
increase or by buying bonds with long maturities and selling bonds with short
maturities when interest rates are expected to decline. However, in
circumstances when the market for bonds may not be as liquid as that for futures
contracts, the ability to invest in such contracts could enable the Fund to
react more quickly to anticipated changes in market conditions or interest
rates.
OPTIONS ON INTEREST RATE FUTURES CONTRACTS
The Funds may purchase and sell put and call options on interest rate
futures contracts which are traded on a United States exchange or board of trade
as a hedge against changes in interest rates, and will enter into closing
transactions with respect to such options to terminate existing positions. An
interest rate futures contract provides for the future sale by one party and the
purchase by the other party of a
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certain amount of a specific financial instrument (debt security) at a specified
price, date, time and place. An option on an interest rate futures contract, as
contrasted with the direct investment in such a contract, gives the purchaser
the right, in return for the premium paid, to assume a position in an interest
rate futures contract at a specified exercise price at any time prior to the
expiration date of the option. Options on interest rate futures contracts are
similar to options on securities, which give the purchaser the right, in return
for the premium paid, to purchase or sell securities. A call option gives the
purchaser of such option the right to buy, and obliges its writer to sell, a
specified underlying futures contract at a specified exercise price at any time
prior to the expiration date of the option. A purchaser of a put option has the
right to sell, and the writer has the obligation to buy, such contract at the
exercise price during the option period. Upon exercise of an option, the
delivery of the futures position by the writer of the option to the holder of
the option will be accompanied by delivery of the accumulated balance in the
writer's future margin account, which represents the amount by which the market
price of the futures contract exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option on the futures contract.
If an option is exercised on the last trading day prior to the expiration date
of the option, the settlement will be made entirely in cash equal to the
difference between the exercise price of the option and the closing price of the
interest rate futures contract on the expiration date. A Fund will pay a
premium for purchasing options on interest rate futures contracts. Because the
value of the option is fixed at the point of sale, there are no daily cash
payments to reflect changes in the value of the underlying contract; however,
the value of the option does change daily and that change would be reflected in
the net asset value of the Fund. In connection with the writing of options on
interest rate futures contracts, a Fund will make initial margin deposits and
make or receive maintenance margin payments that reflect changes in the market
value of such options. Premiums received from the writing of an option are
included in initial margin deposits.
PURCHASE OF PUT OPTIONS ON FUTURES CONTRACTS. A Fund will purchase put
options on interest rate futures contracts if the Adviser anticipates a rise in
interest rates. Because the value of an interest rate futures contract moves
inversely in relation to changes in interest rates, a put option on such a
contract becomes more valuable as interest rates rise. By purchasing put
options on interest rate futures contracts at a time when the Adviser expects
interest rates to rise, a Fund will seek to realize a profit to offset the loss
in value of its portfolio securities.
PURCHASE OF CALL OPTIONS ON FUTURES CONTRACTS. A Fund will purchase call
options on interest rate futures contracts if the Adviser anticipates a decline
in interest rates. The purchase of a call option on an interest rate futures
contract represents a means of obtaining temporary exposure to market
appreciation at limited risk. Because the value of an interest rate futures
contract moves inversely in relation to changes to interest rates, a call option
on such a contract becomes more valuable as interest rates decline. A Fund will
purchase a call option on an interest rate futures contract to hedge against a
decline in interest rates in a market advance
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when the Fund is holding cash. The Fund can take advantage of the anticipated
rise in the value of long-term securities without actually buying them until the
market is stabilized. At that time, the options can be liquidated and the
Fund's cash can be used to buy long-term securities.
WRITING CALL OPTIONS ON FUTURES CONTRACTS. A Fund will write call options
on interest rate futures contracts if the Adviser anticipates a rise in interest
rates. As interest rates rise, a call option on such a contract becomes less
valuable. If the futures contract price at expiration of the option is below
the exercise price, the option will not be exercised and the Fund will retain
the full amount of the option premium. Such amount provides a partial hedge
against any decline that may have occurred in the Fund's portfolio securities.
WRITING PUT OPTIONS ON FUTURES CONTRACTS. A Fund will write put options on
interest rate futures contracts if the Adviser anticipates a decline in interest
rates. As interest rates decline, a put option on an interest rate futures
contract becomes less valuable. If the futures contract price at expiration of
the option has risen due to declining interest rates and is above the exercise
price, the option will not be exercised and the Fund will retain the full amount
of the option premium. Such amount can then be used by the Fund to buy
long-term securities when the market has stabilized.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
HEDGING RISKS IN FUTURES CONTRACTS TRANSACTIONS. There are several risks
in using futures contracts as hedging devices. One risk arises because the
prices of futures contracts may not correlate perfectly with movements in the
underlying fixed-income security due to certain market distortions. First, all
participants in the futures market are subject to initial margin and variation
margin requirements. Rather than making additional variation margin payments,
investors may close the contracts through offsetting transactions which could
distort the normal relationship between the security and the futures market.
Second, the margin requirements in the futures market are lower than margin
requirements in the securities market, and as a result the futures market may
attract more speculators than does the securities market. Increased
participation by speculators in the futures market may also cause temporary
price distortions. Because of possible price distortion in the futures market
and because of imperfect correlation between movements in securities and
movements in the prices of futures contracts, even a correct forecast of general
market trends may not result in a successful hedging transaction over a very
short period. Another risk arises because of imperfect correlation between
movements in the value of the futures contracts and movements in the value of
securities subject to the hedge.
Successful use of futures contracts by a Fund is subject to the ability of
the Adviser to predict correctly movements in the direction of interest rates.
If a Fund has hedged against the possibility of an increase in interest rates
adversely affecting
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the value of fixed-income securities held in its portfolio and interest rates
decrease instead, the Fund will lose part or all of the benefit of the increased
value of its security which it has hedged because it will have offsetting losses
in its futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may, but will not necessarily, be at
increased prices which reflect the decline in interest rates. The Fund may have
to sell securities at a time when it may be disadvantageous to do so.
LIQUIDITY OF FUTURES CONTRACTS. A Fund may elect to close some or all of
its contracts prior to expiration. The purpose of making such a move would be
to reduce or eliminate the hedge position held by the Fund. A Fund may close
its positions by taking opposite positions. Final determinations of variation
margin are then made, additional cash as required is paid by or to the Fund, and
the Fund realizes a loss or a gain.
Positions in futures contracts may be closed only on an exchange or board
of trade providing a secondary market for such futures contracts. Although the
Funds intend to enter into futures contracts only on exchanges or boards of
trade where there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular contract
at any particular time.
In addition, most domestic futures exchanges and boards of trade limit the
amount of fluctuation permitted in futures contract prices during a single
trading day. The daily limit establishes the maximum amount that the price of a
futures contract may vary either up or down from the previous day's settlement
price at the end of a trading session. Once the daily limit has been reached in
a particular contract, no trades may be made that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses because the limit may prevent
the liquidation of unfavorable positions. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses. In such event, it
will not be possible to close a futures position and, in the event of adverse
price movements, a Fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the
portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. However, as described above, there is no
guarantee that the price of the securities being hedged will, in fact, correlate
with the price movements in the futures contract and thus provide an offset to
losses on a futures contract.
RISKS OF OPTIONS ON FUTURES CONTRACTS. The use of options on futures
contracts also involves additional risk. Compared to the purchase or sale of
futures contracts, the purchase of call or put options on futures contracts
involves less potential risk to a Fund because the maximum amount at risk is the
premium paid
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for the options (plus transactions costs). The writing of a call option on a
futures contract generates a premium which may partially offset a decline in the
value of the Fund's portfolio assets. By writing a call option, a Fund becomes
obligated to sell a futures contract, which may have a value higher than the
exercise price. Conversely, the writing of a put option on a futures contract
generates a premium, but the Fund becomes obligated to purchase a futures
contract, which may have a value lower than the exercise price. Thus, the loss
incurred by a Fund in writing options on futures contracts may exceed the amount
of the premium received.
The effective use of options strategies is dependent, among other things,
on a Fund's ability to terminate options positions at a time when the Adviser
deems it desirable to do so. Although the Funds will enter into option
positions only if the Adviser believes that a liquid secondary market exists for
such options, there is no assurance that the Funds will be able to effect
closing transactions at any particular time or at an acceptable price. The
Funds' transactions involving options on futures contracts will be conducted
only on recognized exchanges. Each Fund's purchase or sale of put or call
options on futures contracts will be based upon predictions as to anticipated
interest rates by the Adviser, which could prove to be inaccurate. Even if the
expectations of the Adviser are correct, there may be an imperfect correlation
between the change in the value of the options and of the Fund's portfolio
securities.
REGULATORY MATTERS
To the extent required to comply with applicable Securities and Exchange
Commission releases and staff positions, when entering into futures contracts,
the Fund will maintain, in a segregated account, cash or liquid high-grade debt
securities equal to the value of such contracts.
The Commodity Futures Trading Commission (the "CFTC"), a federal agency,
regulates trading activity on the exchanges pursuant to the Commodity Exchange
Act, as amended. The CFTC requires the registration of "commodity pool
operators," defined as any person engaged in a business which is of the nature
of an Company, syndicate or a similar form of enterprise, and who, in connection
therewith, solicits, accepts or receives from others, funds, securities or
property for the purpose of trading in any commodity for future delivery on or
subject to the rules of any contract market. The CFTC has adopted Rule 4.5,
which provides an exclusion from the definition of commodity pool operator for
any registered investment company which meets the requirements of the Rule.
Rule 4.5 requires, among other things, that an investment company wishing to
avoid commodity pool operator status use futures and options positions only (a)
for "bona fide hedging purposes" (as defined in CFTC regulations) or (b) for
other purposes so long as aggregate initial margins and premiums required in
connection with non-hedging positions do not exceed 5% of the liquidation value
of the investment company's portfolio. Any investment company wishing to claim
the exclusion provided in Rule 4.5 must file a notice of eligibility with both
the CFTC and the
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National Futures Association. Before engaging in transactions involving
interest rate futures contracts, the Funds will file such notices and meet the
requirements of Rule 4.5, or such other requirements as the CFTC or its staff
may from time to time issue, in order to render registration as a commodity pool
operator unnecessary.
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APPENDIX C
STOCK INDEX FUTURES CONTRACTS AND RELATED OPTIONS
STOCK INDEX FUTURES CONTRACTS
Growth Fund, Emerging Growth Fund, Growth and Income Fund, Equity Strategy
Fund and Balanced Fund may purchase and sell stock index futures contracts,
options thereon and options on stock indexes. Stock index futures contracts are
commodity contracts listed on commodity exchanges. They presently include
contracts on the Standard & Poor's 500 Stock Index (the "S&P 500 Index") and
such other broad stock market indexes as the New York Stock Exchange Composite
Stock Index and the Value Line Composite Stock Index, as well as narrower
"sub-indexes" such as the S&P 100 Energy Stock Index and the New York Stock
Exchange Utilities Stock Index. A stock index assigns relative values to common
stocks included in the index and the index fluctuates with the value of the
common stocks so included. A futures contract is a legal agreement between a
buyer or seller and the clearing house of a futures exchange in which the
parties agree to make a cash settlement on a specified future date in an amount
determined by the stock index on the last trading day of the contract. The
amount is a specified dollar amount (usually $100 or $500) times the difference
between the index value on the last trading day and the value on the day the
contract was struck.
For example, the S&P 500 Index consists of 500 selected common stocks, most
of which are listed on the New York Stock Exchange. The S&P 500 Index assigns
relative weightings to the common stocks included in the Index, and the Index
fluctuates with changes in the market values of those common stocks. In the
case of S&P 500 Index futures contracts, the specified multiple is $500. Thus,
if the value of the S&P 500 Index were 150, the value of one contract would be
$75,000 (150 x $500). Unlike other futures contracts, a stock index futures
contract specifies that no delivery of the actual stocks making up the index
will take place. Instead, settlement in cash must occur upon the termination of
the contract with the settlement amount being the difference between the
contract price and the actual level of the stock index at the expiration of the
contract. For example (excluding any transaction costs), if a Fund enters into
one futures contract to buy the S&P 500 Index at a specified future date at a
contract value of 150 and the S&P 500 Index is at 154 on that future date, the
Fund will gain $500 x (154-150) or $2,000. If a Fund enters into one futures
contract to sell the S&P 500 Index at a specified future date at a contract
value of 150 and the S&P 500 Index is at 152 on that future date, the Fund will
lose $500 x (152-150) or $1,000.
Unlike the purchase or sale of an equity security, no price would be paid
or received by a Fund upon entering into stock index futures contracts. Upon
entering into a contract, the Fund would be required to deposit with its
custodian in a segregated account in the name of the futures broker an amount of
cash or U.S. Treasury bills equal to a portion of the contract value. This
amount is known as "initial margin." The nature of initial margin in futures
transactions is different
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from that of margin in security transactions in that futures contract margin
does not involve borrowing funds by a Fund to finance the transactions. Rather,
the initial margin is in the nature of a performance bond or good faith deposit
on the contract that is returned to the Fund upon termination of the contract,
assuming all contractual obligations have been satisfied.
Subsequent payments, called "variation margin," to and from the broker
would be made on a daily basis as the price of the underlying stock index
fluctuates, making the long and short positions in the contract more or less
valuable, a process known as "marking to the market." For example, when a Fund
enters into a contract in which it benefits from a rise in the value of an index
and the price of the underlying stock index has risen, the Fund will receive
from the broker a variation margin payment equal to that increase in value.
Conversely, if the price of the underlying stock index declines, the Fund would
be required to make a variation margin payment to the broker equal to the
decline in value.
The Funds intend to use stock index futures contracts and related options
for hedging and not for speculation. Hedging permits a Fund to gain rapid
exposure to or protect itself from changes in the market. For example, a Fund
may find itself with a high cash position at the beginning of a market rally.
Conventional procedures of purchasing a number of individual issues entail the
lapse of time and the possibility of missing a significant market movement. By
using futures contracts, the Fund can obtain immediate exposure to the market
and benefit from the beginning stages of a rally. The buying program can then
proceed, and once it is completed (or as it proceeds), the contracts can be
closed. Conversely, in the early stages of a market decline, market exposure
can be promptly offset by entering into stock index futures contracts to sell
units of an index and individual stocks can be sold over a longer period under
cover of the resulting short contract position.
The Funds may enter into contracts with respect to any stock index or
sub-index. To hedge a Fund's portfolio successfully, however, the Fund must
enter into contracts with respect to indexes or sub-indexes whose movements will
have a significant correlation with movements in the prices of the Fund's
portfolio securities.
OPTIONS ON STOCK INDEX FUTURES CONTRACTS
The Funds may purchase and sell put and call options on stock index futures
contracts which are traded on a United States exchange or board of trade as a
hedge against changes in the market, and will enter into closing transactions
with respect to such options to terminate existing positions. An option on a
stock index futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a stock index futures contract at a
specified exercise price at any time prior to the expiration date of the option.
A call option gives the purchaser of such option the right to buy, and it
obliges its writer to sell, a specified underlying futures contract at a
specified exercise price at any time prior to the expiration date of the
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option. A purchaser of a put option has the right to sell, and the writer has
the obligation to buy, such contract at the exercise price during the option
period. Upon exercise of an option, the delivery of the futures position by the
writer of the option to the holder of the option will be accompanied by delivery
of the accumulated balance in the writer's future margin account, which
represents the amount by which the market price of the futures contract exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option on the futures contract. If an option is exercised on the last
trading day prior to the expiration date of the option, the settlement will be
made entirely in cash equal to the difference between the exercise price of the
option and the closing price of the stock index futures contract on the
expiration date. A Fund will pay a premium for purchasing options on stock
index futures contracts. Because the value of the option is fixed at the point
of sale, there are no daily cash payments to reflect changes in the value of the
underlying contract; however, the value of the option does change daily and that
change would be reflected in the net asset value of the Fund. In connection
with the writing of options on stock index futures contracts, a Fund will make
initial margin deposits and make or receive maintenance margin payments that
reflect changes in the market value of such options. Premiums received from the
writing of an option are included in initial margin deposits.
PURCHASE OF PUT OPTIONS ON FUTURES CONTRACTS. A Fund will purchase put
options on futures contracts if the Adviser anticipates a market decline. A put
option on a stock index futures contract becomes more valuable as the market
declines. By purchasing put options on stock index futures contracts at a time
when the Adviser expects the market to decline, a Fund will seek to realize a
profit to offset the loss in value of its portfolio securities.
PURCHASE OF CALL OPTIONS ON FUTURES CONTRACTS. A Fund will purchase call
options on stock index futures contracts if the Adviser anticipates a market
rally. The purchase of a call option on a stock index futures contract
represents a means of obtaining temporary exposure to market appreciation at
limited risk. A call option on such a contract becomes more valuable as the
market appreciates. A Fund will purchase a call option on a stock index futures
contract to hedge against a market advance when the Fund is holding cash. The
Fund can take advantage of the anticipated rise in the value of equity
securities without actually buying them until the market is stabilized. At that
time, the options can be liquidated and the Fund's cash can be used to buy
portfolio securities.
WRITING CALL OPTIONS ON FUTURES CONTRACTS. A Fund will write call options
on stock index futures contracts if the Adviser anticipates a market decline.
As the market declines, a call option on such a contract becomes less valuable.
If the futures contract price at expiration of the option is below the exercise
price, the option will not be exercised and the Fund will retain the full amount
of the option premium. Such amount provides a partial hedge against any decline
that may have occurred in the Fund's portfolio securities.
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WRITING PUT OPTIONS ON FUTURES CONTRACTS. A Fund will write put options on
stock index futures contracts if the Adviser anticipates a market rally. As the
market appreciates, a put option on a stock index futures contract becomes less
valuable. If the futures contract price at expiration of the option has risen
due to market appreciation and is above the exercise price, the option will not
be exercised and the Fund will retain the full amount of the option premium.
Such amount can then be used by the Fund to buy portfolio securities when the
market has stabilized.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
HEDGING RISKS IN FUTURES CONTRACTS TRANSACTIONS. There are several risks
in using stock index futures contracts as hedging devices. One risk arises
because the prices of futures contracts may not correlate perfectly with
movements in the underlying stock index due to certain market distortions.
First, all participants in the futures market are subject to initial margin and
variation margin requirements. Rather than making additional variation margin
payments, investors may close the contracts through offsetting transactions
which could distort the normal relationship between the index and the futures
market. Second, the margin requirements in the futures market are lower than
margin requirements in the securities market. Increased participation by
speculators in the futures market may also cause temporary price distortions.
Because of possible price distortion in the futures market and because of
imperfect correlation between movements in stock indexes or securities and
movements in the prices of futures contracts, even a correct forecast of general
market trends may not result in a successful hedging transaction over a very
short period.
Another risk arises because of imperfect correlation between movements in
the value of the stock index futures contracts and movements in the value of
securities subject to the hedge. The risk of imperfect correlation increases as
the composition of a Fund's portfolio diverges from the securities included in
the applicable stock index. It is possible that a Fund might sell stock index
futures contracts to hedge its portfolio against decline in the market, only to
have the market advance and the value of securities held in the Fund's portfolio
decline. If this occurred, the Fund would lose money on the contracts and also
experience a decline in the value of its portfolio securities. While this could
occur, the Adviser believes that over time the value of an equity fund's
portfolio will tend to move in the same direction as the market indexes. In an
attempt to reduce this risk, the Adviser will enter into futures contracts on
indexes whose movements it believes will have a significant correlation with
movements in the value of the Fund's portfolio securities.
Successful use of futures contracts by a Fund is subject to the ability of
the Adviser to predict correctly movements in the direction of the market. If a
Fund has hedged against the possibility of a decline in the value of the stocks
held in its portfolio and stock prices increase instead, the Fund will lose part
or all of the benefit of the increased value of its security which it has hedged
because it will have
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to sell securities to meet daily variation margin requirements. Such sales of
securities may, but will not necessarily, be at increased prices which reflect
the rising market. The Fund may have to sell securities at a time when it may
be disadvantageous to do so.
LIQUIDITY OF FUTURES CONTRACTS. A Fund may elect to close some or all of
its contracts prior to expiration. The purpose of making such a move would be
to reduce or eliminate the hedge position held by the Fund. A Fund may close
its positions by taking opposite positions. Final determinations of variation
margin are then made, additional cash as required is paid by or to the Fund, and
the Fund realizes a loss or a gain.
Positions in futures contracts may be closed only on an exchange or board
of trade providing a secondary market for such futures contracts. Although the
Funds intend to enter into futures contracts only on exchanges or boards of
trade where there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular contract
at any particular time.
In addition, most domestic futures exchanges and boards of trade limit the
amount of fluctuation permitted in futures contract prices during a single
trading day. The daily limit establishes the maximum amount that the price of a
futures contract may vary either up or down from the previous day's settlement
price at the end of a trading session. Once the daily limit has been reached in
a particular contract, no trades may be made that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses because the limit may prevent
the liquidation of unfavorable positions. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses. In such event, it
will not be possible to close a futures position and, in the event of adverse
price movements, the Fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the
portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. However, as described above, there is no
guarantee that the price of the securities being hedged will, in fact, correlate
with the price movements in the futures contract and thus provide an offset to
losses on the futures contract.
RISKS OF OPTIONS ON FUTURES CONTRACTS. The use of options on stock index
futures contracts also involves additional risk. Compared to the purchase or
sale of futures contracts, the purchase of call or put options on futures
contracts involves less potential risk to a Fund because the maximum amount at
risk is the premium paid for the options (plus transactions costs). The writing
of a call option on a futures contract generates a premium which may partially
offset a decline in the value of the Fund's portfolio assets. By writing a call
option, the Fund becomes obligated to sell a futures contract, which may have a
value higher than the exercise
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price. Conversely, the writing of a put option on a futures contract generates
a premium, but the Fund becomes obligated to purchase a futures contract, which
may have a value lower than the exercise price. Thus, the loss incurred by the
Fund in writing options on futures contracts may exceed the amount of the
premium received.
The effective use of options strategies is dependent, among other things,
on a Fund's ability to terminate options positions at a time when the Adviser
deems it desirable to do so. Although a Fund will enter into an option position
only if the Adviser believes that a liquid secondary market exists for such
option, there is no assurance that the Fund will be able to effect closing
transactions at any particular time or at an acceptable price. The Funds'
transactions involving options on futures contracts will be conducted only on
recognized exchanges.
A Fund's purchase or sale of put or call options on futures contracts will
be based upon predictions as to anticipated market trends by the Adviser, which
could prove to be inaccurate. Even if the expectations of the Adviser are
correct, there may be an imperfect correlation between the change in the value
of the options and of the Fund's portfolio securities.
REGULATORY MATTERS
To the extent required to comply with applicable Securities and Exchange
Commission releases and staff positions, when entering into futures contracts,
the Fund will maintain, in a segregated account, cash or liquid high-grade debt
securities equal to the value of such contracts.
The Commodity Futures Trading Commission (the "CFTC"), a federal agency,
regulates trading activity on the exchanges pursuant to the Commodity Exchange
Act, as amended. The CFTC requires the registration of "commodity pool
operators," defined as any person engaged in a business which is of the nature
of an investment trust, syndicate or a similar form of enterprise, and who, in
connection therewith, solicits, accepts or receives from others, funds,
securities or property for the purpose of trading in any commodity for future
delivery on or subject to the rules of any contract market. The CFTC has
adopted Rule 4.5, which provides an exclusion from the definition of commodity
pool operator for any registered investment company which meets the requirements
of the Rule. Rule 4.5 requires, among other things, that an investment company
wishing to avoid commodity pool operator status use futures and options
positions only (a) for "bona fide hedging purposes" (as defined in CFTC
regulations) or (b) for other purposes so long as aggregate initial margins and
premiums required in connection with non-hedging positions do not exceed 5% of
the liquidation value of the investment company's portfolio. Any investment
company wishing to claim the exclusion provided in Rule 4.5 must file a notice
of eligibility with both the CFTC and the National Futures Association. Before
engaging in transactions involving interest rate futures contracts, the Funds
will file such notices and meet the requirements of
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Rule 4.5, or such other requirements as the CFTC or its staff may from time to
time issue, in order to render registration as a commodity pool operator
unnecessary.
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APPENDIX D
INDUSTRY SECTORS
Equity Strategy Fund seeks to achieve its investment objective by varying
the weighting of its portfolio among the following eleven sectors of the
economy:
(1) BASIC ENERGY SECTOR is comprised of companies engaged in the
exploration for, refinement of and/or transportation of various fossil fuels,
including oil, natural gas and coal. These firms include entities organized for
tax shelter purposes, including master limited partnerships. Equity Strategy
Fund will not invest in entities organized for tax shelter purposes. Also
included in the Basic Energy Sector are those entities that provide equipment
and services to companies engaged in the aforementioned activities. The
following MicroGroups are located within the Basic Energy Sector:
101 Oil, Integrated International
102 Oil, Integrated North American
103 Oil & Gas, Independent, Primary
104 Oil & Gas, Independent, Secondary
105 Oil & Gas, Independent, Emerging
106 Oil & Gas, Canadian
107 Oil & Gas, Non-North American
108 Oil Refining & Marketing
109 Gas Gathering and Marketing
110 Master Limited Partnerships
111 Oil Equipment & Services, Primary
112 Oil Equipment & Services, Secondary
113 Computer-Aided Exploration
114 Oil Drilling, Offshore
115 Oil Drilling, Land
116 Pipelines
117 Diversified Energy
118 Coal Mining
119 Energy, Alternate Sources
(2) BASIC MATERIALS SECTOR is comprised of companies engaged in the
initial stages of preparing various natural resources for further industrial or
consumer use. The following MicroGroups are located within the Basic Materials
Sector:
201 Aluminum
202 Steel, Primary
203 Steel, Secondary
204 Steel, Specialty
205 Steel, Bar & Wire
206 Chemicals
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207 Chemicals, Diversified
208 Specialty Chemicals
209 Plastics & Rubber Products
210 Construction Materials, Diversified, Primary
211 Construction Materials, Diversified, Secondary
212 Paper and Forest Products
213 Forest Products
214 Cement
215 Mining, Diversified Non-Ferrous, Primary
216 Mining, Diversified Non-Ferrous, Secondary
217 Gold & Silver Mining, North American
218 Gold Mining, South African
219 Mining, Iron
220 Agrifertilizer
(3) INDUSTRIAL MANUFACTURING SECTOR is made up of companies that process
and/or further refine basic materials for use primarily by industrial consumers.
The following MicroGroups are located within the Industrial Manufacturing
Sector:
301 Conglomerates, Industrial, Primary
302 Conglomerates, Industrial, Secondary
303 Steel Tubing
304 Metal Fasteners
305 Metals Fabrication
306 Metals Servicing/Distribution
307 Bearings
308 Specialty Paper
309 Containers, Paper
310 Containers, Metal, Glass
311 Heavy Construction Components
312 Construction/Materials Handling
313 Industrial Machinery
314 Machine Tools & Accessories
315 Fluid Handling Equipment
316 Fluid Processing Equipment
317 Application Equipment
318 Pollution Control Equipment
319 Paint Manufacturers
320 Doors, Windows & Hardware
321 Lighting Fixtures/Products
322 Plumbing Manufacturers
323 Electrical Components
324 Electrical Equipment
325 Adhesives & Coatings
326 Farm Equipment
327 Trucks & Equipment
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328 Auto Parts & Components
329 Railroad Equipment
(4) UTILITIES SECTOR is made up of companies engaged in converting natural
energy into usable forms for a variety of customer bases. This Sector is broken
down with respect to both section of the country and energy source. The
following MicroGroups are located within the Utilities Sector:
401 Electric, Heavy Nuclear
402 Electric, Heavy Oil Dependent
403 Electric, Coal Rich
404 Gas, East Central
405 Gas, West Coast & West
406 Gas, Midwest
407 Gas, Mid-Atlantic
408 Gas, South & Southeast
409 Gas, Northeast
410 Gas, Southwest
411 Electric, West Coast
412 Electric, Mountain States
413 Electric, Southwest
414 Electric, Midwest
415 Electric, Southeast
416 Electric, East Central
417 Electric, Mid-Atlantic
418 Electric, Northeast
419 Cogeneration
420 Telecommunications, Primary
421 Telecommunications, Secondary
422 Water Services
(5) COMMERCIAL AND INDUSTRIAL SERVICES SECTOR is composed of companies
that provide consulting, managerial, marketing, engineering, measurement and/or
installation services. The following MicroGroups are located within the
Commercial and Industrial Services Sector:
501 Data Processing Services
502 Transaction Processing
503 Financial Equipment
504 Financial Computer Services
505 Business Services Diversified
506 Office Equipment
507 Office Furniture & Fixtures
508 Office Supplies
509 Security & Investigative Products/Services
510 Insurance Brokers
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511 Advertising Agencies
512 Commercial Printing
513 Temporary Help & Maintenance Services
514 Linen & Work Clothing Services
515 Industrial Maintenance Products/Services
516 Computer/Professional Services
517 Merchandising/Marketing Services
518 Vocational/Educational Services
519 Technical & Engineering Services
520 Construction & Engineering Services
521 Waste Management
522 Hazardous Waste Remediation/Disposal
523 Recycling
524 Transportation Equipment Leasing
525 Equipment Remarketers/Leasing
(6) FINANCIAL SECTOR consists of companies providing financial services to
consumers and industries, such as commercial banks, savings and loan
associations, securities brokerage companies, investment advisers and firms in
all segments of the insurance field. Though the performance of closed-end funds
and gold and silver mining entities is also tracked, the stocks within these
specific MicroGroups are excluded from Sector and/or PJH Index calculations, as
highlighted below. The following MicroGroups are located within the Financial
Sector:
601 Banks, Money Center
602 Super-Regional Banks
603 Super-Regionals, Northeast
604 Super-Regionals, Southeast
605 Super-Regionals, Midwest
606 Super-Regionals, West Coast
607 Banks, Northeast, Primary
608 Banks, Northeast, Secondary
609 Banks, Mid-Atlantic, Primary
610 Banks, Mid-Atlantic, Secondary
611 Banks, Southeast, Primary
612 Banks, Southeast, Secondary
613 Banks, South Central, Primary
614 Banks, South Central, Secondary
615 Banks, East Central, Primary
616 Banks, East Central, Secondary
617 Banks, Midwest, Primary
618 Banks, Midwest, Secondary
619 Banks, California, Primary
620 Banks, California, Secondary
621 Banks, Southwest
622 Banks, Western
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623 Thrifts, California, Primary
624 Thrifts, California, Secondary
625 Thrifts, Sunbelt
626 Thrifts, Eastern, Primary
627 Thrifts, Eastern, Secondary
628 Thrifts, Midwest, Primary
629 Thrifts, Midwest, Secondary
630 Thrifts, Western
631 Mortgage Banking, Diversified
632 REITs, Debt
633 REITs, Equity, Diversified
634 REITs, Multifamily Housing
635 REITs, Commercial Properties
636 REITs, Health Care
637 Financial Services, Diversified
638 Insurance, Full Line
639 Insurance, Life, Primary
640 Insurance, Life, Secondary
641 Insurance, Property & Casualty, Primary
642 Insurance, Property & Casualty, Secondary
643 Insurance, Reinsurance
644 Insurance, Specialty
645 Insurance, Automobile
646 Securities Brokers, National
647 Securities Brokers, Regional
648 Discount Brokers
649 Investment Management & Services
650 Closed-End International Stock Funds
651 Closed-End International Bond Funds
652 Non-U.S. Banks
(7) CONSUMER STAPLES SECTOR is composed of companies engaged in producing
and/or selling consumer goods that are generally regarded as "basic needs." The
demand for these goods is generally insensitive to varying economic cycles. The
following MicroGroups are located within the Consumer Services Sector:
701 Processors, Commodities
702 Processors, Sugar
703 Processors, Meat & Poultry
704 Processors, Fruit & Vegetable
705 Food Products
706 Food Products, Diversified
707 Dairy Products
708 Specialty Foods
709 Bakers
710 Conglomerates, Stable
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711 Wine & Spirits
712 Brewers
713 Soft Drinks & Bottlers
714 Snack Foods
715 Confectionery/Collectibles
716 Tobacco, Diversified, Primary
717 Tobacco, Diversified, Secondary
718 Tissue & Disposable Products
719 Housewares
720 Soaps & Cleansers
721 Toiletries/Cosmetics, Primary
722 Toiletries/Cosmetics, Secondary
723 Hair Care
724 Food Stores, Large Chains
725 Food Stores, Large Chains, East
726 Food Stores, Regional Chains, West
727 Food Wholesalers
728 Food Stores, Convenience
729 Drugstore Chains
730 Drug Wholesalers
731 Vending & Food Services
732 Agricultural Biotechnology
733 Crop Seed
734 Private Label Products
(8) CONSUMER CYCLICAL SECTOR is composed of companies engaged in producing
and/or selling consumer goods, the demand for which generally fluctuates
according to general economic cycles. The following MicroGroups are located
within the Consumer Cyclical Sector:
801 Auto Manufacturers, Domestic
802 Auto Manufacturers, Foreign
803 Vehicle Parts, Replacement
804 Tires
805 Auto Parts Stores
806 Appliances
807 Jewelry Stores
808 Greeting Cards
809 Lawn & Garden
810 Hand Tools
811 Furniture Manufacturers
812 Home Entertainment Hardware Manufacturing
813 Leisure Products
814 Leisure Services
815 Golf
816 Toys, Games & Hobbies
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817 Gaming Equipment/Services
818 Photographic Supplies/Services
819 Carpet Manufacturers
820 Textile Manufacturers
821 Clothing Manufacturers, Primary
822 Clothing Manufacturers, Secondary
823 Athletic Wear
824 Sporting Goods Stores
825 Footwear, Retail & Manufacturing
826 Department Stores, Fashion Apparel
827 Specialty Stores, Family
828 Specialty Stores, Women's Apparel
829 Discount Mass Merchants
830 Pawn Shops/Check Cashing
831 Computer/Software Retailers
832 Consumer Electronics Retailers
833 Entertainment Software Retailers/Distributors
834 Home Sewing/Crafts
835 Catalogue Showrooms
836 Mail-Order Retailers
837 Off-Price Retailers
838 Close-Out Liquidators
839 Membership Warehouses
840 Office Products Superstores
841 Jewelry Stores
842 Home Improvement Stores
843 Hardware Distributors
844 Home Furnishings Stores
845 Multimedia, Primary
846 Multimedia, Secondary
847 Television Broadcasting
848 Electronic Media, Producers/Distributors
849 Radio Broadcasting/Programming
850 Motion Picture Theaters
851 Cable Shopping Networks
852 Print Media
853 Book/Magazine Publishers
854 Gambling Casinos
855 Hotels & Motels
856 Restaurant Chains, Primary
857 Restaurant Chains, Secondary
858 Restaurant Chains, Emerging
859 Residential Building
860 Manufactured Housing
861 Recreational Vehicles
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862 Real Estate Developers/Managers
863 Conglomerates, Cyclical
(9) HEALTH CARE SECTOR is made up of companies engaged in all areas of
health care provision, including device and drug manufacture, hospital
management, staffing and computer services. The following MicroGroups are
located within the Health Care Sector:
901 Consumer Health Products, Primary
902 Consumer Health Products, Secondary
903 Pharmaceuticals, Primary
904 Pharmaceuticals, Secondary
905 Generic Pharmaceuticals
906 Pharmacy Management/Mail-Order Services
907 Medical Supplies, Primary
908 Medical Supplies, Secondary
909 Medical Devices
910 Patient Monitoring Systems
911 Surgical Lasers
912 Hospital Management
913 Nursing Homes
914 HMOs
915 Hospital Services
916 Clinical Laboratories
917 Dialysis, Infusion Centers/Services
918 Rehabilitation, Surgery, Services
919 Diagnostic Services
920 Health Care Compensation/Financial Services
921 Diagnostic Reagents/Test Kits
922 Diagnostic Imaging Equipment
923 Implantable Devices
924 Orthopedic Devices
925 Optical Goods & Services
926 Biotechnology
927 Death Services
(10) TECHNOLOGY SECTOR is a comprehensive and specific breakdown of
companies that are expected to have or develop products, processes or services
that will provide or will benefit significantly from technological advances and
improvements or future automation trends in the office and factory. The
following MicroGroups are located within the Technology Sector:
1001 Computers, Mainframe
1002 Minicomputers
1003 Microsystems
1004 Microsystem Components, Peripherals
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1005 Micro/Software Distributors
1006 Microcomputer Software
1007 Software
1008 Software, Database Management
1009 Interactive Multimedia
1010 Specialized Processors
1011 Networking Systems
1012 EDP Displays & Peripherals
1013 EDP Memories & Components
1014 Electronic Testing Equipment
1015 Materials Testing Equipment
1016 Automatic Data Capture
1017 Lasers
1018 Robotics/Machine Vision
1019 CAD/CAM
1020 CAE
1021 CASE
1022 Specialized Graphical Computing
1023 Graphic Imaging
1024 Computer-Aided Publishing
1025 Telecommunications, Equipment/Systems
1026 Telecommunications, Long Distance
1027 Telecommunications, Alternate Access
1028 Telecommunications, Voice Processing
1029 Conferencing, Equipment/Services
1030 Non-U.S. Telecommunications Services
1031 Cable Television
1032 CATV Equipment
1033 Cellular Communications
1034 Mobile Radio Communications
1035 Paging
1036 Aerodefense, Primary
1037 Aerodefense, Secondary
1038 Defense Electronics, Primary
1039 Defense Electronics, Secondary
1040 Semiconductors
1041 Semiconductor Suppliers
1042 Electronic Components
1043 Electronic Connectors
1044 Electronic Component Distributors
1045 Environmental Controls
1046 Industrial & Process Controls Equipment
1047 Diversified Technology, Primary
1048 Diversified Technology, Secondary
D-9
<PAGE>
(11) TRANSPORTATION SECTOR consists of companies involved in the provision
of transportation of people and products. The following MicroGroups are located
within the Transportation Sector:
1101 Airlines, Major
1102 Airlines, Regional
1103 Air Freight
1104 Freight Forwarders
1105 Trucking, Specialized
1106 Trucking, Primary
1107 Trucking, Secondary
1108 Railroads, Western
1119 Railroads, Eastern
1111 Marine Transportation
D-10
<PAGE>
PART B
NATIONAL TAX-EXEMPT FUND
MINNESOTA TAX-EXEMPT FUND
Series of Piper Funds Inc.
STATEMENT OF ADDITIONAL INFORMATION
November 27, 1995
Table of Contents
Page
----
Investment Objectives, Policies and Restrictions . . . . . . . . 2
Directors and Executive Officers . . . . . . . . . . . . . . . . 7
Investment Advisory and Other Services . . . . . . . . . . . . . 13
Portfolio Transactions and Allocation of Brokerage . . . . . . . 19
Capital Stock and Ownership of Shares. . . . . . . . . . . . . . 21
Net Asset Value and Public Offering Price. . . . . . . . . . . . 21
Performance Comparisons. . . . . . . . . . . . . . . . . . . . . 22
Purchase of Shares . . . . . . . . . . . . . . . . . . . . . . . 24
Redemption of Shares . . . . . . . . . . . . . . . . . . . . . . 25
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
General Information. . . . . . . . . . . . . . . . . . . . . . . 29
Financial Statements . . . . . . . . . . . . . . . . . . . . . . 30
Pending Litigation . . . . . . . . . . . . . . . . . . . . . . . 30
Appendix A - Ratings of Tax-Exempt Securities and
Commercial Paper . . . . . . . . . . . . . . . . . . . . . . . A-1
Appendix B - Futures Contracts and Options . . . . . . . . . . . B-1
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information relates to the Prospectus dated November 27,
1995, and should be read in conjunction therewith. A copy of the Prospectus may
be obtained from the Funds at Piper Jaffray Tower, 222 South Ninth Street,
Minneapolis, Minnesota 55402.
-1-
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The shares of Piper Funds Inc. (the "Company") are currently offered in 13
series. This Statement of Additional Information relates to two of those
series, National Tax-Exempt Fund ("National Fund") and Minnesota Tax-Exempt Fund
("Minnesota Fund") (sometimes referred to herein as a "Fund" or, collectively,
as the "Funds"). The investment objectives and policies of the Funds are set
forth in the Prospectus. Certain additional investment information is set forth
below.
REPURCHASE AGREEMENTS
Each Fund may invest in repurchase agreements. The Funds' custodian will
hold the securities underlying any repurchase agreement or such securities will
be part of the Federal Reserve Book Entry System. The market value of the
collateral underlying the repurchase agreement will be determined on each
business day. If at any time the market value of the collateral falls below the
repurchase price of the repurchase agreement (including any accrued interest),
the respective Fund will promptly receive additional collateral (so the total
collateral is an amount at least equal to the repurchase price plus accrued
interest).
The Funds have received from the Securities and Exchange Commission an
exemptive order permitting the Funds, along with the other series of the
Company, closed-end and other open-end investment companies managed by Piper
Capital Management Incorporated (the "Adviser"), and all future series of the
Company and all future investment companies advised by the Adviser or its
affiliates, to deposit uninvested cash balances into a large single joint
account to be used to enter into one or more large repurchase agreements.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
Each Fund may purchase securities on a "when-issued" basis and may purchase
or sell securities on a "forward commitment" basis. When a Fund purchases
securities on a when-issued or forward commitment basis, it will maintain in a
segregated account with its custodian cash or liquid high-grade debt obligations
having an aggregate value equal to the amount of such purchase commitments until
payment is made; the Fund will likewise segregate securities it sells on a
forward commitment basis.
PUTS
To help assure appropriate liquidity, each Fund may acquire Tax-Exempt
Securities (as defined in the Funds' Prospectus) which provide for the right to
resell them to the issuer, a bank or a broker-dealer at a specified price within
a specified period of time prior to the maturity date of such obligation. Such
a right to resell, which is commonly known as a "put," may be sold, transferred
or assigned only with the underlying security or securities. If an issuer, bank
or broker-dealer should default on its obligation to repurchase a security, a
Fund might be unable to recover all or a portion of any loss sustained from
having to sell the security elsewhere. It will be each Fund's policy to enter
into puts only with issuers, banks or broker-dealers that are determined by the
Adviser to present minimal credit risks.
-2-
<PAGE>
DIVERSIFICATION
Although Minnesota Fund is characterized as a non-diversified fund under
the Investment Company Act of 1940, as amended (the "1940 Act"), the Fund must
meet certain diversification requirements in order to qualify as a regulated
investment company for federal income tax purposes. To so qualify, the Fund
must diversify its holdings so that, at the close of each quarter of its taxable
year, (a) at least 50% of the value of its total assets consists of cash, cash
items, securities issued by the U.S. Government, its agencies and
instrumentalities, the securities of other regulated investment companies, and
other securities limited generally with respect to any one issuer to not more
than 5% of the total assets of the Fund and not more than 10% of the outstanding
voting securities of such issuer, and (b) not more than 25% of the value of its
total assets is invested in the securities of any issuer (other than securities
issued by the U.S. Government, its agencies or instrumentalities or the
securities of other regulated investment companies), or in two or more issuers
that the Fund controls and that are engaged in the same or similar trades or
businesses.
ILLIQUID SECURITIES
As set forth in the Prospectus, the Funds may invest in Rule 144A
securities, commercial paper issued pursuant to Rule 4(2) under the Securities
Act of 1933, and municipal lease obligations, and treat such securities as
liquid when they have been determined to be liquid by the Board of Directors of
the Company or by the Adviser subject to the oversight of and pursuant to
procedures adopted by the Board of Directors. Under these procedures, factors
taken into account in determining the liquidity of a security include (a) the
frequency of trades and quotes for the security; (b) the number of dealers
willing to purchase or sell the security and the number of other potential
purchasers; (c) dealer undertakings to make a market in the security; and
(d) the nature of the security and the nature of the marketplace trades (e.g.,
the time needed to dispose of the security, the method of soliciting offers and
the mechanics of transfer). With respect to Rule 144A securities, investing in
such securities could have the effect of increasing the level of Fund
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing these securities.
PORTFOLIO TURNOVER
Portfolio turnover is the ratio of the lesser of annual purchases or sales
of portfolio securities to the average monthly value of portfolio securities,
not including securities maturing in less than 12 months. A 100% portfolio
turnover rate would occur, for example, if the lesser of the value of purchases
or sales of portfolio securities for a particular year were equal to the average
monthly value of the portfolio securities owned during such year.
-3-
<PAGE>
INVESTMENT RESTRICTIONS
In addition to the investment objectives and policies set forth in the
Prospectus, each Fund is subject to certain fundamental and nonfundamental
investment restrictions, as set forth below. Fundamental investment
restrictions may not be changed without the vote of a majority of a Fund's
outstanding shares. "Majority," as used in the Prospectus and in this Statement
of Additional Information, means the lesser of (a) 67% of a Fund's outstanding
shares present at a meeting of the holders if more than 50% of the outstanding
shares are present in person or by proxy or (b) more than 50% of a Fund's
outstanding shares.
As fundamental investment restrictions, neither Fund will:
1. Issue any senior securities (as defined in the 1940 Act) other than as
set forth in restriction #2 below and except to the extent that using options
and futures contracts or purchasing or selling securities on a when-issued or
delayed delivery basis may be deemed to constitute issuing a senior security.
2. Borrow money (provided that each Fund may enter into reverse
repurchase agreements) except from banks for temporary or emergency purposes.
Each Fund may borrow money in an amount up to 10% of the value of its total
assets. With respect to each Fund, interest paid on borrowed funds will
decrease the net earnings of the Fund. Neither Fund will purchase portfolio
securities while outstanding borrowing exceeds 5% of the value of such Fund's
total assets. Neither Fund will borrow money for leverage purposes (provided
that each Fund may enter into reverse repurchase agreements for such purposes).
3. Mortgage, pledge or hypothecate its assets except in an amount not
exceeding 10% of the value of its total assets to secure temporary or emergency
borrowing. For purposes of this restriction, collateral arrangements for margin
deposits on futures contracts or with respect to the writing of options are not
deemed to be a pledge of assets.
4. Purchase or sell commodities or commodities futures contracts,
provided that each of the Funds may enter into financial futures contracts and
engage in related options transactions.
5. Purchase or sell real estate or real estate mortgage loans, except
that the Funds may invest in Tax-Exempt Securities secured by real estate or
interests therein.
6. Act as an underwriter of securities of other issuers, except insofar
as each Fund may be technically deemed an underwriter under the federal
securities laws in connection with the disposition of portfolio securities.
As nonfundamental investment restrictions that may be changed at any time
without shareholder approval, neither Fund will:
-4-
<PAGE>
1. Make short sales of securities, provided that each Fund for hedging
purposes may enter into financial futures contracts and engage in related
options transactions.
2. Purchase any securities on margin except to obtain such short-term
credits as may be necessary for the clearance of transactions and except that
the Funds may make margin deposits in connection with futures contracts.
3. Write, purchase or sell puts, calls or combinations thereof except for
hedging purposes.
4. Purchase or retain the securities of any issuer if, to the Fund's
knowledge, those officers or directors of the Company or its affiliates or of
its investment adviser who individually own beneficially more than 0.5% of the
outstanding securities of such issuer, together own more than 5% of such
outstanding securities.
5. Invest for the purpose of exercising control or management.
6. Purchase or sell oil, gas or other mineral leases, rights or royalty
contracts, except that the Funds may purchase or sell securities of companies
investing in the foregoing.
7. Invest more than 5% of the value of its total assets in securities of
other investment companies except as part of a merger, consolidation or
acquisition of assets.
8. Invest more than 15% of the value of its net assets in illiquid
securities.
9. Invest more than 5% of the value of its total assets in foreign
securities.
10. Invest more than 5% of the value of its total assets in the securities
of any issuers which, with their predecessors, have a record of less than three
years' continuous operation. (Securities of such issuers will not be deemed to
fall within this limitation if they are guaranteed by an entity in continuous
operation for more than three years.)
11. Loan its portfolio securities.
12. Invest in warrants.
The identification of the issuer of a Tax-Exempt Security depends on the
terms and conditions of the obligation. If the assets and revenues of an
agency, authority, instrumentality or other political subdivision are separate
from those of the government creating the subdivision, and the obligation is
backed only by the assets and revenues of the subdivision, such subdivision will
be regarded as the sole issuer. Similarly, in the case of a nongovernmental
user, such as an industrial corporation or a privately owned or operated
hospital, if the security is backed only by the assets and revenues of the
nongovernmental user then such non-governmental user will be deemed to be the
sole issuer. If in either case the creating
-5-
<PAGE>
government or another entity guarantees an obligation, and the value of all
securities issued or guaranteed by the guarantor and owned by a Fund exceeds 10%
of the value of such Fund's total assets, the guarantee will be regarded as a
separate security and treated as an issue of such government or entity.
Any investment restriction or limitation referred to above or in the
Prospectus, except the borrowing policy, which involves a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after an acquisition of securities or
utilization of assets and such excess results therefrom.
SPECIAL CONSIDERATIONS REGARDING INVESTMENTS IN MINNESOTA TAX-EXEMPT SECURITIES
As described in the Prospectus, except during temporary defensive periods,
Minnesota Fund will invest in Minnesota Tax-Exempt Securities. The Fund is
therefore susceptible to political, economic or regulatory factors affecting
issuers of Minnesota Tax-Exempt Securities. The following information, together
with the information set forth in the Prospectus, provides only a brief summary
of the complex factors affecting the financial situation in Minnesota. This
information is derived from sources that are generally available to investors
and is based in part on information obtained from various state and local
agencies in Minnesota. It should be noted that the creditworthiness of
obligations issued by local Minnesota issuers may be unrelated to the
creditworthiness of obligations issued by the State of Minnesota, and that there
is no obligation on the part of the State to make payment on such local
obligations in the event of default.
MINNESOTA ECONOMY. The State relies heavily on a progressive individual
income tax and a retail sales tax for revenue, which results in a fiscal system
unusually sensitive to economic conditions.
During the period from 1980 to 1990, overall employment growth in Minnesota
lagged behind national growth; total employment increased 17.9% in Minnesota
while increasing 20.1% nationally. Most of Minnesota's relatively slower growth
during this period is associated with declining agricultural employment and with
the two recessions in the United States economy occurring in the early 1980s,
which were more severe in Minnesota than nationwide. Minnesota non-farm
employment growth generally kept pace with that of the nation after the end of
the 1981-82 recession. Employment data through 1994 indicate that the recession
that began in July 1990 was less severe in Minnesota than in the national
economy. During 1993, 1994, and the first five months of 1995, the State's
unemployment rate was generally less than the national unemployment rate,
averaging 5.1% in 1993 as compared to the national average of 7.4%, 4.0% in 1994
as compared to the national average of 6.1%, and 3.9% for the first five months
of 1995 as compared to the national average of 5.8%.
Since 1980, Minnesota per capita personal income has been within three
percentage points of national per capita personal income. Minnesota per capita
income has generally remained above the national average during this period in
spite of the early 1980s recessions and some difficult years in agriculture. In
1994, Minnesota per capita income was 103.0% of the national average. During
1993-1994,
-6-
<PAGE>
personal income in Minnesota grew more rapidly than the United States average,
with a growth of 8.04% in Minnesota as compared to a United States average of
5.89%. Between 1990 and 1994, Minnesota non-agricultural employment increased
8.5%, compared to a national average of 4.2%.
There can be no assurance that Minnesota's economy and fiscal condition
will not materially change in the future or that future difficulties will not
occur. Economic difficulties and the resultant impact on State and local
government finances may adversely affect the market value of obligations in the
portfolio of Minnesota Fund or the ability of respective obligors to make timely
payment of the principal and interest on such obligations.
DIRECTORS AND EXECUTIVE OFFICERS
The names, addresses and principal occupations during the past five years
of the directors and executive officers of the Company are given below. The
officers and directors of the Company also serve as officers and directors of
various closed- and open-end investment companies managed by the Adviser.
<TABLE>
<CAPTION>
Name and Address Position with the Company
---------------- -------------------------
<S> <C>
William H. Ellis* Chairman of the Board of Directors
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
David T. Bennett Director
3400 City Center
33 South Sixth Street
Minneapolis, Minnesota 55402
Jaye F. Dyer Director
4670 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402
Karol D. Emmerich Director
7302 Claredon Drive
Edina, Minnesota 55439
Luella G. Goldberg Director
7019 Tupa Drive
Edina, Minnesota 55435
George Latimer Director
754 Linwood Avenue
St. Paul, MN 55105
</TABLE>
-7-
<PAGE>
Name and Address Position with the Company
---------------- -------------------------
Paul A. Dow President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
David E. Rosedahl Secretary
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Charles N. Hayssen Treasurer
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Worth Bruntjen Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Richard W. Filippone Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Marijo A. Goldstein Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Steven V. Markusen Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Robert H. Nelson Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Edward P. Nicoski Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
-8-
<PAGE>
<TABLE>
<CAPTION>
Name and Address Position with the Company
---------------- -------------------------
<S> <C>
Nancy S. Olsen Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Ronald R. Reuss Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Bruce D. Salvog Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Sandra K. Shrewsbury Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
David M. Steele Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Douglas J. White Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
J. Bradley Stone Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Marcy K. Winson Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
</TABLE>
- -----------------
* Directors of the Company who are interested persons (as that term is
defined by the 1940 Act) of Piper Capital Management Incorporated and the
Funds.
William H. Ellis has been President of Piper Jaffray Companies Inc. and
Piper Jaffray Inc. (the "Distributor") since September 1982, Chief Operating
Officer of the same two companies since August 1983, Director and Chairman of
the Board of Piper Capital Management Incorporated ("the Adviser") since October
1985 and President of the Adviser since December 1994.
-9-
<PAGE>
David T. Bennett is of counsel to the law firm of Gray, Plant, Mooty, Mooty
& Bennett, P.A., located in Minneapolis, Minnesota. Mr. Bennett is chairman of
a group of privately held companies and serves on the board of directors of a
number of nonprofit organizations.
Jaye F. Dyer has been President of Dyer Management Company, a private
management company, since January 1991. Prior to that he was President and
Chief Executive Officer of Dyco Petroleum Corporation, a Minneapolis based oil
and natural gas development company he founded, from 1971 to March 1, 1989, and
Chairman of the Board until December 31, 1990. Mr. Dyer serves on the board of
directors of Northwestern National Life Insurance Company, The ReliaStar
Financial Corp. (the holding company of Northwestern National Life Insurance
Company) and various privately held and nonprofit corporations.
Karol D. Emmerich has been President of The Paraclete Group, a consultant
to nonprofit organizations, since 1993. Prior to that she had been Vice
President, Chief Accounting Officer and Treasurer of Dayton Hudson Corporation
from 1980 to May 1993. Ms. Emmerich is an Executive Fellow at the University of
St. Thomas Graduate School of Business and serves on the board of directors of a
number of privately held and nonprofit organizations.
Luella G. Goldberg has served on the board of directors of Northwestern
National Life Insurance Company (since 1976), The ReliaStar Financial Corp.
(since 1989), TCF Financial Corporation (since 1988), the holding company of TCF
Bank Savings fsb, and Hormel Foods Corp. (since 1993). Ms. Goldberg also serves
as a Trustee of Wellesley College, and as a director of a number of other
organizations, including the University of Minnesota Foundation and the
Minnesota Orchestral Association. Ms. Goldberg was Chairman of the Board of
Trustees of Wellesley College from 1985 to 1993 and acting President from July
1, 1993 to October 1, 1993.
George Latimer is Director, Special Actions Office, Office of the
Secretary, Department of Housing and Urban Development since 1993, prior to
which he had been Dean of Hamline Law School, Saint Paul, Minnesota from 1990 to
1993. Mr. Latimer also serves on the board of directors of Digital Biometrics,
Inc. and Payless Cashways, Inc.
Paul A. Dow has been a Senior Vice President of the Adviser since 1989 and
Chief Investment Officer of the Adviser since 1989.
David E. Rosedahl has been Secretary and a Director of the Adviser since
1985, a Managing Director of the Distributor since 1986, a Managing Director of
Piper Jaffray Companies Inc. since 1987, Secretary of the Distributor since 1993
and General Counsel for the Distributor and Piper Jaffray Companies Inc. since
1979.
Charles N. Hayssen has been a Managing Director of the Distributor since
1986 and of Piper Jaffray Companies Inc. since 1987, Chief Financial Officer of
the Distributor since 1988, Director and Chief Financial Officer of the Adviser
since 1989 and Chief Operating Officer of the Adviser since 1994.
-10-
<PAGE>
Worth Bruntjen has been a Senior Vice President of the Adviser since
January 1988.
Richard W. Filippone has been a Senior Vice President of the Adviser since
November 1991, prior to which he had been a Vice President of the Adviser from
1987 to 1991.
Marijo A. Goldstein has been a Senior Vice President of the Adviser since
November 1993, prior to which she was a Vice President of the Adviser from 1991
to 1993 and a fixed income analyst of the Adviser since 1988.
Steven V. Markusen has been a Senior Vice President of the Adviser since
December 1993, prior to which had been a senior vice president of Investment
Advisers, Inc., in Minneapolis, Minnesota from 1989 to 1993.
Robert H. Nelson has been a Senior Vice President of the Adviser since
November 1993, prior to which he had been a Vice President of the Adviser from
1991 to 1993 and Assistant Vice President from 1989 to 1991.
Edward P. Nicoski has been a Senior Vice President of the Adviser since
October 1985 and a Managing Director of the Distributor since November 1986.
Nancy S. Olsen has been a Senior Vice President of the Adviser since
November 1991, prior to which she had been a Vice President of the Adviser from
1987 to 1991.
Ronald R. Reuss has been a Senior Vice President of the Adviser since
January 1989.
Bruce D. Salvog has been a Senior Vice President of the Adviser since
January 1992, prior to which he had been a portfolio manager at Kennedy &
Associates in Seattle, Washington from 1984 to 1992.
Sandra K. Shrewsbury has been a Senior Vice President of the Adviser since
September 1993, prior to which she had been a Managing Director of Piper Jaffray
since November 1992, a Vice President of Piper Jaffray since November 1990.
David M. Steele has been a Senior Vice President of the Adviser since
January 1992, prior to which he had been a portfolio manager at Kennedy &
Associates in Seattle, Washington from 1987 to 1992.
Douglas J. White has been a Senior Vice President of the Adviser since
November 1991, prior to which he had been a Vice President of the Adviser from
1989 to 1991.
J. Bradley Stone has been a Vice President of the Adviser since November
1991 and a fixed-income analyst of the Adviser since March 1990.
-11-
<PAGE>
Marcy K. Winson has been a Vice President of the Adviser since November
1993, prior to which she was an Assistant Vice President of the Adviser since
March 1993 and an educator from 1990 to 1992.
Ms. Goldberg, Ms. Emmerich and Mr. Dyer are members of the Company's Audit
Committee. Ms. Goldberg acts as the chairperson of such committee. The Audit
Committee oversees the Funds' financial reporting process, reviews audit results
and recommends annually to the Company a firm of independent certified public
accountants.
The functions to be performed by the Audit Committee are to recommend
annually to the Board a firm of independent certified public accountants to
audit the books and records of the Funds for the ensuing year; to monitor that
firm's performance; to review with the firm the scope and results of each audit
and determine the need, if any, to extend audit procedures; to confer with the
firm and representatives of the Funds on matters concerning the Funds' financial
statements and reports including the appropriateness of its accounting practices
and of its financial controls and procedures; to evaluate the independence of
the firm; to review procedures to safeguard portfolio securities; to review the
purchase by the Funds from the firm of non-audit services; to review all fees
paid to the firm; and to facilitate communications between the firm and the
Funds' officers and Directors.
The Board of Directors also has a Committee of the Independent Directors,
consisting of Mr. Bennett, who serves as chairperson, Messrs. Dyer, and Latimer,
Ms. Emmerich and Ms. Goldberg, and a Derivatives Committee consisting of Ms.
Emmerich, who serves as chairperson, Ms. Goldberg and Mr. Dyer.
The functions of the Committee of the Independent Directors are: (a)
recommendation to the full Board of approval of any management, advisory, sub-
advisory and/or administration agreements; (b) recommendation to the full Board
of approval of any underwriting and/or distribution agreements; (c) review of
the fidelity bond and premium allocation; (d) review of errors and omissions and
any other joint insurance policies and premium allocation; (e) review of, and
monitoring of compliance with, procedures adopted pursuant to certain rules
promulgated under the 1940 Act; and (f) such other duties as the independent
directors shall, from time to time, conclude are necessary or appropriate to
carry out their duties under the 1940 Act. The functions of the Derivatives
Committee are: (a) to oversee practices, policies and procedures of the Adviser
in connection with the use of derivatives; (b) to receive periodic reports from
management and independent accountants; and (c) to report periodically to the
Committee of the Independent Directors and the Board of Directors.
The directors of the Company who are officers or employees of the Adviser
or any of its affiliates receive no remuneration from the Company. Each of the
other directors receives fees that are allocated among the series of the Company
on the basis of the total assets of each series. Each director receives from
the Company and Piper Institutional Funds Inc., collectively, an annual retainer
of $1,000, plus a fee of $250 for each regular quarterly Board of Directors
meeting attended. (The per-meeting fee is based on the total assets of the
Company and Piper Institutional Funds Inc. and will increase to $500 per meeting
in the event total assets exceed $200
-12-
<PAGE>
million, with continuing increases to as high as $1,500 per meeting in the event
total assets reach $5 billion or more. In addition, members of the Audit
Committee not affiliated with the Adviser receive $1,000 for each Audit
Committee meeting attended ($2,000 with respect to the chairperson of the
Committee), with such fee being allocated among all open-end and closed-end
investment companies managed by the Adviser. Members of the Committee of the
Independent Directors and the Derivatives Committee currently receive no
additional compensation. Directors are also reimbursed for expenses incurred
in connection with attending meetings.
The following table sets forth the aggregate compensation received by each
director from the Company during the fiscal year ended September 30, 1995, as
well as the total compensation received by each director from the Company and
all other registered investment companies managed by the Adviser or affiliates
of the Adviser during the calendar year ended December 31, 1994. Directors who
are officers or employees of the Adviser or any of its affiliates did not
receive any such compensation and are not included in the table.
<TABLE>
<CAPTION>
Pension or
Retirement Estimated Total
Aggregate Benefits Annual Benefits Compensation
Compensation Accrued as Part Upon from Fund
Director from the Company of Fund Expenses Retirement Complex*
- -------- ---------------- ---------------- ---------- --------
<S> <C> <C> <C> <C>
David T. Bennett $7,400 None None $57,500
Jaye F. Dyer $7,995 None None $68,250
Karol D. Emmerich $7,995 None None $68,250
Luella G. Goldberg $8,590 None None $71,250
George Latimer $7,400 None None $65,250
</TABLE>
- ------------------
* Consists of 21 registered investment companies managed by the Adviser or an
affiliate of the Adviser, including Piper Funds. Each director included in the
table, other than Mr. Bennett, serves on the board of each such registered
investment company. Mr. Bennett serves on the board of 20 such companies.
INVESTMENT ADVISORY AND OTHER SERVICES
The investment adviser for the Funds is Piper Capital Management
Incorporated (the "Adviser"). Its affiliate, Piper Jaffray Inc. (the
"Distributor"), acts as the Funds' distributor. Each will act as such pursuant
to a written agreement which will be periodically approved by the directors or
the shareholders of the Funds. The address of both the Adviser and the
Distributor is Piper Jaffray Tower, 222 South Ninth Street, Minneapolis,
Minnesota 55402.
CONTROL OF THE ADVISER AND THE DISTRIBUTOR
The Adviser and the Distributor are both wholly owned subsidiaries of Piper
Jaffray Companies Inc., a publicly held corporation which is engaged through
its subsidiaries in various aspects of the financial services industry.
-13-
<PAGE>
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
The Adviser acts as the investment adviser of the Funds under an Investment
Advisory and Management Agreement which has been approved by the Board of
Directors (including a majority of the directors who are not parties to the
agreement, or interested persons of any such party, other than as directors of
the Funds) and the shareholders of the Funds.
The Investment Advisory and Management Agreement will terminate
automatically in the event of its assignment. In addition, the agreement is
terminable at any time, without penalty, by the Board of Directors of the
Company or by vote of a majority of the Company's outstanding voting securities
on not more than 60 days' written notice to the Adviser, and by the Adviser on
60 days' written notice to the Company. The agreement may be terminated with
respect to a particular Fund at any time by a vote of the holders of a majority
of the outstanding voting securities of such Fund, upon 60 days' written notice
to the Adviser. Unless sooner terminated, the agreement shall continue in
effect for more than two years after its execution only so long as such
continuance is specifically approved at least annually by either the Board of
Directors or by a vote of a majority of the outstanding voting securities of the
Company, provided that in either event such continuance is also approved by a
vote of a majority of the directors who are not parties to such agreement, or
interested persons of such parties, cast in person at a meeting called for the
purpose of voting on such approval. If a majority of the outstanding voting
securities of either Fund approves the agreement, the agreement shall continue
in effect with respect to such approving Fund whether or not the shareholders of
the other Fund approve the agreement.
Pursuant to the Investment Advisory and Management Agreement, the Funds pay
the Adviser monthly advisory fees equal on an annual basis to a certain
percentage of each Fund's average net assets as set forth in the following
table.
Annual Advisory Fee
Average Net Asset Values as Percentage of
of the Fund Average Net Assets
------------------------ -------------------
On the first $250,000,000 .50%
On the next $250,000,000 .45%
On average assets of over
$500,000,000 .40%
For the fiscal years ended September 30, 1993, 1994 and 1995, National Fund
paid $341,795, $368,373 and $298,729, respectively, and Minnesota Fund paid
$757,465, $852,616 and $706,675, respectively, to the Adviser pursuant to the
Investment Advisory and Management Agreement.
The Adviser may, although not required under the Investment Advisory and
Management Agreement, reimburse the Funds for amounts, if any, by which the
Funds' total operating and management expenses (including the Adviser's
compensation and amounts paid pursuant to the Company's Rule 12b-1 plan, but
excluding interest, taxes, brokerage fees and commissions, and extraordinary
-14-
<PAGE>
expenses) for the fiscal year exceed a certain percentage of average daily net
assets. However, this arrangement may be modified or discontinued at any time
after fiscal year end, in the Adviser's discretion. The Investment Advisory
and Management Agreement provides that the Adviser must make any expense
reimbursements to the Funds required under state law. The laws of California
provide that aggregate annual expenses of a mutual fund shall not normally
exceed 2-1/2% of the first $30 million of the average net assets, 2% of the next
$70 million of the average net assets and 1-1/2% of the remaining average net
assets. Such expenses include the Adviser's compensation, but exclude interest,
taxes, brokerage fees and commissions, extraordinary expenses and amounts paid
under the Company's Rule 12b-1 Plan. The Adviser does not believe that the laws
of any other state in which the Funds' shares may be offered for sale contain
expense reimbursement requirements.
Under the Investment Advisory and Management Agreement, the Adviser
provides each Fund with advice and assistance in the selection and disposition
of that Fund's investments. All investment decisions are subject to review by
the Board of Directors of the Company. The Adviser is obligated to pay the
salaries and fees of any affiliates of the Adviser serving as officers or
directors of the Funds.
The same security may be suitable for one or both of the Funds and/or for
other series of the Company or other funds or private accounts managed by the
Adviser or its affiliates. If and when two or more funds or accounts
simultaneously purchase or sell the same security, the transactions will be
allocated as to price and amount in accordance with arrangements equitable to
each fund or account. The simultaneous purchase or sale of the same securities
by both Funds or by either of the Funds and other series of the Company or other
funds or accounts may have a detrimental effect on a Fund, as this may affect
the price paid or received by that Fund or the size of the position obtainable
or able to be sold by that Fund.
EXPENSES
The expenses of each Fund are deducted from their income before dividends
are paid. These expenses include, but are not limited to, organizational costs,
fees paid to the Adviser, fees and expenses of officers and directors who are
not affiliated with the Adviser, taxes, interest, legal fees, transfer agent,
dividend disbursing agent and custodian fees, audit fees, brokerage fees and
commissions, fees and expenses of registering and qualifying the Funds and their
shares for distribution under federal and state securities laws, expenses of
preparing prospectuses and statements of additional information and of printing
and distributing prospectuses and statements of additional information annually
to existing shareholders, the expenses of reports to shareholders, shareholders'
meetings and proxy solicitations, distribution expenses pursuant to the Rule
12b-1 plan, and other expenses which are not expressly assumed by the Adviser
under the Investment Advisory and Management Agreement. Any general expenses of
the Company that are not readily identifiable as belonging to a particular
series of the Company will be allocated among the series based upon the relative
net assets of the series at the time such expenses were incurred.
-15-
<PAGE>
DISTRIBUTION PLAN
Rule 12b-1(b) under the 1940 Act provides that any payments made by the
Funds in connection with financing the distribution of their shares may only be
made pursuant to a written plan describing all aspects of the proposed financing
of distribution, and also requires that all agreements with any person relating
to the implementation of the plan must be in writing. Because some of the
payments described below to be made by the Funds are distribution expenses
within the meaning of Rule 12b-1, the Company has entered into an Underwriting
and Distribution Agreement with the Distributor pursuant to a Distribution Plan
adopted in accordance with such Rule.
Rule 12b-1(b)(1) requires that such plan be approved by a majority of a
Fund's outstanding shares, and Rule 12b-1(b)(2) requires that such plan,
together with any related agreements, be approved by a vote of the Board of
Directors and of the directors who are not interested persons of the Company and
who have no direct or indirect interest in the operation of the plan or in the
agreements related to the plan, cast in person at a meeting called for the
purpose of voting on such plan or agreement. Rule 12b-1(b)(3) requires that the
plan or agreement provide, in substance:
(a) that it shall continue in effect for a period of more than one
year from the date of its execution or adoption only so long as such
continuance is specifically approved at least annually in the manner
described in paragraph (b)(2) of Rule 12b-1;
(b) that any person authorized to direct the disposition of moneys
paid or payable by the Company pursuant to the plan or any related
agreement shall provide to the Company's Board of Directors, and the
directors shall review, at least quarterly, a written report of the amounts
so expended and the purposes for which such expenditures were made; and
(c) in the case of a plan, that it may be terminated at any time by a
vote of a majority of the members of the Board of Directors of the Company
who are not interested persons of the Company and who have no direct or
indirect financial interest in the operation of the plan or in any
agreements related to the plan or by a vote of a majority of the
outstanding voting securities of a Fund.
Rule 12b-1(b)(4) requires that such a plan may not be amended to increase
materially the amount to be spent for distribution without shareholder approval
and that all material amendments of the plan must be approved in the manner
described in paragraph (b)(2) of Rule 12b-1.
Rule 12b-1(c) provides that the Company may rely upon Rule 12b-1(b) only if
the selection and nomination of the Company's disinterested directors are
committed to the discretion of such disinterested directors. Rule 12b-1(e)
provides that the Company may implement or continue a plan pursuant to Rule 12b-
1(b) only if the directors who vote to approve such implementation or
continuation conclude, in the exercise of reasonable business judgment and in
light of their fiduciary duties under state law, and under Sections 36(a) and
(b) of the 1940 Act, that there is a reasonable likelihood that the plan will
benefit the Company and its
-16-
<PAGE>
shareholders. The Board of Directors has concluded that there is a reasonable
likelihood that the Distribution Plan will benefit the Company and its
shareholders.
Pursuant to the provisions of the Distribution Plan, each Fund pays a fee
to the Distributor at a monthly rate of 1/12 of .30% of such Fund's average
daily net assets in connection with servicing of the Fund's shareholder accounts
and in connection with distribution-related services provided with respect to
the Funds. A portion of the total fee (to be determined from time to time by
the Board of Directors) may be paid as a distribution fee and will be used by
the Distributor to cover expenses that are primarily intended to result in, or
that are primarily attributable to, the sale of shares of the Funds
("Distribution Expenses"), and the remaining portion of the fee may be paid as a
shareholder servicing fee and will be used by the distributor to provide
compensation for ongoing servicing and/or maintenance of shareholder accounts
with respect to the Funds ("Shareholder Servicing Costs"). Distribution
Expenses under the Plan include, but are not limited to, initial and ongoing
sales compensation (in addition to sales charges) paid to Investment Executives
of the Distributor and to other broker-dealers; expenses incurred in the
printing of prospectuses, statements of additional information and reports used
for sales purposes; expenses of preparation and distribution of sales
literature; expenses of advertising of any type; an allocation of the
Distributor's overhead; and payments to and expenses of persons who provide
support services in connection with the distribution of Fund shares.
Shareholder Servicing Costs include all expenses of the Distributor incurred in
connection with providing administrative or accounting services to shareholders,
including, but not limited to, an allocation of the Distributor's overhead and
payments made to persons, including employees of the Distributor, who respond to
inquiries of shareholders of the Funds regarding their ownership of shares or
their accounts with the Funds, or who provide other administrative or accounting
services not otherwise required to be provided by the Funds' Adviser or transfer
agent.
For the fiscal years ended September 30, 1993, 1994 and 1995, the
Distributor voluntarily limited amounts payable under the Distribution Plan to
.21%, .20% and .22%, respectively, of average daily net assets for each of the
Funds. During such periods, National Fund paid distribution fees to the
Distributor of $143,122, $147,349 and $129,534, respectively, and Minnesota Fund
paid distribution fees to the Distributor of $317,490, $341,046 and $306,351,
respectively. The Distributor has voluntarily limited amounts payable under the
Distribution Plan during fiscal 1996 to an annual rate of .22% of the average
daily net assets of each of the Funds. The Distributor may terminate its
voluntary fee limitation at any time in its discretion.
-17-
<PAGE>
Distribution fees for the fiscal year ended September 30, 1995, were used
by the Distributor as follows:
<TABLE>
<CAPTION>
National Fund Minnesota Fund
------------- --------------
<S> <C> <C>
Advertising $ -0- $ -0-
Printing and Mailing of
Prospectuses to Other Than
Current Shareholders 11,776 27,850
Compensation to Underwriters
(trail fees to Investment Executives) 117,758 278,501
Compensation to Dealers -0- -0-
Compensation to Sales Personnel
Interest, Carrying or Other
Financing Charges -0- -0-
Other (Specify) -0- -0-
Total $129,534 $306,351
</TABLE>
UNDERWRITING AND DISTRIBUTION AGREEMENT
Pursuant to the Underwriting and Distribution Agreement, the Distributor
has agreed to act as the principal underwriter for the Funds in the sale and
distribution to the public of shares of the Funds, either through dealers or
otherwise. The Distributor has agreed to offer such shares for sale at all
times when such shares are available for sale and may lawfully be offered for
sale and sold. As compensation for its services, in addition to receiving its
distribution fees pursuant to the Distribution Plan discussed above, the
Distributor receives the sales load on sales of Fund shares set forth in the
Prospectus.
The following table sets forth the aggregate dollar amount of underwriting
commissions paid by each of the Funds for the fiscal years ended September 30,
1993, 1994 and 1995, the amount of such commissions retained by the Distributor
and the total dollar amount of brokerage commissions paid by each Fund to the
Distributor.
<TABLE>
<CAPTION>
Underwriting Commissions Brokerage Commissions
Total Underwriting Commissions Retained by Distributor Paid to Distributor
------------------------------ ------------------------ ---------------------
Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal
year year year year year year year year year
ended ended ended ended ended ended ended ended ended
9/30/93 9/30/94 9/30/95 9/30/93 9/30/94 9/30/95 9/30/93 9/30/94 9/30/95
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
National $355,391 $181,043 $36,355 $206,127 $105,005 $21,086 $-0- $850 $-0-
Minnesota 685,043 389,325 83,956 397,325 225,809 48,694 -0- 850 -0-
</TABLE>
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Investors Fiduciary Trust Company ("IFTC"), the transfer agent for the
Company, maintains certain omnibus shareholder accounts for each of the Funds.
Each such omnibus account represents the accounts of a number of individual
shareholders of a Fund. The Company has entered into a Shareholder Account
Servicing Agreement with the Distributor, pursuant to which the Distributor
provides certain transfer agent and dividend disbursing agent services for the
underlying individual shareholder accounts. Pursuant to such Agreement, the
Distributor has agreed to perform the usual and ordinary services of transfer
agent and dividend disbursing agent not performed by IFTC with respect to the
underlying
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<PAGE>
individual shareholder accounts, including, without limitation, the following:
maintaining all shareholder accounts, preparing shareholder meeting lists,
mailing shareholder reports and prospectuses, tracking shareholder accounts for
blue sky and Rule l2b-1 purposes, withholding taxes on nonresident alien and
foreign corporation accounts, preparing and mailing checks for disbursement of
income dividends and capital gains distributions, preparing and filing U.S.
Treasury Department Form 1099 for all shareholders, preparing and mailing
confirmation forms to shareholders and dealers with respect to all purchases,
exchanges and liquidations of series shares and other transactions in
shareholder accounts for which confirmations are required, recording
reinvestments of dividends and distributions in series shares, recording
redemptions of series shares, and preparing and mailing checks for payments upon
redemption and for disbursements to withdrawal plan holders. As compensation
for such services, the Distributor will be paid an annual fee of $7.50 per
active shareholder account (defined as an account that has a balance of
shares) and $1.60 per closed account (defined as an account that does not
have a balance of shares, but has had activitiy within the past 12 months).
Such fee is payable on a monthly basis at a rate of 1/12 of the annual
per-account charge. Such fee covers all services listed above, with the
exception of preparing shareholder meeting lists and mailing shareholder
reports and prospectuses. These services, along with proxy processing (if
applicable) and other special service requests, are billable as performed at
a mutually agreed upon fee in addition to the annual fee noted above,
provided that such mutually agreed upon fee shall be fair and reasonable in
light of the usual and customary charges made by others for services of the
same nature and quality. During the fiscal year ended September 30, 1995,
National Fund paid $9,764 and Minnesota Fund paid $16,947 to the Distributor
under the Agreement.
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
Because each Fund's portfolio is composed exclusively of debt, rather than
equity securities, most of the Funds' portfolio transactions are effected
without the payment of brokerage commissions, but at net prices which usually
include a markup. Most of the Funds' transactions are with the issuer or with
major dealers on a principal basis acting for their own account and not as
brokers. However, portfolio transactions for the Funds which are executed on an
agency basis may be effected through the Distributor on a securities exchange if
the commissions, fees or other remuneration received by the Distributor are
reasonable and fair compared to the commissions, fees or other remuneration paid
to other brokers or other futures commission merchants in connection with
comparable transactions involving similar securities or similar futures
contracts or options on futures contracts being purchased or sold on an exchange
during a comparable period of time. In effecting portfolio transactions through
the Distributor, the Funds intend to comply with Section 17(e)(1) of the 1940
Act.
The Adviser is responsible for effecting securities transactions for each
Fund. In placing orders for securities transactions, the primary criterion for
the selection of a broker-dealer is the ability of the broker-dealer, in the
opinion of the Adviser, to secure prompt execution of the transactions at the
most favorable net price, considering the state of the market at the time.
Frequently the Adviser selects a
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<PAGE>
broker-dealer to effect a particular transaction without contacting all
broker-dealers who might be able to effect such transaction, because of the
volatility of the money market and the desire to accept a particular price for a
security because the price offered by the broker-dealer meets a Fund's
guidelines for profit, yield, or both.
When consistent with the objectives of prompt execution and favorable net
price, business may be placed with broker-dealers who furnish investment
research or services to the Adviser. Such research or services include advice,
both directly and in writing, as to the value of securities; the advisability of
investing in, purchasing or selling securities; and the availability of
securities, or purchasers or sellers of securities; as well as analyses and
reports concerning issues, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts. This allows the Adviser to
supplement its own investment research activities and enables the Adviser to
obtain the views and information of individuals and research staffs of many
different securities firms prior to making investment decisions for the Funds.
To the extent portfolio transactions are effected with broker-dealers who
furnish research services to the Adviser, the Adviser receives a benefit, not
capable of evaluation in dollar amounts, without providing any direct monetary
benefit to the Funds from these transactions. The Adviser believes that most
research services obtained by it generally benefit several or all of the
investment companies and private accounts which it manages, as opposed to solely
benefiting one specific managed fund or account. Normally, research services
obtained through managed funds or accounts investing in common stocks would
primarily benefit the managed funds or accounts which invest in common stock;
similarly, services obtained from transactions in fixed-income securities would
normally be of greater benefit to the managed funds or accounts which invest in
debt securities.
The Adviser has not entered into any formal or informal agreements with any
broker-dealers, nor does it maintain any "formula" which must be followed in
connection with the placement of the Funds' portfolio transactions in exchange
for research services provided the Adviser, except as noted below. However, the
Adviser does maintain an informal list of broker-dealers, which is used from
time to time as a general guide in the placement of the Funds' business, in
order to encourage certain broker-dealers to provide the Adviser with research
services which the Adviser anticipates will be useful to it. Because the list
is merely a general guide, which is to be used only after the primary criterion
for the selection of broker-dealers (discussed above) has been met, substantial
deviations from the list are permissible and may be expected to occur. In the
event any transactions are executed on an agency basis, the Adviser will
authorize the Funds to pay an amount of commission for effecting a securities
transaction in excess of the amount of commission another broker-dealer would
have charged only if the Adviser determines in good faith that such amount of
commission is reasonable in relation to the value of the brokerage and research
services provided by such broker-dealer, viewed in terms of either that
particular transaction or the Adviser's overall responsibilities with respect to
the accounts as to which it exercises investment discretion. If the Funds
execute any transactions on an agency basis, they will generally pay higher than
the lowest commission rates available.
-20-
<PAGE>
Any portfolio transactions for the Funds executed on an agency basis,
including transactions in futures contracts and options thereon, may be effected
through the Distributor. In determining the commissions to be paid to the
Distributor in connection with transactions effected on a securities exchange,
it is the policy of the Funds that such commissions will, in the judgment of the
Adviser, subject to review by the Board of Directors, be both (a) at least as
favorable as those which would be charged by other qualified brokers or futures
commission merchants in connection with comparable transactions involving
similar securities being purchased or sold on an exchange during a comparable
period of time, and (b) at least as favorable as commissions contemporaneously
charged by the Distributor on comparable transactions for its most favored
comparable unaffiliated customers. While the Funds do not deem it practicable
and in their best interest to solicit competitive bids for commission rates on
each transaction, consideration will regularly be given to posted commission
rates as well as to other information concerning the level of commissions
charged on comparable transactions by other qualified brokers and futures
commission merchants.
Neither Fund paid any brokerage commissions for the fiscal year ended
September 30, 1993. For the fiscal year ended September 30, 1994, National Fund
and Minnesota Fund each paid $850 in brokerage commissions in connection with
options and futures transactions. For the fiscal year ended September 30, 1995,
neither Fund paid any brokerage commissions.
From time to time the Funds may acquire the securities of their regular
brokers or dealers or parent companies of such brokers or dealers. Neither Fund
purchased securities of its regular brokers or dealers or parent companies of
such brokers or dealers during the 1995 fiscal year.
CAPITAL STOCK AND OWNERSHIP OF SHARES
Each Fund's shares of common stock have a par value of $.01 per share, and
have equal rights to share in dividends and assets. The shares possess no
preemptive or conversion rights. Cumulative voting is not authorized. This
means that the holders of more than 50% of the shares voting for the election of
directors can elect 100% of the directors if they choose to do so, and in such
event the holders of the remaining shares will be unable to elect any directors.
As of November 1, 1995, no shareholder was known by the Funds to own
beneficially 5% or more of the outstanding shares of either of the Funds. The
directors and officers of the Company as a group owned less than 1% of the
outstanding shares of each of the Funds as of such date.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the public offering price of Fund shares is
summarized in the Prospectus in the text following the headings "How to Purchase
Shares--Public Offering Price" and "Valuation of Shares." The net asset value
of each Fund's shares is determined on each day on which the New York Stock
Exchange is open, provided that the net asset value need not be determined on
days when no Fund shares are tendered for redemption and no order for Fund
shares is
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<PAGE>
received. The New York Stock Exchange is not open for business on the following
holidays (or on the nearest Monday or Friday if the holiday falls on a weekend):
New Year's Day, Presidents' Day, Good Friday, Memorial Day, July 4th, Labor Day,
Thanksgiving and Christmas.
The portfolio securities in which each Fund invests fluctuate in value, and
hence the net asset value per share of each Fund also fluctuates. On
September 30, 1994, the net asset value per share for each Fund was calculated
as follows:
NATIONAL FUND
Net Assets ($57,060,653) = Net Asset Value Per Share
----------------------------- ($10.69)
Shares Outstanding (5,336,531)
MINNESOTA FUND
Net Assets ($133,857,105) = Net Asset Value Per Share
----------------------------- ($10.81)
Shares Outstanding (12,377,572)
In each case, a sales charge of 4.17% of the net asset value (in the case
of sales of less than $100,000) will be added to the net asset value per share
to determine the public offering price per share.
CALCULATION OF PERFORMANCE DATA
Advertisements and other sales literature for the Funds may refer to
"yield," "tax equivalent yield," "average annual total return" or "cumulative
total return." Such amounts are calculated as follows:
Yield is computed by dividing the net investment income per share (as
defined under Securities and Exchange Commission rules and regulations) earned
during the computation period by the maximum offering price per share on the
last day of the period, according to the following formula:
a-b 6
YIELD = 2[(--- + 1) - 1]
cd
Where: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of
reimbursements);
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends; and
d = the maximum offering price per share on the last day of
the period.
National Fund's yield for the 30-day period ended September 30, 1995
was 4.68%. For the same period, Minnesota Fund's yield was 5.62%.
Tax equivalent yield is computed by dividing that portion of the yield of a
Fund (as computed pursuant to the above paragraph) which is tax-exempt by one
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<PAGE>
minus a stated income tax rate and adding the product to that portion, if any,
of the yield of the Fund that is not tax-exempt.
National Fund's tax equivalent yield for the 30-day period ended
September 30, 1995 was 6.78%, assuming a federal income tax rate of 31%. For
the same period, Minnesota Fund's tax equivalent yield was 9.30%, assuming a
combined federal/Minnesota income tax rate of 39.6%.
Average annual total return figures are computed by finding the average
annual compounded rates of return over the periods indicated in the
advertisement that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of
such period.
This calculation deducts the maximum sales charge from the initial hypothetical
$1,000 investment, assumes all dividends and capital gains distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus, and includes all recurring fees, such as investment advisory
and management fees, charged to all shareholder accounts.
During some of the periods for which average annual total return is
calculated, the Adviser waived or paid certain expenses of the Funds, thereby
increasing average annual total return. These expenses may or may not be waived
or paid in the future, in the Adviser's discretion.
The following table sets forth the average annual total return of each Fund
for various periods ended September 30, 1995:
<TABLE>
<CAPTION>
Average Annual Total Return
---------------------------------------------------------------------------------
Absent Voluntary
Actual Fee Waivers
------------------------------------ ------------------------------------
Since Since
1 Year 5 Year Inception 1 Year 5 Year Inception
------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
National Fund
(Inception 7/11/88) 5.89 % 7.51% 7.21% * 7.47% 7.00%
Minnesota Fund
(Inception 7/11/88) 6.92% 7.50% 7.14% * 7.50% 7.14%
</TABLE>
* No fees waived during this period.
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<PAGE>
Cumulative total return is computed by finding the cumulative compounded
rate of return over the period indicated in the advertisement that would equate
the initial amount invested to the ending redeemable value, according to the
following formula:
ERV-P
CTR = (----) 100
P
Where: CTR = Cumulative total return
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of
such period; and
P = initial payment of $1,000
This calculation assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus and includes all recurring fees, such as investment advisory
and management fees, charged to all shareholder accounts.
The cumulative total returns for the period from July 11, 1988
(commencement of operations) through September 30, 1995 for National Fund and
Minnesota Fund were 65.33% and 64.64%, respectively. The Adviser waived or paid
certain expenses of the Funds during this time period and such expenses may or
may not be waived in the future. Absent any voluntary payments or waivers,
National Fund's cumulative total return for the same period would have been
65.12% and Minnesota Fund's cumulative total return would have been 64.64%.
Comparative performance information may be used from time to time in
advertising the Funds' shares, including data from Lipper Analytical Services,
Inc. and other industry publications. The performance of National Fund and
Minnesota Fund may be compared, respectively, to the performance of National
Tax-Exempt Funds and Minnesota Tax-Exempt funds as reported by Lipper Analytical
Services, Inc., to various unmanaged market indices or to data from Morningstar,
Inc. or other entities or organizations that track the performance of investment
companies.
PURCHASE OF SHARES
An investor may qualify for a reduced sales charge immediately by signing a
nonbinding Letter of Intent stating the investor's intention to invest within a
13-month period, beginning not earlier than 90 days prior to the date of
execution of the Letter, a specified amount which, if made at one time, would
qualify for a reduced sales charge. Reinvested dividends will be treated as
purchases of additional shares. Any redemptions made during the term of the
Letter of Intent will be subtracted from the amount of purchases in determining
whether the Letter of Intent has been completed. During the term of a Letter of
Intent, IFTC will hold shares representing 5% of the amount that the investor
intends to invest during the 13-month period in escrow for payment of a higher
sales charge if the full amount indicated in the Letter of Intent is not
purchased. Dividends on the escrowed shares will be paid to the shareholder.
The escrowed shares will be released when the full amount indicated has been
purchased. If the full indicated amount is not purchased within the 13-month
period, the investor will be required to pay, either in cash or by
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<PAGE>
liquidating escrowed shares, an amount equal to the difference in the dollar
amount of sales charge actually paid and the amount of sales charge the investor
would have paid on his or her aggregate purchases if the total of such purchases
had been made at a single time.
REDEMPTION OF SHARES
GENERAL
Redemption of shares, or payment, may be suspended at times (a) when the
New York Stock Exchange is closed for other than customary weekend or holiday
closings, (b) when trading on said Exchange is restricted, (c) when an emergency
exists, as a result of which disposal by the Funds of securities owned by them
is not reasonably practicable, or it is not reasonably practicable for the Funds
fairly to determine the value of their net assets, or (d) during any other
period when the Securities and Exchange Commission, by order, so permits,
provided that applicable rules and regulations of the Securities and Exchange
Commission shall govern as to whether the conditions prescribed in (b) or (c)
exist.
Shareholders who purchased shares through a broker-dealer other than the
Distributor may also redeem such shares by written request to IFTC at the
address set forth in the Prospectus. To be considered in proper form, written
requests for redemption should indicate the dollar amount or number of shares to
be redeemed, refer to the shareholder's Fund account number, and give either a
social security or tax identification number. The request should be signed in
exactly the same way the account is registered. If there is more than one owner
of the shares, all owners must sign. If shares to be redeemed have a value of
$10,000 or more or redemption proceeds are to be paid to someone other than the
shareholder at the shareholder's address of record, the signature(s) must be
guaranteed by an "eligible guarantor institution," which includes a commercial
bank that is a member of the Federal Deposit Insurance Corporation, a trust
company, a member firm of a domestic stock exchange, a savings association or a
credit union that is authorized by its charter to provide a signature guarantee.
IFTC may reject redemption instructions if the guarantor is neither a member of
nor a participant in a signature guarantee program. Signature guarantees by
notaries public are not acceptable. The purpose of a signature guarantee is to
protect shareholders against the possibility of fraud. Further documentation
will be requested from corporations, administrators, executors, personal
representatives, trustees and custodians. Redemption requests given by
facsimile will not be accepted. Unless other instructions are given in proper
form, a check for the proceeds of the redemption will be sent to the
shareholder's address of record.
REINSTATEMENT PRIVILEGE
A shareholder who has redeemed shares of a Fund may reinvest all or part of
the redemption proceeds in shares of any Fund within 30 days without payment of
an additional sales charge. The Distributor will refund to any shareholder a
pro rata amount of any contingent deferred sales charge paid by such shareholder
in connection with a redemption of Fund shares if and to the extent that the
redemption proceeds are reinvested within 30 days of such redemption in any
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mutual fund managed by the Adviser. Such refund will be based upon the ratio of
the net asset value of shares purchased in the reinvestment to the net asset
value of shares redeemed. Reinvestments will be allowed at net asset value
without the payment of a front-end sales charge, irrespective of the amounts of
the reinvestment, but shall be subject to the same pro rata contingent deferred
sales charge that was applicable to the earlier investment; however, the period
during which the contingent deferred sales charge shall apply on the newly
issued shares shall be the period applicable to the redeemed shares extended by
the number of days between the redemption and the reinvestment dates
(inclusive).
SYSTEMATIC WITHDRAWAL PLAN
To establish a Systematic Withdrawal Plan for any Fund and receive regular
periodic payments, an account must have a value of $5,000 or more. A request to
establish a Systematic Withdrawal Plan must be submitted in writing to an
investor's Piper Jaffray Investment Executive or other broker-dealer. There are
no service charges for maintenance; the minimum amount that may be withdrawn
each period is $100. (This is merely the minimum amount allowed and should not
be interpreted as a recommended amount.) The holder of a Systematic Withdrawal
Plan will have any income dividends and any capital gains distributions
reinvested in full and fractional shares at net asset value. To provide funds
for payment, the appropriate Fund will redeem as many full and fractional shares
as necessary at the redemption price, which is net asset value. Redemption of
shares may reduce or possibly exhaust the shares in your account, particularly
in the event of a market decline. As with other redemptions, a redemption to
make a withdrawal payment is a sale for federal income tax purposes. Payments
made pursuant to a Systematic Withdrawal Plan cannot be considered as actual
yield or income since part of such payments may be a return of capital.
The maintenance of a Systematic Withdrawal Plan for a Fund concurrent with
purchases of additional shares of that Fund would be disadvantageous because of
the sales commission involved in the additional purchases. A confirmation of
each transaction showing the sources of the payment and the share and cash
balance remaining in the account will be sent. The plan may be terminated on
written notice by the shareholder or the appropriate Fund, and it will terminate
automatically if all shares are liquidated or withdrawn from the account or upon
the death or incapacity of the shareholder. The amount and schedule of
withdrawal payments may be changed or suspended by giving written notice to your
Piper Jaffray Investment Executive or other broker-dealer at least seven
business days prior to the end of the month preceding a scheduled payment.
TAXATION
Pursuant to the Internal Revenue Code of 1986 (the "Code"), each Fund will
be subject to a nondeductible excise tax equal to 4% of the excess, if any, of
the amount required to be distributed pursuant to the Code for each calendar
year over the amount actually distributed. In order to avoid the imposition of
this excise tax, each Fund generally must declare dividends by the end of a
calendar year representing 98% of the Fund's ordinary income for the calendar
year and 98% of its
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capital gain net income (both long-term and short-term capital gains) for the
12-month period ending October 31 of the calendar year.
Ordinarily, distributions and redemption proceeds earned by a Fund
shareholder are not subject to withholding of federal income tax. However, 31%
of a Fund shareholder's distributions and redemption proceeds must be withheld
if a Fund shareholder fails to supply the Fund or its agent with such
shareholder's taxpayer identification number or if a Fund shareholder who is
otherwise exempt from withholding fails to properly document such shareholder's
status as an exempt recipient.
Any loss on the sale or exchange of shares of a Fund generally will be
disallowed to the extent that a shareholder acquires or contracts to acquire
shares of the same Fund within 30 days before or after such sale or exchange.
In addition, if a shareholder disposes of shares within 90 days of acquiring
such shares and purchases other shares of the Company or another mutual fund
managed by the Adviser at a reduced sales charge, the shareholder's tax basis
for determining gain or loss on the shares which are disposed of is reduced by
the lesser of the amount of the sales charge that was paid when the shares
disposed of were acquired or the amount by which the sales charge for the new
shares is reduced. If a shareholder's tax basis is so reduced, the amount of
the reduction is treated as part of the tax basis of the new shares.
Any loss on the sale or exchange of shares of a Fund held for six months or
less (although regulations may reduce this time period to 31 days) will be
disallowed for federal and Minnesota income tax purposes to the extent of the
amount of any exempt-interest dividend received with respect to such shares.
This loss disallowance rule applies to Minnesota taxpayers (including
corporations) even though all or a portion of such dividend is not excluded from
Minnesota taxable income. Certain deductions otherwise allowable to financial
institutions and property and casualty insurance companies will be eliminated or
reduced by reason of the receipt of certain exempt-interest dividends.
Under the Code, interest on indebtedness incurred or continued to purchase
or carry shares of an investment company paying exempt-interest dividends, such
as each Fund, will not be deductible by a shareholder in proportion to the ratio
of exempt-interest dividends to all dividends other than those treated as
long-term capital gains. Indebtedness may be allocated to shares of either Fund
even though not directly traceable to the purchase of such shares. Federal law
also restricts the deductibility of other expenses allocable to shares of each
Fund. Similar nondeductibility rules apply under Minnesota law to individuals,
estates and trusts, even as to exempt-interest dividends that are not excluded
from Minnesota taxable net income.
For federal income tax purposes, an alternative minimum tax ("AMT") is
imposed on taxpayers to the extent that such tax exceeds a taxpayer's regular
income tax liability (with certain adjustments). Exempt-interest dividends
attributable to interest income on certain tax-exempt obligations issued after
August 7, 1986 to finance certain private activities are treated as an item of
tax preference that is included in alternative minimum taxable income for
purposes of computing the
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federal alternative minimum tax for all taxpayers and the federal environmental
tax on corporations. The Funds may invest in obligations the interest on which
is treated as an item of tax preference, to the extent set forth in the
Prospectus. In addition, a portion of all other tax-exempt interest received by
a corporation, including exempt-interest dividends, will be included in adjusted
current earnings and earnings and profits for purposes of determining the
federal corporate alternative minimum tax, the environmental tax imposed on
corporations by Section 59A of the Code, and the branch profits tax imposed on
foreign corporations under Section 884 of the Code.
Because liability for AMT in the case of individuals and the corporate
minimum tax in the case of corporations will depend upon the regular tax
liability and tax preference items of a specific taxpayer, the extent, if any,
to which any tax preference items resulting from investment in a Fund will be
subject to the tax will depend upon each shareholder's individual situation.
For shareholders with substantial tax preferences, the AMT or corporate minimum
tax could reduce the after-tax economic benefits of an investment in the Fund.
Each shareholder is advised to consult his or her tax adviser with respect to
the possible effects of such tax preference items.
For shareholders who are or may become recipients of Social Security
benefits, exempt-interest dividends are includable in computing "modified
adjusted gross income" for purposes of determining the amount of Social Security
benefits, if any, that is required to be included in gross income. The maximum
amount of Social Security benefits includable in gross income is 85%.
The Code also forbids a regulated investment company from earning 30% or
more of its gross income from the sale or other disposition of securities,
futures contracts and options held less than three months.
The Code requires a regulated investment company to diversify its holdings.
The Internal Revenue Service has not made its position clear regarding the
treatment of futures contracts and options for purposes of the diversification
test, and the extent to which a Fund could buy or sell futures contracts and
options may be limited by this requirement.
Gain or loss on futures contracts and options is taken into account when
realized by entering into a closing transaction or by exercise. In addition,
with respect to many types of futures contracts and options held at the end
of a Fund's taxable year, unrealized gain or loss on such contracts is taken
into account at the then current fair market value thereof under a special
"marked-to-market, 60/40 system," and such gain or loss is recognized for tax
purposes. The gain or loss from such futures contracts and options
(including premiums on certain options that expire unexercised) is treated as
60% long-term and 40% short-term capital gain or loss, regardless of their
holding period. The amount of any capital gain or loss actually realized by a
Fund in a subsequent sale or other disposition of such futures contracts will
be adjusted to reflect any capital gain or loss taken into account by the
Fund in a prior year as a result of the constructive sale under the
"marked-to-market, 60/40 system." Notwithstanding the rules described above,
with respect to certain futures contracts, a Fund may make an election that
will have the effect of
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exempting all or a part of those identified futures contracts from being treated
for federal income tax purposes as sold on the last business day of the Fund's
taxable year. All or part of any loss realized by the Fund on any closing of a
futures contract may be deferred until all of the Fund's offsetting positions
with respect to the futures contracts are closed.
The foregoing relates only to federal and Minnesota income taxation.
Prospective shareholders should consult their tax advisers as to the possible
application of other state and local income tax laws to Fund distributions.
GENERAL INFORMATION
The Board of Directors may, without shareholder approval, create and issue
one or more additional classes of shares within each Fund, as well as within any
series of the Company created in the future. All classes of shares in a Fund
would be identical except that each class of shares would be available through a
different distribution channel and certain classes might incur different
expenses for the provision of distribution services or the provision of
shareholder services or administration assistance by institutions. Shares of
each class would share equally in the gross income of a series, but any
variation in expenses would be charged separately against the income of the
particular class incurring such expenses. This would result in variations in
net investment income accrued and dividends paid by and in the net asset value
of the different classes of a series. This ability to create multiple classes
of shares within each series of the Company will allow the Company in the future
the flexibility to better tailor its methods of marketing, administering and
distributing shares of the Funds to the needs of particular investors and to
allocate expenses related to such marketing, administration and distribution
methods to the particular classes of shareholders of the Fund incurring such
expenses.
On an issue affecting only a particular series, the shares of the affected
series vote separately. An example of such an issue would be a fundamental
investment restriction pertaining to only one series. In voting on the
Investment Advisory and Management Agreement (the "Agreement"), approval of the
Agreement by the shareholders of a particular series would make the Agreement
effective as to that series whether or not it had been approved by the
shareholders of the other series.
The assets received by the Company for the issue or sale of shares of each
series, and all income, earnings, profits and proceeds thereof, subject only to
the rights of creditors, are allocated to such series, and constitute the
underlying assets of such series. The underlying assets of each series are
required to be segregated on the books of account, and are to be charged with
the expenses in respect to such series and with a share of the general expenses
of the Company. Any general expenses of the Company not readily identifiable as
belonging to a particular series shall be allocated among the series based upon
the relative net assets of the series at the time such expenses were accrued.
Minnesota has enacted legislation which authorizes corporations to
eliminate or limit the personal liability of a director to the corporation or
its shareholders for monetary damages for breach of the fiduciary duty of "care"
(the duty to act with the
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care an ordinarily prudent person in a like position would exercise under
similar circumstances). Minnesota law does not, however, permit a corporation
to eliminate or limit the liability of a director (a) for any breach of the
director's duty of "loyalty" to the corporation or its shareholders (the duty to
act in good faith and in a manner reasonably believed to be in the best interest
of the corporation), (b) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (c) for authorizing a
dividend, stock repurchase or redemption or other distribution in violation of
Minnesota law or for violation of certain provisions of Minnesota securities
laws, or (d) for any transaction from which the director derived an improper
personal benefit. Minnesota law does not permit elimination or limitation of a
director's liability under the 1933 Act or the Securities Exchange Act of 1934,
and the 1940 Act prohibits elimination or limitation of a director's liability
for acts involving willful malfeasance, bad faith, gross negligence or reckless
disregard of the duties of a director. The Articles of Incorporation of Piper
Global limit the liability of directors to the fullest extent permitted by
Minnesota law and the 1940 Act.
FINANCIAL STATEMENTS
The audited financial statements and supplementary schedules for the Funds
as of September 30, 1995, have been incorporated by reference into this
Statement of Additional Information from the Funds' annual report to
shareholders in reliance on the report of KPMG Peat Marwick LLP, 4200 Norwest
Center, Minneapolis, Minnesota 55402, independent auditors of the Funds, given
on the authority of such firm as experts in accounting and auditing.
PENDING LITIGATION
Complaints have been brought in federal and state court relating to one
open-end and twelve closed-end investment companies managed by the Adviser and
to two open-end funds for which the Adviser has acted as sub-adviser. An
Amended Consolidated Class Action Complaint was filed on October 5, 1994 in the
United States District Court, District of Minnesota, against the Institutional
Government Income Portfolio (a series of the Company), the Adviser, the
Distributor, William H. Ellis and Edward J. Kohler alleging certain violations
of federal and state securities laws, including the making of materially
misleading statements in the prospectus, common law negligent misrepresentation
and breach of fiduciary duty. This is a consolidated putative class action in
which claims brought by 11 persons or entities have been consolidated under the
title IN RE: PIPER FUNDS INC. INSTITUTIONAL GOVERNMENT INCOME PORTFOLIO
LITIGATION. The named plaintiffs in the complaint purport to represent a class
of individuals and groups who purchased shares of Institutional Government
Income Portfolio during the putative class period of July 1, 1991 through May 9,
1994. The named plaintiffs and defendants have entered into a settlement
agreement which has received preliminary approval from the Court. The terms of
the settlement are set forth in a Settlement Agreement dated July 20, 1995 (as
modified by an Addendum filed on July 28, 1995). The Settlement Agreement
contained a provision which would have permitted the defendants to cancel the
Agreement if shareholders who had incurred a cumulative "Loss" (as defined under
the Agreement) of more than 10% of the Loss sustained by the entire class had
opted out. The deadline for requesting exclusion from the class has passed,
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and the Loss sustained by persons requesting exclusion is less than 10%. If
granted final approval by the Court, the Settlement Agreement would provide up
to approximately $70 million, together with interest earned, less certain
disbursements and attorneys fees as approved by the Court, to class members in
payments scheduled over approximately three years. Such payments would be made
by Piper Jaffray Companies Inc. and the Adviser and would not be an obligation
of the Institutional Government Income Portfolio or the Company.
Six additional complaints, which are based on claims similar to those
asserted in the first complaint, have been brought relating to the Institutional
Government Income Portfolio series of the Company. The first of such complaints
was filed in the same court against the same parties on October 21, 1994, by
Eltrax Systems, Inc. A second additional complaint was filed against the
Company, the Adviser, the Distributor and Piper Jaffray Companies Inc. on
September 30, 1994 in the United States District Court, District of Colorado.
Plaintiffs in the complaint are Gary Pashel and Gregg S. Hayutin, Trustees of
the Mae Pashel Trust; Mae Pashel, individually; Gary Pashel and Michael H.
Feinstein, Trustees of the Robert Hayutin Insurance Trust; and Dennis E.
Hayutin, Gregg S. Hayutin and Gary Pashel, Trustees of the Marie Ellen Hayutin
Trust. The third additional complaint, a putative class action, was filed on
November 1, 1994 in the United States District Court, District of Idaho by the
Idaho Association of Realtors, Inc., a non-profit Idaho corporation. The
complaint was filed against the Institutional Government Income Portfolio series
of the Company, the Adviser, the Distributor, Piper Jaffray Companies Inc.,
William H. Ellis and Edward J. Kohler. The fourth complaint, also a putative
class action, was filed in the United States District Court for the District of
Minnesota, Third Division, on January 25, 1995. The Complaint was brought by
Louise S. Maher and John A. Raetz against the Company, the Institutional
Government Income Portfolio series of the Company, the Adviser, the Distributor,
Piper Jaffray Companies Inc., William H. Ellis and Edward J. Kohler. The fifth
complaint was brought on April 11, 1995, and in the future may be filed in the
Minnesota State District Court, Hennepin County. The plaintiff, Frank R.
Berman, Trustee of Frank R. Berman Professional CP Pension Plan Trust, sued
individually and not on behalf of any putative class. Defendants are the
Distributor, the Company, Morton Silverman and Worth Bruntjen. A sixth
complaint relating to the Institutional Government Income Portfolio series of
the Company was filed on June 22, 1995 in the Montana Thirteenth Judicial
District Court, Yellowstone County by Beverly Muth against the Distributor and
Teresa L. Darnielle. In addition to the above complaints, a number of actions
have been commenced in arbitration by individual investors in the Institutional
Government Income Portfolio. The complaints discussed in this paragraph
generally have been consolidated with the IN RE: PIPER FUNDS INC. action for
pretrial purposes and the arbitrations and litigation have been stayed pending
entry of an order by the Court permitting those class members who have requested
exclusion to proceed with their actions.
A complaint was filed by Herman D. Gordon on October 20, 1994, in the
United States District Court, District of Minnesota, against American Adjustable
Rate Term Trust Inc.--1998, American Adjustable Rate Term Trust Inc.--1999, the
Adviser, the Distributor, Piper Jaffray Companies Inc., Benjamin Rinkey, Jeffrey
Griffin, Charles N. Hayssen and Edward J. Kohler. A second complaint was filed
by Frank Donio, I.R.A. and other plaintiffs on April 14, 1995, in the United
States
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District Court, District of Minnesota, against American Adjustable Rate Term
Trust Inc.--1996, American Adjustable Rate Term Trust Inc.--1997, American
Adjustable Rate Term Trust Inc.--1998, American Adjustable Rate Term Trust Inc.-
- -1999, the Adviser, the Distributor, Piper Jaffray Companies Inc. and certain
associated individuals. Plaintiffs in both actions filed a Consolidated Amended
Class Action Complaint on May 23, 1995 and by Order dated June 8, 1995, the
Court consolidated the two putative class actions. The consolidated amended
complaint, which purports to be a class action, alleges certain violations of
federal and state securities laws, breach of fiduciary duty and negligent
misrepresentation.
A complaint was filed by Carson H. Bradley on February 3, 1995 in the Sixth
Judicial District of the State of Idaho against American Government Income Fund
Inc., American Government Income Portfolio Inc., the Adviser, the Distributor
and Worth Bruntjen. The complaint alleges negligent misrepresentation, breach
of fiduciary duty and breach of contract. The action has been removed to
Federal District Court for the District of Idaho.
A complaint was filed by Gary E. Nelson on June 28, 1995 in the United
States District Court for the Western District of Washington at Seattle against
American Strategic Income Portfolio Inc. - II, the Adviser, the Distributor,
Piper Jaffray Companies Inc., Worth Bruntjen, Charles N. Hayssen, Michael
Jansen, William H. Ellis and Edward J. Kohler. A second complaint was filed by
the same individual in the same court on July 12, 1995 against American
Opportunity Income Fund Inc., the Adviser, the Distributor, Piper Jaffray
Companies Inc., Worth Bruntjen, Charles N. Hayssen, Michael Jansen, William H.
Ellis and Edward J. Kohler. On September 7, 1995, Christian Fellowship
Foundation Peace United Church of Christ, Gary E. Nelson and Lloyd Schmidt filed
an amended complaint purporting to be a class action in the United States
District Court for the District of Washington. The complaint was filed against
American Government Income Portfolio, Inc., American Government Income Fund
Inc., American Government Term Trust, Inc., American Strategic Income Portfolio
Inc., American Strategic Income Portfolio Inc. -- II, American Strategic Income
Portfolio Inc. -- III, American Opportunity Income Fund Inc., American Select
Portfolio Inc., Piper Jaffray Companies Inc., Piper Jaffray Inc., the Adviser
and certain associated individuals. By Order filed October 5, 1995, the
complaints were consolidated. The amended complaint alleges generally that the
prospectus and financial statements of each investment company were false and
misleading. Specific violations of various federal securities laws are alleged
with respect to each investment company. The complaint also alleges that the
defendants violated the Racketeer Influenced and Corrupt Organizations Act, the
Washington State Securities Act and the Washington Consumer Protection Act.
Complaints have also been filed relating to two open-end funds for which
the Adviser has acted as sub-adviser, Managers Intermediate Mortgage Fund and
Managers Short Government Fund. A complaint was filed on September 26, 1994 in
the United States District Court, District of Connecticut, by Florence R. Hosea,
Bobby W. Hosea, Getrud B. Dale and Peter M. Dale, Andrew Poffel and Diane Poffel
as tenants by the Entireties, Myrone Sarone, Donna M. DiPalo, Bernard B. Geltner
and Gail Geltner and Paul Delman. The complaint was filed against The Managers
Funds, the Managers Funds, L.P., Robert P. Watson, the Adviser, the Distributor,
an individual associated with the Adviser, Evaluation Associates, Inc. and
Managers
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Intermediate Mortgage Fund. The complaint, which is a putative class action,
alleges certain violations of federal securities laws, including the making of
false and misleading statements in the prospectus, and alleges negligent
misrepresentation, breach of fiduciary duty and common law fraud. A similar
complaint was filed as a putative class action in the same court on November 4,
1994. The complaint was filed by Karen E. Kopelman against The Managers Fund,
The Managers Funds, L.P., Robert P. Watson, the Adviser, the Distributor, Worth
Bruntjen, Evaluation Associates, Inc. and Managers Intermediate Mortgage Fund.
The two putative class actions were consolidated by court order on December 13,
1994. Plaintiffs filed an Amended and Restated Complaint on July 19, 1995. A
complaint relating to the Managers Short Government Fund was filed on
November 18, 1994 in the United States District Court, District of Minnesota.
The complaint was filed by Robert Fleck as a putative class action against The
Managers Funds, The Managers Funds, L.P., the Adviser, the Distributor, Worth
Bruntjen, Evaluation Associates, Inc., Robert P. Watson, John E. Rosati, William
M. Graulty, Madeline H. McWhinney, Steven J. Pasggioli, Thomas R. Schneeweis and
Managers Short Government Fund, F/K/A/ Managers Short Government Income Fund.
The complaint alleges certain violations of federal securities laws, including
the making of false and misleading statements in the prospectus, and negligent
misrepresentation.
The Adviser and Distributor do not believe that the settlement reached in
connection with the first lawsuit described above, or any other of the above
lawsuits, will have a material adverse effect upon their ability to perform
under their agreements with the Funds, and they intend to defend the remaining
lawsuits vigorously.
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APPENDIX A
RATINGS OF TAX-EXEMPT
SECURITIES AND COMMERCIAL PAPER
The four highest ratings of Moody's Investors Service, Inc. ("Moody's") for
tax exempt securities are Aaa, Aa, A and Baa. Tax exempt securities rated Aaa
are judged to be of the "best quality." The rating of Aa is assigned to tax
exempt securities which are of "high quality by all standards," but as to which
margins of protection or other elements make long term risks appear somewhat
larger than Aaa rated tax exempt securities. The Aaa and Aa rated tax exempt
securities comprise what are generally known as "high grade bonds." Tax exempt
securities which are rated A by Moody's possess many favorable investment
attributes and are considered "upper medium grade obligations." Factors giving
security to principal and interest of A rated tax exempt securities are
considered adequate, but elements may be present which suggest a susceptibility
to impairment sometime in the future. Tax exempt securities rated Baa are
considered as "medium grade" obligations. They are neither highly protected nor
poorly secured. Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such tax exempt
securities lack outstanding investment characteristics and in fact have
speculative characteristics as well. Those securities in the A and Baa groups
which Moody's believes possess the strongest investment attributes are
designated by the symbols A 1 and Baa 1. Other A and Baa securities comprise
the balance of their respective groups. These rankings (1) designate the
securities which offer the maximum in security within their quality group, (2)
designate securities which can be bought for possible upgrading in quality and
(3) additionally afford the investor an opportunity to gauge more precisely the
relative attractiveness of offerings in the market place.
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade (MIG). This distinction is in
recognition of the differences between short-term credit risk and long-term
risk. Factors affecting the liquidity of the borrower and short-term cyclical
elements are critical in short-term ratings, while other factors of major
importance in bond risk may be less important over the short run. A short-term
rating may also be assigned on an issue having a demand feature. Such ratings
will be designated as VMIG if the demand feature is rated. Short-term ratings
on issues with demand features are differentiated to reflect such
characteristics as payment upon periodic demand rather than fixed maturity dates
and payment relying on external liquidity. Loans bearing the MIG-1 or VMIG-1
designation 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 or
VMIG-2 designation are of high quality, with margins of protection ample
although not so large as in the preceding group. Loans bearing the MIG-3 or
VMIG-3 and MIG-4 or VMIG-4 designations are of lower quality.
The four highest ratings of Standard & Poor's Ratings Services ("Standard &
Poor's") for tax exempt securities are AAA, AA, A and BBB. Tax exempt
securities rated AAA bear the highest rating assigned by Standard & Poor's to a
debt obligation and indicates an extremely strong capacity to pay principal and
interest. Tax exempt
A-1
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securities rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree. Securities rated A have a strong
capacity to pay principal and interest, although they are somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions. The BBB rating, which is the lowest "investment grade" security
rating by Standard & Poor's, indicates an adequate capacity to pay principal and
interest. Whereas they normally exhibit adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay principal and interest for securities in this category
than for securities in the A category.
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The designation SP-1 indicates a very strong
or strong capacity to pay principal and interest. The designation SP-2
indicates a satisfactory capacity to pay principal and interest.
Commercial paper ratings are graded by Standard & Poor's into four
categories, ranging from "A" for the highest quality obligations to "D" for the
lowest. Issues assigned the A rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
designation 1, 2, and 3 to indicate the relative degree of safety. The "A-1"
designation indicates that the degree of safety regarding timely payment is very
strong. Those issues determined to possess overwhelming safety characteristics
will be denoted with a plus sign designation. The "A-2" designation indicates
that the degree of safety regarding timely payment is strong.
Moody's commercial paper ratings are opinions of the ability of the issuers
to repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations
are exempt from registration under the Securities Act of 1933, nor does it
represent that any specific note is a valid obligation of a rated issuer or
issued in conformity with any applicable law. Moody's employs the following
three designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Prime-1 Superior capacity for repayment of
short-term promissory obligations.
Prime-2 Strong capacity for repayment of
short-term promissory obligations.
Prime-3 Acceptable capacity for repayment of
short-term promissory obligations.
A-2
<PAGE>
APPENDIX B
FUTURES CONTRACTS AND OPTIONS
FUTURES CONTRACTS
Each Fund may purchase and sell interest rate futures contracts and options
thereon. An interest rate futures contract creates an obligation on the part of
the seller (the "short") to deliver, and an offsetting obligation on the part of
the purchaser (the "long") to accept delivery of, the type of financial
instrument called for in the contract in a specified delivery month for a stated
price. A majority of transactions in interest rate futures contracts, however,
do not result in the actual delivery of the underlying instrument, but are
settled through liquidation, i.e., by entering into an offsetting transaction.
The futures contracts to be traded by the Fund are traded only on commodity
exchanges--known as "contract markets"--approved for such trading by the
Commodity Futures Trading Commission ("CFTC"), and must be executed through a
futures commission merchant, or brokerage firm, which is a member of the
relevant contract market. These contract markets, through their clearing
corporations, guarantee that the contracts will be performed. Presently,
interest rate futures contracts are based on such debt securities as long-term
U.S. Treasury Bonds, Treasury Notes, Government National Mortgage Association
modified pass-through mortgage-backed securities, three-month U.S. Treasury
Bills and bank certificates of deposit.
Although most interest rate futures contracts by their terms call for
actual delivery or acceptance of commodities or securities, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out a short position is effected by purchasing a futures
contract for the same aggregate amount of the specific type of financial
instrument or commodity and the same delivery month. If the price of the
initial sale of the futures contract exceeds the price of the offsetting
purchase, the seller is paid the difference and realizes a gain. Conversely, if
the price of the offsetting purchase exceeds the price of the initial sale, the
trader realizes a loss. Similarly, the closing out of a long position is
effected by the purchaser entering into a futures contract sale. If the
offsetting sale price exceeds the purchase price, the purchaser realizes a gain,
and if the purchase price exceeds the offsetting sale price, he realizes a loss.
The purchase or sale of a futures contract differs from the purchase or
sale of a security, in that no price or premium is paid or received. Instead,
an amount of cash or securities acceptable to the Adviser and the relevant
contract market, which varies, but is generally about 5% of the contract amount,
must be deposited with the custodian in the name of the broker. This amount is
known as "initial margin," and represents a "good faith" deposit assuring the
performance of both the purchaser and the seller under the futures contract.
Subsequent payments to and from the broker, known as "variation margin," are
required to be made on a daily basis as the price of the futures contract
fluctuates, making the long or short positions in the futures contract more or
less valuable, a process known as "marking
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to the market." Prior to the settlement date of the futures contract, the
position may be closed out by taking an opposite position which will operate to
terminate the position in the futures contract. A final determination of
variation margin is then made, additional cash is required to be paid to or
released by the broker, and the purchaser realizes a loss or gain. In addition,
a commission is paid on each completed purchase and sale transaction.
Each Fund also may purchase and sell futures contracts on an index of
municipal securities. These instruments provide for the purchase or sale of a
hypothetical portfolio of municipal bonds at a fixed price in a stated delivery
month. Unlike most other futures contracts, however, a municipal bond index
futures contract does not require actual delivery of securities, but results in
a cash settlement based upon the difference in value of the index between the
time the contract was entered into and the time it is liquidated.
The municipal bond index underlying these futures contracts is The Bond
Buyer Municipal Bond Index, developed by THE BOND BUYER and the Chicago Board of
Trade ("CBT"), the contract market on which the futures contracts are traded.
The index is comprised of 40 tax-exempt term municipal revenue and general
obligation bonds. Each bond included in the index must be rated A- or higher by
Standard and Poor's or A or higher by Moody's and must have a remaining maturity
of 19 years or more. Twice a month new issues satisfying the eligibility
requirements are added to, and an equal number of old issues are deleted from,
the index. The value of the index is computed daily according to a formula
based upon the price of each bond in the index, as evaluated by four
dealer-to-dealer brokers.
The municipal bond index futures contract is traded only on the CBT. Like
other contract markets, the CBT assures performance under futures contracts
through a clearing corporation, a nonprofit organization managed by the exchange
membership which is also responsible for handling daily accounting of deposits
or withdrawals of margin.
The purpose of the acquisition or sale of futures contracts by the Funds,
as holders of long-term municipal securities, is to hedge against fluctuations
in rates on such securities without actually buying or selling long-term
municipal securities. For example, if a Fund owns long-term bonds and interest
rates are expected to increase, the Fund might sell futures contracts. Such a
sale would have much the same effect as selling some of the long-term bonds in
the Fund's portfolio. If interest rates increase as anticipated by the Adviser,
the value of certain long-term securities in the portfolio would decline, but
the value of the Fund's futures contracts would increase at approximately the
same rate, thereby keeping the net asset value of the Fund from declining as
much as it otherwise would have. Of course, since the value of the securities
in each Fund's portfolio will far exceed the value of the futures contracts sold
by such Fund, an increase in the value of the futures contracts could only
mitigate--but not totally offset--the decline in the value of the portfolio.
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Similarly, when it is expected that interest rates may decline, futures
contracts could be purchased to hedge against a Fund's anticipated purchases of
long-term bonds at higher prices. Since the rate of fluctuation in the value of
futures contracts should be similar to that of long-term bonds, the Fund could
take advantage of the anticipated rise in the value of long-term bonds without
actually buying them until the market had stabilized. At that time, the futures
contracts could be liquidated and the Fund's cash could then be used to buy
long-term bonds on the cash market. The Fund could accomplish similar results
by selling bonds with long maturities and investing in bonds with short
maturities when interest rates are expected to increase or by buying bonds with
long maturities and selling bonds with short maturities when interest rates are
expected to decline. However, in circumstances when the market for bonds may
not be as liquid as that for futures contracts, the ability to invest in such
contracts could enable a Fund to react more quickly to anticipated changes in
market conditions or interest rates.
OPTIONS ON FUTURES CONTRACTS
The Funds may purchase and sell put and call options on interest rate and
municipal bond index futures contracts which are traded on a United States
exchange or board of trade as a hedge against changes in interest rates, and
will enter into closing transactions with respect to such options to terminate
existing positions. Options on interest rate futures contracts are currently
available with respect to Treasury bonds (direct obligations of the U.S.
Treasury which generally have maturities of greater than ten years). An options
contract based on the municipal bond index futures contract discussed above was
introduced on the CBT in June 1987. An option on a futures contract, as
contrasted with the direct investment in such a contract, gives the purchaser
the right, in return for the premium paid, to assume a position in a futures
contract at a specified exercise price at any time prior to the expiration date
of the option. Options on futures contracts are similar to options on
securities, which give the purchaser the right, in return for the premium paid,
to purchase or sell securities. A call option gives the purchaser of such
option the right to buy, and obliges its writer to sell, a specified underlying
futures contract at a stated exercise price at any time prior to the expiration
date of the option. A purchaser of a put option has the right to sell, and the
writer has the obligation to buy, such contract at the exercise price during the
option period. Upon exercise of an option, the delivery of the futures position
by the writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures margin account,
which represents the amount by which the market price of the futures contract
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option on the futures contract. If an option is exercised
on the last trading day prior to the expiration date of the option, the
settlement will be made entirely in cash equal to the difference between the
exercise price of the option and the closing price of the interest rate futures
contract on the expiration date. The potential loss related to the purchase of
an option on a futures contract is limited to the premium paid for the option
(plus transaction costs).
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<PAGE>
Because the value of the option is fixed at the point of sale, there are no
daily cash payments to reflect changes in the value of the underlying contract;
however, the value of the option does change daily and that change would be
reflected in the net asset values of the Funds. In connection with the writing
of options on futures contracts, a Fund will make initial margin deposits and
make or receive maintenance margin payments that reflect changes in the market
value of such options. Premiums received from the writing of an option are
included in initial margin deposits.
PURCHASE OF PUT OPTIONS ON FUTURES CONTRACTS. A Fund will purchase put
options on futures contracts if the Adviser anticipates a rise in interest
rates. Because the value of an interest rate or municipal bond index futures
contract moves inversely in relation to changes in interest rates, a put option
on such a contract becomes more valuable as interest rates rise. By purchasing
put options on futures contracts at a time when the Adviser expects interest
rates to rise, a Fund will seek to realize a profit to offset the loss in value
of its portfolio securities.
PURCHASE OF CALL OPTIONS ON FUTURES CONTRACTS. A Fund will purchase call
options on futures contracts if the Adviser anticipates a decline in interest
rates. The purchase of a call option on an interest rate or municipal bond
index futures contract represents a means of obtaining temporary exposure to
market appreciation at limited risk. Because the value of an interest rate or
municipal bond index futures contract moves inversely in relation to changes to
interest rates, a call option on such a contract becomes more valuable as
interest rates decline. A Fund will purchase a call option on a futures
contract to hedge against a decline in interest rates in a market advance when
the Fund is holding cash. The Fund can take advantage of the anticipated rise
in the value of long-term securities without actually buying them until the
market is stabilized. At that time, the options can be liquidated and the
Fund's cash can be used to buy long-term securities.
WRITING CALL OPTIONS ON FUTURES CONTRACTS. A Fund will write call options
on futures contracts if the Adviser anticipates a rise in interest rates. As
interest rates rise, a call option on such a contract becomes less valuable. If
the futures contract price at expiration of the option is below the exercise
price, the option will not be exercised and the Fund will retain the full amount
of the option premium. Such amount provides a partial hedge against any decline
that may have occurred in the Fund's portfolio securities.
WRITING PUT OPTIONS ON FUTURES CONTRACTS. A Fund will write put options on
futures contracts if the Adviser anticipates a decline in interest rates. As
interest rates decline, a put option on an interest rate or municipal bond index
futures contract becomes less valuable. If the futures contract price at
expiration of the option has risen due to declining interest rates and is above
the exercise price, the option will not be exercised and the Fund will retain
the full amount of the option premium. Such amount can then be used by the Fund
to buy long-term securities when the market has stabilized.
B-4
<PAGE>
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
HEDGING RISKS IN FUTURES CONTRACTS TRANSACTIONS. There are several risks
in using municipal bond index or interest rate futures contracts as hedging
devices. One risk arises because the prices of futures contracts may not
correlate perfectly with movements in the underlying municipal bond index or
fixed-income security due to certain market distortions. First, all
participants in the futures market are subject to initial margin and variation
margin requirements. Rather than making additional variation margin payments,
investors may close the contracts through offsetting transactions which could
distort the normal relationship between the index or security and the futures
market. Second, the margin requirements in the futures market are lower than
margin requirements in the securities market, and as a result the futures market
may attract more speculators than does the securities market. Increased
participation by speculators in the futures market may also cause temporary
price distortions. Because of possible price distortion in the futures market
and because of imperfect correlation between movements in the municipal bond
index or securities and movements in the prices of futures contracts, even a
correct forecast of general market trends may not result in a successful hedging
transaction over a very short period.
Another risk arises because of imperfect correlation between movements in
the value of the futures contracts and movements in the value of securities
subject to the hedge. For example, there can be no assurance that there will be
a correlation between movements in the price of the municipal bond index and
movements in the price of the municipal bonds which are the subject of the
hedge. The degree of imperfection or correlation depends upon, among other
things, the differences between the municipal securities being hedged and the
municipal securities underlying the municipal bond index futures contracts. For
example, each bond included in the municipal bond index must have a remaining
maturity of 19 years or more, whereas each Fund's portfolio probably will be
comprised of securities with an average aggregate maturity of less than 19
years. This risk of an imperfect correlation increases to the extent that
either Fund enters into futures contracts for other than municipal bonds since
the value of municipal bonds and other debt securities may not react exactly the
same to general changes in interest rates and may react differently to factors
other than changes in the general level of interest rates.
Successful use of futures contracts by a Fund is subject to the ability of
the Adviser to predict correctly movements in the direction of interest rates.
If a Fund has hedged against the possibility of an increase in interest rates
adversely affecting the value of fixed-income securities held in its portfolio
and interest rates decrease instead, the Fund will lose part or all of the
benefit of the increased value of its security which it has hedged because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell securities to
meet daily variation margin requirements. Such sales of securities may, but
will not necessarily, be at increased prices which reflect the
B-5
<PAGE>
decline in interest rates. The Fund may have to sell securities at a time when
it may be disadvantageous to do so.
LIQUIDITY OF FUTURES CONTRACTS. A Fund may elect to close some or all of
its contracts prior to expiration. The purpose of making such a move would be
to reduce or eliminate the hedge position held by the Fund. A Fund may close
its positions by taking opposite positions. Final determinations of variation
margin are then made, additional cash as required is paid by or to the Fund, and
the Fund realizes a loss or a gain.
Positions in futures contracts may be closed only on an exchange or board
of trade providing a secondary market for such futures contracts. Although the
Funds intend to enter into futures contracts only on exchanges or boards of
trade where there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular contract
at any particular time. The purchase of municipal bond index futures contracts
involves an additional risk since these are instruments with a relatively short
trading history. As a result, it is possible that trading in such futures
contracts will be less liquid than that in other futures contracts.
In addition, most domestic futures exchanges and boards of trade limit the
amount of fluctuation permitted in futures contract prices during a single
trading day. The daily limit establishes the maximum amount that the price of a
futures contract may vary either up or down from the previous day's settlement
price at the end of a trading session. Once the daily limit has been reached in
a particular contract, no trades may be made that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses because the limit may prevent
the liquidation of unfavorable positions. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses. In such event, it
will not be possible to close a futures position and, in the event of adverse
price movements, the Fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the
portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. However, as described above, there is no
guarantee that the price of the securities being hedged will, in fact, correlate
with the price movements in the futures contract and thus provide an offset to
losses on a futures contract.
RISKS OF OPTIONS ON FUTURES CONTRACTS. The use of options on futures
contracts also involves certain risks. Compared to the purchase or sale of
futures contracts, the purchase of call or put options on futures contracts
involves less potential risk to a Fund because the maximum amount at risk is the
premium paid for the options (plus transactions costs). The writing of a call
option on a futures contract generates a premium which may partially offset a
decline in the value of a
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<PAGE>
Fund's portfolio assets. By writing a call option, the Fund becomes obligated
to sell a futures contract, which may have a value higher than the exercise
price. Conversely, the writing of a put option on a futures contract generates
a premium, but the Fund becomes obligated to purchase a futures contract, which
may have a value lower than the exercise price. Thus, the loss incurred by a
Fund in writing options on futures contracts may exceed the amount of the
premium received.
The effective use of options strategies is dependent, among other things,
on a Fund's ability to terminate options positions at a time when the Adviser
deems it desirable to do so. Although a Fund will enter into an option position
only if the Adviser believes that a liquid secondary market exists for such
option, there is no assurance that the Fund will be able to effect closing
transactions at any particular time or at an acceptable price. The Funds'
transactions involving options on futures contracts will be conducted only on
recognized exchanges.
A Fund's purchase or sale of put or call options on futures contracts will
be based upon predictions as to anticipated interest rates by the Adviser, which
could prove to be inaccurate. Even if the expectations of the Adviser are
correct, there may be an imperfect correlation between the change in the value
of the options and of the Fund's portfolio securities.
REGULATORY MATTERS
To the extent required to comply with applicable Securities and Exchange
Commission releases and staff positions, when entering into futures contracts,
the Fund will maintain, in a segregated account, cash or liquid high-grade debt
securities equal to the value of such contracts.
The Commodity Futures Trading Commission (the "CFTC"), a Federal agency,
regulates trading activity on the exchanges pursuant to the Commodity Exchange
Act, as amended. The CFTC requires the registration of "commodity pool
operators," defined as any person engaged in a business which is of the nature
of an Company, syndicate, or a similar form of enterprise, and who, in
connection therewith, solicits, accepts, or receives from others, funds,
securities, or property for the purpose of trading in any commodity for future
delivery on or subject to the rules of any contract market. The CFTC has
adopted Rule 4.5, which provides an exclusion from the definition of commodity
pool operator for any registered investment company which meets the requirements
of the Rule. Rule 4.5 requires, among other things, that an investment company
wishing to avoid commodity pool operator status use futures and options
positions only (a) for "bona fide hedging purposes" (as defined in CFTC
regulations) or (b) for other purposes so long as aggregate initial margins and
premiums required in connection with non-hedging positions do not exceed 5% of
the liquidation value of the investment company's portfolio.
B-7
<PAGE>
Any investment company wishing to claim the exclusion provided in Rule 4.5 must
file a notice of eligibility with both the CFTC and the National Futures
Association. Both Funds intend to file such a notice and to meet the
requirements of Rule 4.5, or such other requirements as the CFTC or its staff
may from time to time issue, in order to render registration as a commodity pool
operator unnecessary.
B-8
<PAGE>
PART B
INSTITUTIONAL GOVERNMENT INCOME PORTFOLIO
A Series of Piper Funds Inc.
STATEMENT OF ADDITIONAL INFORMATION
November 27, 1995
Table of Contents
Page
----
Investment Objective, Policies and Restrictions. . . . . . . . . 2
Directors and Executive Officers . . . . . . . . . . . . . . . . 4
Investment Advisory and Other Services . . . . . . . . . . . . . 11
Portfolio Transactions and Allocation of Brokerage . . . . . . . 16
Capital Stock and Ownership of Shares. . . . . . . . . . . . . . 18
Net Asset Value and Public Offering Price. . . . . . . . . . . . 18
Performance Comparisons. . . . . . . . . . . . . . . . . . . . . 19
Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
General Information. . . . . . . . . . . . . . . . . . . . . . . 22
Financial Statements . . . . . . . . . . . . . . . . . . . . . . 23
Pending Litigation . . . . . . . . . . . . . . . . . . . . . . . 23
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information relates to the Prospectus of Institutional
Government Income Portfolio, a series of Piper Funds Inc., dated November 27,
1995, and should be read in conjunction therewith. A copy of the Prospectus may
be obtained from the Fund at Piper Jaffray Tower, 222 South Ninth Street,
Minneapolis, Minnesota 55402.
<PAGE>
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
The shares of Piper Funds Inc. (the "Company") are currently offered in 13
series. This Statement of Additional Information relates to one of those
series, the Institutional Government Income Portfolio (the "Fund"). The
investment objective and policies of the Fund are set forth in its Prospectus.
Certain additional investment information is set forth below.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements. The Fund's custodian will
hold the securities underlying any repurchase agreement or such securities will
be part of the Federal Reserve Book Entry System. The market value of the
collateral underlying the repurchase agreement will be determined on each
business day. If at any time the market value of the collateral falls below the
repurchase price of the repurchase agreement (including any accrued interest),
the Fund will promptly receive additional collateral (so the total collateral is
an amount at least equal to the repurchase price plus accrued interest). The
Fund will enter into repurchase agreements only with the primary reporting
dealers that report to the Federal Reserve Bank of New York and with banks that
are among the 100 largest United States commercial banks.
The Fund has received from the Securities and Exchange Commission an
exemptive order permitting the Fund, along with the other series of the Company,
closed-end and other open-end investment companies managed by Piper Capital
Management Incorporated (the "Adviser"), and all future series of the Company
and all future investment companies advised by the Adviser or its affiliates, to
deposit uninvested cash balances into a large single joint account to be used to
enter into one or more large repurchase agreements.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
The Fund may purchase securities on a "when-issued" basis and may purchase
or sell securities on a "forward commitment" basis. When the Fund purchases
securities on a when-issued or forward commitment basis, it will maintain in a
segregated account with its custodian cash or liquid high-grade debt obligations
having an aggregate value equal to the amount of such purchase commitments until
payment is made; the Fund will likewise segregate securities it sells on a
forward commitment basis.
PORTFOLIO TURNOVER
Portfolio turnover is the ratio of the lesser of annual purchases or sales
of portfolio securities to the average monthly value of portfolio securities,
not including securities maturing in less than 12 months. A 100% portfolio
turnover rate would occur, for example, if the lesser of the value of purchases
or sales of portfolio securities for a particular year were equal to the average
monthly value of the portfolio securities owned during such year. For purposes
of calculating
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<PAGE>
portfolio turnover, the maturity of investment purchases and sales related to
"rollover" transactions of the Fund is considered to be less than 12 months.
The Fund's portfolio turnover rate for the fiscal year ended September 30,
1995 was 136% (in comparison to 169% for fiscal 1994 and less than 100% in prior
years). The increase in portfolio turnover in fiscal 1994 was primarily a
result of significant sales of portfolio securities in connection with meeting
cash needs for shareholder redemptions during that fiscal year.
INVESTMENT RESTRICTIONS
In addition to the investment objective and policies set forth in the
Prospectus, the Fund is subject to certain fundamental and nonfundamental
investment restrictions, as set forth below. Fundamental investment
restrictions may not be changed without the vote of a majority of the Fund's
outstanding shares. "Majority," as used in the Prospectus and in this Statement
of Additional Information, means the lesser of (a) 67% of the Fund's outstanding
shares present at a meeting of the holders if more than 50% of the outstanding
shares are present in person or by proxy or (b) more than 50% of the Fund's
outstanding shares.
As fundamental investment restrictions, the Fund will not:
1. Issue any senior securities, as defined in the Investment Company Act
of 1940, as amended (the "1940 Act").
2. Borrow money, except from banks for temporary or emergency purposes in
an amount not exceeding 5% of the value of its total assets.
3. Mortgage, pledge or hypothecate its assets, except in an amount not
exceeding 10% of the value of its total assets to secure temporary or emergency
borrowing.
4. Act as an underwriter of securities of other issuers, except insofar
as the Fund may be technically deemed an underwriter under the federal
securities laws in connection with the disposition of portfolio securities.
5. Purchase or sell real estate or real estate mortgage loans, except
that the Fund may invest in securities secured by real estate or interests
therein.
6. Purchase or sell commodities or commodity futures contracts.
7. Invest 25% or more of the value of its total assets in the securities
of issuers conducting their principal business activities in any one industry.
This restriction does not apply to securities of the U.S. Government or its
agencies or instrumentalities and repurchase agreements relating thereto.
8. Make loans to other persons, provided that the Fund may enter into
repurchase agreements. The purchase of a portion of an issue of publicly
distributed
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<PAGE>
bonds, debentures, or other debt securities will not be considered the making of
a loan.
9. Loan its portfolio securities.
As nonfundamental investment restrictions that may be changed at any time
without shareholder approval, the Fund will not:
1. Invest in illiquid securities.
2. Purchase or sell oil, gas or other mineral leases, rights or royalty
contracts.
3. Purchase or retain the securities of any issuer, if, to the Fund's
knowledge, those officers or directors of the Company or its affiliates or of
its investment adviser who individually own beneficially more than 0.5% of the
outstanding securities of such issuer, together own more than 5% of such
outstanding securities.
4. Purchase securities on margin except to obtain such short-term credits
as may be necessary for the clearance of transactions.
5. Write, purchase or sell puts, calls or combinations thereof.
6. Make short sales of securities.
7. Invest for the purpose of exercising control or management.
8. Purchase the securities of other investment companies, except as part
of a merger, consolidation, or acquisition of assets.
9. Invest in warrants.
Any investment restriction or limitation referred to above or in the
Prospectus, except the borrowing policy, which involves a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after an acquisition of securities or
utilization of assets and such excess results therefrom.
DIRECTORS AND EXECUTIVE OFFICERS
The names, addresses and principal occupations during the past five years
of the directors and executive officers of the Company are given below. The
officers and directors of the Company also serve as officers and directors of
various closed- and open-end investment companies managed by the Adviser.
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<PAGE>
Name and Address Position with the Company
---------------- -------------------------
William H. Ellis* Chairman of the Board of Directors
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
David T. Bennett Director
3400 City Center
33 South Sixth Street
Minneapolis, Minnesota 55402
Jaye F. Dyer Director
4670 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402
Karol D. Emmerich Director
7302 Claredon Drive
Edina, Minnesota 55439
Luella G. Goldberg Director
7019 Tupa Drive
Edina, Minnesota 55435
George Latimer Director
754 Linwood Avenue
St. Paul, MN 55105
Paul A. Dow President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
David E. Rosedahl Secretary
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Charles N. Hayssen Treasurer
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Worth Bruntjen Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
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<PAGE>
Name and Address Position with the Company
---------------- -------------------------
Richard W. Filippone Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Marijo A. Goldstein Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Steven V. Markusen Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Robert H. Nelson Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Edward P. Nicoski Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Nancy S. Olsen Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Ronald R. Reuss Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Bruce D. Salvog Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Sandra K. Shrewsbury Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
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<PAGE>
David M. Steele Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Douglas J. White Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
J. Bradley Stone Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Marcy K. Winson Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
- -----------------
* Directors of the Company who are interested persons (as that term is
defined by the 1940 Act) of Piper Capital Management Incorporated and the
Funds.
William H. Ellis has been President of Piper Jaffray Companies Inc. and
Piper Jaffray Inc. (the "Distributor") since September 1982, Chief Operating
Officer of the same two companies since August 1983, Director and Chairman of
the Board of Piper Capital Management Incorporated ("the Adviser") since October
1985 and President of the Adviser since December 1994.
David T. Bennett is of counsel to the law firm of Gray, Plant, Mooty, Mooty
& Bennett, P.A., located in Minneapolis, Minnesota. Mr. Bennett is chairman of
a group of privately held companies and serves on the board of directors of a
number of nonprofit organizations.
Jaye F. Dyer has been President of Dyer Management Company, a private
management company, since January 1991. Prior to that he was President and
Chief Executive Officer of Dyco Petroleum Corporation, a Minneapolis based oil
and natural gas development company he founded, from 1971 to March 1, 1989, and
Chairman of the Board until December 31, 1990. Mr. Dyer serves on the board of
directors of Northwestern National Life Insurance Company, The ReliaStar
Financial Corp. (the holding company of Northwestern National Life Insurance
Company) and various privately held and nonprofit corporations.
Karol D. Emmerich has been President of The Paraclete Group, a consultant
to nonprofit organizations, since 1993. Prior to that she had been Vice
President, Chief Accounting Officer and Treasurer of Dayton Hudson Corporation
from 1980 to May 1993. Ms. Emmerich is an Executive Fellow at the University of
St. Thomas
-7-
<PAGE>
Graduate School of Business and serves on the board of directors of a number of
privately held and nonprofit organizations.
Luella G. Goldberg has served on the board of directors of Northwestern
National Life Insurance Company (since 1976), The ReliaStar Financial Corp.
(since 1989), TCF Financial Corporation (since 1988), the holding company of TCF
Bank Savings fsb, and Hormel Foods Corp. (since 1993). Ms. Goldberg also serves
as a Trustee of Wellesley College, and as a director of a number of other
organizations, including the University of Minnesota Foundation and the
Minnesota Orchestral Association. Ms. Goldberg was Chairman of the Board of
Trustees of Wellesley College from 1985 to 1993 and acting President from July
1, 1993 to October 1, 1993.
George Latimer is Director, Special Actions Office, Office of the
Secretary, Department of Housing and Urban Development since 1993, prior to
which he had been Dean of Hamline Law School, Saint Paul, Minnesota from 1990 to
1993. Mr. Latimer also serves on the board of directors of Digital Biometrics,
Inc. and Payless Cashways, Inc.
Paul A. Dow has been a Senior Vice President of the Adviser since 1989 and
Chief Investment Officer of the Adviser since 1989.
David E. Rosedahl has been Secretary and a Director of the Adviser since
1985, a Managing Director of the Distributor since 1986, a Managing Director of
Piper Jaffray Companies Inc. since 1987, Secretary of the Distributor since 1993
and General Counsel for the Distributor and Piper Jaffray Companies Inc. since
1979.
Charles N. Hayssen has been a Managing Director of the Distributor since
1986 and of Piper Jaffray Companies Inc. since 1987, Chief Financial Officer of
the Distributor since 1988, Director and Chief Financial Officer of the Adviser
since 1989 and Chief Operating Officer of the Adviser since 1994.
Worth Bruntjen has been a Senior Vice President of the Adviser since
January 1988.
Richard W. Filippone has been a Senior Vice President of the Adviser since
November 1991, prior to which he had been a Vice President of the Adviser from
1987 to 1991.
Marijo A. Goldstein has been a Senior Vice President of the Adviser since
November 1993, prior to which she was a Vice President of the Adviser from 1991
to 1993 and a fixed income analyst of the Adviser since 1988.
Steven V. Markusen has been a Senior Vice President of the Adviser since
December 1993, prior to which had been a senior vice president of Investment
Advisers, Inc., in Minneapolis, Minnesota from 1989 to 1993.
Robert H. Nelson has been a Senior Vice President of the Adviser since
November 1993, prior to which he had been a Vice President of the Adviser from
1991 to 1993 and Assistant Vice President from 1989 to 1991.
-8-
<PAGE>
Edward P. Nicoski has been a Senior Vice President of the Adviser since
October 1985 and a Managing Director of the Distributor since November 1986.
Nancy S. Olsen has been a Senior Vice President of the Adviser since
November 1991, prior to which she had been a Vice President of the Adviser from
1987 to 1991.
Ronald R. Reuss has been a Senior Vice President of the Adviser since
January 1989.
Bruce D. Salvog has been a Senior Vice President of the Adviser since
January 1992, prior to which he had been a portfolio manager at Kennedy &
Associates in Seattle, Washington from 1984 to 1992.
Sandra K. Shrewsbury has been a Senior Vice President of the Adviser since
September 1993, prior to which she had been a Managing Director of Piper Jaffray
since November 1992, a Vice President of Piper Jaffray since November 1990.
David M. Steele has been a Senior Vice President of the Adviser since
January 1992, prior to which he had been a portfolio manager at Kennedy &
Associates in Seattle, Washington from 1987 to 1992.
Douglas J. White has been a Senior Vice President of the Adviser since
November 1991, prior to which he had been a Vice President of the Adviser from
1989 to 1991.
J. Bradley Stone has been a Vice President of the Adviser since November
1991 and a fixed-income analyst of the Adviser since March 1990.
Marcy K. Winson has been a Vice President of the Adviser since November
1993, prior to which she was an Assistant Vice President of the Adviser since
March 1993 and an educator from 1990 to 1992.
Ms. Goldberg, Ms. Emmerich and Mr. Dyer are members of the Company's Audit
Committee. Ms. Goldberg acts as the chairperson of such committee. The Audit
Committee oversees the Funds' financial reporting process, reviews audit results
and recommends annually to the Company a firm of independent certified public
accountants.
The functions to be performed by the Audit Committee are to recommend
annually to the Board a firm of independent certified public accountants to
audit the books and records of the Funds for the ensuing year; to monitor that
firm's performance; to review with the firm the scope and results of each audit
and determine the need, if any, to extend audit procedures; to confer with the
firm and representatives of the Funds on matters concerning the Funds' financial
statements and reports including the appropriateness of its accounting practices
and of its financial controls and procedures; to evaluate the independence of
the firm; to review procedures to safeguard portfolio securities; to review the
purchase by the
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<PAGE>
Funds from the firm of non-audit services; to review all fees paid to the firm;
and to facilitate communications between the firm and the Funds' officers and
Directors.
The Board of Directors also has a Committee of the Independent Directors,
consisting of Mr. Bennett, who serves as chairperson, Messrs. Dyer, and Latimer,
Ms. Emmerich and Ms. Goldberg, and a Derivatives Committee consisting of Ms.
Emmerich, who serves as chairperson, Ms. Goldberg and Mr. Dyer.
The functions of the Committee of the Independent Directors are: (a)
recommendation to the full Board of approval of any management, advisory, sub-
advisory and/or administration agreements; (b) recommendation to the full Board
of approval of any underwriting and/or distribution agreements; (c) review of
the fidelity bond and premium allocation; (d) review of errors and omissions and
any other joint insurance policies and premium allocation; (e) review of, and
monitoring of compliance with, procedures adopted pursuant to certain rules
promulgated under the 1940 Act; and (f) such other duties as the independent
directors shall, from time to time, conclude are necessary or appropriate to
carry out their duties under the 1940 Act. The functions of the Derivatives
Committee are: (a) to oversee practices, policies and procedures of the Adviser
in connection with the use of derivatives; (b) to receive periodic reports from
management and independent accountants; and (c) to report periodically to the
Committee of the Independent Directors and the Board of Directors.
The directors of the Company who are officers or employees of the Adviser
or any of its affiliates receive no remuneration from the Company. Each of the
other directors receives fees that are allocated among the series of the Company
on the basis of the total assets of each series. Each director receives from
the Company and Piper Institutional Funds Inc., collectively, an annual retainer
of $1,000, plus a fee of $250 for each regular quarterly Board of Directors
meeting attended. (The per-meeting fee is based on the total assets of the
Company and Piper Institutional Funds Inc. and will increase to $500 per meeting
in the event total assets exceed $200 million, with continuing increases to as
high as $1,500 per meeting in the event total assets reach $5 billion or more.
In addition, members of the Audit Committee not affiliated with the Adviser
receive $1,000 for each Audit Committee meeting attended ($2,000 with respect to
the chairperson of the Committee), with such fee being allocated among all open-
end and closed-end investment companies managed by the Adviser. Members of the
Committee of the Independent Directors and the Derivatives Committee currently
receive no additional compensation. Directors are also reimbursed for expenses
incurred in connection with attending meetings.
The following table sets forth the aggregate compensation received by each
director from the Company during the fiscal year ended September 30, 1995, as
well as the total compensation received by each director from the Company and
all other registered investment companies managed by the Adviser or affiliates
of the Adviser during the calendar year ended December 31, 1994. Directors who
are officers or employees of the Adviser or any of its affiliates did not
receive any such compensation and are not included in the table.
-10-
<PAGE>
<TABLE>
<CAPTION>
Pension or
Retirement Estimated Total
Aggregate Benefits Annual Benefits Compensation
Compensation Accrued as Part Upon from Fund
Director from the Company of Fund Expenses Retirement Complex*
- -------- ---------------- ---------------- ---------- --------
<S> <C> <C> <C> <C>
David T. Bennett $7,400 None None $57,500
Jaye F. Dyer $7,995 None None $68,250
Karol D. Emmerich $7,995 None None $68,250
Luella G. Goldberg $8,590 None None $71,250
George Latimer $7,400 None None $65,250
</TABLE>
- -------------------
* Consists of 21 registered investment companies managed by the Adviser or an
affiliate of the Adviser, including Piper Funds. Each director included in the
table, other than Mr. Bennett, serves on the board of each such registered
investment company. Mr. Bennett serves on the board of 20 such companies.
INVESTMENT ADVISORY AND OTHER SERVICES
The investment adviser for the Fund is Piper Capital Management
Incorporated (the "Adviser"). Its affiliate, Piper Jaffray Inc. (the
"Distributor") acts as the Fund's distributor. Each will act as such pursuant
to a written agreement which will be periodically approved by the directors or
the shareholders of the Fund. The address of both the Adviser and the
Distributor is Piper Jaffray Tower, 222 South Ninth Street, Minneapolis,
Minnesota 55402.
CONTROL OF THE ADVISER AND THE DISTRIBUTOR
The Adviser and the Distributor are both wholly owned subsidiaries of Piper
Jaffray Companies Inc., a publicly held corporation which is engaged through its
subsidiaries in various aspects of the financial services industry.
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
The Adviser acts as the investment adviser of the Fund under an Investment
Advisory and Management Agreement which has been approved by the Board of
Directors (including a majority of the directors who are not parties to the
agreement, or interested persons of any such party, other than as directors of
the Fund) and the shareholders of the Fund.
The Investment Advisory and Management Agreement will terminate
automatically in the event of its assignment. In addition, the agreement is
terminable at any time, without penalty, by the Board of Directors of the
Company or by vote of a majority of the Company's outstanding voting securities
on not more than 60 days' written notice to the Adviser, and by the Adviser on
60 days' written notice to the Company. The agreement may be terminated with
respect to a particular series, including the Fund, at any time by a vote of the
holders of a majority of the outstanding voting securities of such series, upon
60 days' written notice to the Adviser. Unless sooner terminated, the agreement
shall continue in effect for more than two years after its execution only so
long as such continuance is specifically approved at least annually by either
the Board of Directors or by a vote of a majority of the outstanding voting
securities of the Company, provided that in
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<PAGE>
either event such continuance is also approved by a vote of a majority of the
directors who are not parties to such agreement, or interested persons of such
parties, cast in person at a meeting called for the purpose of voting on such
approval. If a majority of the outstanding voting securities of any series,
including the Fund, approves the agreement, the agreement shall continue in
effect with respect to such approving series whether or not the shareholders of
any other series approve the agreement.
Pursuant to the Investment Advisory and Management Agreement, the Fund pays
the Adviser monthly advisory fees equal on an annual basis to a certain
percentage of the Fund's average daily net assets as set forth in the following
table:
Annual Advisory Fee
Average Net Asset Values as Percentage of
of the Fund Average Net Assets
------------------------ ------------------
On the first $100,000,000 .30%
On the next $150,000,000 .25%
On average assets of over
$250,000,000 .20%
For the fiscal years ended September 30, 1993, 1994 and 1995, the Fund paid
$1,388,12, $1,645,922 and $959,379, respectively, to the Adviser pursuant to the
Investment Advisory and Management Agreement.
The Investment Advisory and Management Agreement provides that the Adviser
must make any expense reimbursements to the Fund required under state law. The
laws of California provide that aggregate annual expenses of a mutual fund shall
not normally exceed 2-1/2% of the first $30 million of the average net assets,
2% of the next $70 million of the average net assets and 1-1/2% of the remaining
average net assets. Such expenses include the Adviser's compensation, but
exclude interest, taxes, brokerage fees and commissions, extraordinary expenses
and amounts paid under the Company's Rule 12b-1 Plan. The Adviser does not
believe that the laws of any other state in which the Fund's shares may be
offered for sale contain expense reimbursement requirements.
Under the Investment Advisory and Management Agreement, the Adviser
provides the Fund with advice and assistance in the selection and disposition of
its investments. All investment decisions are subject to review by the Board of
Directors of the Company. The Adviser is obligated to pay the salaries and fees
of any affiliates of the Adviser serving as officers or directors of the Fund.
The same security may be suitable for more than one of the series of the
Company and/or for other funds or private accounts managed by the Adviser or its
affiliates. If and when two or more funds or accounts simultaneously purchase
or sell the same security, the transactions will be allocated as to price and
amount in accordance with arrangements equitable to each fund or account. The
simultaneous purchase or sale of the same securities by more than one series or
by any of the series and other funds or accounts may have a detrimental effect
on a series, as this may
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<PAGE>
affect the price paid or received by that series or the size of the position
obtainable or able to be sold by that series.
EXPENSES
The expenses of the Fund are deducted from its income before dividends are
paid. These expenses include, but are not limited to, organizational costs,
fees paid to the Adviser, fees and expenses of officers and directors who are
not affiliated with the Adviser, taxes, interest, legal fees, transfer agent,
dividend disbursing agent and custodian fees, audit fees, brokerage fees and
commissions, fees and expenses of registering and qualifying the Fund and its
shares for distribution under federal and state securities laws, expenses of
preparing prospectuses and statements of additional information and of printing
and distributing prospectuses and statements of additional information annually
to existing shareholders, the expenses of reports to shareholders, shareholders'
meetings and proxy solicitations, distribution expenses pursuant to the Rule
12b-1 plan, and other expenses which are not expressly assumed by the Adviser
under the Investment Advisory and Management Agreement. Any general expenses of
the Company that are not readily identifiable as belonging to a particular
series of the Company will be allocated among the series based upon the relative
net assets of the series at the time such expenses were incurred.
DISTRIBUTION PLAN
Rule 12b-1(b) under the 1940 Act provides that any payments made by the
Company in connection with financing the distribution of their shares may only
be made pursuant to a written plan describing all aspects of the proposed
financing of distribution, and also requires that all agreements with any person
relating to the implementation of the plan must be in writing. Because some of
the payments described below to be made by the Company are distribution expenses
within the meaning of Rule 12b-1, the Company has entered into an Underwriting
and Distribution Agreement with the Distributor pursuant to a Distribution Plan
adopted in accordance with such Rule.
Rule 12b-1(b)(1) requires that such plan be approved by a majority of a
series outstanding shares, and Rule 12b-1(b)(2) requires that such plan,
together with any related agreements, be approved by a vote of the Board of
Directors and of the directors who are not interested persons of the Company and
who have no direct or indirect interest in the operation of the plan or in the
agreements related to the plan, cast in person at a meeting called for the
purpose of voting on such plan or agreement. Rule 12b-1(b)(3) requires that the
plan or agreement provide, in substance:
(a) that it shall continue in effect for a period of more than one
year from the date of its execution or adoption only so long as such
continuance is specifically approved at least annually in the manner
described in paragraph (b)(2) of Rule 12b-1;
(b) that any person authorized to direct the disposition of
moneys paid or payable by the Company pursuant to the plan or any
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<PAGE>
related agreement shall provide to the Company's Board of Directors, and
the directors shall review, at least quarterly, a written report of the
amounts so expended and the purposes for which such expenditures were made;
and
(c) in the case of a plan, that it may be terminated at any time
by a vote of a majority of the members of the Board of Directors of
the Company who are not interested persons of the Company and who have
no direct or indirect financial interest in the operation of the plan
or in any agreements related to the plan or by a vote of a majority of
the outstanding voting securities of the Fund.
Rule 12b-1(b)(4) requires that such a plan may not be amended to increase
materially the amount to be spent for distribution without shareholder approval
and that all material amendments of the plan must be approved in the manner
described in paragraph (b)(2) of Rule 12b-1.
Rule 12b-1(c) provides that the Company may rely upon Rule 12b-1(b) only if
the selection and nomination of the Company's disinterested directors are
committed to the discretion of such disinterested directors. Rule 12b-1(e)
provides that the Company may implement or continue a plan pursuant to Rule
l2b-1(b) only if the directors who vote to approve such implementation or
continuation conclude, in the exercise of reasonable business judgment and in
light of their fiduciary duties under state law, and under Sections 36(a) and
(b) of the Investment Company Act of 1940, that there is a reasonable likelihood
that the plan will benefit the Company and its shareholders. The Board of
Directors has concluded that there is a reasonable likelihood that the
Distribution Plan will benefit the Company and its shareholders.
Pursuant to the provisions of the Distribution Plan, the Fund pays a fee to
the Distributor at a monthly rate of 1/12 of .30% of the Fund's average daily
net assets in connection with servicing of the Fund's shareholder accounts and
in connection with distribution-related services provided with respect to the
Fund. A portion of the total fee (to be determined from time to time by the
Board of Directors) may be paid as a distribution fee and will be used by the
Distributor to cover expenses that are primarily intended to result in, or that
are primarily attributable to, the sale of shares of the Funds ("Distribution
Expenses"), and the remaining portion of the fee may be paid as a shareholder
servicing fee and will be used by the distributor to provide compensation for
ongoing servicing and/or maintenance of shareholder accounts with respect to the
Funds ("Shareholder Servicing Costs"). Distribution Expenses under the Plan
include, but are not limited to, initial and ongoing sales compensation (in
addition to sales charges) paid to Investment Executives of the Distributor and
to other broker-dealers; expenses incurred in the printing of prospectuses,
statements of additional information and reports used for sales purposes;
expenses of preparation and distribution of sales literature; expenses of
advertising of any type; an allocation of the Distributor's overhead; and
payments to and expenses of persons who provide support services in connection
with the distribution of Fund shares. Shareholder Servicing Costs include all
expenses of the Distributor incurred in connection with providing administrative
or accounting services to shareholders, including, but not limited to, an
allocation of the
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<PAGE>
Distributor's overhead and payments made to persons, including employees of the
Distributor, who respond to inquiries of shareholders of the Fund regarding
their ownership of shares or their accounts with the Fund, or who provide other
administrative or accounting services not otherwise required to be provided by
the Fund's Adviser or transfer agent.
For the fiscal years ended September 30, 1993, 1994 and 1995, the
Distributor voluntarily limited amounts payable under the Distribution Plan to
.23%, .21% and .20%, respectively, of average daily net assets for each year.
During such periods, the Fund paid distribution fees to the Distributor of
$1,364,766, $1,553,536 and $781,067, respectively. The Distributor has
voluntarily limited amounts payable under the Distribution Plan during fiscal
1996 to an annual rate of .20% of the average daily net assets of the Fund. The
Distributor may terminate its voluntary fee limitation at any time in its
discretion.
Distribution fees for the fiscal year ended September 30, 1995, were used
by the Distributor as follows:
Advertising $ -0-
Printing and Mailing of Prospectuses to
Other Than Current Shareholders
Compensation to Underwriters (trail fees to
Investment Executives) 781,067
Compensation to Dealers -0-
Compensation to Sales Personnel -0-
Interest, Carrying or Other Finance Charge
Other (Specify) -0-
----------
$ 781,067
UNDERWRITING AND DISTRIBUTION AGREEMENT
Pursuant to the Underwriting and Distribution Agreement, the Distributor
has agreed to act as the principal underwriter for the Fund in the sale and
distribution to the public of shares of the Fund, either through dealers or
otherwise. The Distributor has agreed to offer such shares for sale at all
times when such shares are available for sale and may lawfully be offered for
sale and sold. As compensation for its services, in addition to receiving its
distribution fees pursuant to the Distribution Plan discussed above, the
Distributor receives the sales load on sales of Fund shares set forth in the
Prospectus.
For the fiscal years ended September 30, 1993, 1994 and 1995, the Fund paid
$1,838,990, $1,340,277 and $43,458, respectively, in total underwriting
commissions. Of such amounts, $1,066,614, $777,361 and $25,206, respectively,
was retained by the Distributor.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Investors Fiduciary Trust Company ("IFTC"), the transfer agent for the
Company, maintains certain omnibus shareholder accounts for the Fund. Such
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<PAGE>
omnibus account represents the accounts of a number of individual shareholders
of the Fund. The Company has entered into a Shareholder Account Servicing
Agreement with the Distributor, pursuant to which the Distributor provides
certain transfer agent and dividend disbursing agent services for the underlying
individual shareholder accounts. Pursuant to such Agreement, the Distributor
has agreed to perform the usual and ordinary services of transfer agent and
dividend disbursing agent not performed by IFTC with respect to the underlying
individual shareholder accounts, including, without limitation, the following:
maintaining all shareholder accounts, preparing shareholder meeting lists,
mailing shareholder reports and prospectuses, tracking shareholder accounts for
blue sky and Rule 12b-1 purposes, withholding taxes on nonresident alien and
foreign corporation accounts, preparing and mailing checks for disbursement of
income dividends and capital gains distributions, preparing and filing U.S.
Treasury Department Form 1099 for all shareholders, preparing and mailing
confirmation forms to shareholders and dealers with respect to all purchases,
exchanges and liquidations of series shares and other transactions in
shareholder accounts for which confirmations are required, recording
reinvestments of dividends and distributions in series shares, recording
redemptions of series shares, and preparing and mailing checks for payments upon
redemption and for disbursements to withdrawal plan holders. As compensation
for such services, the Distributor will be paid an annual fee of $7.50 per
active shareholder account (defined as an account that has a blance of
shares) and $1.60 per closed accoutn (defined as an account that does not
have a balance of shares but has had activity within the past 12 months).
Such fee is payable on a monthly basis at a rate of 1/12 of the annual
per-account charge. Such fee covers all services listed above, with the
exception of preparing shareholder meeting lists and mailing shareholder
reports and prospectuses. These services, along with proxy processing (if
applicable) and other special service requests, are billable as performed at
a mutually agreed upon fee in addition to the annual fee noted above,
provided that such mutually agreed upon fee shall be fair and reasonable in
light of the usual and customary charges made by others for services of the
same nature and quality. During the fiscal year ended September 30, 1995,
the Fund paid $30,800 under the Agreement.
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
Because the Fund's portfolio is composed exclusively of debt, rather than
equity securities, most of the Fund's portfolio transactions are effected
without the payment of brokerage commissions, but at net prices which usually
include a markup. Most of the Fund's transactions are with the issuer or with
major dealers on a principal basis acting for their own account and not as
brokers. However, portfolio transactions for the Funds which are executed on an
agency basis may be effected through the Distributor on a securities exchange if
the commissions, fees or other remuneration received by the Distributor are
reasonable and fair compared to the commissions, fees or other remuneration paid
to other brokers or other futures commission merchants in connection with
comparable transactions involving similar securities or similar futures
contracts or options on futures contracts being purchased or sold on an exchange
during a comparable period of time. In effecting
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<PAGE>
portfolio transactions through the Distributor, the Funds intend to comply with
Section 17(e)(1) of the 1940 Act.
The Adviser is responsible for effecting securities transactions for the
Fund. In placing orders for securities transactions, the primary criterion for
the selection of a broker-dealer is the ability of the broker-dealer, in the
opinion of the Adviser, to secure prompt execution of the transactions at the
most favorable net price, considering the state of the market at the time.
Frequently the Adviser selects a broker-dealer to effect a particular
transaction without contacting all broker-dealers who might be able to effect
such transaction, because of the volatility of the market and the desire to
accept a particular price for a security because the price offered by the
broker-dealer meets the Fund's guidelines for profit, yield, or both.
When consistent with the objectives of prompt execution and favorable net
price, business may be placed with broker-dealers who furnish investment
research or services to the Adviser. Such research or services include advice,
both directly and in writing, as to the value of securities; the advisability of
investing in, purchasing or selling securities; and the availability of
securities, or purchasers or sellers of securities; as well as analyses and
reports concerning issues, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts. This allows the Adviser to
supplement its own investment research activities and enables the Adviser to
obtain the views and information of individuals and research staffs of many
different securities firms prior to making investment decisions for the Fund.
To the extent portfolio transactions are effected with broker-dealers who
furnish research services to the Adviser, the Adviser receives a benefit, not
capable of evaluation in dollar amounts, without providing any direct monetary
benefit to the Fund from these transactions. The Adviser believes that most
research services obtained by it generally benefit several or all of the
investment companies and private accounts which it manages, as opposed to solely
benefiting one specific managed fund or account. Normally, research services
obtained through managed funds or accounts investing in common stocks would
primarily benefit the managed funds or accounts which invest in common stock;
similarly, services obtained from transactions in fixed-income securities would
normally be of greater benefit to the managed funds or accounts which invest in
debt securities.
In the event any transactions are executed on an agency basis, the Adviser
will authorize the Fund to pay an amount of commission for effecting a
securities transaction in excess of the amount of commission another
broker-dealer would have charged only if the Adviser determines in good faith
that such amount of commission is reasonable in relation to the value of the
brokerage and research services provided by such broker-dealer, viewed in terms
of either that particular transaction or the Adviser's overall responsibilities
with respect to the accounts as to which it exercises investment discretion. If
the Fund executes any transactions on an agency basis, it will generally pay
higher than the lowest commission rates available.
Any portfolio transactions for the Fund executed on an agency basis may be
effected through the Distributor. In determining the commissions to be paid to
the
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<PAGE>
Distributor in connection with transactions effected on a securities exchange,
it is the policy of the Fund that such commissions will, in the judgment of the
Adviser, subject to review by the Board of Directors, be both (a) at least as
favorable as those which would be charged by other qualified brokers in
connection with comparable transactions involving similar securities being
purchased or sold on an exchange during a comparable period of time, and (b) at
least as favorable as commissions contemporaneously charged by the Distributor
on comparable transactions for its most favored comparable unaffiliated
customers. While the Fund does not deem it practicable and in its best interest
to solicit competitive bids for commission rates on each transaction,
consideration will regularly be given to posted commission rates as well as to
other information concerning the level of commissions charged on comparable
transactions by other qualified brokers.
The Fund paid $3,400, $24,022 and $11,883, respectively, in brokerage
commissions for the fiscal years ended September 30, 1993, 1994 and 1995. All
of such amounts, representing $16,473,200, $7,430,859 and $115,495,398,
respectively, of portfolio transactions, were paid to broker-dealers with which
the Fund had entered into agreements regarding the placement of brokerage
transactions in exchange for research services. No brokerage commissions were
paid to the Distributor.
CAPITAL STOCK AND OWNERSHIP OF SHARES
The Fund's shares of common stock have a par value of $.01 per share, and
have equal rights to share in dividends and assets. The shares possess no
preemptive or conversion rights. Cumulative voting is not authorized. This
means that the holders of more than 50% of the shares voting for the election of
directors can elect 100% of the directors if they choose to do so, and in such
event the holders of the remaining shares will be unable to elect any directors.
No persons are known by the Fund to have owned of record or beneficially 5%
or more of the outstanding shares of the Fund as of November 1, 1995. The
directors and officers of the Company as a group owned less than 1% of the
outstanding shares of the Fund as of such date.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the public offering price of Fund shares is
summarized in the Prospectus in the text following the headings "Purchase of
Shares--Public Offering Price" and "Valuation of Shares." The net asset value
of the Fund's shares is determined on each day on which the New York Stock
Exchange is open, provided that the net asset value need not be determined on
days when no Fund shares are tendered for redemption and no order for Fund
shares is received. The New York Stock Exchange is not open for business on the
following holidays (or on the nearest Monday or Friday if the holiday falls on a
weekend): New Year's Day, Presidents' Day, Good Friday, Memorial Day, July 4th,
Labor Day, Thanksgiving and Christmas.
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The portfolio securities in which the Fund invests fluctuate in value, and
hence the net asset value per share of the Fund also fluctuates. On
September 30, 1995, the net asset value per share for the Fund was calculated as
follows:
Net Assets ($318,624,617)_____ = Net Asset Value Per Share
Shares Outstanding (39,250,195) ($8.12)
A sales charge of 1.52% of the net asset value (in the case of sales of
less than $100,000) will be added to the net asset value per share to determine
the public offering price per share.
PERFORMANCE COMPARISONS
Advertisements and other sales literature for the Fund may refer to
"yield," "average annual total return" and "cumulative total return." Such
amounts are calculated as described below.
During some of the periods for which yield, average annual total return and
cumulative total return quotations are given in this Statement of Additional
Information, the Adviser waived or paid certain expenses of the Fund, thereby
increasing yield, average annual total return and cumulative total return.
These expenses may or may not be waived or paid in the future in the Adviser's
discretion.
Yield is computed by dividing the net investment income per share (as
defined under Securities and Exchange Commission rules and regulations) earned
during the computation period by the maximum offering price per share on the
last day of the period. Yield is computed according to the following formula:
a-b 6
YIELD = 2[(--- + 1) - 1]
cd
Where: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of
reimbursements);
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends; and
d = the maximum offering price per share on the last day of
the period.
The Fund's yield for the 30-day period ended September 30, 1995 was 8.03%.
Average annual total return figures are computed by finding the average
annual compounded rates of return over the periods indicated in the
advertisement that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
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<PAGE>
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of
such period.
This calculation deducts the maximum sales charge from the initial hypothetical
$1,000 investment, assumes all dividends and capital gains distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus, and includes all recurring fees, such as investment advisory
and management fees, charged to all shareholder accounts.
Average annual total returns on an investment in the Fund for various
periods ending September 30, 1995 were:
One Year 14.41%
Five Year 6.18%
Since inception (7/11/88) 7.16%
Cumulative total return is computed by finding the cumulative compounded
rate of return over the period indicated in the advertisement that would equate
the initial amount invested to the ending redeemable value, according to the
following formula:
ERV-P
CTR = (-----) 100
P
Where: CTR = cumulative total return;
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of
such period; and
P = initial payment of $1,000.
This calculation assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus and includes all recurring fees, such as investment advisory
and management fees, charged to all shareholder accounts.
The Fund's cumulative total return for the period from July 11, 1988
(commencement of operations) through September 30, 1995, was 64.84%.
Comparative performance information may be used from time to time in
advertising the Fund's shares, including the performance of Short-Term (1-5
Year) U.S. Government Funds as reported by Lipper Analytical Services, Inc.
and Salomon Brothers Mortgage Index. It should be noted, however, that the
Fund may invest in assets and employ strategies which are significantly
different that those of other funds in this category.
REDEMPTION
Redemption of shares, or payment, may be suspended at times (a) when the
New York Stock Exchange is closed for other than customary weekend or holiday
closings, (b) when trading on said Exchange is restricted, (c) when an emergency
exists, as a result of which disposal by the Fund of securities owned by it is
not reasonably practicable, or it is not reasonably practicable for the Fund
fairly to
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<PAGE>
determine the value of its net assets, or (d) during any other period when the
Securities and Exchange Commission, by order, so permits, provided that
applicable rules and regulations of the Securities and Exchange Commission shall
govern as to whether the conditions prescribed in (b) or (c) exist.
TAXATION
The Fund will be subject to a nondeductible excise tax equal to 4% of the
excess, if any, of the amount required to be distributed pursuant to the
Internal Revenue Code of 1986, as amended (the "Code"), for each calendar year
over the amount actually distributed. In order to avoid the imposition of this
excise tax, the Fund generally must declare dividends by the end of a calendar
year representing 98% of the Fund's ordinary income for the calendar year and
98% of its capital gain net income (both long-term and short-term capital gains)
for the 12-month period ending October 31 of the calendar year. For purposes of
this calculation, amounts of income on which corporate-level income tax have
been paid are deemed to have been distributed. The Fund incurred federal excise
taxes of $1,437,855 ($0.037 per share) on income retained by the Fund during the
1994 excise tax year. The Fund may decide to retain a portion of its taxable
income for the 1995 excise tax year and may pay an excise tax on this
undistributed amount.
The Fund has qualified and intends to continue to qualify each year as a
"regulated investment company" under Subchapter M of the Code. To qualify as a
regulated investment company the Fund must, among other things, receive at least
90% of its gross income each year from dividends, interest, gains from the sale
or other disposition of securities and certain other types of income. The Code
also forbids a regulated investment company from earning 30% or more of its
gross income from the sale or other disposition of securities held less than
three months and requires a regulated investment company to diversify its
holdings.
Ordinarily, distributions and redemption proceeds earned by a Fund
shareholder are not subject to withholding of federal income tax. However, 31%
of a Fund shareholder's distributions and redemption proceeds must be withheld
if a Fund shareholder fails to supply the Fund or its agent with such
shareholder's taxpayer identification number or if a Fund shareholder who is
otherwise exempt from withholding fails to properly document such shareholder's
status as an exempt recipient.
Any loss on the sale or exchange of shares of the Fund generally will be
disallowed to the extent that a shareholder acquires or contracts to acquire
shares of the Fund within 30 days before or after such sale or exchange. In
addition, if a shareholder disposes of shares within 90 days of acquiring such
shares and purchases other shares of the Company or another mutual fund managed
by the Adviser at a reduced sales charge, the shareholder's tax basis for
determining gain or loss on the shares which are disposed of is reduced by the
lesser of the amount of the sales charge that was paid when the shares disposed
of were acquired or the amount by which the sales charge for the new shares is
reduced. If a shareholder's tax basis is so reduced, the amount of the
reduction is treated as part of the tax basis of the new shares.
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<PAGE>
Additionally, distributions may be subject to state and local income taxes,
and the treatment thereof may differ from the federal income tax consequences
discussed above.
GENERAL INFORMATION
The Board of Directors may, without shareholder approval, create and issue
one or more additional classes of shares within the Fund, as well as within any
series of the Company created in the future. All classes of shares in a Fund
would be identical except that each class of shares would be available through a
different distribution channel and certain classes might incur different
expenses for the provision of distribution services or the provision of
shareholder services or administration assistance by institutions. Shares of
each class would share equally in the gross income of a series, but any
variation in expenses would be charged separately against the income of the
particular class incurring such expenses. This would result in variations in
net investment income accrued and dividends paid by and in the net asset value
of the different classes of a series. This ability to create multiple classes
of shares within each series of the Company will allow the Company in the future
the flexibility to better tailor its methods of marketing, administering and
distributing shares of the Funds to the needs of particular investors and to
allocate expenses related to such marketing, administration and distribution
methods to the particular classes of shareholders of the Fund incurring such
expenses.
On an issue affecting only a particular series, the shares of the affected
series vote separately. An example of such an issue would be a fundamental
investment restriction pertaining to only one series. In voting on the
Investment Advisory and Management Agreement (the "Agreement"), approval of the
Agreement by the shareholders of a particular series would make the Agreement
effective as to that series whether or not it had been approved by the
shareholders of the other series.
The assets received by the Company for the issue or sale of shares of each
series, and all income, earnings, profits and proceeds thereof, subject only to
the rights of creditors, are allocated to such series, and constitute the
underlying assets of such series. The underlying assets of each series are
required to be segregated on the books of account, and are to be charged with
the expenses in respect to such series and with a share of the general expenses
of the Company. Any general expenses of the Company not readily identifiable as
belonging to a particular series shall be allocated among the series based upon
the relative net assets of the series at the time such expenses were accrued.
Minnesota has enacted legislation which authorizes corporations to
eliminate or limit the personal liability of a director to the corporation or
its shareholders for monetary damages for breach of the fiduciary duty of "care"
(the duty to act with the care an ordinarily prudent person in a like position
would exercise under similar circumstances). Minnesota law does not, however,
permit a corporation to eliminate or limit the liability of a director (a) for
any breach of the director's duty of "loyalty" to the corporation or its
shareholders (the duty to act in good faith and in a manner reasonably believed
to be in the best interest of the corporation), (b) for acts
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<PAGE>
or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law, (c) for authorizing a dividend, stock repurchase or
redemption or other distribution in violation of Minnesota law or for violation
of certain provisions of Minnesota securities laws, or (d) for any transaction
from which the director derived an improper personal benefit. Minnesota law
does not permit elimination or limitation of a director's liability under the
1933 Act or the Securities Exchange Act of 1934, and the 1940 Act prohibits
elimination or limitation of a director's liability for acts involving willful
malfeasance, bad faith, gross negligence or reckless disregard of the duties of
a director. The Articles of Incorporation of Piper Global limit the liability
of directors to the fullest extent permitted by Minnesota law and the 1940 Act.
FINANCIAL STATEMENTS
The audited financial statements and supplementary schedules for the Fund
as of September 30, 1995, have been incorporated by reference into this
Statement of Additional Information from the Fund's annual report to
shareholders in reliance on the report of KPMG Peat Marwick LLP, 4200 Norwest
Center, Minneapolis, Minnesota 55402, independent auditors of the Fund, given on
the authority of such firm as experts in accounting and auditing.
PENDING LITIGATION
Complaints have been brought in federal and state court relating to one
open-end and twelve closed-end investment companies managed by the Adviser and
to two open-end funds for which the Adviser has acted as sub-adviser. An
Amended Consolidated Class Action Complaint was filed on October 5, 1994 in the
United States District Court, District of Minnesota, against the Fund, the
Adviser, the Distributor, William H. Ellis and Edward J. Kohler alleging certain
violations of federal and state securities laws, including the making of
materially misleading statements in the prospectus, common law negligent
misrepresentation and breach of fiduciary duty. This is a consolidated putative
class action in which claims brought by 11 persons or entities have been
consolidated under the title IN RE: PIPER FUNDS INC. INSTITUTIONAL GOVERNMENT
INCOME PORTFOLIO LITIGATION. The named plaintiffs in the complaint purport to
represent a class of individuals and groups who purchased shares of the Fund
during the putative class period of July 1, 1991 through May 9, 1994. The named
plaintiffs and defendants have entered into a settlement agreement which has
received preliminary approval from the Court. The terms of the settlement are
set forth in a Settlement Agreement dated July 20, 1995 (as modified by an
Addendum filed on July 28, 1995). The Settlement Agreement contained a
provision which would have permitted the defendants to cancel the Agreement if
shareholders who had incurred a cumulative "Loss" (as defined under the
Agreement) of more than 10% of the Loss sustained by the entire class had opted
out. The deadline for requesting exclusion from the class has passed, and the
Loss sustained by persons requesting exclusion is less than 10%. If granted
final approval by the Court, the Settlement Agreement would provide up to
approximately $70 million, together with interest earned, less certain
disbursements and attorneys fees as approved by the Court, to class members in
payments scheduled over approximately three years. Such payments would be made
by Piper
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<PAGE>
Jaffray Companies Inc. and the Adviser and would not be an obligation of the
Fund or the Company.
Six additional complaints, which are based on claims similar to those
asserted in the first complaint, have been brought relating to the Fund. The
first of such complaints was filed in the same court against the same parties on
October 21, 1994, by Eltrax Systems, Inc. A second additional complaint was
filed against the Company, the Adviser, the Distributor and Piper Jaffray
Companies Inc. on September 30, 1994 in the United States District Court,
District of Colorado. Plaintiffs in the complaint are Gary Pashel and Gregg S.
Hayutin, Trustees of the Mae Pashel Trust; Mae Pashel, individually; Gary Pashel
and Michael H. Feinstein, Trustees of the Robert Hayutin Insurance Trust; and
Dennis E. Hayutin, Gregg S. Hayutin and Gary Pashel, Trustees of the Marie Ellen
Hayutin Trust. The third additional complaint, a putative class action, was
filed on November 1, 1994 in the United States District Court, District of Idaho
by the Idaho Association of Realtors, Inc., a non-profit Idaho corporation. The
complaint was filed against the Fund, the Adviser, the Distributor, Piper
Jaffray Companies Inc., William H. Ellis and Edward J. Kohler. The fourth
complaint, also a putative class action, was filed in the United States District
Court for the District of Minnesota, Third Division, on January 25, 1995. The
Complaint was brought by Louise S. Maher and John A. Raetz against the Company,
the Fund, the Adviser, the Distributor, Piper Jaffray Companies Inc., William H.
Ellis and Edward J. Kohler. The fifth complaint was brought on April 11, 1995,
and in the future may be filed in the Minnesota State District Court, Hennepin
County. The plaintiff, Frank R. Berman, Trustee of Frank R. Berman Professional
CP Pension Plan Trust, sued individually and not on behalf of any putative
class. Defendants are the Distributor, the Company, Morton Silverman and Worth
Bruntjen. A sixth complaint relating to the Fund was filed on June 22, 1995 in
the Montana Thirteenth Judicial District Court, Yellowstone County by Beverly
Muth against the Distributor and Teresa L. Darnielle. In addition to the above
complaints, a number of actions have been commenced in arbitration by individual
investors in the Fund. The complaints discussed in this paragraph generally
have been consolidated with the IN RE: PIPER FUNDS INC. action for pretrial
purposes and the arbitrations and litigation have been stayed pending entry of
an order by the Court permitting those class members who have requested
exclusion to proceed with their actions.
A complaint was filed by Herman D. Gordon on October 20, 1994, in the
United States District Court, District of Minnesota, against American Adjustable
Rate Term Trust Inc.--1998, American Adjustable Rate Term Trust Inc.--1999, the
Adviser, the Distributor, Piper Jaffray Companies Inc., Benjamin Rinkey, Jeffrey
Griffin, Charles N. Hayssen and Edward J. Kohler. A second complaint was filed
by Frank Donio, I.R.A. and other plaintiffs on April 14, 1995, in the United
States District Court, District of Minnesota, against American Adjustable Rate
Term Trust Inc.--1996, American Adjustable Rate Term Trust Inc.--1997, American
Adjustable Rate Term Trust Inc.--1998, American Adjustable Rate Term Trust Inc.-
- -1999, the Adviser, the Distributor, Piper Jaffray Companies Inc. and certain
associated individuals. Plaintiffs in both actions filed a Consolidated Amended
Class Action Complaint on May 23, 1995 and by Order dated June 8, 1995, the
Court consolidated the two putative class actions. The consolidated amended
complaint, which
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<PAGE>
purports to be a class action, alleges certain violations of federal and state
securities laws, breach of fiduciary duty and negligent misrepresentation.
A complaint was filed by Carson H. Bradley on February 3, 1995 in the Sixth
Judicial District of the State of Idaho against American Government Income Fund
Inc., American Government Income Portfolio Inc., the Adviser, the Distributor
and Worth Bruntjen. The complaint alleges negligent misrepresentation, breach
of fiduciary duty and breach of contract. The action has been removed to
Federal District Court for the District of Idaho.
A complaint was filed by Gary E. Nelson on June 28, 1995 in the United
States District Court for the Western District of Washington at Seattle against
American Strategic Income Portfolio Inc. - II, the Adviser, the Distributor,
Piper Jaffray Companies Inc., Worth Bruntjen, Charles N. Hayssen, Michael
Jansen, William H. Ellis and Edward J. Kohler. A second complaint was filed by
the same individual in the same court on July 12, 1995 against American
Opportunity Income Fund Inc., the Adviser, the Distributor, Piper Jaffray
Companies Inc., Worth Bruntjen, Charles N. Hayssen, Michael Jansen, William H.
Ellis and Edward J. Kohler. On September 7, 1995, Christian Fellowship
Foundation Peace United Church of Christ, Gary E. Nelson and Lloyd Schmidt filed
an amended complaint purporting to be a class action in the United States
District Court for the District of Washington. The complaint was filed against
American Government Income Portfolio, Inc., American Government Income Fund
Inc., American Government Term Trust, Inc., American Strategic Income Portfolio
Inc., American Strategic Income Portfolio Inc. -- II, American Strategic Income
Portfolio Inc. -- III, American Opportunity Income Fund Inc., American Select
Portfolio Inc., Piper Jaffray Companies Inc., Piper Jaffray Inc., the Adviser
and certain associated individuals. By Order filed October 5, 1995, the
complaints were consolidated. The amended complaint alleges generally that the
prospectus and financial statements of each investment company were false and
misleading. Specific violations of various federal securities laws are alleged
with respect to each investment company. The complaint also alleges that the
defendants violated the Racketeer Influenced and Corrupt Organizations Act, the
Washington State Securities Act and the Washington Consumer Protection Act.
Complaints have also been filed relating to two open-end funds for which
the Adviser has acted as sub-adviser, Managers Intermediate Mortgage Fund and
Managers Short Government Fund. A complaint was filed on September 26, 1994 in
the United States District Court, District of Connecticut, by Florence R. Hosea,
Bobby W. Hosea, Getrud B. Dale and Peter M. Dale, Andrew Poffel and Diane Poffel
as tenants by the Entireties, Myrone Sarone, Donna M. DiPalo, Bernard B. Geltner
and Gail Geltner and Paul Delman. The complaint was filed against The Managers
Funds, the Managers Funds, L.P., Robert P. Watson, the Adviser, the Distributor,
an individual associated with the Adviser, Evaluation Associates, Inc. and
Managers Intermediate Mortgage Fund. The complaint, which is a putative class
action, alleges certain violations of federal securities laws, including the
making of false and misleading statements in the prospectus, and alleges
negligent misrepresentation, breach of fiduciary duty and common law fraud. A
similar complaint was filed as a putative class action in the same court on
November 4, 1994. The complaint was filed by Karen E. Kopelman against The
Managers Fund, The Managers Funds, L.P., Robert P. Watson, the Adviser, the
Distributor, Worth Bruntjen, Evaluation Associates, Inc. and Managers
Intermediate Mortgage Fund. The two putative class actions were consolidated by
court order on December 13, 1994. Plaintiffs filed an Amended and Restated
Complaint on July 19, 1995. A complaint relating to the Managers Short
Government Fund was filed on November 18, 1994 in the United States District
Court, District of Minnesota. The complaint was filed by Robert Fleck as a
putative class action against The Managers Funds,
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<PAGE>
The Managers Funds, L.P., the Adviser, the Distributor, Worth Bruntjen,
Evaluation Associates, Inc., Robert P. Watson, John E. Rosati, William M.
Graulty, Madeline H. McWhinney, Steven J. Pasggioli, Thomas R. Schneeweis and
Managers Short Government Fund, F/K/A/ Managers Short Government Income Fund.
The complaint alleges certain violations of federal securities laws, including
the making of false and misleading statements in the prospectus, and negligent
misrepresentation.
The Adviser and Distributor do not believe that the settlement reached in
connection with the first lawsuit described above, or any other of the above
lawsuits, will have a material adverse effect upon their ability to perform
under their agreements with the Fund, and they intend to defend the remaining
lawsuits vigorously.
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<PAGE>
PART B
MONEY MARKET FUND
U.S. GOVERNMENT MONEY MARKET FUND
TAX-EXEMPT MONEY MARKET FUND
Series of Piper Funds Inc.
STATEMENT OF ADDITIONAL INFORMATION
November 27, 1995
Table of Contents
PAGE
Investment Objectives, Policies and Restrictions . . . . . . . 2
Directors and Executive Officers . . . . . . . . . . . . . . 6
Investment Advisory and Other Services . . . . . . . . . . . . 13
Portfolio Transactions and Allocation of Brokerage. . . . . . . 18
Capital Stock and Ownership of Shares . . . . . . . . . . . . . 20
Net Asset Value and Public Offering Price . . . . . . . . . . . 20
Calculation of Yield . . . . . . . . . . . . . . . . . . . . . 22
Redemption of Shares . . . . . . . . . . . . . . . . . . . . . 23
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
General Information . . . . . . . . . . . . . . . . . . . . . . 26
Financial Statements . . . . . . . . . . . . . . . . . . . . . 27
Pending Litigation . . . . . . . . . . . . . . . . . . . . . . 27
Appendix A - Ratings . . . . . . . . . . . . . . . . . . . . . A-1
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information relates to the Prospectus dated November 27,
1995, and should be read in conjunction therewith. A copy of the Prospectus may
be obtained from the Funds at Piper Jaffray Tower, 222 South Ninth Street,
Minneapolis, Minnesota 55402.
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The shares of Piper Funds Inc. (the "Company") are currently offered in 13
series. This Statement of Additional Information relates to three of those
series, Money Market Fund, U.S. Government Money Market Fund and Tax-Exempt
Money Market Fund (sometimes referred to herein as a "Fund" or, collectively, as
the "Funds"). The investment objectives and policies of the Funds are set forth
in the Prospectus. Certain additional investment information is set forth
below.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
Each Fund may invest in repurchase agreements. The Funds' custodian will
hold the securities underlying any repurchase agreement or such securities will
be part of the Federal Reserve Book Entry System. The market value of the
collateral underlying the repurchase agreement will be determined on each
business day. If at any time the market value of the collateral falls below the
repurchase price of the repurchase agreement (including any accrued interest),
the respective Fund will promptly receive additional collateral (so the total
collateral is an amount at least equal to the repurchase price plus accrued
interest).
U.S. Government Money Market Fund will enter into repurchase agreements and
reverse repurchase agreements only with the primary reporting dealers that
report to the Federal Reserve Bank of New York and with banks that are among the
100 largest United States commercial banks.
The Funds have received from the Securities and Exchange Commission an
exemptive order permitting the Funds, along with the other series of the
Company, closed-end and other open-end investment companies currently managed by
Piper Capital Management Incorporated (the "Adviser"), and all future series of
the Company and all future investment companies advised by the Adviser or its
affiliates, to deposit uninvested cash balances into a large single joint
account to be used to enter into one or more large repurchase agreements.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
Tax-Exempt Money Market Fund may purchase securities on a "when-issued"
basis and may purchase and sell securities on a "forward commitment" basis.
When the Fund purchases securities on a when-issued or forward commitment basis,
it will maintain in a segregated account with its custodian cash or liquid
high-grade debt obligations having an aggregate value equal to the amount of
such purchase commitments until payment is made; the Fund will likewise
segregate securities it sells on a forward commitment basis.
PUTS
To help assure appropriate liquidity, Tax-Exempt Money Market Fund may
acquire Municipal Obligations which provide for the right to resell them to the
issuer, a bank or a broker-dealer at a specified price within a specified period
of time prior to the maturity date of such obligation. Such a right to resell,
which is commonly known as a "put," may be sold, transferred or assigned only
with the
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underlying security or securities. Immediately after acquisition of any put,
Tax-Exempt Money Market Fund will not, with respect to 75% of the total
amortized cost value of its assets, have invested more than 5% of the total
amortized cost value of its assets in securities underlying puts from the same
institution. An unconditional put, which is a put that would be readily
exercisable in the event of a default in payment of principal or interest on the
underlying security or securities, will not be considered to be a put from that
institution, provided that the amortized cost value of all securities held by
the Fund and issued or guaranteed by the same institution does not exceed 10% of
the total amortized cost value of the Fund's assets. For the purposes of this
paragraph, a put will be considered to be from the party to whom the Fund will
look for payment of the exercise price and an unconditional put will be
considered to be a guarantee of the underlying security or securities.
If an issuer, bank or broker-dealer should default on its obligation to
repurchase a security, Tax-Exempt Money Market Fund might be unable to recover
all or a portion of any loss sustained from having to sell the security
elsewhere. It will be the Fund's policy to enter into puts only with issuers,
banks or broker-dealers that are determined by the Adviser to present minimal
credit risks.
ILLIQUID SECURITIES
As set forth in the Prospectus, the Funds may invest in Rule 144A
securities and commercial paper issued pursuant to Rule 4(2) under the
Securities Act of 1933, and treat such securities as liquid when they have been
determined to be liquid by the Board of Directors of the Company or by the
Adviser subject to the oversight of and pursuant to procedures adopted by the
Board of Directors. Under these procedures, factors taken into account in
determining the liquidity of a security include (a) the frequency of trades and
quotes for the security; (b) the number of dealers willing to purchase or sell
the security and the number of other potential purchasers; (c) dealer
undertakings to make a market in the security; and (d) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
transfer). With respect to Rule 144A securities, investing in such securities
could have the effect of increasing the level of Fund illiquidity to the extent
that qualified institutional buyers become, for a time, uninterested in
purchasing these securities.
PORTFOLIO TURNOVER
Each Fund, consistent with its investment objective, may attempt to
maximize yield through portfolio trading. This may involve selling portfolio
instruments and purchasing different instruments to take advantage of
disparities of yield in different segments of the high-grade money market or
among particular instruments within the same segment of the market. Since each
Fund's assets will be invested in securities with short maturities and the Funds
will manage their portfolios as described above, each Fund's portfolio will turn
over several times a year. However, this will not generally increase the Funds'
brokerage costs, since brokerage commissions as such are not usually paid in
connection with the purchase or sale of the instruments in which the Funds
invest.
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<PAGE>
Portfolio turnover is the ratio of the lesser of annual purchases or sales
of portfolio securities to the average monthly value of portfolio securities,
not including securities maturing in less than 12 months. A 100% portfolio
turnover rate would occur, for example, if the lesser of the value of purchases
or sales of portfolio securities for a particular year were equal to the average
monthly value of the portfolio securities owned during such year. Because
securities with maturities of less than one year are excluded from required
portfolio turnover rate calculations, the portfolio turnover rate for each Fund
will generally be insignificant.
INVESTMENT RESTRICTIONS
In addition to the investment objectives and policies set forth in the
Prospectus, each Fund is subject to certain fundamental and nonfundamental
investment restrictions, as set forth below. Fundamental investment
restrictions may not be changed without the vote of a majority of a Fund's
outstanding shares. "Majority," as used in the Prospectus and in this Statement
of Additional Information, means the lesser of (a) 67% of a Fund's outstanding
shares present at a meeting of the holders if more than 50% of the outstanding
shares are present in person or by proxy or (b) more than 50% of a Fund's
outstanding shares.
As fundamental investment restrictions, no Fund will:
1. Invest 25% or more of the value of its total assets in the securities
of issuers conducting their principal business activities in any one industry.
This restriction does not apply to securities of the U.S. Government or its
agencies and instrumentalities and repurchase agreements relating thereto, or to
Tax-Exempt Securities, as defined in the Prospectus. In addition, this
restriction does not apply to obligations of United States banks, domestic
branches thereof and United States branches of foreign banks subject to United
States regulation. The various types of utilities companies, such as gas,
electric, telephone, telegraph, satellite and microwave communications
companies, are considered as separate industries.
2. Issue any senior securities, as defined in the Investment Company Act
of 1940, as amended (the "1940 Act"), other than as set forth in restriction
number 3 below and except to the extent that purchasing or selling securities on
a when-issued or delayed delivery basis may be deemed to constitute issuing a
senior security.
3. Borrow money (provided that the Funds may enter into reverse
repurchase agreements) except from banks for temporary or emergency purposes.
Each Fund may borrow money in an amount up to one-third of the value of its
total assets in order to meet redemption requests without immediately selling
any money market instruments. If, for any reason, the current value of a
Fund's total assets falls below an amount equal to three times the amount of
its indebtedness from money borrowed, such Fund will, within three business
days, reduce its indebtedness to the extent necessary. To do this, a Fund
may have to sell a portion of its investments at a time when it may be
disadvantageous to do so. With respect to each of the Funds, interest paid
on borrowed funds will decrease the net earnings of the Fund. None of the
Funds will purchase portfolio securities while outstanding borrowing exceeds
5% of the value of the Fund's total assets. None of
-4-
<PAGE>
the Funds will borrow money for leverage purposes (provided that the Funds
may enter into reverse repurchase agreements for such purposes).
4. Mortgage, pledge or hypothecate its assets except in an amount not
exceeding 10%, with respect to Money Market Fund and U.S. Government Money
Market Fund, and 20% with respect to Tax-Exempt Money Market Fund, of the value
of their total assets to secure temporary or emergency borrowing.
5. Purchase or sell commodities or commodity futures contracts.
6. Purchase or sell real estate or real estate mortgage loans, except
that the Funds may invest in securities secured by real estate or interests
therein or issued by companies that invest in real estate or interests therein.
7. Act as an underwriter of securities of other issuers, except insofar
as each Fund may be technically deemed an underwriter under the federal
securities laws in connection with the disposition of portfolio securities.
As nonfundamental investment restrictions that may be changed at any time
without shareholder approval, no Fund will:
1. Invest more than 10% of its net assets in illiquid securities.
2. Invest in warrants.
3. Invest more than 5% of the value of its total assets in the securities
of any issuers which, with their predecessors, have a record of less than three
years' continuous operation. (Securities of such issuers will not be deemed to
fall within this limitation if they are guaranteed by an entity in continuous
operation for more than three years. The value of all securities issued or
guaranteed by such guarantor and owned by a Fund shall not exceed 10% of the
value of the total assets of such Fund.)
4. Make short sales of securities.
5. Purchase any securities on margin except to obtain such short-term
credits as may be necessary for the clearance of transactions.
6. Write, purchase or sell puts, calls or combinations thereof, provided
that the Funds may purchase securities with demand or put features.
7. Purchase or retain the securities of any issuer if, to the Fund's
knowledge, those officers or directors of the Company or its affiliates or of
its investment adviser who individually own beneficially more than 0.5% of the
outstanding securities of such issuer, together own more than 5% of such
outstanding securities.
8. Invest for the purpose of exercising control or management.
-5-
<PAGE>
9. Purchase or sell oil, gas or other mineral leases, rights or royalty
contracts, except that the Funds may purchase or sell securities of companies
investing in the foregoing.
10. Purchase the securities of other investment companies except as part
of a merger, consolidation or acquisition of assets, provided that Tax-Exempt
Money Market Fund may invest up to 5% of its total assets in the securities of
other investment companies. Any purchases by Tax-Exempt Money Market Fund of
the securities of other investment companies will be made in the open market
where customary brokerage fees and commissions are paid.
11. Invest in foreign securities, except as follows: (a) Money Market
Fund may invest without limit in foreign securities, subject to the requirements
of Rule 2a-7 of the 1940 Act, and (b) Tax-Exempt Money Market Fund may invest up
to 5% of its total assets in foreign securities. For purposes of this
investment limitation, securities of foreign issuers which are guaranteed as to
payment of principal and interest by the U.S. Government or its agencies or
instrumentalities are not considered foreign securities.
12. Loan portfolio securities.
The identification of the issuer of a Tax-Exempt Security depends on the
terms and conditions of the obligation. If the assets and revenues of an
agency, authority, instrumentality or other political subdivision are separate
from those of the government creating the subdivision, and the obligation is
backed only by the assets and revenues of the subdivision, such subdivision will
be regarded as the sole issuer. Similarly, in the case of a nongovernmental
user, such as an industrial corporation or a privately owned or operated
hospital, if the security is backed only by the assets and revenues of the
nongovernmental user then such nongovernmental user will be deemed to be the
sole issuer. If in either case the creating government or another entity
guarantees an obligation, and the value of all securities issued or guaranteed
by the guarantor and owned by a Fund exceeds 10% of the value of such Fund's
total assets, the guarantee will be regarded as a separate security and treated
as an issue of such government or entity.
Any investment restriction or limitation referred to above or in the
Prospectus, except the borrowing policy, which involves a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after an acquisition of securities or
utilization of assets and such excess results therefrom.
DIRECTORS AND EXECUTIVE OFFICERS
The names, addresses and principal occupations during the past five years
of the directors and executive officers of the Company are given below. The
officers and directors of the Company also serve as officers and directors of
various closed- and open-end investment companies managed by the Adviser.
-6-
<PAGE>
Name and Address Position with the Company
---------------- -------------------------
William H. Ellis* Chairman of the Board of Directors
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
David T. Bennett Director
3400 City Center
33 South Sixth Street
Minneapolis, Minnesota 55402
Jaye F. Dyer Director
4670 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402
Karol D. Emmerich Director
7302 Claredon Drive
Edina, Minnesota 55439
Luella G. Goldberg Director
7019 Tupa Drive
Edina, Minnesota 55435
George Latimer Director
754 Linwood Avenue
St. Paul, MN 55105
Paul A. Dow President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
David E. Rosedahl Secretary
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Charles N. Hayssen Treasurer
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Worth Bruntjen Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Richard W. Filippone Senior Vice President
-7-
<PAGE>
Name and Address Position with the Company
---------------- -------------------------
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Marijo A. Goldstein Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Steven V. Markusen Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Robert H. Nelson Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Edward P. Nicoski Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Nancy S. Olsen Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Ronald R. Reuss Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Bruce D. Salvog Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Sandra K. Shrewsbury Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
David M. Steele Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
-8-
<PAGE>
Douglas J. White Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
J. Bradley Stone Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Marcy K. Winson Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
- ------------------
* Directors of the Company who are interested persons (as that term is
defined by the 1940 Act) of Piper Capital Management Incorporated and the
Funds.
William H. Ellis has been President of Piper Jaffray Companies Inc. and
Piper Jaffray Inc. (the "Distributor") since September 1982, Chief Operating
Officer of the same two companies since August 1983, Director and Chairman of
the Board of Piper Capital Management Incorporated ("the Adviser") since October
1985 and President of the Adviser since December 1994.
David T. Bennett is of counsel to the law firm of Gray, Plant, Mooty, Mooty
& Bennett, P.A., located in Minneapolis, Minnesota. Mr. Bennett is chairman of
a group of privately held companies and serves on the board of directors of a
number of nonprofit organizations.
Jaye F. Dyer has been President of Dyer Management Company, a private
management company, since January 1991. Prior to that he was President and
Chief Executive Officer of Dyco Petroleum Corporation, a Minneapolis based oil
and natural gas development company he founded, from 1971 to March 1, 1989, and
Chairman of the Board until December 31, 1990. Mr. Dyer serves on the board of
directors of Northwestern National Life Insurance Company, The ReliaStar
Financial Corp. (the holding company of Northwestern National Life Insurance
Company) and various privately held and nonprofit corporations.
Karol D. Emmerich has been President of The Paraclete Group, a consultant
to nonprofit organizations, since 1993. Prior to that she had been Vice
President, Chief Accounting Officer and Treasurer of Dayton Hudson Corporation
from 1980 to May 1993. Ms. Emmerich is an Executive Fellow at the University of
St. Thomas Graduate School of Business and serves on the board of directors of a
number of privately held and nonprofit organizations.
Luella G. Goldberg has served on the board of directors of Northwestern
National Life Insurance Company (since 1976), The ReliaStar Financial Corp.
(since 1989), TCF Financial Corporation (since 1988), the holding company of TCF
Bank Savings fsb, and Hormel Foods Corp. (since 1993). Ms. Goldberg also serves
as a Trustee of Wellesley College, and as a director of a number of other
organizations,
-9-
<PAGE>
including the University of Minnesota Foundation and the Minnesota Orchestral
Association. Ms. Goldberg was Chairman of the Board of Trustees of Wellesley
College from 1985 to 1993 and acting President from July 1, 1993 to October 1,
1993.
George Latimer is Director, Special Actions Office, Office of the
Secretary, Department of Housing and Urban Development since 1993, prior to
which he had been Dean of Hamline Law School, Saint Paul, Minnesota from 1990 to
1993. Mr. Latimer also serves on the board of directors of Digital Biometrics,
Inc. and Payless Cashways, Inc.
Paul A. Dow has been a Senior Vice President of the Adviser since 1989 and
Chief Investment Officer of the Adviser since 1989.
David E. Rosedahl has been Secretary and a Director of the Adviser since
1985, a Managing Director of the Distributor since 1986, a Managing Director of
Piper Jaffray Companies Inc. since 1987, Secretary of the Distributor since 1993
and General Counsel for the Distributor and Piper Jaffray Companies Inc. since
1979.
Charles N. Hayssen has been a Managing Director of the Distributor since
1986 and of Piper Jaffray Companies Inc. since 1987, Chief Financial Officer of
the Distributor since 1988, Director and Chief Financial Officer of the Adviser
since 1989 and Chief Operating Officer of the Adviser since 1994.
Worth Bruntjen has been a Senior Vice President of the Adviser since
January 1988.
Richard W. Filippone has been a Senior Vice President of the Adviser since
November 1991, prior to which he had been a Vice President of the Adviser from
1987 to 1991.
Marijo A. Goldstein has been a Senior Vice President of the Adviser since
November 1993, prior to which she was a Vice President of the Adviser from 1991
to 1993 and a fixed income analyst of the Adviser since 1988.
Steven V. Markusen has been a Senior Vice President of the Adviser since
December 1993, prior to which had been a senior vice president of Investment
Advisers, Inc., in Minneapolis, Minnesota from 1989 to 1993.
Robert H. Nelson has been a Senior Vice President of the Adviser since
November 1993, prior to which he had been a Vice President of the Adviser from
1991 to 1993 and Assistant Vice President from 1989 to 1991.
Edward P. Nicoski has been a Senior Vice President of the Adviser since
October 1985 and a Managing Director of the Distributor since November 1986.
Nancy S. Olsen has been a Senior Vice President of the Adviser since
November 1991, prior to which she had been a Vice President of the Adviser from
1987 to 1991.
-10-
<PAGE>
Ronald R. Reuss has been a Senior Vice President of the Adviser since
January 1989.
Bruce D. Salvog has been a Senior Vice President of the Adviser since
January 1992, prior to which he had been a portfolio manager at Kennedy &
Associates in Seattle, Washington from 1984 to 1992.
Sandra K. Shrewsbury has been a Senior Vice President of the Adviser since
September 1993, prior to which she had been a Managing Director of Piper Jaffray
since November 1992 and a Vice President of Piper Jaffray since November 1990.
David M. Steele has been a Senior Vice President of the Adviser since
January 1992, prior to which he had been a portfolio manager at Kennedy &
Associates in Seattle, Washington from 1987 to 1992.
Douglas J. White has been a Senior Vice President of the Adviser since
November 1991, prior to which he had been a Vice President of the Adviser from
1989 to 1991.
J. Bradley Stone has been a Vice President of the Adviser since November
1991 and a fixed-income analyst of the Adviser since March 1990.
Marcy K. Winson has been a Vice President of the Adviser since November
1993, prior to which she was an Assistant Vice President of the Adviser since
March 1993 and an educator from 1990 to 1992.
Ms. Goldberg, Ms. Emmerich and Mr. Dyer are members of the Company's Audit
Committee. Ms. Goldberg acts as the chairperson of such committee. The Audit
Committee oversees the Funds' financial reporting process, reviews audit results
and recommends annually to the Company a firm of independent certified public
accountants.
The functions to be performed by the Audit Committee are to recommend
annually to the Board a firm of independent certified public accountants to
audit the books and records of the Funds for the ensuing year; to monitor that
firm's performance; to review with the firm the scope and results of each audit
and determine the need, if any, to extend audit procedures; to confer with the
firm and representatives of the Funds on matters concerning the Funds' financial
statements and reports including the appropriateness of its accounting practices
and of its financial controls and procedures; to evaluate the independence of
the firm; to review procedures to safeguard portfolio securities; to review the
purchase by the Funds from the firm of non-audit services; to review all fees
paid to the firm; and to facilitate communications between the firm and the
Funds' officers and Directors.
The Board of Directors also has a Committee of the Independent Directors,
consisting of Mr. Bennett, who serves as chairperson, Messrs. Dyer, and Latimer,
Ms. Emmerich and Ms. Goldberg, and a Derivatives Committee consisting of Ms.
Emmerich, who serves as chairperson, Ms. Goldberg and Mr. Dyer.
-11-
<PAGE>
The functions of the Committee of the Independent Directors are: (a)
recommendation to the full Board of approval of any management, advisory, sub-
advisory and/or administration agreements; (b) recommendation to the full Board
of approval of any underwriting and/or distribution agreements; (c) review of
the fidelity bond and premium allocation; (d) review of errors and omissions and
any other joint insurance policies and premium allocation; (e) review of, and
monitoring of compliance with, procedures adopted pursuant to certain rules
promulgated under the 1940 Act; and (f) such other duties as the independent
directors shall, from time to time, conclude are necessary or appropriate to
carry out their duties under the 1940 Act. The functions of the Derivatives
Committee are: (a) to oversee practices, policies and procedures of the Adviser
in connection with the use of derivatives; (b) to receive periodic reports from
management and independent accountants; and (c) to report periodically to the
Committee of the Independent Directors and the Board of Directors.
The directors of the Company who are officers or employees of the Adviser
or any of its affiliates receive no remuneration from the Company. Each of the
other directors receives fees that are allocated among the series of the Company
on the basis of the total assets of each series. Each director receives from
the Company and Piper Institutional Funds Inc., collectively, an annual retainer
of $1,000, plus a fee of $250 for each regular quarterly Board of Directors
meeting attended. (The per-meeting fee is based on the total assets of the
Company and Piper Institutional Funds Inc. and will increase to $500 per meeting
in the event total assets exceed $200 million, with continuing increases to as
high as $1,500 per meeting in the event total assets reach $5 billion or more.
In addition, members of the Audit Committee not affiliated with the Adviser
receive $1,000 for each Audit Committee meeting attended ($2,000 with respect to
the chairperson of the Committee), with such fee being allocated among all open-
end and closed-end investment companies managed by the Adviser. Members of the
Committee of the Independent Directors and the Derivatives Committee currently
receive no additional compensation. Directors are also reimbursed for expenses
incurred in connection with attending meetings.
The following table sets forth the aggregate compensation received by each
director from the Company during the fiscal year ended September 30, 1995, as
well as the total compensation received by each director from the Company and
all other registered investment companies managed by the Adviser or affiliates
of the Adviser during the calendar year ended December 31, 1994. Directors who
are officers or employees of the Adviser or any of its affiliates did not
receive any such compensation and are not included in the table.
<TABLE>
<CAPTION>
Pension or
Retirement Estimated Total
Aggregate Benefits Annual Benefits Compensation
Compensation Accrued as Part Upon from Fund
Director from the Company of Fund Expenses Retirement Complex*
- -------- ---------------- ---------------- ---------- --------
<S> <C> <C> <C> <C>
David T. Bennett $7,400 None None $57,500
Jaye F. Dyer $7,995 None None $68,250
Karol D. Emmerich $7,995 None None $68,250
Luella G. Goldberg $8,590 None None $71,250
George Latimer $7,400 None None $65,250
- -----------------
</TABLE>
-12-
<PAGE>
* Consists of 21 registered investment companies managed by the Adviser or an
affiliate of the Adviser, including Piper Funds. Each director included in the
table, other than Mr. Bennett, serves on the board of each such registered
investment company. Mr. Bennett serves on the board of 20 such companies.
INVESTMENT ADVISORY AND OTHER SERVICES
The investment adviser for the Funds is Piper Capital Management
Incorporated (the "Adviser"). Its affiliate, Piper Jaffray Inc. (the
"Distributor") acts as the Funds' distributor. Each will act as such pursuant
to a written agreement which will be periodically approved by the directors or
the shareholders of the Funds. The address of both the Adviser and the
Distributor is Piper Jaffray Tower, 222 South Ninth Street, Minneapolis,
Minnesota 55402.
CONTROL OF THE ADVISER AND THE DISTRIBUTOR
The Adviser and the Distributor are both wholly owned subsidiaries of Piper
Jaffray Companies Inc., a publicly held corporation which is engaged through its
subsidiaries in various aspects of the financial services industry.
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
The Adviser acts as the investment adviser of the Funds under an Investment
Advisory and Management Agreement which has been approved by the Board of
Directors (including a majority of the directors who are not parties to the
agreement, or interested persons of any such party, other than as directors of
the Funds) and the shareholders of the Funds.
The Investment Advisory and Management Agreement will terminate
automatically in the event of its assignment. In addition, the agreement is
terminable at any time, without penalty, by the Board of Directors of the
Company or by vote of a majority of the Company's outstanding voting securities
on not more than 60 days' written notice to the Adviser, and by the Adviser on
60 days' written notice to the Company. The agreement may be terminated with
respect to a particular Fund at any time by a vote of the holders of a majority
of the outstanding voting securities of such Fund, upon 60 days' written notice
to the Adviser. Unless sooner terminated, the agreement shall continue in
effect for more than two years after its execution only so long as such
continuance is specifically approved at least annually by either the Board of
Directors or by a vote of a majority of the outstanding voting securities of the
Company, provided that in either event such continuance is also approved by a
vote of a majority of the directors who are not parties to such agreement, or
interested persons of such parties, cast in person at a meeting called for the
purpose of voting on such approval. If a majority of the outstanding voting
securities of any of the Funds approves the agreement, the agreement shall
continue in effect with respect to such approving Fund whether or not the
shareholders of any other Fund approve the agreement.
Pursuant to the Investment Advisory and Management Agreement, the Funds pay
the Adviser monthly advisory fees equal on an annual basis to a certain
percentage of each Fund's average net assets as set forth in the following
table.
-13-
<PAGE>
<TABLE>
<CAPTION>
Annual Advisory Fee
Average Net Asset Values as Percentage of
of the Fund Average Net Assets
- ----------------------------- ------------------
<S> <C>
On the first $500,000,000 .50%
On the next $250,000,000 .425%
On the next $250,000,000 .375%
On the next $500,000,000 .35%
On the next $500,000,000 .325%
On the next $500,000,000 .30%
On average assets of over
$2,500,000,000 .275%
</TABLE>
Money Market Fund, U.S. Government Money Market Fund and Tax-Exempt Money
Market Fund paid $5,034,611, $972,530 and $932,865, respectively, in advisory
fees for the fiscal year ended September 30, 1993, $5,287,804, $995,914 and
$972,714, respectively, in advisory fees for the fiscal year ended September 30,
1994 and $5,857,287, $1,105,123 and $966,676, respectively, in advisory fees for
the fiscal year ended September 30, 1995.
The Investment Advisory and Management Agreement provides that the Adviser
must make any expense reimbursements to the Funds required under state law. The
laws of California provide that aggregate annual expenses of a mutual fund shall
not normally exceed 2-1/2% of the first $30 million of the average net assets,
2% of the next $70 million of the average net assets and 1-1/2% of the remaining
average net assets. Such expenses include the Adviser's compensation, but
exclude interest, taxes, brokerage fees and commissions, extraordinary expenses
and amounts paid under the Company's Rule 12b-1 Plan. The Adviser does not
believe that the laws of any other state in which the Funds' shares may be
offered for sale contain expense reimbursement requirements.
Under the Investment Advisory and Management Agreement, the Adviser
provides each Fund with advice and assistance in the selection and disposition
of that Fund's investments. All investment decisions are subject to review by
the Board of Directors of the Company. The Adviser is obligated to pay the
salaries and fees of any affiliates of the Adviser serving as officers or
directors of the Funds.
The same security may be suitable for more than one of the Funds and/or for
other series of the Company or other funds or private accounts managed by the
Adviser or its affiliates. If and when two or more funds or accounts
simultaneously purchase or sell the same security, the transactions will be
allocated as to price and amount in accordance with arrangements equitable to
each fund or account. The simultaneous purchase or sale of the same securities
by more than one of the Funds or by any of the Funds and other series of the
Company or other funds or accounts may have a detrimental effect on a Fund, as
this may affect the price paid or received by that Fund or the size of the
position obtainable or able to be sold by that Fund.
EXPENSES
The expenses of each Fund are deducted from their income before dividends
are paid. These expenses include, but are not limited to, organizational costs,
fees
-14-
<PAGE>
paid to the Adviser, fees and expenses of officers and directors who are not
affiliated with the Adviser, taxes, interest, legal fees, transfer agent,
dividend disbursing agent and custodian fees, audit fees, brokerage fees and
commissions, fees and expenses of registering and qualifying the Funds and their
shares for distribution under federal and state securities laws, expenses of
preparing prospectuses and statements of additional information and of printing
and distributing prospectuses and statements of additional information annually
to existing shareholders, the expenses of reports to shareholders, shareholders'
meetings and proxy solicitations, distribution expenses pursuant to the Rule
12b-1 plan, and other expenses which are not expressly assumed by the Adviser
under the Investment Advisory and Management Agreement. Any general expenses of
the Company that are not readily identifiable as belonging to a particular
series of the Company will be allocated among the series based upon the relative
net assets of the series at the time such expenses were incurred.
DISTRIBUTION PLAN
Rule l2b-1(b) under the 1940 Act provides that any payments made by the
Funds in connection with financing the distribution of their shares may only be
made pursuant to a written plan describing all aspects of the proposed financing
of distribution, and also requires that all agreements with any person relating
to the implementation of the plan must be in writing. Because some of the
payments described below to be made by the Funds are distribution expenses
within the meaning of Rule 12b-1, the Company has entered into an Underwriting
and Distribution Agreement with the Distributor pursuant to a Distribution Plan
adopted in accordance with such Rule.
Rule l2b-1(b)(1) requires that such plan be approved by a majority of a
Fund's outstanding shares, and Rule l2b-1(b)(2) requires that such plan,
together with any related agreements, be approved by a vote of the Board of
Directors and of the directors who are not interested persons of the Company and
who have no direct or indirect interest in the operation of the plan or in the
agreements related to the plan, cast in person at a meeting called for the
purpose of voting on such plan or agreement. Rule l2b-1(b)(3) requires that the
plan or agreement provide, in substance:
(a) that it shall continue in effect for a period of more than one
year from the date of its execution or adoption only so long as such
continuance is specifically approved at least annually in the manner
described in paragraph (b)(2) of Rule l2b-1;
(b) that any person authorized to direct the disposition of moneys
paid or payable by the Company pursuant to the plan or any related
agreement shall provide to the Company's Board of Directors, and the
directors shall review, at least quarterly, a written report of the amounts
so expended and the purposes for which such expenditures were made; and
(c) in the case of a plan, that it may be terminated at any time by a
vote of a majority of the members of the Board of Directors of the Company
who are not interested persons of the Company and who have no direct or
indirect financial interest in the operation of the plan or in any
agreements related to
-15-
<PAGE>
the plan or by a vote of a majority of the outstanding voting securities of a
Fund.
Rule l2b-1(b)(4) requires that such a plan may not be amended to increase
materially the amount to be spent for distribution without shareholder approval
and that all material amendments of the plan must be approved in the manner
described in paragraph (b)(2) of Rule l2b-1.
Rule 12b-1(c) provides that the Company may rely upon Rule l2b-1(b) only if
the selection and nomination of the Company's disinterested directors are
committed to the discretion of such disinterested directors. Rule l2b-1(e)
provides that the Company may implement or continue a plan pursuant to Rule
l2b-1(b) only if the directors who vote to approve such implementation or
continuation conclude, in the exercise of reasonable business judgment and in
light of their fiduciary duties under state law, and under Sections 36(a) and
(b) of the Investment Company Act of 1940, that there is a reasonable likelihood
that the plan will benefit the Company and its shareholders. The Board of
Directors has concluded that there is a reasonable likelihood that the
Distribution Plan will benefit the Company and its shareholders.
Pursuant to the provisions of the Distribution Plan, each Fund pays a fee
to the Distributor at a monthly rate of 1/12 of .30% of such Fund's average
daily net assets in connection with servicing of the Fund's shareholder accounts
and in connection with distribution-related services provided with respect to
the Funds. A portion of the total fee (to be determined from time to time by
the Board of Directors) may be paid as a distribution fee and will be used by
the Distributor to cover expenses that are primarily intended to result in, or
that are primarily attributable to, the sale of shares of the Funds
("Distribution Expenses"), and the remaining portion of the fee may be paid as a
shareholder servicing fee and will be used by the distributor to provide
compensation for ongoing servicing and/or maintenance of shareholder accounts
with respect to the Funds ("Shareholder Servicing Costs"). Distribution
Expenses under the Plan include, but are not limited to, initial and ongoing
sales compensation (in addition to sales charges) paid to Investment Executives
of the Distributor and to other broker-dealers; expenses incurred in the
printing of prospectuses, statements of additional information and reports used
for sales purposes; expenses of preparation and distribution of sales
literature; expenses of advertising of any type; an allocation of the
Distributor's overhead; and payments to and expenses of persons who provide
support services in connection with the distribution of Fund shares.
Shareholder Servicing Costs include all expenses of the Distributor incurred in
connection with providing administrative or accounting services to shareholders,
including, but not limited to, an allocation of the Distributor's overhead and
payments made to persons, including employees of the Distributor, who respond to
inquiries of shareholders of the Funds regarding their ownership of shares or
their accounts with the Funds, or who provide other administrative or accounting
services not otherwise required to be provided by the Funds' Adviser or transfer
agent.
For each of the fiscal years ended September 30, 1993, 1994 and 1995, the
Distributor voluntarily limited amounts payable under the Distribution Plan to
an annual rate of .20% of average daily net assets for each Fund. Money Market
Fund
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<PAGE>
paid distribution fees for the fiscal years ended September 30, 1993, 1994 and
1995 of $2,306,127, $2,450,296 and $2,725,532, respectively. U.S. Government
Money Market Fund paid distribution fees for the fiscal years ended September
30, 1993, 1994 and 1995 of $389,074, $399,419 and $443,366, respectively.
Tax-Exempt Money Market Fund paid distribution fees for the fiscal years ended
September 30, 1993, 1994 and 1995 of $373,238, $389,086 and $381,907,
respectively.
Distribution fees for the fiscal year ended September 30, 1995, were used
by the Distributor as follows:
<TABLE>
<CAPTION>
U.S. Government Tax-Exempt
Money Market Money Market Money Market
Fund Fund Fund
------------ --------------- ------------
<S> <C> <C> <C>
Advertising........................ $ -0- $ -0- $ -0-
Printing and Mailing of
Prospectuses to Other
than Current Shareholders .... -0- -0- -0-
Compensation to Under-
writers (trail fees to
Investment Executives)........ 2,725,532 443,661 381,907
Compensation to Dealers ........ -0- -0- -0-
Compensation to Sales
Personnel .................... -0- -0- -0-
Interest, Carrying or Other
Finance Charge ............... -0- -0- -0-
Other (Specify) .................. -0- -0- -0-
---------- -------- --------
$2,725,532 $443,661 $381,907
</TABLE>
UNDERWRITING AND DISTRIBUTION AGREEMENT
Pursuant to the Underwriting and Distribution Agreement, the Distributor
has agreed to act as the principal underwriter for the Funds in the sale and
distribution to the public of shares of the Funds, either through dealers or
otherwise. The Distributor has agreed to offer such shares for sale at all
times when such shares are available for sale and may lawfully be offered for
sale and sold.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Investors Fiduciary Trust Company ("IFTC"), the transfer agent for the
Company, maintains certain omnibus shareholder accounts for each of the Funds.
Each such omnibus account represents the accounts of a number of individual
shareholders of a Fund. The Company has entered into a Shareholder Account
Servicing Agreement with the Distributor, pursuant to which the Distributor
provides certain transfer agent and dividend disbursing agent services for the
underlying individual shareholder accounts. Pursuant to such Agreement, the
Distributor has agreed to perform the usual and ordinary services of transfer
agent and dividend disbursing agent not performed by IFTC with respect to the
underlying individual shareholder accounts, including, without limitation, the
following: maintaining all shareholder accounts, preparing shareholder meeting
lists, mailing shareholder reports and prospectuses, tracking shareholder
accounts for blue sky
-17-
<PAGE>
and Rule l2b-1 purposes, withholding taxes on nonresident alien and foreign
corporation accounts, preparing and mailing checks for disbursement of income
dividends and capital gains distributions, preparing and filing U.S. Treasury
Department Form 1099 for all shareholders, preparing and mailing confirmation
forms to shareholders and dealers with respect to all purchases, exchanges and
liquidations of series shares and other transactions in shareholder accounts for
which confirmations are required, recording reinvestments of dividends and
distributions in series shares, recording redemptions of series shares, and
preparing and mailing checks for payments upon redemption and for disbursements
to withdrawal plan holders. As compensation for such services, the Distributor
is paid an annual fee of $9.00 per active shareholder account and $6.00 per
inactive account (defined as an account that has a balance of shares in any of
the Funds but that does not require a client statement for the current month).
There is no charge for a closed shareholder account (defined as an account that
has been inactive for at least three consecutive months). Such fee is payable
on a monthly basis at a rate of 1/12 of the annual per-account charge. Such fee
covers all services listed above, with the exception of preparing shareholder
meeting lists and mailing shareholder reports and prospectuses. These services,
along with proxy processing (if applicable) and other special service requests,
are billable as performed at a mutually agreed upon fee in addition to the
annual fee noted above, provided that such mutually agreed upon fee shall be
fair and reasonable in light of the usual and customary charges made by others
for services of the same nature and quality. Money Market Fund, U.S. Government
Money Market Fund and Tax-Exempt Money Market Fund paid $2,525,208, $142,433
and $104,169, respectively, to the Distributor under the Shareholder Account
Servicing Agreement during the fiscal year ended September 30, 1993, $2,747,092,
$165,733 and $111,906, respectively, during the fiscal year ended September 30,
1994 and $2,944,581, $177,755 and $126,307, respectively, during the fiscal year
ended September 30, 1995.
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
Because each Fund's portfolio is composed exclusively of debt, rather than
equity securities, most of the Funds' portfolio transactions are effected
without the payment of brokerage commissions, but at net prices which usually
include a markup. Most of the Funds' transactions are with the issuer, or with
major dealers on a principal basis acting for their own account and not as
brokers. However, portfolio transactions for the Funds which are executed on an
agency basis may be effected through the Distributor on a securities exchange if
the commissions, fees or other remuneration received by the Distributor are
reasonable and fair compared to the commissions, fees or other remuneration paid
to other brokers or other futures commission merchants in connection with
comparable transactions involving similar securities or similar futures
contracts or options on futures contracts being purchased or sold on an exchange
during a comparable period of time. In effecting portfolio transactions through
the Distributor, the Funds intend to comply with Section 17(e)(1) of the 1940
Act. For the fiscal years ended September 30, 1993, 1994 and 1995, the Funds
did not pay any brokerage commissions.
The Adviser is responsible for effecting securities transactions for each
of the Funds. In placing orders for securities transactions, the primary
criterion for the selection of a broker-dealer is the ability of the
broker-dealer, in the opinion of the
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<PAGE>
Adviser, to secure prompt execution of the transactions at the most favorable
net price, considering the state of the market at the time. Frequently the
Adviser selects a broker-dealer to effect a particular transaction without
contacting all broker-dealers who might be able to effect such transaction,
because of the volatility of the money market and the desire to accept a
particular price for a security because the price offered by the broker-dealer
meets a Fund's guidelines for profit, yield, or both.
When consistent with the objectives of prompt execution and favorable net
price, business may be placed with broker-dealers who furnish investment
research or services to the Adviser. Such research or services include advice,
both directly and in writing, as to the value of securities; the advisability of
investing in, purchasing or selling securities; and the availability of
securities, or purchasers or sellers of securities; as well as analyses and
reports concerning issues, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts. This allows the Adviser to
supplement its own investment research activities and enables the Adviser to
obtain the views and information of individuals and research staffs of many
different securities firms prior to making investment decisions for the Funds.
To the extent portfolio transactions are effected with broker-dealers who
furnish research services to the Adviser, the Adviser receives a benefit, not
capable of evaluation in dollar amounts, without providing any direct monetary
benefit to the Funds from these transactions. The Adviser believes that most
research services obtained by it generally benefit several or all of the
investment companies and private accounts which it manages, as opposed to solely
benefiting one specific managed fund or account. Normally, research services
obtained through managed funds or accounts investing in common stocks would
primarily benefit the managed funds or accounts which invest in common stock;
similarly, services obtained from transactions in fixed-income securities would
normally be of greater benefit to the managed funds or accounts which invest in
debt securities.
The Adviser has not entered into any formal or informal agreements with any
broker-dealers, nor does it maintain any "formula" which must be followed in
connection with the placement of the Funds' portfolio transactions in exchange
for research services provided the Adviser, except as noted below. However, the
Adviser does maintain an informal list of broker-dealers, which is used from
time to time as a general guide in the placement of the Funds' business, in
order to encourage certain broker-dealers to provide the Adviser with research
services which the Adviser anticipates will be useful to it. Because the list
is merely a general guide, which is to be used only after the primary criterion
for the selection of broker-dealers (discussed above) has been met, substantial
deviations from the list are permissible and may be expected to occur. In the
event any transactions are executed on an agency basis, the Adviser will
authorize the Funds to pay an amount of commission for effecting a securities
transaction in excess of the amount of commission another broker-dealer would
have charged only if the Adviser determines in good faith that such amount of
commission is reasonable in relation to the value of the brokerage and research
services provided by such broker-dealer, viewed in terms of either that
particular transaction or the Adviser's overall responsibilities with respect to
the accounts as to which it exercises investment discretion. If the Funds
execute any transactions on an agency basis, they will generally pay higher than
the lowest commission rates available.
-19-
<PAGE>
Any portfolio transactions for the Funds executed on an agency basis may be
effected through the Distributor. In determining the commissions to be paid to
the Distributor, it is the policy of the Funds that such commissions will, in
the judgment of the Adviser, subject to review by the Board of Directors, be
both (a) at least as favorable as those which would be charged by other
qualified brokers in connection with comparable transactions involving similar
securities being purchased or sold on an exchange during a comparable period of
time, and (b) at least as favorable as commissions contemporaneously charged by
the Distributor on comparable transactions for its most favored comparable
unaffiliated customers. While the Funds do not deem it practicable and in their
best interest to solicit competitive bids for commission rates on each
transaction, consideration will regularly be given to posted commission rates as
well as to other information concerning the level of commissions charged on
comparable transactions by other qualified brokers.
From time to time the Funds may acquire the securities of their regular
brokers or dealers or parent companies of such brokers or dealers. As of
September 30, 1995, Money Market Fund held $15,000,915 of securities issued by
Morgan Guaranty, $20,648,883 issued by C.S. First Boston, $14,814,024 issued by
Goldman Sachs Group L.P. and $21,928,338 issued by Merrill Lynch & Company.
During the 1995 fiscal year, Money Market Fund purchased securities issued by
Morgan Guaranty, C.S. First Boston, Goldman Sachs Group L.P., Merrill Lynch &
Company, Morgan Stanley Group Inc. and Lehman Brothers Inc.
U.S. Government Money Market Fund and Tax-Exempt Money Market Fund did not
purchase securities of their regular brokers or dealers or parent companies of
such brokers or dealers during the 1995 fiscal year.
CAPITAL STOCK AND OWNERSHIP OF SHARES
Each Fund's shares of common stock have a par value of $.01 per share, and
have equal rights to share in dividends and assets. The shares possess no
preemptive or conversion rights. Cumulative voting is not authorized. This
means that the holders of more than 50% of the shares voting for the election of
directors can elect 100% of the directors if they choose to do so, and in such
event the holders of the remaining shares will be unable to elect any directors.
As of November 1, 1995, no shareholder was known by any of the Funds to own
beneficially 5% or more of the outstanding shares of the Fund. The directors
and officers of the Company as a group owned less than 1% of the outstanding
shares of each of the Funds as of such date.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the public offering price of Fund shares (which
is equal to their net asset value) is summarized in the Prospectus in the text
following the heading "Valuation of Shares." The net asset value of each Fund's
shares is determined on each day on which the New York Stock Exchange is open,
provided that the net asset value need not be determined on days when no Fund
shares are tendered for redemption and no order for Fund shares is received.
The
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<PAGE>
New York Stock Exchange is not open for business on the following holidays (or
on the nearest Monday or Friday if the holiday falls on a weekend): New Year's
Day, Presidents' Day, Good Friday, Memorial Day, July 4th, Labor Day,
Thanksgiving and Christmas.
The portfolio securities in which each Fund invests fluctuate in value, and
hence the net asset value per share of each Fund may also fluctuate. On
September 30, 1995, the net asset value and public offering price per share for
each Fund were calculated as follows:
MONEY MARKET FUND
Net Assets ($1,702,712,671) = Net Asset Value Per Share
- ------------------------------------------
Shares Outstanding (1,702,712,671) ($1.00)
U. S. GOVERNMENT MONEY MARKET FUND
Net Assets ($256,447,147) = Net Asset Value Per Share
- ------------------------------------------
Shares Outstanding (256,447,147) ($1.00)
TAX-EXEMPT MONEY MARKET FUND
Net Assets ($206,211,634) = Net Asset Value Per Share
- -----------------------------------------
Shares Outstanding (206,211,634) ($1.00)
Each Fund values its portfolio securities at amortized cost in accordance
with Rule 2a-7 under the 1940 Act. This method involves valuing an instrument
at its cost and thereafter assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuations in interest rates
on the market value of the instrument and regardless of any unrealized capital
gains or losses. While this method provides certainty in valuation, it may
result in periods during which value, as determined by amortized cost, is higher
or lower than the price a Fund would receive if it sold the instrument. During
periods of declining interest rates, the daily yield on shares of a Fund
computed by dividing the annualized daily income of the Fund by the net asset
value computed as described above may tend to be higher than a like computation
made by the Fund with identical investments utilizing a method of valuation
based upon market prices and estimates of market prices for all of its
securities.
Pursuant to Rule 2a-7, the Board of Directors has determined, in good faith
based upon a full consideration of all material factors, that it is in the best
interests of each of the Funds and their shareholders to maintain a stable net
asset value per share by virtue of the amortized cost method of valuation. Each
of the Funds will continue to use this method only so long as the Board of
Directors believes that it fairly reflects the market-based net asset value per
share. In accordance with Rule 2a-7, the Board of Directors has undertaken, as
a particular responsibility within the overall duty of care owed to Fund
shareholders, to establish procedures reasonably designed, taking into account
current market conditions and the Funds' investment objectives, to stabilize
each Fund's net asset value per share at a single value. These procedures
include the periodic determination of any deviation of
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<PAGE>
current net asset value per share, calculated using available market quotations,
from each Fund's amortized cost price per share, the periodic review by the
Board of the amount of any such deviation and the method used to calculate any
such deviation, the maintenance of records of such determinations and the
Board's review thereof, the prompt consideration by the Board if any such
deviation exceeds 1/2 of 1%, and the taking of such remedial action by the Board
as it deems appropriate where it believes the extent of any such deviation may
result in material dilution or other unfair results to investors or existing
shareholders. Such remedial action may include redemptions in kind, selling
portfolio instruments prior to realizing capital gains or losses, shortening the
average portfolio maturity, withholding dividends or utilizing a net asset value
per share as determined by using available market quotations. Each Fund will,
in further compliance with Rule 2a-7, maintain a dollar-weighted average
portfolio maturity appropriate to its objective of maintaining a stable net
asset value and not exceeding 90 days, will not purchase any instrument with a
remaining maturity of greater than 397 calendar days, will limit its portfolio
investments to those U.S. dollar-denominated instruments which the Board
determines present minimal credit risks and which are at the time of acquisition
Eligible Securities (as defined in Rule 2a-7), and will record, maintain and
preserve a written copy of the above-described procedures and a written record
of the Board's considerations and actions taken in connection with the discharge
of its above-described responsibilities.
CALCULATION OF YIELD
Each Fund may issue current yield quotations. Simple yields are computed
by determining the net change, exclusive of capital changes, in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of a recent seven calendar day period, subtracting a hypothetical charge
reflecting deductions from shareholder accounts, and dividing the difference by
the value of the account at the beginning of the base period to obtain the base
period return, and then multiplying the base period return by 365/7. The
resulting yield figure will be carried to at least the nearest hundredth of one
percent. Effective yields are computed by determining the net change, exclusive
of capital changes, in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of a recent seven calendar day period,
subtracting a hypothetical charge reflecting deductions from shareholder
accounts, and dividing the difference by the value of the account at the
beginning of the base period to obtain the base period return, and then
compounding the base period return by adding 1, raising the sum to a power equal
to 365 divided by 7, and subtracting 1 from the result, according to the
following formula:
EFFECTIVE YIELD = [(BASE PERIOD RETURN +1)365/7] -1
When calculating the foregoing yield or effective yield quotations, the
calculation of net change in account value will include the value of additional
shares purchased with dividends from the original share and dividends declared
on both the original share and any such additional shares, and all fees, other
than nonrecurring accounts or sales charges, that are charged to all shareholder
accounts in proportion to the length of the base period. Realized gains and
losses from the
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<PAGE>
sale of securities and unrealized appreciation and depreciation are excluded
from the calculation of yield and effective yield.
Tax-Exempt Money Market Fund may also advertise its tax equivalent yield.
This yield will be computed by dividing that portion of the seven-day yield or
effective yield of the Fund (computed as set forth above) which is tax-exempt by
one minus a stated income tax rate and adding the product to that portion, if
any, of the yield of the Fund that is not tax-exempt.
The Funds' yields, effective yields and, in the case of Tax-Exempt Money
Market Fund, tax-equivalent yield (assuming a 36% federal income tax rate),
based upon the seven days ended September 30, 1995, are set forth below.
Effective Tax-Equivalent Tax-Equivalent
Fund Yield Yield Yield Effective Yield
---- ----- --------- -------------- ---------------
Money Market Fund 4.87% 4.99% N/A N/A
U.S. Government Money
Market Fund 4.85% 4.97% N/A N/A
Tax-Exempt Money
Market Fund 3.08% 3.12% 4.81% 4.88%
During some of the periods for which yields are calculated, the Adviser
voluntarily waived certain Rule 12b-1 fees for each Fund, thereby increasing
yields. These fees may or may not be waived or paid in the future, in the
Adviser's discretion. The following table sets forth the yields of each Fund
as of September 30, 1995, absent the waiver of fees.
Effective Tax-Equivalent Tax-Equivalent
Fund Yield Yield Yield Effective Yield
---- ----- --------- -------------- ---------------
Money Market Fund 4.77% 4.89% N/A N/A
U.S. Government Money
Market Fund 4.75% 4.87% N/A N/A
Tax-Exempt Money
Market Fund 2.98% 3.02% 4.88% 4.72%
REDEMPTION OF SHARES
Redemption of shares, or payment, may be suspended at times (a) when the
New York Stock Exchange is closed for other than customary weekend or holiday
closings, (b) when trading on said Exchange is restricted, (c) when an emergency
exists, as a result of which disposal by the Funds of securities owned by them
is not reasonably practicable, or it is not reasonably practicable for the Funds
fairly to determine the value of their net assets, or (d) during any other
period when the Securities and Exchange Commission, by order, so permits,
provided that applicable rules and regulations of the Securities and Exchange
Commission shall govern as to whether the conditions prescribed in (b) or (c)
exist.
Shareholders who purchased shares through a broker-dealer other than the
Distributor may also redeem such shares by written request to IFTC at the
address set forth in the Prospectus. To be considered in proper form, written
requests for redemption should indicate the dollar amount or number of shares to
be redeemed, refer to the shareholder's Fund account number, and give either a
social security or tax identification number. The request should be signed in
exactly the same way the account is registered. If there is more than one owner
of the shares, all owners must sign. If shares to be redeemed have a value of
$10,000 or more or redemption proceeds are to be paid to someone other than the
shareholder at the shareholder's address of record, the signature(s) must be
guaranteed by an "eligible guarantor institution," which includes a commercial
bank that is a member of the Federal Deposit Insurance Corporation, a trust
company, a member firm of a domestic stock exchange, a savings association or a
credit union that is authorized by its charter to provide a signature guarantee.
IFTC may reject redemption instructions if the guarantor is neither a member of
nor a participant in a signature guarantee program. Signature guarantees by
notaries public are not acceptable. The purpose of
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<PAGE>
a signature guarantee is to protect shareholders against the possibility of
fraud. Further documentation will be requested from corporations,
administrators, executors, personal representatives, trustees and custodians.
Redemption requests given by facsimile will not be accepted. Unless other
instructions are given in proper form, a check for the proceeds of the
redemption will be sent to the shareholder's address of record.
TAXATION
Pursuant to the Internal Revenue Code of 1986, as amended (the "Code"),
each Fund will be subject to a nondeductible excise tax equal to 4% of the
excess, if any, of the amount required to be distributed pursuant to the Code
for each calendar year over the amount actually distributed. In order to avoid
the imposition of this excise tax, each Fund generally must declare dividends by
the end of a calendar year representing 98% of the Fund's ordinary income for
the calendar year and 98% of its capital gain net income (both long-term and
short-term capital gains) for the 12-month period ending October 31 of the
calendar year. For purposes of this calculation, any amount of income on which
corporate-level income tax has been paid is deemed to have been distributed.
Ordinarily, distributions and redemption proceeds earned by a Fund
shareholder are not subject to withholding of federal income tax. However, 31%
of a Fund's distributions and redemption proceeds must be withheld if a Fund
shareholder fails to supply the Fund or its agent with such shareholder's
taxpayer identification number or if a Fund shareholder who is otherwise exempt
from withholding fails to properly document such shareholder's status as an
exempt recipient.
Distributions paid from net realized capital gains, if any, will be taxable
to shareholders as ordinary income. Capital gains from the sale or exchange of
shares are also taxable.
Distributions may be subject to state and local income taxes and the
treatment thereof may differ from the federal income tax consequences discussed
above.
TAX-EXEMPT MONEY MARKET FUND
Under the Code, interest on indebtedness incurred or continued to purchase
or carry shares of an investment company paying exempt-interest dividends, such
as Tax-Exempt Money Market Fund, will not be deductible by a shareholder in
proportion to the ratio of exempt-interest dividends to all dividends other than
those treated as long-term capital gains. Indebtedness may be allocated to
shares of Tax-Exempt Money Market Fund even though not directly traceable to the
purchase of such shares. Federal law also restricts the deductibility of other
expenses allocable to shares of Tax-Exempt Money Market Fund.
For federal income tax purposes, an alternative minimum tax ("AMT") is
imposed on taxpayers to the extent that such tax exceeds a taxpayer's regular
income tax liability (with certain adjustments). Exempt-interest dividends
attributable to interest income on certain tax-exempt obligations issued after
August 7, 1986 to
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<PAGE>
finance certain private activities are treated as an item of tax preference that
is included in alternative minimum taxable income for purposes of computing the
federal alternative minimum tax for all taxpayers and the federal environmental
tax on corporations. Tax-Exempt Money Market Fund may invest in obligations the
interest on which is treated as an item of tax preference, to the extent set
forth in the Prospectus. In addition, a portion of all other tax-exempt
interest received by a corporation, including exempt-interest dividends, will be
included in adjusted current earnings and earnings and profits for purposes of
determining the federal corporate alternative minimum tax, the environmental tax
imposed on corporations by Section 59A of the Code, and the branch profits tax
imposed on foreign corporations under Section 884 of the Code.
Because liability for AMT in the case of individuals and the corporate
minimum tax in the case of corporations will depend upon the regular tax
liability and tax preference items of a specific taxpayer, the extent, if any,
to which any tax preference items resulting from investment in Tax-Exempt Money
Market Fund will be subject to the tax will depend upon each shareholder's
individual situation. For shareholders with substantial tax preferences, the
AMT or corporate minimum tax could reduce the after-tax economic benefits of an
investment in the Fund. Each shareholder is advised to consult his or her tax
adviser with respect to the possible effects of such tax preference items.
For shareholders who are or may become recipients of Social Security
benefits, exempt-interest dividends are includable in computing "modified
adjusted gross income" for purposes of determining the amount of Social Security
benefits, if any, that is required to be included in gross income. The maximum
amount of Social Security benefits includable in gross income is 85%.
The Code imposes requirements on certain tax-exempt bonds which, if not
satisfied, could result in loss of tax-exemption for interest on such bonds,
even retroactively to the date of issuance of the bonds. Proposals may be
introduced before Congress in the future, the purpose of which will be to
further restrict or eliminate the federal income tax exemption for Tax-Exempt
Securities. The Fund cannot predict what additional legislation may be enacted
that may affect shareholders. The Fund will avoid investment in Tax-Exempt
Securities which, in the opinion of the Adviser, pose a material risk of the
loss of tax exemption. Further, if a Tax-Exempt Security in the Fund's
portfolio loses its exempt status, the Fund will make every effort to dispose of
such investment on terms that are not detrimental to the Fund.
GENERAL INFORMATION
The Board of Directors may, without shareholder approval, create and issue
one or more additional classes of shares within each Fund, as well as within any
series of the Company created in the future. All classes of shares in a Fund
would be identical except that each class of shares would be available through a
different distribution channel and certain classes might incur different
expenses for the provision of distribution services or the provision of
shareholder services or administration assistance by institutions. Shares of
each class would share equally in the gross income of a series, but any
variation in expenses would be charged
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<PAGE>
separately against the income of the particular class incurring such expenses.
This would result in variations in net investment income accrued and dividends
paid by and in the net asset value of the different classes of a series. This
ability to create multiple classes of shares within each series of the Company
will allow the Company in the future the flexibility to better tailor its
methods of marketing, administering and distributing shares of the Funds to the
needs of particular investors and to allocate expenses related to such
marketing, administration and distribution methods to the particular classes of
shareholders of the Fund incurring such expenses.
On an issue affecting only a particular series, the shares of the affected
series vote separately. An example of such an issue would be a fundamental
investment restriction pertaining to only one series. In voting on the
Investment Advisory and Management Agreement (the "Agreement"), approval of the
Agreement by the shareholders of a particular series would make the Agreement
effective as to that series whether or not it had been approved by the
shareholders of the other series.
The assets received by the Company for the issue or sale of shares of each
series, and all income, earnings, profits and proceeds thereof, subject only to
the rights of creditors, are allocated to such series, and constitute the
underlying assets of such series. The underlying assets of each series are
required to be segregated on the books of account, and are to be charged with
the expenses in respect to such series and with a share of the general expenses
of the Company. Any general expenses of the Company not readily identifiable as
belonging to a particular series shall be allocated among the series based upon
the relative net assets of the series at the time such expenses were accrued.
Minnesota has enacted legislation which authorizes corporations to
eliminate or limit the personal liability of a director to the corporation or
its shareholders for monetary damages for breach of the fiduciary duty of "care"
(the duty to act with the care an ordinarily prudent person in a like position
would exercise under similar circumstances). Minnesota law does not, however,
permit a corporation to eliminate or limit the liability of a director (a) for
any breach of the director's duty of "loyalty" to the corporation or its
shareholders (the duty to act in good faith and in a manner reasonably believed
to be in the best interest of the corporation), (b) for acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of law,
(c) for authorizing a dividend, stock repurchase or redemption or other
distribution in violation of Minnesota law or for violation of certain
provisions of Minnesota securities laws, or (d) for any transaction from which
the director derived an improper personal benefit. Minnesota law does not
permit elimination or limitation of a director's liability under the 1933 Act or
the Securities Exchange Act of 1934, and the 1940 Act prohibits elimination or
limitation of a director's liability for acts involving willful malfeasance, bad
faith, gross negligence or reckless disregard of the duties of a director. The
Articles of Incorporation of Piper Global limit the liability of directors to
the fullest extent permitted by Minnesota law and the 1940 Act.
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<PAGE>
FINANCIAL STATEMENTS
The edited financial statements and supplementary schedules for the Funds
as of September 30, 1995, have been incorporated by reference into this
Statement of Additional Information from the Funds' annual report to
shareholders in reliance on the report of KPMG Peat Marwick LLP, 4200 Norwest
Center, Minneapolis, Minnesota 55402, independent auditors of the Funds, given
on the authority of such firm as experts in accounting and auditing.
PENDING LITIGATION
Complaints have been brought in federal and state court relating to one
open-end and twelve closed-end investment companies managed by the Adviser and
to two open-end funds for which the Adviser has acted as sub-adviser. An
Amended Consolidated Class Action Complaint was filed on October 5, 1994 in the
United States District Court, District of Minnesota, against the Institutional
Government Income Portfolio (a series of the Company), the Adviser, the
Distributor, William H. Ellis and Edward J. Kohler alleging certain violations
of federal and state securities laws, including the making of materially
misleading statements in the prospectus, common law negligent misrepresentation
and breach of fiduciary duty. This is a consolidated putative class action in
which claims brought by 11 persons or entities have been consolidated under the
title IN RE: PIPER FUNDS INC. INSTITUTIONAL GOVERNMENT INCOME PORTFOLIO
LITIGATION. The named plaintiffs in the complaint purport to represent a class
of individuals and groups who purchased shares of Institutional Government
Income Portfolio during the putative class period of July 1, 1991 through May 9,
1994. The named plaintiffs and defendants have entered into a settlement
agreement which has received preliminary approval from the Court. The terms of
the settlement are set forth in a Settlement Agreement dated July 20, 1995 (as
modified by an Addendum filed on July 28, 1995). The Settlement Agreement
contained a provision which would have permitted the defendants to cancel the
Agreement if shareholders who had incurred a cumulative "Loss" (as defined under
the Agreement) of more than 10% of the Loss sustained by the entire class had
opted out. The deadline for requesting exclusion from the class has passed, and
the Loss sustained by persons requesting exclusion is less than 10%. If
granted final approval by the Court, the Settlement Agreement would provide up
to approximately $70 million, together with interest earned, less certain
disbursements and attorneys fees as approved by the Court, to class members in
payments scheduled over approximately three years. Such payments would be made
by Piper Jaffray Companies Inc. and the Adviser and would not be an obligation
of the Institutional Government Income Portfolio or the Company.
Six additional complaints, which are based on claims similar to those
asserted in the first complaint, have been brought relating to the Institutional
Government Income Portfolio series of the Company. The first of such complaints
was filed in the same court against the same parties on October 21, 1994, by
Eltrax Systems, Inc. A second additional complaint was filed against the
Company, the Adviser, the Distributor and Piper Jaffray Companies Inc. on
September 30, 1994 in the United States District Court, District of Colorado.
Plaintiffs in the complaint are Gary Pashel and Gregg S. Hayutin, Trustees of
the Mae Pashel Trust; Mae Pashel, individually;
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<PAGE>
Gary Pashel and Michael H. Feinstein, Trustees of the Robert Hayutin Insurance
Trust; and Dennis E. Hayutin, Gregg S. Hayutin and Gary Pashel, Trustees of the
Marie Ellen Hayutin Trust. The third additional complaint, a putative class
action, was filed on November 1, 1994 in the United States District Court,
District of Idaho by the Idaho Association of Realtors, Inc., a non-profit Idaho
corporation. The complaint was filed against the Institutional Government
Income Portfolio series of the Company, the Adviser, the Distributor, Piper
Jaffray Companies Inc., William H. Ellis and Edward J. Kohler. The fourth
complaint, also a putative class action, was filed in the United States District
Court for the District of Minnesota, Third Division, on January 25, 1995. The
Complaint was brought by Louise S. Maher and John A. Raetz against the Company,
the Institutional Government Income Portfolio series of the Company, the
Adviser, the Distributor, Piper Jaffray Companies Inc., William H. Ellis and
Edward J. Kohler. The fifth complaint was brought on April 11, 1995, and in the
future may be filed in the Minnesota State District Court, Hennepin County. The
plaintiff, Frank R. Berman, Trustee of Frank R. Berman Professional CP Pension
Plan Trust, sued individually and not on behalf of any putative class.
Defendants are the Distributor, the Company, Morton Silverman and Worth
Bruntjen. A sixth complaint relating to the Institutional Government Income
Portfolio series of the Company was filed on June 22, 1995 in the Montana
Thirteenth Judicial District Court, Yellowstone County by Beverly Muth against
the Distributor and Teresa L. Darnielle. In addition to the above complaints, a
number of actions have been commenced in arbitration by individual investors in
the Institutional Government Income Portfolio. The complaints discussed in this
paragraph generally have been consolidated with the IN RE: PIPER FUNDS INC.
action for pretrial purposes and the arbitrations and litigation have been
stayed pending entry of an order by the Court permitting those class members who
have requested exclusion to proceed with their actions.s
A complaint was filed by Herman D. Gordon on October 20, 1994, in the
United States District Court, District of Minnesota, against American Adjustable
Rate Term Trust Inc.-1998, American Adjustable Rate Term Trust Inc.-1999, the
Adviser, the Distributor, Piper Jaffray Companies Inc., Benjamin Rinkey, Jeffrey
Griffin, Charles N. Hayssen and Edward J. Kohler. A second complaint was filed
by Frank Donio, I.R.A. and other plaintiffs on April 14, 1995, in the United
States District Court, District of Minnesota, against American Adjustable Rate
Term Trust Inc.-1996, American Adjustable Rate Term Trust Inc.-1997, American
Adjustable Rate Term Trust Inc.-1998, American Adjustable Rate Term Trust Inc.-
1999, the Adviser, the Distributor, Piper Jaffray Companies Inc. and certain
associated individuals. Plaintiffs in both actions filed a Consolidated Amended
Class Action Complaint on May 23, 1995 and by Order dated June 8, 1995, the
Court consolidated the two putative class actions. The consolidated amended
complaint, which purports to be a class action, alleges certain violations of
federal and state securities laws, breach of fiduciary duty and negligent
misrepresentation.
A complaint was filed by Carson H. Bradley on February 3, 1995 in the Sixth
Judicial District of the State of Idaho against American Government Income Fund
Inc., American Government Income Portfolio Inc., the Adviser, the Distributor
and Worth Bruntjen. The complaint alleges negligent misrepresentation, breach
of fiduciary duty and breach of contract. The action has been removed to
Federal District Court for the District of Idaho.
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<PAGE>
A complaint was filed by Gary E. Nelson on June 28, 1995 in the United
States District Court for the Western District of Washington at Seattle against
American Strategic Income Portfolio Inc. - II, the Adviser, the Distributor,
Piper Jaffray Companies Inc., Worth Bruntjen, Charles N. Hayssen, Michael
Jansen, William H. Ellis and Edward J. Kohler. A second complaint was filed by
the same individual in the same court on July 12, 1995 against American
Opportunity Income Fund Inc., the Adviser, the Distributor, Piper Jaffray
Companies Inc., Worth Bruntjen, Charles N. Hayssen, Michael Jansen, William H.
Ellis and Edward J. Kohler. On September 7, 1995, Christian Fellowship
Foundation Peace United Church of Christ, Gary E. Nelson and Lloyd Schmidt filed
an amended complaint purporting to be a class action in the United States
District Court for the District of Washington. The complaint was filed against
American Government Income Portfolio, Inc., American Government Income Fund
Inc., American Government Term Trust, Inc., American Strategic Income Portfolio
Inc., American Strategic Income Portfolio Inc. - II, American Strategic Income
Portfolio Inc. - III, American Opportunity Income Fund Inc., American Select
Portfolio Inc., Piper Jaffray Companies Inc., Piper Jaffray Inc., the Adviser
and certain associated individuals. By Order filed October 5, 1995, the
complaints were consolidated. The amended complaint alleges generally that the
prospectus and financial statements of each investment company were false and
misleading. Specific violations of various federal securities laws are alleged
with respect to each investment company. The complaint also alleges that the
defendants violated the Racketeer Influenced and Corrupt Organizations Act, the
Washington State Securities Act and the Washington Consumer Protection Act.
Complaints have also been filed relating to two open-end funds for which
the Adviser has acted as sub-adviser, Managers Intermediate Mortgage Fund and
Managers Short Government Fund. A complaint was filed on September 26, 1994 in
the United States District Court, District of Connecticut, by Florence R. Hosea,
Bobby W. Hosea, Getrud B. Dale and Peter M. Dale, Andrew Poffel and Diane Poffel
as tenants by the Entireties, Myrone Sarone, Donna M. DiPalo, Bernard B. Geltner
and Gail Geltner and Paul Delman. The complaint was filed against The Managers
Funds, the Managers Funds, L.P., Robert P. Watson, the Adviser, the Distributor,
an individual associated with the Adviser, Evaluation Associates, Inc. and
Managers Intermediate Mortgage Fund. The complaint, which is a putative class
action, alleges certain violations of federal securities laws, including the
making of false and misleading statements in the prospectus, and alleges
negligent misrepresentation, breach of fiduciary duty and common law fraud. A
similar complaint was filed as a putative class action in the same court on
November 4, 1994. The complaint was filed by Karen E. Kopelman against The
Managers Fund, The Managers Funds, L.P., Robert P. Watson, the Adviser, the
Distributor, Worth Bruntjen, Evaluation Associates, Inc. and Managers
Intermediate Mortgage Fund. The two putative class actions were consolidated by
court order on December 13, 1994. Plaintiffs filed an Amended and Restated
Complaint on July 19, 1995. A complaint relating to the Managers Short
Government Fund was filed on November 18, 1994 in the United States District
Court, District of Minnesota. The complaint was filed by Robert Fleck as a
putative class action against The Managers Funds, The Managers Funds, L.P., the
Adviser, the Distributor, Worth Bruntjen, Evaluation Associates, Inc., Robert P.
Watson, John E. Rosati, William M. Graulty, Madeline H. McWhinney, Steven J.
Pasggioli, Thomas R. Schneeweis and Managers
-29-
<PAGE>
Short Government Fund, F/K/A/ Managers Short Government Income Fund. The
complaint alleges certain violations of federal securities laws, including the
making of false and misleading statements in the prospectus, and negligent
misrepresentation.
The Adviser and Distributor do not believe that the settlement reached in
connection with the first lawsuit described above, or any other of the above
lawsuits, will have a material adverse effect upon their ability to perform
under their agreements with the Funds, and they intend to defend the remaining
lawsuits vigorously.
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<PAGE>
APPENDIX A
RATINGS
Description of the two highest commercial paper, bond and other short- and
long-term rating categories assigned by Standard & Poor's Ratings Services
("S&P"), Moody's Investors Service, Inc. ("Moody's"), Fitch Investors Service,
Inc. ("Fitch"), Duff & Phelps, Inc. ("Duff"), IBCA Limited and IBCA Inc.
("IBCA") and Thomson BankWatch, Inc. ("BankWatch").
COMMERCIAL PAPER AND SHORT-TERM RATINGS
The designation A-1 by S&P indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined
to possess overwhelming safety characteristics are denoted with a plus sign (+)
designation. Capacity for timely payment on issues with an A-2 designation is
strong. However, the relative degree of safety is not as high as for issues
designated A-1.
The rating Prime-1 (P-1) is the highest commercial paper rating assigned by
Moody's. Issuers of P-1 paper must have a superior capacity for repayment of
short-term promissory obligations, and ordinarily will be evidenced by leading
market positions in well-established industries, high rates of return on funds
employed, conservative capitalization structures with moderate reliance on debt
and ample asset protection, broad margins in earnings coverage of fixed
financial charges and high internal cash generation, and well-established access
to a range of financial markets and assured sources of alternate liquidity.
Issues rated Prime-2 (P-2) have a strong capacity for repayment of short-term
promissory obligations. This ordinarily will be evidenced by many of the
characteristics cited above, but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
The rating Fitch-1 (Highest Grade) is the highest commercial paper rating
assigned by Fitch. Paper rated Fitch-1 is regarded as having the strongest
degree of assurance for timely payment. The rating Fitch-2 (Very Good Grade) is
the second highest commercial paper rating assigned by Fitch which reflects an
assurance of timely payment only slightly less in degree than the strongest
issues.
The rating Duff-1 is the highest commercial paper rating assigned by Duff.
Paper rated Duff-1 is regarded as having very high certainty of timely payment
with excellent liquidity factors which are supported by ample asset protection.
Risk factors are minor. Paper rated Duff-2 is regarded as having good certainty
of timely payment, good access to capital markets, and sound liquidity factors
and company fundamentals. Risk factors are small.
The designation A1 by IBCA indicates that the obligation is supported by a
very strong capacity for timely repayment. Those obligations rated A1+ are
supported by the highest capacity for timely repayment. Obligations rated A2
are supported by a strong capacity for timely repayment, although such capacity
may be susceptible to adverse changes in business, economic or financial
conditions.
A-1
<PAGE>
The rating TBW-1 is the highest short-term obligation rating assigned by
BankWatch. Obligations rated TBW-1 are regarded as having the strongest
capacity for timely repayment. Obligations rated TBW-2 are supported by a
strong capacity for timely repayment, although the degree of safety is not as
high as for issues rated TBW-1.
BOND AND LONG-TERM RATINGS
Bonds rated AAA are considered by S&P to be the highest grade obligations
and possess an extremely strong capacity to pay principal and interest. Bonds
rated AA by S&P are judged by S&P to have a very strong capacity to pay
principal and interest, and in the majority of instances differ only in small
degrees from issues rated AAA.
Bonds rated Aaa are judged by Moody's to be of the best quality. Bonds
rated Aa by Moody's are judged by Moody's to be of high quality by all standards
and, together with the Aaa group, they comprise what are generally known as
high-grade bonds. Bonds rated Aa are rated lower than Aaa bonds because margins
of protection may not be as large or fluctuations of protective elements may be
of greater amplitude or there may be other elements present which make the long-
term risks appear somewhat larger. Moody's applies numerical modifiers 1, 2 and
3 in the Aa rating category. The modifier 1 indicates a ranking for the
security in the higher end of this rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
the rating category.
Bonds rated AAA by Fitch are judged by Fitch to be strictly high-grade,
broadly marketable, suitable for investment by trustees and fiduciary
institutions, and liable to but slight market fluctuation other than through
changes in the money rate. The prime feature of an AAA bond is a showing of
earnings several times or many times interest requirements, with such stability
of applicable earnings that safety is beyond reasonable question whatever
changes occur in conditions. Bonds rated AA by Fitch are judged by Fitch to be
of safety virtually beyond question and are readily salable, whose merits are
not unlike those of the AAA class, but whose margin of safety is less strikingly
broad. The issue may be the obligation of a small company, strongly secured but
influenced as to rating by the lesser financial power of the enterprise and more
local type of market.
Bonds rated AAA by Duff are considered to be of the highest credit quality.
The risk factors are negligible, being only slightly more than U.S. Treasury
debt. Bonds rated AA are considered by Duff to be of high credit quality with
strong protection factors. Risk is modest but may vary slightly from time to
time because of economic conditions.
Obligations rated AAA by IBCA have the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial,
such that adverse changes in business, economic or financial conditions are
unlikely to increase investment risk significantly. Obligations rated AA by
IBCA have a very low expectation of investment risk. Capacity for timely
repayment of principal and
A-2
<PAGE>
interest is substantial. Adverse changes in business, economic or financial
condition may increase investment risk, albeit not very significantly.
IBCA also assigns a rating to certain international and U.S. banks. An
IBCA bank rating represents IBCA's current assessment of the strength of the
bank and whether such bank would receive support should it experience
difficulties. In its assessment of a bank, IBCA uses a dual rating system
comprised of Legal Ratings and Individual Ratings. In addition, IBCA assigns
banks Long- and Short-Term Ratings as used in the corporate ratings discussed
above. Legal Ratings, which range in gradation from 1 through 5, address the
question of whether the bank would receive support provided by central banks or
shareholders if it experienced difficulties, and such ratings are considered by
IBCA to be a prime factor in its assessment of credit risk. Individual Ratings,
which range in gradations from A through E, represent IBCA's assessment of a
bank's economic merits and address the question of how the bank would be viewed
if it were entirely independent and could not rely upon support from state
authorities or its owners.
In addition to its ratings of short-term obligations, BankWatch assigns a
rating to each issuer it rates, in gradations of A through E. BankWatch
examines all segments of the organization, including, where applicable, the
holding company, member banks or associations, and other subsidiaries. In those
instances where financial disclosure is incomplete or untimely, a qualified
rating (QR) is assigned to the institution. BankWatch also assigns, in the case
of foreign banks, a country rating which represents an assessment of the overall
political and economic stability of the country in which the bank is domiciled.
A-3
<PAGE>
PART C
OTHER INFORMATION
Growth Fund, Emerging Growth Fund, Growth and Income Fund,
Equity Strategy Fund, Balanced Fund, Government Income Fund,
Short-Intermediate Bond Fund, National Tax-Exempt Fund,
Minnesota Tax-Exempt Fund, Institutional Government Income Portfolio,
U.S. Government Money Market Fund, Money Market Fund and
Tax-Exempt Money Market Fund
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements are incorporated by reference to the Registrant's
Annual Reports filed with the Commission on November 24, 1995.
(b) Exhibits:
<TABLE>
<C> <S>
1.1 Restated Articles of Incorporation dated November 23, 1993 *
1.2 Certificate of Designation of Series M Common Shares *
2.1 Bylaws *
2.2 Amendment to Bylaws dated July 6, 1995 *
2.3 Amendment to Bylaws dated November , 1995 *
5.1 Investment Advisory and Management Agreement dated
February 19, 1987 *
5.2 Supplement to Investment Advisory and Management Agreement
dated April 4, 1988 *
5.3 Supplement to Investment Advisory and Management Agreement
dated March 16, 1990 *
5.4 Supplement to Investment Advisory and Management Agreement
dated July 21, 1992 *
5.5 Supplement to Investment Advisory and Management Agreement
dated April 10, 1995 *
6 Amended Underwriting and Distribution Agreement *
9.1 Shareholder Account Servicing Agreement between Piper Funds
Inc. and Piper Trust Company *
9.2 Shareholder Account Servicing Agreement between Piper Funds
Inc. and Piper Jaffray Inc. *
10 Opinion and Consent of Dorsey & Whitney P.L.L.P. dated April 7,
1995 *
11 Consent of KPMG Peat Marwick LLP *
13 Letter of Investment Intent dated April 6, 1995 *
15.1 Amended and Restated Plan of Distribution *
15.2 Supplement to Distribution Plan dated April 10, 1995 *
17.1 Power of Attorney dated November 27, 1995 *
17.2 Financial Data Schedule filed electronically as Exhibit 27 pursuant
to Rule 401 of Regulation S-T *
</TABLE>
- -----------------------
* Filed herewith.
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
No person is directly or indirectly controlled by or under common control
with the Registrant.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
Number of
As of October 31, 1995: Title of Class Record Holders
-------------- --------------
<S> <C> <C>
Growth Fund Common Shares 13,900
Emerging Growth Fund Common Shares 19,969
Growth and Income Fund Common Shares 7,107
Equity Strategy Fund Common Shares 6,407
Balanced Fund Common Shares 2,751
Government Income Fund Common Shares 6,901
Short-Intermediate Bond Fund Common Shares 18
National Tax-Exempt Fund Common Shares 1,753
Minnesota Tax-Exempt Fund Common Shares 3,092
Institutional Government Income
Portfolio Common Shares 5,530
U. S. Government Money Market Fund Common Shares 19,739
Money Market Fund Common Shares 305,137
Tax-Exempt Money Market Fund Common Shares 12,743
</TABLE>
ITEM 27. INDEMNIFICATION
The Articles of Incorporation and Bylaws of the Registrant provide that
the Registrant shall indemnify such persons for such expenses and
liabilities, in such manner and under such circumstances, to the full extent
permitted by Section 302A.521, Minnesota Statutes, as now enacted or
hereafter amended, provided that no such indemnification may be made if it
would be in violation of Section 17(h) of the Investment Company Act of 1940,
as now enacted or hereafter amended. Section 302A.521 of the Minnesota
Statutes, as now enacted, provides that a corporation shall indemnify a
person made or threatened to be made a party to a proceeding of the person
against judgments, penalties, fines, settlements, and reasonable expenses,
including attorneys' fees and disbursements, incurred by the person in
connection with the proceeding if, with respect to the acts or omissions of
the person complained of in the proceeding, the person has not been
indemnified by another organization for the same judgments, penalties, fines,
settlements, and reasonable expenses incurred by the person in connection
with the proceeding with respect to the same acts or omissions; acted in good
faith, received no improper personal benefit and the Minnesota Statutes
dealing with directors' conflicts of interest, if applicable, have been
satisfied; in the case of a criminal proceeding, had no reasonable cause to
believe that the conduct was unlawful; and reasonably believed that the
conduct was in the best interests of the corporation or, in certain
circumstances, reasonably believed that the conduct was not opposed to the
best interests of the corporation.
2
<PAGE>
Insofar as the indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons
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 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
controlling person of 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 whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Information on the business of the Adviser is described in the section of
the Prospectus, incorporated by reference in this Registration Statement,
entitled "Management -- Investment Adviser."
The officers and directors of the Adviser and their titles are as follow:
<TABLE>
<CAPTION>
Name Title
---- -----
<C> <S>
William H. Ellis President, Director and Chairman of
the Board
Charles N. Hayssen Director, Chief Financial Officer and
Chief Operating Officer
David E. Rosedahl Director, Secretary and General
Counsel
Bruce C. Huber Director
DeLos V. Steenson Director
Momchilo Vucenich Director
Beverly J. Zimmer Director
Paul A. Dow Senior Vice President and Chief
Investment Officer
James A. Berman Senior Vice President
Worth Bruntjen Senior Vice President
Michael C. Derck Senior Vice President
Richard W. Filippone Senior Vice President
John J. Gibas Senior Vice President
Marijo A. Goldstein Senior Vice President
Mark R. Grotte Senior Vice President
Jerry Gudmundson Senior Vice President
Robert Hannah Senior Vice President
Lynne Harrington Senior Vice President
Michael P. Jansen Senior Vice President
Lisa A. Kenyon Senior Vice President
Mark S. Lee Senior Vice President
</TABLE>
3
<PAGE>
<TABLE>
<C> <S>
Thomas S. McGlinch Senior Vice President
Curt D. McLeod Senior Vice President
Steven V. Markusen Senior Vice President
Paula Meyer Senior Vice President
Robert H. Nelson Senior Vice President
Gary Norstrem Senior Vice President
Nancy S. Olsen Senior Vice President
Ronald R. Reuss Senior Vice President
Maxine D. Rossini Senior Vice President
Bruce D. Salvog Senior Vice President
Sandra K. Shrewsbury Senior Vice President
David M. Steele Senior Vice President
J. Bradley Stone Senior Vice President
Randall J. Sukovich Senior Vice President
Robert H. Weidenhammer Senior Vice President
John G. Wenker Senior Vice President
Douglas J. White Senior Vice President
Cynthia K. Castle Vice President
Richard Daly Vice President
Molly Destro Vice President
Julie Deutz Vice President
Joan L. Harrod Vice President
Newby Herrod Vice President
Kevin A. Jansen Vice President
Amy K. Johnson Vice President
Kimberly F. Kaul Vice President
Russell Kappenman Vice President
John D. Kightlinger Vice President
Wan-Chong Kung Vice President
Thomas Moore Vice President
Siobann Nelson Vice President
Edward P. Nicoski Vice President
Paul Pearson Vice President
Daniel Phillips Vice President
John K. Schonberg Vice President
Eric L. Siedband Vice President
Catherine M. Stienstra Vice President
Shaista Tajamal Vice President
Bonnie L. Theis Vice President
Michael Wallace Vice President
Jane K. Welter Vice President
John G. Wenker Vice President
Marcy K. Winson Vice President
Fong P. Woo Vice President
</TABLE>
Principal occupations of Messrs. Ellis, Dow, Hayssen, Rosedahl,
Bruntjen, Filippone, Markusen, Nelson, Nicoski, Reuss, Salvog, Steele, White
and Stone and Ms. Olsen, Ms. Goldstein, Ms. Shrewsbury and Ms. Winson are set
forth in the Statement of Additional Information under the heading "Directors
and Officers."
4
<PAGE>
Mr. Huber has been a Director of the Adviser since October 1985 and was a
Vice President of the Adviser from October 1985 until April 1992, and a
Managing Director of Piper Jaffray Inc. ("Piper Jaffray") since November
1986. Mr. Berman has been a Senior Vice President of the Adviser since 1993;
prior to which he was a Managing Director of Piper Jaffray Inc. from 1992 to
1993, Vice President of Acquisitions at Sandia Mortgage Corporation from 1991
to 1992 and a Director of Investment Analysis and Acquisitions for Larken
Properties, Inc. from 1987 to 1991. Mr. Derck has been a Vice President of
the Adviser since November 1992, prior to which he had been a manager of
Advisory Accounts Services with the Adviser since April 1992 and, before
that, an Assistant Vice President at First Trust since 1976. Mr. Gibas has
been a Senior Vice President of the Adviser since November 1992, prior to
which he had been a Vice President of the Adviser from 1987 to 1992. Mr.
Grotte has been a Senior Vice President of the Adviser since November 1992,
prior to which he had been a Vice President of the Adviser from 1988 to 1992.
Mr. Gudmundson has been a Senior Vice President of the Adviser since August
1995, prior to which he was an Executive Vice President at Resource Capital
Advisers from 1991 to May 1995. Mr. Hannah has been a Senior Vice President
of the Adviser since May 1995, prior to which he was manager of Craig and
Associates in Seattle, Washington from September 1993 to November 1994, and
prior thereto, he was manager of Exvere in Seattle from January 1993 to
August 1993 and a registered representative at Geneva in Irvine, California
from Janaury 1991 to December 1992. Ms. Harrington has been a Senior Vice
President of the Adviser since March 1995, prior to which she was a Managing
Director at Piper Jaffray Inc. in the Public Finance Department. Mr. Michael
Jansen has been a Senior Vice President of the Adviser since October 1993,
prior to which he was a Managing Director of Piper Jaffray since 1987, an
Executive Vice President of Piper Mortgage Acceptance Corporation since 1991
and an Executive Vice President and Director of Premier Acceptance
Corporation since 1988. Ms. Kenyon has been a Senior Vice President of the
Adviser since January 1992, prior to which she had been a financial adviser
for a private family in Los Angeles. Mr. Lee has been a Senior Vice
President of the Adviser since November 1995, prior to which he had been a
Vice President of the Adivser since 1990. Mr. McGlinch has been a Senior
Vice President of the Adviser since November 1995, prior to which he had been
a Vice President of the Adviser since November 1992 and, prior thereto, he
had been a specialty products trader at FBS Investment Services from January
1990 to January 1992. Mr. McLeod has been a Senior Vice President of the
Adviser since November 1995, prior to which he had been an analyst at the
Adviser since 1988. Ms. Meyer has been a Senior Vice President of the
Adviser since December 1994, prior to which she had been a Vice President of
Secura Insurance, Appleton, Wisconsin from 1988 to 1994. Mr. Norstrem has
been a Senior Vice President of the Adviser since 1993, prior to which he was
Treasurer of the City of Saint Paul, Minnesota for twenty-eight years. Ms.
Rossini has been a Senior Vice President of the Adviser since September 1993,
prior to which she had been a managing Director of the Distributor since
November 1989. Mr. Steenson has been a Director of the Adviser since December
1994 and a Managing Director of the Underwriter since 1982. Mr. Sukovich has
been a Senior Vice President of the Adviser since January 1989. Mr. Vucenich
has been a Director of the Adviser since December 1994 and a managing
director of regional sales for Piper Jaffray Companies Inc. since February
1993. Mr. Weidenhammer has been a Senior Vice President of the Adviser since
November 1991, prior to which he had
5
<PAGE>
been a Vice President of the Adviser from 1987 to 1991. Mr. Wenker has been a
Senior Vice President of the Adviser since October 1993, prior to which he
was a Managing Director of Piper Jaffray from 1992 to 1993 and the Director
of Revitalization Resources of the Minneapolis Community Development Agency
from 1990 to 1992. Ms. Zimmer has been a Director of the Adviser since
December 1994, prior to which she was Chief Operating Officer of the Adviser
from May 1992 to December 1994 and Senior Vice President of the Adviser from
December 1990 to December 1994.
Ms. Castle has been a Vice President of the Adviser since November 1994,
prior to which she was a client sservice asociate of the Adviser since 1990.
Mr. Daly has been a Vice President of the Adviser since 1992, prior to which
he was an Assistant Vice President of the Piper Jaffray since 1990 and a
broker with Piper Jaffray from 1987 to 1992. Ms. Destro has been a Vice
President of the Adviser since 1994, prior to which she was Accounting
Manager from 1993 to 1994 and mutual fund accountant from 1991 to 1993 with
the Adviser, and prior thereto, mutual fund accountant at Voyageur Fund
Managers in Minneapolis from 1989 to 1991. Ms. Duetz has been a Vice
President of the Adviser since September 1995, prior to which she was an
Assistant Vice President at Daiwa Bank, Ltd. from November 1992 to September
1995 and a manager of financial reporting at The Churchill Companies from
September 1991 to October 1992. Ms. Harrod has been a Vice President of the
Adviser since November 1992 and has been a trader for the Adviser since
October 1989. Mr. Herrod has been a Vice President of the Adviser since
1992, prior to which he was a Vice President of Capital Markets at Washington
Square Capital Management from 1987 to 1992. Mr. Kevin Jansen has been a
Vice President of the Adviser since November 1993, prior to which he was an
Assistant Vice President of Piper Jaffray from 1992 to 1993 and an analyst at
Piper Jaffray from 1991 to 1992. Ms. Johnson has been a Vice President of
the Adviser since 1994, prior to which she was Accounting Manager from 1993
to 1994 and a mutual fund accountant from 1991 to 1993 with the Adviser, and
prior thereto, audit senior with KPMG Peat Marwick in Minneapolis from 1990
to 1992. Mr. Kappenman has been a Vice President of the Adviser since 1991.
Ms. Kaul has been a Vice President and Director of Corporate Communications
of the Adviser since November 1991, prior to which she was Copy Director and
Assistant Vice President in the advertising department of Piper Jaffray since
1986. Mr. Kightlinger has been a Vice President of the Adviser since 1991,
prior to which he had been a department head and portfolio manager for TCF
Bank Savings. Ms. Kung has been a Vice President of the Adviser since May
1993, prior to which she had been a Senior Consultant at Cytrol Inc. from
1989 to December 1992. Mr. Moore has been a Vice President of the Adviser
since 1992, prior to which he was a Portfolio Manager at Alpine Capital
Management from 1990 to 1992 and a broker at Hanifen Capital Management from
1990 to 1992. Ms. Nelson has been a Vice President of the Adviser since
November 1994, prior to which she was a supervisor for the Adviser since 1991
and an operations coordinator for the Adviser from 1990 to 1991. Mr. Pearson
has been a Vice President of the Adviser since November 1995, prior to which
he was a Mutual Funds Accounting Manager of the Adviser since February 1994
and prior to that he was the Director of Fund Operations at Norwest Bank in
Minneapolis from 1992 to 1994. Mr. Phillips has been a Vice President of the
Adviser since 1993 and has been an insurance product manager at Piper Jaffray
since 1987. Mr. Schonberg has been a Vice President of the
6
<PAGE>
Adviser since November 1992 and a portfolio manager for the Adviser since
July 1989. Mr. Siedband has been a Vice President of the Adviser since 1992.
Ms. Stienstra has been a Vice President of the Adviser since November 1995 and
a municipal bond trader of the Adviser since June 1995, prior to which she was
an assistant analyst of the Adviser from 1991 to 1994. Ms. Tajamal has been a
Vice President of the Adviser since November 1995 and a portfolio manager of
the Adviser since 1993, prior to which she was a money market analyst of the
Adviser from 1990 to 1993. Ms. Theis has been a Vice President of the
Adviser since November 1992, prior to which she had been an Assistant Vice
President of the Adviser since 1989. Mr. Wallace has been a Vice President
of the Adviser since November 1995, prior to which he was an Assistant Vice
President of the Adviser since November 1994 and prior to that he was an
Equity Analyst at the Adviser from June 1993 to November 1994. Ms. Welter
has been a Vice President of the Adviser since November 1994, prior to which
she was a client service associate of the Adviser since 1993 and a mutual
fund accountant with the Adviser from 1990 to 1993. Mr. Wenker has been a
Vice President of the Adviser since November 1994 and a Managing Director of
Piper Jaffray since 1995, prior to which he had been a Managing Director of
Piper Jaffray from 1992 to 1993, and prior thereto, a Director of
Revitalization Resources of the Minneapolis Community Development Agency from
1990 to 1992. Mr. Woo has been a Vice President of the Adviser since
November 1994, prior to which he was a municipal credit analyst of the
Adviser since 1992 and prior to that he was a credit specialist at a
commercial trading firm from 1991 to 1992.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Piper Jaffray Inc. acts as principal underwriter for the Registrant
and also for three other open-end investment companies, Piper Institutional
Funds Inc., the shares of which are currently offered in two series, Piper
Funds Inc. -- II, the shares of which are currently offered in one series and
Piper Global Funds Inc., the shares of which are currently offered in one
series. Piper Jaffray has acted as principal underwriter in connection with
the initial public offering of shares of 23 closed-end investment companies.
(b) The name, positions and offices with Piper Jaffray Inc., and
positions and offices with the Registrant of each director and officer of
Piper Jaffray Inc. are as follow:
<TABLE>
<CAPTION>
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
---- --------------------- ----------------------
<C> <S> <C>
Addison L. Piper Chairman of the Board of None
Directors and Chief Executive
Officer
William H. Ellis President, Chief Operating Chairman of Board of
Officer and Member of the Directors
Board of Directors
Karen M. Bohn Member of the Board None
of Directors
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
---- --------------------- ----------------------
<C> <S> <C>
Ralph W. Burnet Member of the Board None
of Directors
John L. McElroy, Jr. Member of the Board None
of Directors
Kathy Halbreich Member of the Board None
of Directors
Robert S. Slifka Member of the Board None
of Directors
David Stanley Member of the Board None
of Directors
James J. Bellus Managing Director None
AnnDrea M. Benson Managing Director None
Lloyd K. Benson Managing Director None
James L. Bergtold Managing Director None
Carol A. Bertsch Managing Director None
Peter A. Bessette Managing Director None
Gary J. Blauer Managing Director None
Sean K. Boyea Managing Director None
Ronald O. Braun Managing Director None
Paul E. Brodsky Managing Director None
Jay A. Brunkhorst Managing Director None
Kenneth S. Cameranesi Managing Director None
Stephen M. Carnes Managing Director None
Joseph V. Caruso Managing Director None
Joyce E. Chaney Managing Director None
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
---- --------------------- ----------------------
<C> <S> <C>
Antonio J. Cecin Managing Director None
Kenneth P. Clark Managing Director None
Linda A. Clark Managing Director None
Stephen B. Clark Managing Director None
David P. Crosby Managing Director None
George S. Dahlman Managing Director None
Jack C. Dillingham Managing Director None
Mark T. Donahoe Managing Director None
Andrew W. Donleavy Managing Director None
Philip S. Dow Managing Director None
Andrew S. Duff Managing Director None
Richard A. Edstrom Managing Director None
Fred R. Eoff, Jr. Managing Director None
Richard D. Estenson Managing Director None
Francis E. Fairman IV Managing Director None
John R. Farrish Managing Director None
Gordon R. Ferguson Managing Director None
Paul Ferry Managing Director None
Mark E. Fisler Managing Director None
Michael W. Follett Managing Director None
Daniel P. Gallaher Managing Director None
Peter M. Gill Managing Director None
Kevin D. Grahek Managing Director None
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
---- --------------------- ----------------------
<C> <S> <C>
Paul D. Grangaard Managing Director None
R. Hunt Greene Managing Director None
Daniel J. Hagen Managing Director None
James S. Harrington Managing Director None
Charles N. Hayssen Managing Director, Chief Treasurer
Financial Officer &Treasurer
William P. Henderson Managing Director None
Allan F. Hickok Managing Director None
Richard L. Hines Managing Director None
David B. Holden Managing Director None
John E. Houlihan Managing Director None
Charles E. Howell Managing Director None
Bruce C. Huber Managing Director None
Elizabeth A. Huey Managing Director None
John R. Jacobs Managing Director None
Earl L. Johnson Managing Director None
Richard L. Johnson Managing Director None
Nicholas P. Karos Managing Director None
Jerome P. Kohl Managing Director None
Charles B. Lannin Managing Director None
Eric W. Larson Managing Director None
Dan L. Lastavich Managing Director None
Robert J. Magnuson Managing Director None
James M. Manire Jr. Managing Director None
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
---- --------------------- ----------------------
<C> <S> <C>
Robert E. Mapes Managing Director None
Peter T. Mavroulis Managing Director None
Michael P. McMahon Managing Director None
Gregory T. McNellis Managing Director None
Thomas A. Medlin Managing Director None
Joseph E. Meyers Managing Director None
John V. Miller Managing Director None
Dennis V. Mitchell Managing Director None
Susan D. Musselman Managing Director None
Edward P. Nicoski Managing Director None
Benjamin S. Oehler Managing Director None
Joseph J. Olchefske Managing Director None
Brooks G. O'Neil Managing Director None
John P. O'Neill Managing Director None
John Otterlei Managing Director None
Gary M. Petrucci Managing Director None
Robin C. Pfister Managing Director None
Laurence S. Podobinski Managing Director None
Steven J. Proeschel Managing Director None
Rex W. Ramsay Managing Director None
Brian J. Ranallo Managing Director None
Roger W. Redmond Managing Director None
Ronald N. Reiches Managing Director None
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
---- --------------------- ----------------------
<C> <S> <C>
Robert P. Rinek Managing Director None
Jim M. Roane Managing Director None
Deborah K. Roesler Managing Director None
David E. Rosedahl Managing Director, General Secretary
Counsel and Secretary
Thomas P. Schnettler Managing Director None
Steven R. Schroll Managing Director None
Joyce Nelson Schuette Managing Director None
Morton D. Silverman Managing Director None
Linda E. Singer Managing Director None
David P. Sirianni Managing Director None
Arch C. Smith Managing Director None
Robert L. Sonnek Managing Director None
Thomas E. Stanberry Managing Director None
DeLos V. Steenson Managing Director None
Richard J. Stream Managing Director None
D. Greg Sundberg Managing Director None
William H. Teeter Managing Director None
Ann C. Tillotson Managing Director None
Marie A. Urich Managing Director None
Momchilo Vucenich Managing Director None
John G. Wenker Managing Director None
Darrell L. Westby Managing Director None
David R. Westcott Managing Director None
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
---- --------------------- ----------------------
<C> <S> <C>
Douglas R. Whitaker Managing Director None
Douglas H. Wilford Managing Director None
Stephen W. Woodard Managing Director None
Mark Wren Managing Director None
Saul Yaari Managing Director None
</TABLE>
The principal business address of each of the individuals listed above is
Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota
55402-3804.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The physical possession of the accounts, books, and other documents
required to be maintained by Section 31(a) of the Investment Company Act of
1940 and Rules 3la-1 to 3la-3 promulgated thereunder is maintained by the
Registrant at Piper Jaffray Tower, 222 South Ninth Street, Minneapolis,
Minnesota 55402-3804, except that the physical possession of certain
accounts, books and other documents related to the custody of the
Registrant's securities is maintained by Investors Fiduciary Trust Company,
127 West Tenth Street, Kansas City, Missouri 64105.
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
(a) Not applicable.
(b) Not applicable
(c) Each recipient of a prospectus of any series of the Registrant may
request the latest Annual Report of such series, and such Annual Report will
be furnished by the Registrant without charge.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement on Form N-1A pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this Registration Statement on
Form N-1A to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Minneapolis and State of Minnesota on the 23rd day
of November 1995.
PIPER FUNDS INC.
(Registrant)
By /s/ Paul A. Dow
-----------------------
Paul A. Dow
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<S> <C> <C>
/s/ Paul A. Dow President (principal November 23, 1995
- ------------------------- executive officer)
Paul A. Dow
/s/ Charles N. Hayssen Treasurer (principal November 23, 1995
- ------------------------- financial and
Charles N. Hayssen accounting officer)
David T. Bennett* Director
Jaye F. Dyer* Director
William H. Ellis* Director
Karol D. Emmerich* Director
Luella G. Goldberg* Director
George Latimer* Director
*By /s/ William H. Ellis November 23, 1995
--------------------
William H. Ellis
Attorney-in-Fact
</TABLE>
<PAGE>
EXHIBIT INDEX
TO
REGISTRATION STATEMENT
OF
PIPER FUNDS INC.
<TABLE>
<CAPTION>
EXHIBIT PAGE NO.
- ------- --------
<S> <C>
1.1 Restated Articles of Incorporation dated November 23, 1993
1.2 Certificate of Designation of Series M Common Shares
2.1 Bylaws
2.2 Amendment to Bylaws dated July 6, 1995
2.3 Amendment to Bylaws dated November , 1995
5.1 Investment Advisory and Management Agreement dated February 19, 1987
5.2 Supplement to Investment Advisory and Management Agreement dated
April 4, 1988
5.3 Supplement to Investment Advisory and Management Agreement dated
March 16, 1990
5.4 Supplement to Investment Advisory and Management Agreement dated
July 21, 1992
5.5 Supplement to Investment Advisory and Management Agreement dated
April 10, 1995
6 Amended Underwriting and Distribution Agreement
9.1 Shareholder Account Servicing Agreement between Piper Funds Inc. and
Piper Trust Company dated December 1, 1994
9.2 Shareholder Account Servicing Agreement between Piper Funds Inc. and
Piper Jaffray Inc. dated December 1, 1994
10 Opinion and Consent of Dorsey & Whitney P.L.L.P. dated April 7, 1995
11 Consent of KPMG Peat Marwick LLP
13 Letter of Investment Intent dated April 6, 1995
15.1 Amended and Restated Plan of Distribution
15.2 Supplement to Distribution Plan dated April 10, 1995
17.1 Power of Attorney dated November 27, 1995
17.2 Financial Data Schedule filed electronically as Exhibit 27 pursuant to
Rule 401 of Regulation S-T
</TABLE>
<PAGE>
CERTIFICATE OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
PIPER JAFFRAY INVESTMENT TRUST INC.
The undersigned, David Evans Rosedahl, the Secretary of Piper Jaffray
Investment Trust Inc. (the "Corporation"), a Minnesota corporation, hereby
certifies as follows:
1. The name of the Corporation is Piper Jaffray Investment Trust Inc.
2. At meetings duly called and held (pursuant to the requirements of the
Minnesota Statutes, Chapter 302A) on October 28, 1992 and February
23,1993, the Corporation's Board of Directors and shareholders,
respectively, adopted and approved the following Restated Articles of
Incorporation of the Corporation to replace the Corporation's existing
Articles of Incorporation (as amended) in their entirety, and directed
that the officers of the Corporation file the Allowing Restated
Articles of Incorporation in the office of the Minnesota Secretary of
State.
3. The Restated Articles of Incorporation have been adopted pursuant to
Chapter 302A of the Minnesota Business Corporation Act.
______________
RESTATED ARTICLES OF INCORPORATION
OF
PIPER JAFFRAY INVESTMENT TRUST INC.
For the purpose of forming a corporation pursuant to the provisions of
Minnesota Statutes, Chapter 302A, the following Restated Articles of
Incorporation are adopted:
1. The name of the corporation (the "Corporation") is Piper Funds Inc.
2. The Corporation shall have general business purposes and shall have
unlimited power to engage in and do any lawful act concerning any and all lawful
businesses for which corporations may be organized under the Minnesota Statutes,
Chapter 302A. Without limiting the generality of the foregoing, the Corporation
shall have specific power.
(a) To conduct, operate and carry on the business of a so-called
"open-end" management investment company pursuant to applicable state and
federal regulatory statutes, and exercise all the powers necessary and
appropriate to the conduct of such operations.
(b) To purchase, subscribe for, invest in or otherwise acquire, and
to own, hold, pledge, mortgage, hypothecate, sell, possess, transfer or
otherwise
<PAGE>
dispose of, or turn to account or realize upon, and generally deal in, all
forms of securities of every kind, nature, character, type and form, and
other financial instruments which may not be deemed to be securities,
including but not limited to futures contracts and options thereon Such
securities and other financial instruments may include but are not limited
to shares, stocks, bonds, debentures, notes, scrip, participation
certificates, rights to subscribe, warrants, options, certificates of
deposit, bankers' acceptances, repurchase agreements, commercial paper,
choses in action, evidences of indebtedness, certificates of indebtedness
and certificates of interest of any and every kind and nature whatsoever,
secured and unsecured, issued or to be issued, by any corporation, company,
partnership (limited or general), association, trust, entity or person,
public or private, whether organized under the laws of the United States,
or any state, commonwealth, territory or possession thereof, or organized
under the laws of any foreign country, or any state, province, territory or
possession thereof, or issued or to be issued by the United States
government or any agency or instrumentality thereof, options on stock
indexes, stock index and interest rate futures contracts and options
thereon, and other futures contracts and options thereon.
(c) In the above provisions of this Article 2, purposes shall also be
construed as powers and powers shall also be construed as purposes, and the
enumeration of specific purposes or powers shall not be construed to limit
other statements of purposes or to limit purposes or powers which the
Corporation may otherwise have under applicable law, all of the same being
separate and cumulative, and all of the same may be carried on, promoted
and pursued, transacted or exercised in any place whatsoever.
3. The Corporation shall have perpetual existence.
4. The location and post office address of the registered office in
Minnesota is Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota
55402-3804.
5. The total authorized number of shares of the Corporation is 10
trillion (10,000,000,000,000), all of which shall be common shares of the par
value of 5.01 per share (individually, a "Share" and collectively, the Shares").
The Corporation may issue and sell any of its Shares in fractional denominations
to the same extent as its whole Shares, and Shares and fractional denominations
shall have, in proportion to the relative fractions represented thereby, all the
rights of whole Shares, including, without limitation, the right to vote, the
right to receive dividends and distributions, and the right to participate upon
liquidation of the Corporation.
(a), Ten billion (10,000,000,000) of the Shares may be issued by the
Corporation in a series designated Series A Common Shares" ten billion
(10,000,000,000) of the Shares may be issued by the Corporation in a series
designated "Series B Common Shares,n ten billion (10,000,000,000) of the
Shares may be issued by the Corporation in a series designated Series C
-2-
<PAGE>
Common Shares;" ten billion (10,000,000,000) of the Shares may be issued by
the Corporation in a series designated Series D Common Shares)' one hundred
billion (100,000,000,000) of the Shares may be issued by the Corporation in
a series designated Series E Common Shares,n one hundred billion
(100,000,000,000) of the Shares may be issued by the Corporation in a
series designated as Series F Common Shares;n one hundred billion
(100,000,000,000) of the Shares may be issued by the Corporation in a
series designated as Series G Common Shares" ten billion (10,000,000,000)
of the Shares may be issued by the Corporation in a series designated as
Series H Common Shares,n ten billion (10,000,000,000) of the Shares may be
issued by the Corporation in a series designated as Series I Common Shares
" ten billion (10,000,000,000) of the Shares may be issued by the
Corporation in a series designated as Series J Common Shares;" ten billion
(10,000,000,000) of the Shares may be issued by the Corporation in a series
designated as "Series K Common Shares S ten billion (10,000,000,000) of the
Shares may be issued by the Corporation in a series designated as Series L
Common Shares and the remaining nine trillion, six hundred ten billion
(9,610,000,000,000) Shares authorized by this Article 5 shall initially be
undesignated Shares (the Undesignated Shares~~). Any series of the Shares
shall be referred to herein individually as a "Series" and collectively
herein, together with any further series from time to time created by the
Board of Directors as "Series".n The Undesignated Shares may be issued in
such Series with such designations, preferences and relative, participating
optional or other special rights, or qualifications, limitations or
restrictions thereof, as shall be stated or expressed in a resolution or
resolutions providing for the issue of any Series as may be adopted from
time to time by the Board of Directors of the Corporation pursuant to the
authority hereby vested in the Board of Directors. Each Series of Shares
which the Board of Directors may establish, as provided herein, may
evidence, if the Board of Directors shall so determine by resolution, an
interest in a separate and distinct portion of the Corporation's assets,
which shall take the form of a separate portfolio of investment securities,
cash and other assets. Authority to establish such separate portfolios is
hereby vested in the Board of Directors of the Corporation, and such
separate portfolios may be established by the Board of Directors without
the authorization or approval of the holders of any Series of Shares of the
Corporation. Such investment portfolios in which Shares of the Series
represent interests are also hereinafter referred to as "Series."
(b) The Shares of each Series may be classified by the Board of
Directors in one or more classes (individually, a "Class" and,
collectively, together with any other class or classes within any Series,
the "Classes") with such relative rights and preferences as shall be stated
or expressed in a resolution or resolutions providing for the issue of any
such Class or Classes as may be adopted from time to time by the Board of
Directors of the Corporation pursuant to the authority hereby vested in the
Board of Directors and Minnesota Statutes, Section 302A.401, Subd. 3, or
any successor
-3-
<PAGE>
provision. The Shares of each Class within a Series may be subject to such
charges and expenses (including by way of example, but not by way of
limitation, front-end and deferred sales charges, expenses under Rule 12b-1
plans, administration plans, service plans, or other plans or arrangements,
however designated) adopted from time to time by the Board of Directors in
accordance, to the extent applicable, with the Investment Company Act of
1940, as amended (together with the rules and regulations promulgated
thereunder, the "}940 Acts), which charges and expenses may differ from
those applicable to another Class within such Series, and all of the
charges and expenses to which a Class is subject shall be borne by such
Class and shall be appropriately reflected (in the manner determined by the
Board of Directors in the resolution or resolutions providing for the issue
of such Class) in determining the net asset value and the amounts payable
with respect to dividends and distributions on and redemptions or
liquidations of, such Class. Subject to compliance with the requirements
of the 1940 Act, the Board of Directors shall have the authority to provide
that Shares of any Class shall be convertible (automatically, optionally or
otherwise) into Shares of one or more other Classes in accordance with such
requirements and procedures as may be established by the Board of
Directors.
6. The shareholders of each Series (or Class thereof) of common shares of
the Corporation:
(a) shall not have the right to cumulate votes for the election of
directors; and
(b) shall have no preemptive right to subscribe to any issue of
shares of any Series (or Class thereof) of the Corporation now or hereafter
created, designated or classified.
7. A description of the relative rights and preferences of all Series of
Shares (and Classes thereon is as follows, unless otherwise set forth in one or
more amendments to these Articles of Incorporation or in the resolution
providing for the issue of such Series (and Classes thereon:
(a) On any matter submitted to a vote of shareholders of the
Corporation, all Shares of the Corporation then issued and outstanding and
entitled to vote, irrespective of Series or Class, shall be voted in the
aggregate and not by Series or Class, except: (i) when otherwise required
by Minnesota Statutes, Chapter 302A, in which case shares will be voted by
individual Series or Class, as applicable; (ii) when otherwise required by
the 1940 Act or the rules adopted thereunder, in which case shares shall be
voted by individual Series or Class, as applicable; and (iii) when the
matter does not affect the interests of a particular Pries or Class
thereof, in which case only shareholders of the Series or Mass thereof
affected shall be entitled to vote thereon and shall vote by individual
Series or Class, as applicable.
-4-
<PAGE>
(b) All consideration received by the Corporation for the issue or
sale of Shares of any Series, together with all assets, income, earnings,
profits and proceeds derived therefrom (including all proceeds derived from
the sale, exchange or liquidation thereof and, if applicable, any assets
derived from any reinvestment of such proceeds in whatever form the same
may be) shall become part of the assets of the portfolio to which the
Shares of that Series relate, for all purpose subject only to the rights of
creditors, and shall be so treated upon the books of account of the
Corporation. Such assets, income, earnings, profits and proceeds
(including any proceeds derived from the sale, exchange or liquidation
thereof and, if applicable, any asset; derived from any reinvestment of
such proceeds in whatever form the same may be) are herein referred to as
"assets belonging to" such Series of Shares of the Corporation.
(c) Assets of the Corporation not belonging to any particular Series
are referred to herein as "General Assets." General Assets shall be
allocated to each Series in proportion to the respective net assets
belonging to such Series. The determination of the Board of Directors
shall be conclusive as to the amount of assets, as to the characterization
of assets as those belonging to a Series or as General Assets, and as to
the allocation of General Assets.
(d) The assets belonging to a particular Serifs of Shares shall be
charged with the liabilities incurred specifically on behalf of such Series
of Shares ("Special Liabilities"). Such assets shall also be charged with
a share of the general liabilities of the Corporation ("General
Liabilities") in proportion to the respective net assets belonging to such
Series of common shares. The determination of the Board of Directors shall
be conclusive as to the amount of liabilities, including accrued expenses
and reserves, as to the characterization of any liability as a Special
Liability or General Liability, and as to the allocation of General
Liabilities among Series.
(e) The Board of Directors may, to the extent permitted by Minnesota
Statutes, Chapter 302A or any successor provision thereto, declare and pay
dividends or distributions in Shares, cash or other property on any or all
Series (or Classes thereon of Shares, the amount of such dividends and the
payment thereof being wholly in the discretion of the Board of Directors.
(f) In the event of the liquidation or dissolution of the
Corporation, holders of the Shares of any Series shall have priority over
the holders of any other Series with respect to, and shall be entitled to
receive, out of the assets of the Corporation available for distribution to
holders of shares, the assets belonging to such Series of Shares and the
General Assets allocated to such Series of Shares, and the assets so
distributable to the holders of the Shares of any Series shall be
distributed among such holders in proportion to the number of Shares of
such Series held by each such shareholder and recorded on the books of the
Corporation, except that, in the case of a Series with more
-5-
<PAGE>
than one Class of Shares, such distributions shall be adjusted to
appropriately reflect any charges and expenses borne by each individual
Class.
(g) With the approval of a majority of the shareholders of each of
the affected Series of Shares present in person or by proxy at a meeting
called for the Allowing purpose (provided that at least 10% of the issued
and outstanding Shares of the affected Series is present at such meeting in
person or by proxy), the Board of Directors may transfer the assets of any
Series to any other Series. Upon such a transfer, the Corporation shall
issue Shares representing interests in the Series to which the assets were
transferred in exchange Or all Shares representing interests in the Series
from which the assets were transferred. Such Shares shall be exchanged at
their respective net asset values.
8. The following additional provisions, when consistent with law, are
hereby established for the management of the business, for the conduct of the
affairs of the Corporation, and for the purpose of describing certain specific
powers of the Corporation and of id directors and shareholders.
(a) In furtherance and not in limitation of the powers conferred by
statute and pursuant to these Articles of Incorporation, the Board of
Directors is expressly authorized to do the following
( i ) to make, adopt, alter, amend and repeal Bylaws of the
Corporation unless reserved to the shareholders by the Bylaws or by
the laws of the State of Minnesota, subject to the power of the
shareholders to change or repeal such Bylaws;
(ii) to distribute, in its discretion, for any fiscal year
(in the year or in the next fiscal year) as ordinary dividends and as
capital gains distributions, respectively, amounts sufficient to
enable each Series to qualify under the Internal Revenue Code as a
regulated investment company to avoid any liability for federal income
tax in respect of such year. Any distribution or dividend paid to
shareholders from any capital source shall be accompanied by a written
statement showing the source or sources of such payment;
(iii) to authorize, subject to such vote, consent, or
approval of shareholders and other conditions, if any, as may be
required by any applicable statute, rule or regulation, the execution
and performance by the Corporation of any agreement or agreements with
any person, corporation, association, company, trust, partnership
Limited or general) or other organization whereby, subject to the
supervision and control of the Board of Directors, any such other
person, corporation, association, company, trust, partnership Limited
or general), or other organization shall render managerial, investment
advisory,
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distribution, transfer agent, accounting and/or other services to the
Corporation (including if deemed advisable, the management or
supervision of the investment portfolios of the Corporation) upon such
terms and conditions as may be provided in such agreement or
agreements;
(iv) to authorize any agreement of the character described
in subparagraph 3 of this paragraph (a) with any person, corporation,
association, company, trust, partnership (limited or general) or other
organization, although one or more of the members of the Board of
Directors or officers of the Corporation may be the other party to any
such agreement or an officer, director, employee, shareholder, or
member of such other party, and no such agreement shall be invalidated
or rendered voidable by reason of the existence of any such
relationship;
(v) to allot and authorize the issuance of the authorized but
unissued Shares of any Series, or Class thereof, of the Corporation;
(vi) to accept or reject subscriptions for Shares of any
Series, or Class thereof, made after incorporation;
(vii) to fix the terns, conditions and provisions of and
authorize the issuance of options to purchase or subscribe for Shares
of any Series, or Class thereof, including the option price or prices
at which Shares may be purchased or subscribed for;
(viii) to take any action which might be taken at a meeting of
the Board of Directors, or any duly constituted committee thereof,
without a meeting pursuant to a writing signed by that number of
directors or committee members that would be required to taken the
same action at a meeting of the Board of Directors or committee
thereof at which all directors or committee members were present;
provided, however, that, if such action also requires shareholder
approval, such writing must be signed by all of the directors or
committee members entitled to vote on such matter; and
(ix) to determine what constitutes net income, total assets
and the net asset value of the Shares of each Series (or Class thereon
of the Corporation. Any such determination made in good faith shall
be final and conclusive, and shall be binding upon the Corporation,
and all holders (past, present and future) of Shares of each Series
and Class thereof.
(b) Except as provided in the next sentence of this paragraph (b),
Shares of any Series, or Class thereof, hereafter issued which are
redeemed,
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exchanged, or otherwise acquired by the Corporation shall return to the
status of authorized and unissued Shares of such Series or Class. Upon the
redemption, exchange, or other acquisition by the Corporation of all
outstanding Shares of any Series (or Class thereof), hereafter issued, such
Shares shall return to the status of authorized and unissued Shares without
designation as to series (if no Shares of the Series remains outstanding)
or with the same designation as to Series, but no designation as to class
within such Series (if Shares of such Series remain outstanding, but no
Shares of such Class thereof remain outstanding), and all provisions of
these articles of incorporation relating to such Series, or Class thereof
(including, without limitation, any statement establishing or fixing the
rights and preferences of such Series, or t Marc thereof), shall cease to
be of further effect and shall cease to be a part of these articles. Upon
the occurrence of such events, the Board of Directors of the Corporation
shall have the power, pursuant to Minnesota Statutes Section 302A.135,
Subdivision S or any successor provision and without shareholder action, to
cause restated articles of incorporation of the Corporation to be prepared
and filed with the Secretary of State of the State of Minnesota which
reflect such removal from these articles of all such provisions relating to
such Series, or Class thereof.
(c) The determination as to any of the following matters made by or
pursuant to the direction of the Board of Directors consistent with these
Articles of Incorporation and in the absence of willful misfeasance, bad
faith, gross negligence or reckless disregard of duties, shall be final and
conclusive and shall be binding upon the Corporation and every holder of
shares of its capital stock: namely, the amount of the assets, obligations,
liabilities and expenses of each Series (or Class thereof) of the
Corporation; the amount of the net income of each Series (or Class thereof)
of the Corporation from dividends and interest for any period and the
amount of assets at any time legally available for the payment of dividends
in each Series (or Class thereof); the amount of paid-in surplus, other
surplus, annual or other net profits, or net assets in excess of capital,
undivided profits, or excess of profits over losses on sales of securities
of each Series (or Class thereof); the amount, purpose, time of creation,
increase or decrease, alteration or cancellation of any reserves or charges
and the propriety thereof (whether or not any obligation or liability for
which such reserves or charges shall have been created shall have been paid
or discharged); the market value, or any sale, bid or asked price to be
applied in determining the market value, of any security owned or held by
or in each Series of the Corporation; the Air value of any other asset
owned by or in each Series of the Corporation; the number of Shares of each
Series (or Class thereof) of the Corporation issued or issuable; any matter
relating to the acquisition, holding and disposition of securities and
other assets by each Series of the Corporation; and any question as to
whether any transaction constitutes a purchase of securities on margin, a
short sale of securities, or an underwriting of the sale of, or
participation in
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<PAGE>
any underwriting or selling group in connection with the public
distribution of any securities.
(d) The Board of Directors or the shareholders of the Corporation may
adopt, amend, affirm or reject investment policies and restrictions upon
investment or the use of assets of each Series of the Corporation and may
designate some such policies as fundamental and not subject to change other
than by a vote of a majority of the outstanding voting securities, as such
phrase is defined in the 1940 Act, of the affected Serifs of the
Corporation.
9. The Corporation shall indemnify such persons for such expenses and
liability in such manner, under such Circumstance, and to the full extent
permitted by Section 302A.521 of the Minnesota Statute as now enacted or
hereafter amended, provided, however, that no such indemnification may be made
if it would be in violation of Section 17(h) of the 1940 Act, as now enacted or
hereafter amended.
10. To the fullest extent permitted by the Minnesota Statutes,, Chapter
302A, as the same exists or may hereafter be amended (except as prohibited by
the 1940 Act, as the same exists or may hereafter be amended), a director of the
Corporation shall not be liable to the Corporation or its shareholders for
monetary damages for breach of fiduciary duty as a director.
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Amendment to the Articles of Incorporation of Piper Jaffray Investment Trust
Inc. on November 23, 1993.
/s/ David Evans Rosedahl
-------------------------------
David Evans Rosedahl, Secretary
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CERTIFICATE OF DESIGNATION
OF SERIES OF COMMON SHARES
The undersigned, Secretary of Piper Funds Inc., a Minnesota corporation
(the "Corporation"), hereby certifies that the following is a true, complete and
correct copy of resolutions duly adopted at a meeting of the Board of Directors
of the Corporation held February 9, 1995.
DESIGNATION OF SERIES M COMMON SHARES
WHEREAS, the total authorized number of shares of the Corporation is ten
trillion (10,000,000,000,000 all of which shares are common shares, par value
$.01 per share, as set forth in this Corporation's Restated Articles of
Incorporation;
WHEREAS, ten billion (10,000,000,000) of such shares have been designated
in said Restated Articles of Incorporation as Series A Common Shares, ten
billion (10,000,000,000) have been designated as Series B Common Shares, ten
billion (10,000,000,000) have been designated as Series C Common Shares, ten
billion (10,000,000,000) have been designated as Series D Common Shares, one
hundred billion (100,000,000,000) have been designated as Series E Common
Shares, one hundred billion (100,000,000,000) have been designated as Series F
Common Shares, one hundred billion (100,000,000,000) have been designated as
Series G Common Shares, ten billion (10,000,000,000) have been designated as
Series H Common Shares, ten billion (10,000,000,000) have been designated as
Series I Common Shares, ten billion (10,000,000,000) have been designated as
Series J Common Shares, ten billion (10,000,000,000) have been designated as
Series K Common Shares and ten billion (10,000,000,000) have been designated as
Series L Common Shares; and
WHEREAS, said Restated Articles of Incorporation set forth that the balance
of nine trillion, six hundred ten billion (9,610,000,000,000) authorized shares
may be issued in such series and with such designations, preferences and
relative, participating, optional or other special rights, or qualifications,
limitations or restrictions thereof, as shall be stated or expressed in a
resolution or resolutions providing for the issue of any series of common shares
as may be adopted from time to time by the Board of Directors of this
Corporation.
NOW, THEREFORE, BE IT RESOLVED, that ten billion (10,000,000,000) of the
remaining nine trillion, six hundred ten billion (9,610,000,000,000) authorized
common shares of this Corporation be, and they hereby are, designated as Series
M Common Shares, and said Series M Common Shares shall represent interests in a
separate and distinct portion of the Corporation's assets which shall take the
form of a separate portfolio of investment securities, cash and other assets.
<PAGE>
FURTHER RESOLVED, that the Series M Common Shares designated by these
resolutions shall have the preferences and relative, participating, optional or
other special rights, and qualifications, limitations and restrictions thereof,
set forth in the Restated Articles of Incorporation of this Corporation.
IN WITNESS WHEREOF, the undersigned has signed this Certificate on behalf
of Piper Funds Inc. this 4th day of April, 1995.
/s/ David Evans Rosedahl
------------------------
David Evans Rosedahl, Secretary
STATE OF MINNESOTA )
) SS
COUNTY OF HENNEPIN )
On April 4, 1995 before me, a Notary Public, personally appeared
David Evans Rosedahl, to me known to be the person named as Secretary and who
executed the foregoing Certificate of Designation, and he acknowledged that he
executed the same as his free act and deed.
/s/ Leslie A. Johnson
---------------------
[Notarial Seal]
<PAGE>
BYLAWS
OF
PIPER JAFFRAY INVESTMENT TRUST INC.
ARTICLE I
OFFICES, CORPORATE SEAL
Section 1.01. NAME. The name of the corporation is Piper Jaffray
Investment Trust Inc.
Section 1.02. REGISTERED OFFICE. The registered Office of the corporation
in Minnesota shall be that set forth in the Articles of Incorporation or in the
most recent amendment of the Articles of Incorporation or resolution of the
directors filed with the Secretary of State of Minnesota changing the registered
office.
Section 1.03. OTHER OFFICES. The corporation may have such other offices
and places of business, within or without the State of Minnesota, as the
directors shall, from time to time, determine.
Section 1.04. CORPORATE SEAL. The corporation shall have no seal.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 2.01. PLACE AND TIME OF MEETINGS. Except as provided otherwise by
Minnesota Statutes Chapter 302A, meetings of the shareholders may be held at any
place, within or without the State of Minnesota, designated by the directors
and, in the absence of such designation, shall be held at the registered office
of the corporation in the State of Minnesota. The directors shall designate the
time of day for each meeting and, in the absence of such designation, every
meeting of shareholders shall be held at ten o'clock a.m.
Section 2.02. REGULAR MEETINGS. Annual meetings of shareholders are not
required by these Bylaws. Regular meetings shall be held only with such
frequency and at such times and places as provided in and required by Minnesota
Statutes Section 302A.431.
Section 2.03. SPECIAL MEETINGS. Special meetings of the shareholders may
be held at any time and for any purpose and may be called by the Chairman of the
Board, the President, and two or more directors, or by one or more shareholders
holding ten percent (10%) or more of the shares entitled to vote on the matters
to be presented to the meeting.
<PAGE>
Section 2.04. QUORUM: ADJOURNED MEETINGS. The holders of ten percent
(10%) of the shares outstanding and entitled to vote at the meeting shall
constitute a quorum for the transaction of business at any regular or special
shareholders meeting. In case a quorum shall not be present at a meeting, those
present in person or by prosy shall adjourn to such day as they shall, by
majority vote, agree upon without further notice other than by announcement at
the meeting at which such adjournment is taken. If a quorum is present, a
meeting may be adjourned from time to time without notice other than
announcement at the meeting. At adjourned meetings at which a quorum is
present, any business may be transacted which might have been transacted at the
meeting as originally noticed. If a quorum is present, the shareholders may
continue to transact business until adjournment notwithstanding the withdrawal
of enough shareholders to leave less than a quorum.
Section 2.05. VOTING. At each meeting of the shareholders, every
shareholder shall have the right to vote in person or by proxy. Each
shareholder, unless the Articles of Incorporation or applicable laws provide
otherwise, shall have one vote for each share having voting power registered in
his name on the books of the corporation. Upon the demand of any shareholder,
the vote upon any question before the meeting shall be by written ballot.
Except as otherwise specifically provided by these Bylaws or as required by
provisions of the Investment Company Act of 1940 or other applicable laws, all
questions shall be decided by a majority vote of the number of shares entitled
to vote and represented at the meeting at the time of the vote. If the
matter(s) to be presented at a regular or special meeting relates only to a
particular portfolio or portfolios of the corporation, then only the
shareholders of the series of stock issued by such portfolio or portfolios are
entitled to vote on such matter(s).
Section 2.06. VOTING - PROXIES. The right to vote by prosy shall exist
only if the instrument authorizing such prosy to act shall have been executed in
writing by the shareholder himself or by his attorney thereunto duly authorized
in writing. No prosy shall be voted after three years from its date unless it
provides for a longer period.
Section 2.07. Closing of Books. The Board of Directors may FIX a time,
not exceeding sixty (60) days preceding the date of any meeting of shareholders,
as a record date for the determination OF the shareholders entitled to NOTICE
OF, and to vote at, such meeting, notwithstanding any transfer of shares on the
books of the corporation after any record date so fixed. If the Board of
Directors fails to fix a record date for determination of the shareholders
entitled to notice of, and to vote at, any meeting of shareholders, the record
date shall be the thirtieth (30th) day preceding the date of such meeting.
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Section 2.08. NOTICE OF MEETINGS. The Secretary or an Assistant Secretary
shall mail to each shareholder, shown by the books of the corporation to be a
holder of record of voting shares at his address as shown by the books of the
corporations a notice setting out the time and date and place Of each regular
meeting and each special meeting, which notice shall be mailed at least ten (10)
days prior thereto; except that notice of a meeting at which an agreement of
merger or consolidation is to be considered shall be mailed to all shareholders
of record, whether entitled to vote or not, at least two (2) weeks prior
thereto; and except that notice of a meeting at which a proposal to dispose of
all, or substantially all, of the property and assets of the corporation is to
be considered shall be mailed to all shareholders of record, whether entitled to
vote or not, at least ten (10) days prior thereto; and except that notice of a
meeting at which a proposal to dissolve the corporation or to amend the Articles
of Incorporation is to be considered shall be mailed to all shareholders of
record, whether entitled to vote or not, at least ten (10) days prior thereto.
Every notice of any special meeting shall state the purpose or purposes for
which the meeting has been called, pursuant to Section 2.03, and the business
transacted at all special meetings shall be confined to the purpose stated in
the call.
Section 2.09. WAIVER OF NOTICE. Notice of any regular or special meeting
may be waived either before, at or after such meeting in writing signed by each
shareholder or representative thereof entitled to vote the shares so
represented.
Section 2.10. WRITTEN ACTION. Any action which might be taken at a
meeting of the shareholders may be taken without a meeting if done in writing
and signed by a majority of the shareholders entitled to vote on that action.
If the action to be taken relates to a particular portfolio or portfolios of the
corporation, then only shareholders of the series of stock Issued by such
portfolio or portfolios are entitled to vote on such action
ARTICLE III
DIRECTORS
Section 3.01. NUMBER QUALIFICATIONS AND TERM OF OFFICE. Until the first
meeting of shareholders, or until the directors increase their number by
resolution, the number of directors shall be the number named in the Articles of
Incorporation. Thereafter, the number of directors shall be established by
resolution of the shareholders (subject to the authority of the Board of
Directors to increase or decrease the number of directors as permitted by law),
but shall not be less than the lesser of (i) the number of shareholders of
record and beneficially or (ii) one (1). In the absence of such resolutions the
number of directors shall be the number last fixed by the shareholders or the
Board of Directors, or the Articles of Incorporation. Directors may but need
not be shareholders. Each of the directors shall hold office until the regular
meeting of shareholders nest held after his election and until his
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successor shall have been elected and shall qualify, or until he shall resign,
or shall have been removed as hereinafter provided.
Section 3.02. ELECTION OF DIRECTORS. Except as otherwise provided in
Section 3.11 and 3.12 hereof, the directors shall be elected at all regular
shareholders' meeting. Directors may be elected at a special shareholders'
meeting, provided that the notice of such meeting shall contain mention of such
purpose. At each shareholders' meeting for the election of directors, the
directors shall be elected by a plurality of the votes validly cast at such
election. The shareholders of each series of stock of the corporation shall be
entitled to vote for directors and shall have equal voting power.
Section 3.03. GENERAL POWERS.
(a) The property, affairs and business of the corporation shall be managed
by the Board of Directors, which may exercise all the powers of the corporation
except those powers vested solely in the shareholders of the corporation by
statute, the Articles of Incorporation, or these Bylaws, as amended.
(b) All acts done by any meeting of the Directors or by any person acting
as a director, so long as his successor shall not have been duly elected or
appointed, shall, notwithstanding that it be afterwards discovered that there
was some defect in the election of the directors or such person acting as
aforesaid or that they or any of them were disqualified be as valid as if the
directors or such other persons as the case may be, had been duly elected and
were or was qualified to be directors or a director of the corporation.
Section 3.04. POWER TO DECLARE DIVIDENDS.
(a) The Board of Directors, from time to time as they may deem advisable,
may declare and pay dividends in cash or Other property of the corporation, out
of any source available for dividends, to the shareholders of each series of
stock of the corporation according to their respective rights and interests in
the investment portfolio of the corporation issuing such series of stock.
(b) The Board of Directors shall cause to be accompanied by a written
statement any dividend payment wholly or partly from any source other than
(i) each investment portfolio's accumulated and accrued undistributed
net income (determined in accordance with generally accepted accounting practice
and the rules and regulations of the Securities and Exchange Commission then in
effect) and not including profits or losses realized upon the sale of securities
or other properties; or
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<PAGE>
(ii) each investment portfolio's net income so determined for the
current or preceding fiscal year.
Such statement shall adequately disclose the source or sources of such payment
and the basis of calculation, and shall be in such form as the Commission may
prescribe.
(c) Notwithstanding the above provisions of this Section 3.04, the Board
of Directors may at any time declare and distribute pro rata among the
shareholders of each series of stock a "stock dividends out of each portfolio's
authorized but unissued shares of stock, including any shares previously
purchased by a portfolio of the corporation.
Section 3.05. ANNUAL MEETING. The Board of Directors shall meet at the
registered office of the corporation, or at such other place within or without
the State of Minnesota, and at such time as may be designated by the Board of
Directors, for the purpose of electing the officers of the corporation and for
the transaction of such other business as shall come before the meeting.
Section 3.06. REGULAR MEETINGS. Regular meetings of the Board of
Directors shall be held from time to time at such time and place within or
without the State of Minnesota as may be fixed by resolution adopted by a
majority of the whole Board Of Directors.
Section 3.07. SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called by the Chairman of the Board, the President, or by
any two of the directors and shall be held from time to time at such time and
place as may be designated in the notice of such meeting.
Section 3.08. NOTICE OF MEETINGS. Unless otherwise required by Statute,
no notice need be given of any annual or regular meeting of the Board of
Directors. Notice of each special meeting of the Board of Directors shall be
given by the Secretary who shall give at least twenty-four (24) hours' notice
thereof to each director by mail, telephone, telegram or in person.
Section 3.09. WAIVER OF NOTICE. Notice of any meeting of the Board of
Directors may be waived either before, at, or after such meeting in writing
signed by each director. A director, by his attendance and participation in the
action taken at any meeting of the Board of Directors, shall be deemed to have
waived notice of such meeting.
Section 3.10. QUORUM. A majority of the whole Board of Directors shall
constitute a quorum for the transaction of Business except that, when a vacancy
or vacancies exist, a majority of the remaining directors (provided such
majority
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consists of not less than the lesser of (i) the number of Directors required by
Section 3.02, or (ii) two (2) directors) shall constitute a quorum.
Section 3.11. VACANCIES: NEWLY CREATED DIRECTORSHIP. Vacancies in the
Board of Directors of this corporation occurring by reason of death,
resignation or increase in the number of directors by the shareholders to the
minimum number required by Section 3.01 or by the Board Pursuant to Section
3.01, shall be filled for the unexpired Term by a majority of the remaining
directors of the Board although less than a quorum; newly created
directorships resulting from an increase in the authorized number of
directors by action of the Board of Directors as permitted by Section 3.01
may be filled by a two-thirds (2/3) vote of the directors serving at the time
of such increase; and each person so elected shall be a director until his
successor is elected by the shareholders, who may make such election at their
next regular meeting or at any meeting duly called for that purpose;
provided, however, that no vacancy can be filled as provided above if
prohibited by the provisions of the Investment Company as of 1940.
Section 3.12. REMOVAL. The entire Board of Directors or any individual
director may be removed from office, with or without cause, by a vote of the
shareholders holding a majority Of the shares entitled to vote at an election of
directors excepts in the event that the entire Board or any one or more
directors be so removed, new directors shall be elected at the same meeting, or
the remaining directors may, to the extent vacancies are not filled at such
meeting, fill any vacancy or vacancies created by such removal.
Section 3.13. EXECUTIVE COMMITTEE. The Board of Directors, by unanimous
affirmative action of the entire Board, may establish an Executive Committee
consisting of two (2) or more directors. Such Committee may meet at stated
times or on notice of all given by any of their own number. During the
intervals between meetings of the Board of Directors, such Committee shall
advise and aid the officers of the corporation in all matters concerning the
business and affairs of the corporation and, generally, perform such duties and
exercise such powers as may be directed or delegated by the Board of Directors
from time to time. The Board of Directors may, by unanimous affirmative action
of the entire Board, delegate to such Committee authority to exercise all the
powers of the Board of Directors, except the power to amend the Bylaws and to
take action on matters reserved to the entire Board by the Investment Company
Act of 1940, while the Board of Directors is not in session. Vacancies in the
membership of the Committee shall be filled by the Board of Directors at a
regular meeting or at a special meeting called for that purpose.
Section 3.14. OTHER COMMITTEES. The Board of Directors may establish
other committees from time to time making such regulations as it deems advisable
with respect to the membership, authority and procedures of such committees.
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Section 3.15. WRITTEN ACTION. Any action which might be taken at a
meeting of the Board of Directors, or any duly constituted committee thereof,
may be taken without a meeting if done in writing and signed by a majority of
the directors or committee members.
Section 3.16. COMPENSATION. Directors who are not salaried officers of
this corporation shall receive such fixed sum per meeting attended or such fixed
annual sum as shall be determined, from time to time, by resolution of the Board
of Directors. All directors may receive their expenses, if any, of attendance
at meetings of the Board of Directors or any committee thereof. Nothing herein
contained shall be construed to preclude any director from serving this
corporation in any other capacity and receiving proper compensation therefor.
ARTICLE IV
OFFICERS
Section 4.01. NUMBER. The officers of the corporation shall consist of a
Chairman of the Board (if one is Elected by the Board), the President, one or
more Vice Presidents (if desired by the Board), a Secretary and one or more
Assistant Secretaries, a Treasurer and one or more assistant Treasurers, and
such other officers and agents as nay, from time to time, be elected by the
Board of Directors. any two offices except those of Chairman of the Board,
President and Vice President may be held by one person.
Section 4.02. ELECTION, TERM OF OFFICE AND QUALIFICATIONS. At each annual
meeting of the Board of Directors, the Board shall elect, from within or without
their lumber, the President, the Secretary, the Treasurer and such other
officers as may be deemed advisable. Such officers shall old office until the
nest annual meeting of the directors or until their successors are elected and
qualify. The President and all other officers who may be directors shall
continue to hold office until the election and qualification of their
successors, notwithstanding an earlier termination of their Directorship.
Section 4.03. RESIGNATION. Any officer may resign his office at any time
by delivering a written resignation to :he Board of Directors, the President,
the Secretary, or any assistant Secretary. Unless otherwise specified therein,
such resignation shall take effect upon delivery.
Section 4.04. REMOVAL AND VACANCIES. Any officer may We removed from his
officer by a majority of the whole Board of Directors, with or without cause.
Such removal, however, shall We without prejudice to the contract rights of the
person so removed. If there be a vacancy among the officers of the Corporation
by reason by death, resignation or otherwise, such vacancy shall be filled for
the unexpired term by the Board of Directors.
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Section 4.05. CHAIRMAN OF THE BOARD. The Chairman of :he Board, if one is
elected, shall preside at all meetings of :he shareholders and directors and
shall have such other duties is may be prescribed, from time to time, by the
Board of Directors.
Section 4.06. PRESIDENT. The President shall have general active
management of the business of the corporation. In the absence of the
Chairman of the Board, he shall preside at all meetings of the shareholders
and directors. He shall be the chief executive officer of the corporation
and shall see that all orders and resolutions of the Board of Directors are
carried into effect. He shall be ex officio a member of all standing
committees. He may execute and deliver, in the name Of the corporation, any
deeds, mortgages, bonds, contracts or other instruments pertaining to the
business of the corporation and, in general, shall perform all duties usually
incident to the office of President. He shall have such other duties as may,
from time to time, be prescribed by the Board of Directors.
Section 4.07. VICE PRESIDENT. Each Vice President shall have such powers
and shall perform such duties as may be specified in the Bylaws or prescribed by
the Board of Directors or by the President. In the event of absence or
disability of the President, Vice Presidents shall succeed to his power and
duties in the order designated by the Board of Directors.
Section 4.08. SECRETARY. The Secretary shall be secretary of, and shall
attend all, meetings of the shareholders and Board of Directors and shall record
all proceedings of such meetings in the minute book of the corporation. He
shall give proper notice of meetings of shareholders and directors. He shall
keep the seal of the corporation and shall affix the same to any instrument
requiring it and may, when necessary, attest the seal by his signature. He
shall perform such other duties as may, from time to time, be prescribed by the
Board of Directors or by the President.
Section 4.09. TREASURER. The Treasurer shall keep accurate accounts of
all moneys of the corporation received or disbursed. He shall deposit all
moneys, drafts and checks in the name of, and to the credit of, the corporation
in such banks and depositories as a majority of the whole Board of Directors
shall, from time to time, designate. He shall have power to endorse, for
deposit, all notes, checks and drafts received by the corporation. He shall
disburse the funds of the corporation, as ordered by the Board of Directors,
making proper vouchers therefor. He shall render to the President and the
directors, whenever required, an account of all his transactions as Treasurer
and of the financial condition of the corporation, and shall perform such other
duties as may, from time to time, be prescribed by the Board of Directors or by
the President.
Section 4.10. ASSISTANT SECRETARIES. At the request of the Secretary, or
in his absence or disability, any Assistant Secretary shall have power to
perform all the
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duties of the Secretary and, when so acting, shall have all the powers of, and
be subject to all restrictions upon, the Secretary.
The Assistant Secretaries shall perform such other duties as from time to time
may be assigned to them by the Board of Directors or the President.
Section 4.11. ASSISTANT TREASURERS. At the request of the Treasurer, or
in his absence or disability, any Assistant Treasurer shall have power to
perform all the duties of the Treasurer, and when so acting, shall have all the
powers OF, and be subject to all the restrictions upon, the Treasurer. The
Assistant Treasurers shall perform such other duties as from time to time may be
assigned to them by the Board of Directors or the President.
Section 4.12. COMPENSATION. The officers of this corporation shall
receive such compensation for their services as may be determined, from time to
time, by resolution of the Board of Directors.
Section 4.13. SURETY BONDS. The Board of Directors may require any
officer or agent of the corporation to execute a bond (including, without
limitation, any bond required by the Investment Company Act of 1940 and the
rules and regulations of the Securities and Exchange Commission) to the
corporation in such sum and with such surety or sureties as the Board of
Directors may determine, conditioned upon the faithful performance of his duties
to the corporation, including responsibility for negligence and for the
accounting of any of the corporation's property, funds or securities that may
come into his hands. In any such case, a new bond of like character shall be
given at least every six years, so that the date of the new bond shall not be
more than six years subsequent to the date of the bond immediately preceding.
ARTICLE V
SHARES AND THEIR TRANSFER AND REDEMPTION
Section 5.01. CERTIFICATES FOR SHARES.
(a) Shares issued by the corporation may be certificated or
uncertificated, as provided by a resolution approved by the affirmative vote of
a majority of the directors present. Every owner of certificated shares issued
by the corporation shall be entitled to a certificate, to be in such form as
shall be prescribed by the Board of Directors, certifying the number of shares
of the corporation owned by him. The certificates for such shares shall be
numbered in the order in which they shall be issued and shall be signed, in the
name of the corporation, by the President or a Vice President and by the
Treasurer, or by such officers as the Board of Directors may designate. Such
signatures may be facsimile if authorized by the Board of Directors. Every
certificate surrendered to the corporation for exchange or transfer shall be
canceled, and no new certificate or certificates shall be issued in exchange for
any
-9-
<PAGE>
existing certificate until such existing certificate shall until such existing
certificate shall have been so canceled, except in cases provided for in Section
5.08.
(b) In case any officer, transfer agent or registrar who shall have signed
any such certificate, or whose facsimile signature has been placed thereon,
shall cease to be such an officer (because of death, resignation or otherwise)
before such certificate is issued, such certificate may be issued and delivered
by the corporation with the same effect as if he were such officer, transfer
agent or registrar at the date of issue.
Section 5.02. ISSUANCE OF SHARES. The Board of Directors is authorized to
cause to be issued shares of the corporation up to the full amount authorized by
the Articles of Incorporation in such series and in such amounts as may be
determined by the Board of Directors and as may be permitted by law. No shares
shall be allotted except in consideration of cash or of an amount transferred
from surplus to stated capital upon a share dividend. At the time of such
allotment of shares, the Board of Directors making such allotments shall state,
by resolution, their determination of the fair value to the corporation in
monetary terms of any consideration other than cash for which shares are
allotted. No shares of stock issued by the corporation shall be issued, sold,
or exchanged by or on behalf of the corporation for any amount less than the net
asset value per share of the shares outstanding as determined pursuant to
Article X hereunder.
Section 5.03. REDEMPTION OF SHARES. Upon the demand of any shareholder
this corporation shall redeem any share of stock issued by it held and owned by
such shareholder at the net asset value thereof as determined pursuant to
Article X hereunder. The Board of Directors may suspend the right of redemption
or postpone the date of payment during any period when: (a) trading on the New
York Stock Exchange is restricted or such Exchange is closed for other than
weekends or holidays; (b) the Securities and Exchange Commission has by order
permitted such suspension; or (c) an emergency as defined by rules of the
Securities and Exchange Commission exists, making disposal of portfolio
securities or valuation of net assets of the corporation not reasonably
practicable.
Section 5.04. TRANSFER OF SHARES. Transfer of shares on the books of the
corporation may be authorized only by the shareholder named on the books of the
corporation in the case Of uncertificated shares or in the certificate in the
case of certificated shares, or the shareholder's legal representative, or the
shareholders duly authorized attorney-in-fact, and, in the case of certificated
shares, upon surrender of the certificate or the certificates for such shares or
a duly executed assignment covering shares held in uncertificated form. The
corporation may treat, as the absolute owner of shares of the corporation, the
person or persons in whose name shares are registered on the books of the
corporation.
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<PAGE>
Section 5.05. REGISTERED SHAREHOLDERS. The corporation shall be entitled
to treat the holder of record of any share or shares of stock as the holder in
fact thereof and accordingly shall not be bound to recognize any equitable or
other claim to or interest in such share on the part of any other person,
whether or not it shall have express or other notice thereof, except as
otherwise expressly provided by the laws of Minnesota.
Section 5.06. TRANSFER AGENTS AND REGISTRARS. The Board of Directors may
from time to time appoint or remove transfer agents and/or registrars of
transfers of shares of stock of the corporation, and it may appoint the same
person as both transfer agent and registrar. Upon any such appointment being
made all certificates representing shares of capital stock thereafter issued
shall be countersigned by one of such transfer agents or by one of such
registrars of transfers or by both and shall not be valid unless so
countersigned. If the same person shall be both transfer agent and registrar,
only one countersignature by such person shall be required.
Section 5.07. TRANSFER REGULATIONS. The shares of stock of the
corporation may be freely transferred, and the Board of Directors may from time
to time adopt rules and regulations with reference to the method of transfer of
the shares of stock of the corporation.
Section 5.08. LOST, STOLEN, DESTROYED AND MUTILATED CERTIFICATES. The
holder of any certificated shares of the corporation shall immediately notify
the corporation of any loss, theft, destruction or mutilation of any certificate
therefor, and the Board of Directors may, in its discretion, cause to be issued
to him a new certificate or certificates of stock upon the surrender of the
mutilated certificate or in case of loss, theft or destruction of the
certificate, upon satisfactory proof of such loss, theft or destruction, after
the owner of the lost, stolen or destroyed certificate, or his legal
representatives, gives to the corporation and to such registrar or transfer
agent as may be authorized or required to countersign such new certificate or
certificates a bond, in such sum as they may direct, and with such surety or
sureties, as they may direct, as indemnity against any claim that may be made
against them or any of them on account of or in connection with the alleged
loss, theft, or destruction of any such certificate.
Section 5.09. REDEMPTION OF SMALL SHAREHOLDER ACCOUNTS. If the value of
a shareholder's investment in any portfolio becomes less than $500 (or such
other amount as may be determined from time to time by the Board of
Directors) as a result of a redemption or transfer of shares, the
corporation's Officers are authorized, in their discretion, on behalf of such
portfolio, to redeem such shareholder's entire interest and remit such
amount, provided that such a redemption will only be effected by the
corporation following (a) the mailing by the corporation to such shareholder
of a notice of intention to redeem", and (b) the passage of such time period
as may be determined by the Board of Directors, during
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<PAGE>
which time the shareholder will have the opportunity to make an additional
investment in the corporation to increase the value of such shareholder's
account to at least such minimum amount.
ARTICLE VI
DIVIDENDS, SURPLUS, ETC.
Section 6.01. The corporation's net investment income will be determined,
and its dividends shall be declared and made payable at such time(s) as the
Board of Directors shall determine; dividends shall be payable to shareholders
of record as of the date of declaration.
It shall be the policy of the corporation to qualify for and elect the tax
treatment applicable to regulated investment companies under the Internal
Revenue Code, so that the corporation will not be subjected to Federal income
tax on such part of its income or capital gains as it distributes to
shareholders.
ARTICLE VII
BOOKS AND RECORDS, AUDIT, FISCAL YEAR
Section 7.01. BOOKS AND RECORDS. The Board of Directors of the
corporation shall cause to be kept:
(1) a share register, giving the names and addresses of the shareholders,
the number and classes held by each, and the dates on which the
certificates therefor were issued;
(2) records of all proceedings of shareholders and directors; and
(3) such other records and books of account as shall be necessary and
appropriate to the conduct of the corporate business.
Section 7.02. DOCUMENTS KEPT AT REGISTERED OFFICE. The Board of Directors
shall cause to be kept at the registered Office of the corporation originals or
copies of:
(1) records of all proceedings of shareholders and directors;
(2) Bylaws of the corporation and all amendments thereto; and
(3) reports made to any or all of the shareholders within the last
preceding three (3) years.
Section 7.03. AUDIT. ACCOUNTANT.
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<PAGE>
(a) The Board of Directors shall cause the records and books of account of
the corporation to be audited at least once in each fiscal year and at such
other times as it may deem necessary or appropriate.
(b) The corporation shall employ an independent certified public
accountant or firm of independent certified public accountants as its Accountant
to examine the accounts of the corporation and to sign and certify financial
statements filed by the corporation. The Accountant's certificates and reports
shall be addressed both to the Board of Directors and to the shareholders.
(c) A majority of the members of the Board of Directors shall select the
Accountant at any meeting held before the first regular meeting of shareholders,
and thereafter shall select the Accountant annually at a meeting held within
thirty (30) days before or after the beginning of the fiscal year of the
corporation. Such selection shall be submitted for ratification or rejection at
the nest succeeding regular shareholders meeting. If such meeting shall reject
such selection, the Accountant shall be selected by majority vote, either at the
meeting at which the rejection occurred or at a subsequent meeting of
shareholders called for the purpose.
(d) Any vacancy occurring between regular meetings, due to the death,
resignation or otherwise of the Accountant, may be filled by the Board of
Directors.
Section 7.04. FISCAL YEAR. The fiscal year of the corporation shall be
determined by the Board of Directors.
ARTICLE VIII
INSPECTION OF BOOKS
Section 8.01. Every shareholder of the corporation and every holder of a
voting trust certificate shall have a right to examine, in person or by agent or
attorney, at any reasonable time or times, for any proper purpose, and at the
place or places where usually kept, the share register, books of account and
records of the proceedings of the shareholders and directors and to make
extracts therefrom.
ARTICLE IX
VOTING OF STOCK HELD
Section 9.01. Unless otherwise provided by resolutionof the Board of
Directors, the President, any Vice President, the Secretary or the Treasurer,
may from time to time appoint an attorney or attorneys or agent or agents of the
corporation,in the name and on behalf of the corporation, to cast the votesI
which the corporation may be entitled to cast as a stockholder or otherwise in
any other corporation or association, any of whose stock or securities may be
held by the corporation, at meetings of the holders of the stock or other
securities of any such
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<PAGE>
other corporation or association, or to consent in writing to any action by any
such other corporation or association, and may instruct the person or persons so
appointed as to the manner of casting such votes or giving such consent, and may
execute or cause to be executed on behalf of the corporation and under its
corporate seal, or otherwise, such written proxies, consents, waivers, or other
instruments as it may deem necessary or proper in the circumstances; or any of
such officers may themselves attend any meeting of the holders of stock or other
securities of any such corporation or association and thereat vote or exercise
any or all other powers of the corporation as the holder of such stock or other
securities of such other corporation or association, or consent in writing to
any action by any such other corporation or association.
ARTICLE X
VALUATION OF NET ASSET VALUE
Section 10.01. The net asset value per share of each series of stock issued
by the portfolios of the corporation shall be determined in good faith by or
under supervision of the officers of the corporation as authorized by the Board
of Directors as often and on such days and at such time(s) as the Board of
Directors shall determine. Provisions in the currently effective Prospectus of
the corporation regarding determination of net asset value shall be controlling.
ARTICLE XI
CUSTODY OF ASSETS
Section 11.01. All securities and cash owned by this corporation shall, as
hereinafter provided, be held by or deposited with a bank or trust company
having (according to its last published report) not less than two million
dollars ($2,000,000) aggregate capital, surplus and undivided profits (the
"Custodian").
This corporation shall enter into a written contract with the Custodian
regarding the powers; duties and compensation of the Custodian with respect to
the cash and securities of this corporation held by the Custodian. Said
contract and all amendments thereto shall be approved by the Board of Directors
of this corporation. In the event of the Custodian's resignation or
termination, the corporation shall use its best efforts promptly to obtain a
successor Custodian and shall require that the cash and securities owned by this
corporation held by the Custodian be delivered directly to such successor
Custodian.
ARTICLE XII
AMENDMENTS
Section 12.01. These Bylaws may be amended or altered by a vote of the
majority of the whole Board of Directors at any meeting provided that notice of
such
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<PAGE>
proposed amendment shall have been given in the notice given to the directors of
such meeting. Such authority in the Board of Directors is subject to the power
of the shareholders to change or repeal such Bylaws by a majority vote of the
shareholders present or represented at any annual or special meeting of
shareholders called for such purpose. The Board of Directors shall not make or
alter any Bylaws fixing their qualifications, classifications, term of office,
or number, except that the Board of Directors may make or alter any Bylaw to
increase their number.
ARTICLE XIII
INDEMNIFICATION
No indemnification shall be made by this corporation that is inconsistent
with the guidelines set forth in Investment Company Act Releases No. 7221 (June
9, 1972) and No. 11330 (September 2, 1980) or, if such releases are modified,
superseded or rescinded, the guidelines set forth in any successor releases
regarding indemnification under Section 17(h) of the Investment Company Act of
1940.
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<PAGE>
AMENDMENT TO THE BYLAWS
OF
PIPER FUNDS INC.
PIPER FUNDS INC.--II
AMERICAN GOVERNMENT INCOME FUND INC.
AMERICAN GOVERNMENT INCOME PORTFOLIO, INC.
AMERICAN GOVERNMENT TERM TRUST INC.
AMERICAN OPPORTUNITY INCOME FUND INC.
AMERICAN MUNICIPAL TERM TRUST INC.
AMERICAN MUNICIPAL TERM TRUST INC.--II
AMERICAN MUNICIPAL TERM TRUST INC.--III
MINNESOTA MUNICIPAL TERM TRUST INC.
MINNESOTA MUNICIPAL TERM TRUST INC.--II
AMERICAN STRATEGIC INCOME PORTFOLIO INC.
AMERICAN STRATEGIC INCOME PORTFOLIO INC.--II
AMERICAN STRATEGIC INCOME PORTFOLIO INC.--III
PIPER GLOBAL FUNDS INC
PIPER INSTITUTIONAL FUNDS INC.
AMERICAN MUNICIPAL INCOME PORTFOLIO INC.
MINNESOTA MUNICIPAL INCOME PORTFOLIO INC.
AMERICAN SELECT PORTFOLIO INC.
THE AMERICAS INCOME TRUST
HIGHLANDER INCOME FUND INC.
HERCULES FUNDS INC.
Section 2.6 or Section 2.06, as applicable, of the Bylaws of each of the
above-referenced Funds are amended in its entirety to read as follows (amended
language in italics):
VOTING - PROXIES. The right to vote by proxy SHALL BE
GOVERNED BY THE RELEVANT PROVISIONS OF THE MINNESOTA STATUTES,
AS THE SAME MAY BE AMENDED FROM TIME TO TIME.
Dated: July 6, 1995
<PAGE>
WRITTEN ACTION
OF THE BOARD OF DIRECTORS
OF
PIPER FUNDS INC.
The undersigned, being a majority of the Directors of Piper Funds Inc., a
Minnesota corporation (the "Corporation"), in accordance with the authority
contained in Section 302A.239 of the Minnesota Statutes, in lieu of holding a
Directors' meeting to consider the same, hereby adopt and approve the following
corporate resolutions and instruct the Secretary to file this Written Action
with the minutes of the Corporation:
WHEREAS, the Board of Directors has received from Piper Capital
Management Incorporated, the investment adviser to the Corporation, a
recommendation that the name of the Corporation's Series A Common Shares be
changed from "Value Fund" to "Growth Fund" to better reflect the investment
objective and policies of such Series.
NOW, THEREFORE, BE IT RESOLVED, that the Bylaws of Piper Funds Inc.
shall be amended to revise Article I, Section 1.01 to read as follows:
Section 1.01. NAME. The name of the corporation is Piper
Funds Inc. The common shares of the corporation are issued in
series, which are currently designated Series A through Series M
in the corporation's Restated Articles of Incorporation. Each
such series shall be known by the name set forth below:
SERIES NAME
Series A Growth Fund
Series B Equity Strategy Fund
Series C Balanced Fund
Series D Government Income Fund
Series E Money Market Fund
Series F U.S. Government Money Market Fund
Series G Tax-Exempt Money Market Fund
Series H Institutional Government Income Portfolio
Series I National Tax-Exempt Fund
Series J Minnesota Tax-Exempt Fund
Series K Emerging Growth Fund
Series L Growth and Income Fund
Series M Short-Intermediate Bond Fund
<PAGE>
FURTHER RESOLVED, that such amendment shall be effective on the
effective date of the next post-effective amendment to the Corporation's
Registration Statement on Form N1-A.
Dated: November ___, 1995
/s/ David T. Bennett /s/ Karol D. Emmerich
- -------------------------- --------------------------------
David T. Bennett Karol D. Emmerich
/s/ Jaye F. Dyer /s/ Luella G. Goldberg
- -------------------------- --------------------------------
Jaye F. Dyer Luella G. Goldberg
/s/ William H. Ellis /s/ George Latimer
- -------------------------- --------------------------------
William H. Ellis George Latimer
<PAGE>
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
THIS AGREEMENT, made this 19th day of February, 1987, by and between Piper
Jaffray Investment Trust Inc., a Minnesota Corporation (the "Fund") and Piper
Capital Management Incorporated a Delaware corporation (the "Adviser").
1. INVESTMENT ADVISORY AND MANAGEMENT SERVICES.
The Fund hereby engages the Adviser, and the Adviser hereby agrees to act
as investment adviser for, and to manage the affairs, business and the
investment of the assets of the Fund's five Portfolios (the Portfolios").
The investment of the assets of the Portfolios shall at all times be
subject to the applicable provisions of the Articles of Incorporation, Bylaws,
Registration Statement and currently effective Prospectus of the Fund and shall
conform to the policies and purposes of the Fund and the Portfolios as set forth
in the Registration Statement and Prospectus and as interpreted from time to
time by the Board of Directors of the Fund. Within the framework of the
investment policies of the Fund, the Adviser shall have the sole and exclusive
responsibility for the management of the Fund's Portfolios and the making and
execution of all investment decisions for the Fund. The Adviser shall report to
the Board of Directors of the Fund regularly at such times and in such detail as
the Board may from time to time determine to be appropriate, in Order to permit
the Board to determine the adherence of the Adviser to the investment policies
of the Fund.
The Adviser shall, at its own expense, furnish the Fund suitable office
space, and all necessary office facilities, equipment and personnel for
servicing the investments of the Fund. The Adviser shall arrange, if requested
by the Fund, for officers, employees or other Affiliated Persons (as defined in
Section 2(a)(3) of the Investment Company act of 1940 and the rules, regulations
and releases relating thereto) of the Adviser to serve without compensation from
the Fund as directors, officers, or employees of the Fund if duly elected to
such positions by the shareholders or directors of the Fund.
The Adviser hereby acknowledges that all records necessary in the operation
of the Fund, including records pertaining to its shareholders and investments,
are the property of the Fund, and in the event that a transfer of management or
investment advisory services to someone other than the Adviser should ever
occur, the Adviser will promptly, and at its own cost, take all steps necessary
to segregate such records and deliver them to the Fund.
2. COMPENSATION FOR SERVICES.
In payment for all services, facilities, equipment and personnel, and for
other costs of the Adviser hereunder, the Fund shall pay to the Adviser a
monthly
<PAGE>
investment advisory fee for each Portfolio, which fee shall be paid to the
Adviser not later than the fifth business day of the month following the month
in which such services are rendered. Each such monthly fee shall be 1/12 of the
per annum rate or rates set forth below and shall be based on the average net
asset value of all of the issued and outstanding shares of the respective
Portfolio as determined as of the close of each business day of the month
pursuant to the currently effective Prospectus of the Fund. The following table
sets forth the fees on a monthly and annual basis:
Per
Monthly Annum Average Net Asset Values
Rate Rate of the Portfolio
------------ ----- -------------------------
Value 1/12 of .75% .75% On the first $100,000,000
Fund, Sector 1/12 of .65% .65% On the nest $200,000,000
Performance 1/12 of .55% .55% On the nest $200,000,000
Fund and 1/12 of .50% .50% On average net assets
Balanced Fund over $500,000,000
Portfolios
Government 1/12 of .50% .50% On the first $250,000,000
Income 1/12 of .45% .45% On the nest $250,000,000
Fund 1/12 of .40% .40% On average net assets
over $500,000,000
Money 1/12 of .50% .50% On the first $500,000,000
Market 1/12 of .425% .425% On the next $250,000,000
Fund 1/12 of .375% .375% On the next $250,000,000
Portfolio 1/12 of .35% .35% On the next $500,000,000
1/12 of .325% .325% On the next $500,000,000
1/12 of .30% .30% On the next $500,000,000
1/12 of .275% .275% On average net assets
over $2,500,000,000
The fees shall be prorated for any fraction of a month at the commencement
or termination of this Agreement.
3. ALLOCATION OF EXPENSES.
(a) In addition to the fees described in Section 2 hereof, the Fund shall
pay all its expenses which are not assumed by the Adviser and/or Piper, Jaffray
& Hopwood Incorporated (the "Distributor"). These Fund expenses include, by way
of example, but not by way of limitation, the fees and expenses of directors and
officers of the Fund who are not Affiliated Persons of the Adviser, interest
expenses, taxes, brokerage fees and commissions, fees and expenses of
registering and qualifying the
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<PAGE>
Fund and its shares for distribution under federal and state securities laws,
expenses of preparing prospectuses and of printing and distributing prospectuses
annually to existing shareholders, custodian charges, auditing and legal
expenses, insurance expenses, association membership dues, and the expense of
reports to shareholders, shareholders' meetings, and prosy solicitations.
(b) The Adviser or the Distributor shall bear all promotional expenses in
connection with the distribution of the Fund's shares, including but not limited
to the costs of printing and distributing prospectuses and shareholder reports
for new shareholders and the costs of sales literature and advertising.
4. LIMIT ON EXPENSES.
It is understood that the laws of certain states in which each Portfolio's
shares are offered for sale may require that the Portfolios be reimbursed for
excess Portfolio expenses, and the Adviser agrees to make such reimbursement.
5. FREEDOM TO DEAL WITH THIRD PARTIES.
The Adviser shall be free to render services to others similar to those
rendered under this Agreement or of a different nature except as such services
may conflict with the services to be rendered or the duties to be assumed
hereunder.
6. EFFECTIVE DATE. DURATION AND TERMINATION OF AGREEMENT.
The effective date of this Agreement shall be February 19, 1987. Wherever
referred to in this Agreement, the vote or approval of the holders of a majority
of the outstanding shares of the Fund or any Portfolio of the Fund shall mean
the vote of 67% or more of such shares if the holders of more than 50% of such
shares are present in person or by proxy or the vote of more than 50% of such
shares, whichever is less.
Unless sooner terminated as hereinafter provided, this Agreement shall
continue in effect only so long as such continuance is specifically approved at
least annually by the Board of Directors of the Fund, including the specific
approval of a majority of the directors who are not Interested Persons (as
defined in Section 2(a)(19) of the Investment Company Act of 1940 and the rules,
regulations and releases relating thereto) of the Adviser or of the Fund cast in
person at a meeting called for the purpose of voting on such approval, or by the
vote of the holders of a majority of the Fund's outstanding shares; provided
that, if a majority of the outstanding shares of any Portfolio approves this
Agreement, this Agreement shall continue in effect with respect to such
approving Portfolio whether or not the shareholders of any other Portfolio of
the Fund approve this Agreement.
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<PAGE>
This Agreement may be terminated at any time without the payment of any
penalty by the vote of the Board of Directors of the Fund or by the vote of the
holders of a majority of the outstanding shares of the Fund, or by the Adviser,
upon sixty (60) days written notice to the other party; provided that if a
majority of the outstanding shares of any Portfolio of the Fund votes to
terminate this Agreement, such termination shall be effective with respect to
such Portfolio whether or not the shareholders of any other Portfolio vote to
terminate this Agreement. Any such termination may be made effective with
respect to both the investment advisory and management services provided for in
this Agreement or with respect to either of such kinds of services. This
Agreement shall automatically terminate in the event of its assignment.
7. AMENDMENTS TO AGREEMENT.
No material amendment to this Agreement shall be effective until approved
by vote of the holders of a majority of the outstanding shares of the Portfolios
which have approved and are subject to this Agreement. In addition, if a
majority of the outstanding shares of any Portfolio of the Fund votes to amend
this Agreement, such amendment shall be effective with respect to such Portfolio
whether or not the shareholders of any other Portfolio vote to adopt such
amendment.
8. NOTICES.
Any notice under this Agreement shall be in writing, addressed, delivered
or mailed, postage prepaid, to the other party at such address as such other
party may designate in writing for receipt of such notice.
IN WITNESS WHEREOF, the Fund and the Adviser have caused this Agreement to
be executed by their duly authorized officers as of the day and year first above
written.
PIPER JAFFRAY INVESTMENT
TRUST INC.
By /s/ Edward J. Kohler
-------------------------------------
Its President
--------------------------------
PIPER CAPITAL MANAGEMENT
INCORPORATION
By /s/ Edward J. Kohler
-------------------------------------
Its President
--------------------------------
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<PAGE>
SUPPLEMENT
TO
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
This Supplement, made this 4th day of April, 1988, by and between
Piper Jaffray Investment Trust Inc., a Minnesota corporation (the "Fund"), and
Piper Capital Management Incorporated, a Delaware corporation (the "Adviser").
WHEREAS, the Fund has entered into an Investment Advisory and
Management Agreement with the Adviser dated February 19, 1987 (the "Original
Agreement") whereby the Fund engaged the Adviser to act as investment adviser
for, and to manage the affairs, business and investment of the assets of, five
portfolios of the Fund, designated Value Fund, Sector Performance Fund, Balanced
Fund, Government Income Fund and Money Market Fund portfolios.
WHEREAS, pursuant to a resolution of the Board of Directors of the
Fund, five additional portfolios of the Fund have been formed, which portfolios
have been designated U.S. Government Money Market Fund, Tax-Exempt Money Market
Fund, Institutional Investors Income Fund, National Tax-Exempt Fund and
Minnesota Tax-Exempt Fund portfolios.
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual covenants contained herein, the parties hereto agree as follows:
1. All of the terms, provisions, covenants and agreements set forth
in the Original Agreement with respect to Value Fund, Sector Performance Fund,
Balanced Fund, Government Income Fund and Money Market Fund portfolios shall
apply to U.S. Government Money Market Fund, Tax-Exempt Money Market Fund,
Institutional Investors Income Fund, National Tax-Exempt Fund and Minnesota Tax-
Exempt Fund portfolios as well, provided that the following table sets forth the
fees to be paid pursuant to Section 2 of the Original Agreement with respect to
U.S. Government Money Market Fund, Tax-Exempt Money Market Fund, Institutional
Investors Income Fund, National Tax-Exempt Fund and Minnesota Tax-Exempt Fund
portfolios.
<PAGE>
Per
Annum Average Net Asset Values
Monthly Rate Rate of the Portfolio
------------ ---- ----------------
National Tax-Exempt 1/12 of .50% .50% On the first $250,000,000
Fund and Minnesota 1/12 of .45% .45% On the next $250,000,000
Tax-Exempt Fund 1/12 of .40% .40% On average net assets over
portfolios $500,000,000
U.S. Government 1/12 of .50% .50% On the first $500,000,000
Money Market Fund 1/12 of .425% .425% On the next $250,000,000
and Tax-Exempt 1/12 of .375% .375% On the next $250,000,000
Money Market Fund 1/12 of .35% .35% On the next $500,000,000
portfolios 1/12 of .325% .325% On the next $500,000,000
1/12 of .30% .30% On the next $500,000,000
1/12 of .275% .275% On average net assets over
$2,500,000,000
Institutional 1/12 of .30% .308 On the first $100,000,000
Investors 1/12 of .25% .25% On the next $150,000,000
Income Fund 1/12 of .20% .20% On average net assets over
portfolio $250,000,000
2. The effective date of this Supplement shall be April 4, 1988.
IN WITNESS WHEREOF, the Fund and the Adviser have caused this
Supplement to be executed by their duly authorized officers as of the day and
year first above written.
PIPER JAFFRAY INVESTMENT
TRUST INC.
By /s/ Edward J. Kohler
---------------------------------
Its President
---------------------------
PIPER CAPITAL MANAGEMENT
INCORPORATED
By /s/ Edward J. Kohler
---------------------------------
Its President
---------------------------
-2-
<PAGE>
EX. 5.3
"Adv. Agrmnt. Supp 3/16/90"
SUPPLEMENT
TO
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
This Supplement, made this 16th day of March, 1990, by and between
Piper Jaffray Investment Trust Inc., a Minnesota corporation (the "Fund"), and
Piper Capital Management Incorporated, a Delaware corporation (the "Adviser").
WHEREAS, the Fund has entered into an Investment Advisory and
Management Agreement with the Adviser dated February 19, 1987 (the "Original
Agreement") whereby the Fund engaged the Adviser to act as investment adviser
for, and to manage the affairs, business and investment of the assets of, five
portfolios of the Fund, designated Value Fund, Sector Performance Fund, Balanced
Fund, Government Income Fund and Money Market Fund portfolios.
WHEREAS, pursuant to a Supplement dated April 4, 1988, all of the
terms, provisions, covenants and agreements set forth in the Original Agreement
were adopted with respect to five additional portfolios of the Fund, designated
the U.S. Government Money Market Fund, Tax-Exempt Money Market Fund,
Institutional Government Income Portfolio, National Tax-Exempt Fund and
Minnesota Tax-Exempt Fund portfolios.
WHEREAS, pursuant to a resolution of the Board of Directors of the
Fund, an additional portfolio of the Fund has been formed, which portfolio has
been designated the Emerging Growth Fund portfolio.
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual covenants contained herein, the parties hereto agree as follows;
1. All of the terms, provisions, covenants and agreements set forth
in the Original Agreement shall apply to the Emerging Growth Fund portfolio,
provided that the following table sets forth the fees to be paid pursuant to
Section 2 of the Original Agreement with respect to the Emerging Growth Fund
portfolio.
<PAGE>
Per
Annum Average Net Asset Values
Monthly Rate Rate of the Portfolio
------------ ---- ----------------
Emerging Growth 1/12 of .75% .75% On the first $100,000,000
Fund portfolio 1/12 of .65% .65% On the next $200,000,000
1/12 of .55% .55% On the next $200,000,000
1/12 of .508 .50% On average net assets over
$500,000,000
2. The effective date of this Supplement shall be April 16, 1990.
IN WITNESS WHEREOF, the Fund and the Adviser have caused this
Supplement to be executed by their duly authorized officers as of the day and
year first above written.
PIPER JAFFRAY INVESTMENT
TRUST INC.
By /s/ Beverly J. Zimmer
----------------------------
Its Vice President
------------------------
PIPER CAPITAL MANAGEMENT
INCORPORATED
By /s/ Beverly J. Zimmer
----------------------------
Its Vice President
------------------------
-2-
<PAGE>
SUPPLEMENT
TO
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
This Supplement, made this 21st day of July, 1992, by and between
Piper Jaffray Investment Trust Inc., a Minnesota corporation (the "Fund"), and
Piper Capital Management Incorporated, a Delaware corporation (the "Adviser").
WHEREAS, the Fund has entered into an Investment Advisory and
Management Agreement with the Adviser dated February 19,1987 (the "Original
Agreement") whereby the Fund engaged the Adviser to act as investment adviser
for, and to manage the affairs, business and investment of the assets of, five
portfolios of the Fund, designated Value Fund, Sector Performance Fund, Balanced
Fund, Government Income Fund and Money Market Fund portfolios.
WHEREAS, pursuant to a Supplement dated April 4,1988, all of the
terms, provisions, covenants and agreements set forth in the Original Agreement
were adopted with respect to five additional portfolios of the Fund, designated
the U.S. Government Money Market Fund, Tax-Exempt Money Market Fund,
Institutional Government Income Portfolio, National Tax-Exempt Fund and
Minnesota Tax-Exempt Fund portfolios.
WHEREAS, pursuant to a Supplement dated March 16,1990, all of the
terms, provisions, covenants and agreements set forth in the Original Agreement
were adopted with respect to one additional portfolio of the Fund, designated
the Emerging Growth Fund portfolio.
WHEREAS, pursuant to a resolution of the Board of Directors of the
Fund, an additional portfolio of the Fund has been formed, which portfolio has
been designated the Growth and Income Fund portfolio.
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual covenants contained herein, the parties hereto agree as follows:
1. All of the terms, provisions, covenants and agreements set forth
in the Original Agreement shall apply to the Growth and Income Fund portfolio,
provided that the following table sets forth the fees to be paid pursuant to
Section 2 of the Original Agreement with respect to the Growth and Income Fund
portfolio.
<PAGE>
Per
Annum Average Net Asset Values
Monthly Rate Rate of the Portfolio
------------ ---- ----------------
Growth and Income 1/12 of .75% .75% On the first $100,000,000
Fund portfolio 1/12 of .65% .65% On the next $200,000,000
1/12 of .55% .55% On the next $200,000,000
1/12 of .50% .50% On the average next assets
over $500,000,000
2. The effective date of this Supplement shall be July 21, 1992.
IN WITNESS WHEREOF, the Fund and the Adviser have caused this
Supplement to be executed by their duly authorized officers as of the day and
year first above written.
PIPER JAFFRAY INVESTMENT
TRUST INC.
By /s/ Edward J. Kohler
---------------------------
Its President
-----------------------
PIPER CAPITAL MANAGEMENT
INCORPORATED
By /s/ Beverly J. Zimmer
---------------------------
Its Senior Vice President
-----------------------
-2-
<PAGE>
SUPPLEMENT
TO
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
This Supplement, made as of the 10th day of April, 1995, by and between
Piper Funds Inc., a Minnesota corporation (the "Corporation"), and Piper Capital
Management Incorporated, a Delaware corporation (the "Adviser").
WHEREAS, the Corporation has entered into an Investment Advisory and
Management Agreement with the Adviser dated February 19, 1987 (the "Original
Agreement") whereby the Corporation engaged the Adviser to act as investment
adviser for, and to manage the affairs, business and investment of the assets
of, five series of the Corporation, known as Value Fund, Equity Strategy Fund
(formerly Sector Performance Fund), Balanced Fund, Government Income Fund and
Money Market Fund series.
WHEREAS, pursuant to a Supplement dated April 4, 1988, all of the terms,
provisions, covenants and agreements set forth in the Original Agreement were
adopted with respect to five additional series of the Corporation, known as the
U.S. Government Money Market Fund, Tax-Exempt Money Market Fund, Institutional
Government Income Portfolio, National Tax-Exempt Fund and Minnesota Tax-Exempt
Fund series.
WHEREAS, pursuant to a Supplements dated March 16, 1990 and May 7, 1992,
all of the terms, provisions, covenants and agreements set forth in the Original
Agreement were adopted with respect to Emerging Growth Fund and Growth and
Income Fund, respectively, two additional series of the Corporation.
WHEREAS, pursuant to a resolution of the Board of Directors of the
Corporation, an additional series of the Corporation has been formed, which
series has been designated the Short-Intermediate Bond Fund series.
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
covenants contained herein, the parties hereto agree as follows:
1. All of the terms, provisions, covenants and agreements set forth in the
Original Agreement shall apply to the Short-Intermediate Bond Fund series,
provided that the monthly fee to be paid pursuant to Section 2 of the Original
Agreement with respect to the Short-Intermediate Bond Fund series shall be equal
to 1/12 of .40% of such Fund's average daily net assets.
<PAGE>
2. The effective date of this Supplement shall be April 10, 1995.
IN WITNESS WHEREOF, the Corporation and the Adviser have caused this
Supplement to be executed by their duly authorized officers as of the day and
year first above written.
PIPER FUNDS INC.
By /s/ Marijo A. Goldstein
-------------------------------
Its Vice President
---------------------------
PIPER CAPITAL MANAGEMENT
INCORPORATED
By /s/ William H. Ellis
-------------------------------
Its President
---------------------------
<PAGE>
AMENDED UNDERWRITING AND DISTRIBUTION AGREEMENT
THIS AGREEMENT, made as of the 10th day of April, 1995, by and between
Piper Funds Inc., a Minnesota corporation ("Piper Funds") and Piper Jaffray
Inc., a Delaware corporation (the "Distributor").
WITNESSETH:
1. UNDERWRITING SERVICES. Piper Funds hereby engages the Distributor,
and the Distributor hereby agrees to act, as principal underwriter for Piper
Funds in the sale and distribution to the public of Piper Funds' shares of
common stock, $.01 par value (the "Shares"), either through dealers or
otherwise. The Distributor agrees to offer such Shares for sale at all times
when such Shares are available for sale and may lawfully be offered for sale and
sold. The Shares may be offered in one or more series (the "Series"), with each
designated Series representing a separate portfolio of investments. The
thirteen Series currently outstanding are Value Fund, Emerging Growth Fund,
Growth and Income Fund, Equity Strategy Fund, Balanced Fund, Government Income
Fund, Institutional Government Income Portfolio, Money Market Fund, U.S.
Government Money Market Fund, Tax-Exempt Money Market Fund, National Tax-Exempt
Fund, Minnesota Tax-Exempt Fund and Short-Intermediate Bond Fund. Other Series
may be created in the future by Piper Fund's Board of Directors.
2. SALE OF PIPER FUNDS SHARES. Such Shares are to be sold only on the
following terms:
(a) All subscriptions, offers or sales shall be subject to acceptance or
rejection by Piper Funds. Any offer or sale shall be conclusively presumed to
have been accepted by Piper Funds if Piper Funds shall fail to notify the
Distributor of the rejection of such offer or sale prior to the computation of
the net asset value of the Shares next following receipt by Piper Funds of
notice of such offer or sale.
(b) No Share shall be sold by the Distributor for any consideration other
than cash or for any amount less than the net asset value of such Share,
computed as provided in the currently effective prospectus of the appropriate
Series of Piper Funds. With respect to Money Market Fund, U.S. Government Money
Market Fund and Tax-Exempt Money Market Fund, the net asset value per Share is
normally expected to be $1.00. All Shares sold by the Distributor shall be sold
at the public offering price, as hereinafter defined, provided that, with
respect to a Series sold with a Front-End Sales Load (as hereinafter defined),
the Distributor may allow, or sell at, a discount from said public offering
price to broker-dealers that have entered into sales agreements with the
Distributor, which discount shall be no greater than the Front-End Sales Load.
<PAGE>
(c) The public offering price of the Shares shall be the net asset value
thereof next determined following receipt of an order by the Distributor plus a
front-end sales load or loading charge, if any, which shall be such percentage
of the public offering price, computed to the nearest cent, as is set forth in
Section 7(a) hereof, or as otherwise may be agreed upon in writing by Piper
Funds and the Distributor and specifically approved by the Board of Directors of
Piper Funds (the "Front-End Sales Load"), provided that no schedule of Front-End
Sales Loads shall be effective until set forth in a prospectus of Piper Funds
meeting the requirements of the Securities Act of 1933. Said Front-End Sales
Load may be graduated on a scale based upon the dollar amount of Shares sold.
(d) In connection with purchases of $500,000 and over, a 1.00% sales load
payable upon redemption (.20% in the case of Institutional Government Income
Portfolio) (a "Contingent Deferred Sales Load") will be imposed in the event of
a redemption transaction occurring within 24 months following such a purchase.
(e) The Front-End Sales Load for any Series of Piper Funds may, at the
discretion of Piper Funds and the Distributor, be reduced or eliminated as
permitted by the Investment Company Act of 1940, and the rules and regulations
thereunder, as they may be amended from time to time, provided that such
reduction or elimination shall be set forth in the currently effective
prospectus for such Series, and provided that Piper Funds shall in no event
receive for any Shares sold an amount less than the net asset value thereof. In
addition, the Contingent Deferred Sales Load for any Series of Piper Funds may,
at the discretion of Piper Funds and the Distributor, be reduced or eliminated
in accordance with the terms of an exemptive order received from the Securities
and Exchange Commission by Piper Funds, and any amendments thereto, provided
that such reduction or elimination shall be set forth in the currently effective
prospectus for such Series.
3. INVESTMENT OF DIVIDENDS AND DISTRIBUTIONS. Piper Funds may extend to
its shareholders the right to purchase Shares of any Series (or Shares of any
series of Piper Institutional Funds Inc. or Piper Global Funds Inc. or any other
open-end investment management companies or series thereof managed by the
Adviser) at the net asset value thereof with the proceeds of any dividend or
capital gain distribution paid or payable by a Series of Piper Funds to its
shareholders.
4. REGISTRATION OF SHARES. Piper Funds agrees to make prompt and
reasonable efforts to effect and keep in effect, at its own expense, the
registration or qualification of its Shares for sale in such jurisdictions as
Piper Funds may designate.
5. INFORMATION TO BE FURNISHED TO DISTRIBUTOR. Piper Funds agrees that
it will furnish the Distributor with such information with respect to the
affairs and accounts of Piper Funds as the Distributor may from time to time
reasonably require, and further agrees that the Distributor, at all reasonable
times, shall be permitted to inspect the books and records of Piper Funds.
2
<PAGE>
6. ALLOCATION OF EXPENSES. During the period of this agreement, Piper
Funds shall pay or cause to be paid all expenses, costs and fees incurred by
Piper Funds which are not assumed by the Distributor or Piper Capital Management
Incorporated (the "Adviser"). The Distributor agrees to provide, and shall pay
costs which it incurs in connection with, ongoing servicing and/or maintenance
of shareholder accounts with respect to each Series (such costs are referred to
as "Shareholder Servicing Costs"). The Distributor shall also pay all costs of
distributing the Shares of each Series ("Distribution Expenses"). Distribution
Expenses include, but are not limited to, initial and ongoing sales compensation
(in addition to sales loads) paid to investment executives of the Distributor
and to other broker-dealers in respect of sales of Shares of a Series and other
advertising and promotional expenses in connection with the distribution of
Shares of a Series. These advertising and promotional expenses include, by way
of example and not by way of limitation, costs of printing and mailing
prospectuses, statements of additional information and shareholders reports to
prospective investors; expenses of preparation and distribution of sales
literature; expenses of advertising of any type; an allocation of the
Distributor's overhead and other expenses related to the distribution of Shares
of a Series; and payments to, and expenses of, officers, employees or
representatives of the Distributor, of other broker-dealers, banks or other
financial institutions, and of any other persons who provide support services in
connection with the distribution of Shares of a Series, including travel,
entertainment and telephone expenses. Shareholder Servicing Costs include, but
not limited to, an allocation of the Distributor's overhead and payments made to
persons, including employees of the Distributor, who respond to inquiries of
shareholders regarding their ownership of Shares or their accounts with a
Series, or who provide other administrative or accounting services not otherwise
required to be provided by the investment adviser or the transfer agent for the
Series. The investment adviser, rather than the Distributor, may bear the
expenses referred to in this section, but the Distributor shall be liable for
such expenses until paid.
7. COMPENSATION TO DISTRIBUTOR. As compensation for all of its services
provided and its costs assumed under this Agreement, the Distributor shall
receive the following forms and amounts of compensation:
(a) With respect to sales of Shares of Value Fund, Emerging Growth Fund,
Growth and Income Fund, Equity Strategy Fund, Government Income Fund,
Institutional Government Income Portfolio, National Tax-Exempt Fund, Minnesota
Tax-Exempt Fund and Short-Intermediate Bond Fund, the Distributor shall receive
the difference between the total amount charged and received by the Distributor
as the purchase price for the Shares and the net asset value thereof. Such
difference shall be equal to the Front-End Sales Loads indicated below as a
percentage of the public offering price and the net asset value. As indicated,
the Front-End Sales Loads are reduced on a graduated scale on single purchases
of $100,000 or more. Front-End Sales Loads for any future Series shall be set
forth in an amendment to this Agreement.
3
<PAGE>
SERIES OTHER THAN INSTITUTIONAL GOVERNMENT
INCOME PORTFOLIO AND SHORT-INTERMEDIATE BOND FUND
<TABLE>
<CAPTION>
Front-End Front-End
Sales Load as Sales Load as
Amount of Transaction a Percentage of a Percentage of
at Offering Price Offering Price Net Asset Value
- ----------------------- ---------------- ----------------
<S> <C> <C>
Less than $100,000 . . . . . . . . . . . 4.00% 4.17%
$100,000 but less than $250,000. . . . . 3.25% 3.36%
$250,000 but less than $500,000. . . . . 2.50% 2.56%
$500,000 and over. . . . . . . . . . . . 0% 0%
</TABLE>
INSTITUTIONAL GOVERNMENT INCOME PORTFOLIO AND
SHORT-INTERMEDIATE BOND FUND
<TABLE>
<CAPTION>
Front-End Front-End
Sales Load as Sales Load as
Amount of Transaction a Percentage of a Percentage of
at Offering Price Offering Price Net Asset Value
- ----------------------- ---------------- ----------------
<S> <C> <C>
Less than $100,000 . . . . . . . . . . . 1.50% 1.52%
$100,000 but less than $250,000. . . . . 1.25% 1.27%
$250,000 but less than $500,000. . . . . 1.00% 1.01%
$500,000 and over. . . . . . . . . . . . 0% 0%
</TABLE>
Up to the entire amount of the Front-End Sales Load set forth above with
respect to each Series may be reallowed by the Distributor to broker-dealers in
connection with the sale of the Shares of such Series. The amount of the Front-
End Sales Loads set forth above may be retained or deducted by the Distributor
from any sums received by it in payment for Shares so sold. If such amount is
not deducted by the Distributor from such payments, such amount shall be paid to
the Distributor by Piper Funds not later than five business days after the close
of any month during which any such sales were made by the Distributor and
payment received by Piper Funds.
No Front-End Sales Load shall be charged to purchasers or paid to the
Distributor on sales of Shares of Money Market Fund, U.S. Government Money
Market Fund or Tax-Exempt Money Market Fund.
(b) For each Series of Piper Funds that imposes a Front-End Sales Load, in
connection with sales of $500,000 and over, a Contingent Deferred Sales Load
will be imposed on the shareholder and paid to the Distributor in the event of a
redemption transaction occurring within 24 months following such purchase. Such
4
<PAGE>
Contingent Deferred Sales Load shall be equal to .20% of the offering price for
Institutional Government Income Portfolio and Short-Intermediate Bond Fund and
1.00% of the offering price for all other Series of Piper Funds.
No Contingent Deferred Sales Load will be imposed when a shareholder
redeems (i) shares held for longer than 24 months, (ii) amounts representing an
increase in the value of shares due to capital appreciation, or (iii) shares
purchased through reinvestment of dividends or capital gain distributions. In
determining whether a Contingent Deferred Sales Load is payable, shares that are
not subject to any Contingent Deferred Sales Load will be redeemed first, and
other shares will then be redeemed in the order purchased.
For each Series other than Institutional Government Income Portfolio and
Short-Intermediate Bond Fund, with respect to cumulative purchases of shares of
such Series in excess of $500,000, the Distributor will pay its investment
executives and other broker-dealers a fee of up to 1.00% of the first
$1,000,000 of the offering price, .75% of the next $2,000,000 of the offering
price, .50% of the next $2,000,000 of the offering price, .25% of the next
$5,000,000 of the offering price, and $.15% of the offering price in excess of
$10,000,000. Such payments may be revised from time to time as agreed upon by
Piper Funds and the Distributor and are not reimbursable under Piper Funds' Rule
12b-1 plan.
For Institutional Government Income Portfolio and Short-Intermediate Bond
Fund, in connection with cumulative purchases of shares in excess of $500,000,
the Distributor will pay its investment executives and other broker-dealers a
fee of up to .20% of the first $3,000,000 of the offering price, .15% of the
next $2,000,000 of the offering price, .10% of the next $5,000,000 of the
offering price, and .05% of the offering price in excess of $10,000,000. Such
payments may be revised from time to time as agreed upon by Piper Funds and the
Distributor and are not reimbursable under Piper Funds' Rule 12b-1 plan.
(c) Pursuant to Piper Funds' Distribution Plan adopted in accordance with
Rule 12b-1 under the Investment Company Act of 1940 (the "Plan"), each of Value
Fund, Emerging Growth Fund, Growth and Income Fund, Equity Strategy Fund,
Balanced Fund and Government Income Fund shall pay the Distributor a total fee
each month equal to .50% per annum of the average daily net assets of each such
series to cover Distribution Expenses and Shareholder Servicing Costs. Such fee
shall be equal to .30% per annum of the average daily net assets of each of
Money Market Fund, U.S. Government Money Market Fund, Tax-Exempt Money Market
Fund, National Tax-Exempt Fund, Minnesota Tax-Exempt Fund and Institutional
Government Income Portfolio and .20% of the average daily net assets of Short-
Intermediate Bond Fund. As determined from time to time by the Board of
Directors of Piper Funds, a portion of each such fee shall be designated as a
"distribution fee" designed to cover Distribution Expenses and a portion shall
be designated as a "shareholder servicing fee" designed to cover Shareholder
Servicing
5
<PAGE>
Costs. Average daily net assets shall be computed in accordance with the
currently effective prospectus of each Series.
Amounts payable to the Distributor under the Plan may exceed or be less
than the Distributor's actual Distribution Expenses and Shareholder Servicing
Costs. In the event such Expenses and Costs exceed amounts payable to the
Distributor under the Plan, the Distributor shall not be entitled to
reimbursement by Piper Funds.
(d) In each year during which this Agreement remains in effect, the
Distributor will prepare and furnish to the Board of Directors of Piper Funds,
and the Board will review, on a quarterly basis, written reports complying with
the requirements of Rule 12b-1 under the Investment Company Act of 1940, as
amended, that set forth the amounts expended under this Agreement and the Plan
and the purposes for which those expenditures were made.
8. LIMITATION OF DISTRIBUTOR'S AUTHORITY. The Distributor shall be
deemed to be an authorized independent contractor and, except as specifically
provided or authorized herein, shall have no authority to act for or represent
Piper Funds. In connection with its role as underwriter of the Shares of Piper
Funds, the Distributor shall at all times be deemed an agent of Piper Funds and
shall sell Piper Funds Shares to purchasers thereof as agent and not as
principal.
9. SUBSCRIPTION FOR SHARES; REFUND FOR CANCELED ORDERS. The Distributor
shall subscribe for the Shares of Piper Funds only for the purpose of covering
purchase orders already received by it or for the purpose of investment for its
own account. In the event that an order for the purchase of Shares is placed
with the Distributor by a customer or dealer and subsequently canceled, the
Distributor shall forthwith cancel the subscription for such Shares entered on
the book of Piper Funds and, if the Distributor has paid Piper Funds for such
Shares, shall be entitled to receive from Piper Funds in refund of such payment
the lesser of:
(a) the consideration received by Piper Funds for said Shares; or
(b) the Net Asset Value of such Shares at the time of cancellation by
the Distributor.
10. INDEMNIFICATION OF PIPER FUNDS. The Distributor agrees to indemnify
Piper Funds against any and all litigation and other legal proceedings of any
kind or nature and against any liability, judgment, cost or penalty imposed as a
result of such litigation or proceedings in any way arising out of or in
connection with the sale or distribution of the Shares of Piper Funds by the
Distributor. In the event of the threat or institution of any such litigation
or legal proceedings against Piper Funds, the Distributor shall defend such
action on behalf of Piper Funds at its own expense, and shall pay any such
liability, judgment, cost or penalty resulting therefrom, whether imposed by
legal authority or agreed upon by way of compromise and settlement; provided,
however, that the Distributor shall not be
6
<PAGE>
required to pay or reimburse Piper Funds for any liability, judgment, cost or
penalty incurred as a result of information supplied to the Distributor by or as
a result of an omission to supply information to the Distributor by Piper Funds
or a director, officer or employee of Piper Funds who is not an Interested
Person of the Distributor (as defined in Section 2(a)(19) of the Investment
Company Act of 1940 and the rules, regulations and releases relating thereto),
unless the information so supplied or omitted was available to the Distributor
or Piper Funds' investment adviser without recourse to Piper Funds or any such
Interested Person of Piper Funds.
11. FREEDOM TO DEAL WITH THIRD PARTIES. The Distributor shall be free to
render to others services of a nature either similar to or different from those
rendered under this contract, except such as may impair its performance of the
services and duties to be rendered by it hereunder.
12. EFFECTIVE DATE, DURATION AND TERMINATION OF AGREEMENT. The effective
date of this Agreement shall be the date first set forth above. Wherever
referred to in this Agreement, the vote or approval of the holders of a majority
of the outstanding Shares of Piper Funds or of a Series of Piper Funds shall
mean the vote of 67% or more of such Shares if the holders of more than 50% of
such Shares are present in person or by proxy or the vote of more than 50% of
such Shares, whichever is less.
Unless sooner terminated as hereinafter provided, this Agreement shall
continue in effect from year to year with respect to each Series, but only so
long as such continuance is specifically approved at least annually (a) by the
Board of Directors of Piper Funds or by the vote of a majority of the
outstanding voting securities of the applicable Series, and (b) by the vote of a
majority of the directors who are not Interested Persons of Piper Funds or of
the Distributor and who have no direct or indirect financial interest in the
operation of this Agreement, or in any agreements relating to this Agreement,
cast in person at a meeting called for the purpose of voting on such approval.
This Agreement may be terminated at any time without the payment of any
penalty by the vote of a majority of the members of the Board of Directors of
Piper Funds who are not Interested Persons of Piper Funds and who have no direct
or indirect financial interest in the operation of this Agreement or in any
agreements relating to this Agreement, or by the Distributor, upon not more than
60 days' written notice to the other party. This Agreement may be terminated
with respect to a particular Series at any time without the payment of any
penalty by the vote of the holders of a majority of the outstanding Shares of
such Series, upon 60 days' written notice to the Distributor. This Agreement
shall automatically terminate in the event of its assignment.
13. AMENDMENTS TO AGREEMENT. No material amendment to this Agreement
shall be effective until approved by the Distributor and by the vote of a
majority of
7
<PAGE>
the Board of Directors of Piper Funds who are not Interested Persons of the
Distributor.
14. NOTICES. Any notices under this Agreement shall be in writing,
addressed, delivered or mailed, postage prepaid, to the other party at such
address as such other party may designate in writing for the receipt of such
notice.
IN WITNESS WHEREOF, Piper Funds and the Distributor have caused this
Agreement to be executed by their duly authorized officers as of the day and
year first above written.
PIPER FUNDS INC.
By /s/ Marijo A. Goldstein
-------------------------------
Its Vice President
--------------------------
PIPER JAFFRAY INC.
By /s/ William H. Ellis
-------------------------------
Its President
--------------------------
8
<PAGE>
SHAREHOLDER ACCOUNT SERVICING AGREEMENT
THIS AGREEMENT, made this 1st day of December 1994, by and between Piper
Funds Inc., a Minnesota corporation (the "Company"), on behalf of each series of
the Company's common stock set forth in Exhibit A hereto (such series are
referred to herein individually as a "Fund" and collectively as the "Funds"),
and Piper Trust Company, a Minnesota corporation ("Piper Trust").
WITNESSETH:
WHEREAS, the Company has entered into an Agency Agreement with Investors
Fiduciary Trust Company ("IFTC") pursuant to which IFTC was appointed as
Transfer Agent and Dividend Disbursing Agent for the Funds; and
WHEREAS, management of the Company has determined that it would be in the
best interests of each Fund and its shareholders to maintain with IFTC certain
omnibus accounts, with each such account representing the accounts of individual
shareholders who are participants in a defined contribution plan for which Piper
Trust acts as Trustee, and to have Piper Trust provide transfer agent and
dividend disbursing agent services for such underlying individual shareholder
accounts.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, the parties hereto agree as follows:
1. SCOPE OF APPOINTMENT.
(a) Subject to the conditions set forth in this Agreement, the Company
hereby appoints Piper Trust to perform certain transfer agent and dividend
disbursing agent services, and Piper Trust accepts such appointment.
(b) Such services shall be provided with respect to all individual
shareholder accounts encompassed within the omnibus accounts which represent
defined contribution plans for which Piper Trust acts as trustee.
(c) Piper Trust agrees to provide the necessary facilities, equipment and
personnel to perform its duties and obligations hereunder in accordance with
industry practice.
(d) Piper Trust agrees to perform the usual and ordinary services of
transfer agent and dividend disbursing agent not performed by IFTC with respect
to the shareholder accounts outlined in Section 1(b), including, as appropriate
and without limitation, the following: maintaining all shareholder accounts;
preparing shareholder meeting lists; mailing shareholder reports and
prospectuses; tracking shareholder accounts for blue sky and Rule 12b-1
purposes; withholding taxes on non-resident alien and foreign corporation
accounts; preparing and mailing checks
<PAGE>
for disbursement of income dividends and capital gains distributions; preparing
and filing U.S. Treasury Department Form 1099 for all shareholders; preparing
and mailing confirmation forms to shareholders and dealers with respect to all
purchases, exchanges and liquidations of Fund shares and other transactions in
shareholder accounts for which confirmations are required; recording
reinvestments of dividends and distributions in Fund shares; recording
redemptions of Fund shares; and preparing and mailing checks for payments upon
redemption and for disbursements to withdrawal plan holders.
2. COMPENSATION. As compensation for the services to be provided by Piper
Trust hereunder, each Fund will pay to Piper Trust an annual per-account fee as
set forth in Exhibit A hereto. Such fee shall be payable on a monthly basis at
a rate of 1/12th of the annual per-account charge, with payment being made
within ten business days following the end of the month covered by such payment.
Such fee covers all services outlined in Section 1(d) with the exception of
preparing shareholder meeting lists and mailing shareholder reports and
prospectuses. These services, along with proxy processing (if applicable) and
other special service requests, will be billable as performed at a mutually
agreed upon fee in addition to the annual fee as noted, provided that such
mutually agreed upon fee shall be fair and reasonable in light of the usual and
customary charges made by others for services of the same nature and quality.
3. RECORDS.
(a) Piper Trust will maintain customary records in connection with its
agency appointment hereunder, and in particular will maintain those records
required to be maintained pursuant to subparagraph 2(iv) of paragraph (b) of
Rule 31a-1 under the Investment Company Act of 1940, as amended (the "1940
Act").
(b) To the extent required by Section 31 of the 1940 Act and the rules and
regulations thereunder, Piper Trust agrees that all records maintained by Piper
Trust relating to the services to be performed by it under this Agreement are
the property of the Company and will be preserved in accordance with Rule 31a-2
under the 1940 Act and will be surrendered promptly to the Company upon request.
4. INDEMNIFICATION.
(a) Piper Trust will not be responsible for, and the Company will hold
harmless and indemnify Piper Trust from and against, any loss by or liability to
the Company or a third party, including attorneys' fees, in connection with any
claim or suit asserting any such liability arising out of or attributable to
actions taken by Piper Trust pursuant to this Agreement, unless Piper Trust has
acted negligently or in bad faith. Without limitation of the foregoing:
2
<PAGE>
(i) at any time Piper Trust may apply to any officer of the Company
for instructions, and may consult with legal counsel for the Company or its
own legal counsel at the expense of the Company, with respect to any matter
arising in connection with its agency, and Piper Trust will not be liable
for any action taken or omitted by it in good faith reliance upon such
instructions or upon the opinion of such counsel; and
(ii) Piper Trust may rely upon and will be protected in acting upon
any paper or document reasonably believed by it to be genuine and to have
been signed by the proper person or persons and will not be held to have
notice of any change of authority of any person until receipt of written
notice thereof from the Company.
(b) Piper Trust will hold harmless and indemnify the Company from and
against any loss or liability arising out of Piper Trust's failure to comply
with the terms of this Agreement or arising out of Piper Trust's negligence,
misconduct or bad faith.
5. INTERPRETATION; GOVERNING LAW. This Agreement shall be subject to and
interpreted in accordance with all applicable provisions of law, including,
without limitation, the 1940 Act and the rules and regulations promulgated
thereunder. To the extent the provisions herein contained conflict with any
such applicable provisions of law, the latter shall control. The laws of the
State of Minnesota shall otherwise govern the construction, validity and effect
of this Agreement.
6. EFFECTIVE DATE; DURATION; TERMINATION.
(a) This Agreement shall be effective as of the date first set forth
above.
(b) Unless sooner terminated as hereinafter provided, this Agreement shall
continue in effect from year to year but only so long as such continuance is
specifically approved at least annually by the Board of Directors of the
Company, including a majority of the Directors who are not parties to this
Agreement or "interested persons" of any such party (as defined in the 1940
Act), by vote cast in person at a meeting called for the purpose of voting on
such approval.
(c) This Agreement may be terminated at any time without the payment of
any penalty by either party upon not less than 60 days' written notice to the
other party. Upon the effective termination date, subject to payment by the
Company to Piper Trust of all amounts due to Piper Trust as of said date, Piper
Trust shall make available to the Company or its designated record keeping
successor all of the records of the Company maintained under this Agreement then
in Piper Trust's possession.
3
<PAGE>
(d) This Agreement shall automatically terminate in the event of its
assignment (as defined by the provisions of the 1940 Act) unless such assignment
is approved in advance by the Board of Directors, including a majority of the
directors of the Company who are not parties to this Agreement or "interested
persons" of any such party (as defined in the 1940 Act).
7. AMENDMENTS. No material amendment to this Agreement shall be effective
until approved by Piper Trust and by a vote of the Board of Directors of the
Company, including a majority of the Directors who are not parties to this
Agreement or "interested persons" of any such party (as defined in the 1940
Act).
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their duly authorized officers as of the day and year first above
written.
ATTEST: PIPER FUNDS INC.
/s/ Jill Collins By /s/ Robert H. Nelson
- ---------------------------- ---------------------------
Its Senior Vice President
-----------------------
ATTEST: PIPER TRUST COMPANY
/s/ Deanna S. Dowler By /s/ Alan Kennebeck
- ---------------------------- ---------------------------
Its C.O.O.
-----------------------
4
<PAGE>
EXHIBIT A TO SHAREHOLDER ACCOUNT SERVICING AGREEMENT
SCHEDULE OF CHARGES
MONEY MARKET FUND ACCOUNTS
$9.00 per active account
$6.00 per inactive account
DAILY DIVIDEND ACCRUAL FUND ACCOUNTS (NOT INCLUDING MONEY MARKET FUNDS)
$7.50 per active account
$1.60 per closed account
NON-DAILY ACCRUAL FUND ACCOUNTS
$6.00 per active account
$1.60 per closed account
For Money Market Fund Accounts: An active account is defined as an account that
has a balance of shares and requires a statement for the current month. An
inactive account is defined as an account that has a balance of shares but does
not require a statement for the current month. There will be no charge for a
closed account, which is defined as an account that has been inactive for at
least three consecutive months.
For Non-Money Market Fund Accounts: An active account is defined as an account
that has a balance of shares. A closed account is defined as an account that
does not have a balance of shares but has had activity within the past 12
months.
<PAGE>
SHAREHOLDER ACCOUNT SERVICING AGREEMENT
THIS AGREEMENT, made this 1st day of December, 1994, by and between Piper
Funds Inc., a Minnesota corporation (the "Company"), on behalf of each series of
the Company's common stock set forth in Exhibit A hereto (such series are
referred to herein individually as a "Fund" and collectively as the "Funds"),
and Piper Jaffray Inc., a Delaware corporation ("Piper Jaffray").
WITNESSETH:
WHEREAS, the Company has entered into an Agency Agreement with Investors
Fiduciary Trust Company ("IFTC") pursuant to which IFTC was appointed as
Transfer Agent and Dividend Disbursing Agent for the Funds; and
WHEREAS, management of the Company has determined that it would be in the
best interests of each Fund and its shareholders to maintain with IFTC certain
omnibus accounts, with each such account representing the accounts of a number
of individual shareholders who maintain accounts with Piper Jaffray, and to have
Piper Jaffray provide transfer agent and dividend disbursing agent services for
such underlying individual shareholder accounts.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, the parties hereto agree as follows:
1. SCOPE OF APPOINTMENT.
(a) Subject to the conditions set forth in this Agreement, the Company
hereby appoints Piper Jaffray to perform certain transfer agent and dividend
disbursing agent services, and Piper Jaffray accepts such appointment.
(b) Such services shall be provided with respect to all individual
shareholder accounts encompassed within the omnibus accounts referenced above.
(c) Piper Jaffray agrees to provide the necessary facilities, equipment
and personnel to perform its duties and obligations hereunder in accordance with
industry practice.
(d) Piper Jaffray agrees to perform the usual and ordinary services of
transfer agent and dividend disbursing agent not performed by IFTC with respect
to the shareholder accounts outlined in Section 1(b), including, without
limitation, the following: maintaining all shareholder accounts; preparing
shareholder meeting lists; mailing shareholder reports and prospectuses;
tracking shareholder accounts for blue sky and Rule 12b-1 purposes; withholding
taxes on non-resident alien and foreign corporation accounts; preparing and
mailing checks for disbursement of income dividends and capital gains
distributions; preparing and filing U.S. Treasury
<PAGE>
Department Form 1099 for all shareholders; preparing and mailing confirmation
forms to shareholders and dealers with respect to all purchases, exchanges and
liquidations of Fund shares and other transactions in shareholder accounts for
which confirmations are required; recording reinvestments of dividends and
distributions in Fund shares; recording redemptions of Fund shares; and
preparing and mailing checks for payments upon redemption and for disbursements
to withdrawal plan holders.
2. COMPENSATION. As compensation for the services to be provided by Piper
Jaffray hereunder, each Fund will pay to Piper Jaffray an annual per-account fee
as set forth in Exhibit A hereto. Such fee shall be payable on a monthly basis
at a rate of 1/12th of the annual per-account charge, with payment being made
within ten business days following the end of the month covered by such payment.
Such fee covers all services outlined in Section 1(d) with the exception of
preparing shareholder meeting lists and mailing shareholder reports and
prospectuses. These services, along with proxy processing (if applicable) and
other special service requests, will be billable as performed at a mutually
agreed upon fee in addition to the annual fee as noted, provided that such
mutually agreed upon fee shall be fair and reasonable in light of the usual and
customary charges made by others for services of the same nature and quality.
3. RECORDS.
(a) Piper Jaffray will maintain customary records in connection with its
agency appointment hereunder, and in particular will maintain those records
required to be maintained pursuant to subparagraph 2(iv) of paragraph (b) of
Rule 31a-1 under the Investment Company Act of 1940, as amended (the "1940
Act").
(b) To the extent required by Section 31 of the 1940 Act and the rules and
regulations thereunder, Piper Jaffray agrees that all records maintained by
Piper Jaffray relating to the services to be performed by it under this
Agreement are the property of the Company and will be preserved in accordance
with Rule 31a-2 under the 1940 Act and will be surrendered promptly to the
Company upon request.
4. INDEMNIFICATION.
(a) Piper Jaffray will not be responsible for, and the Company will hold
harmless and indemnify Piper Jaffray from and against, any loss by or liability
to the Company or a third party, including attorneys' fees, in connection with
any claim or suit asserting any such liability arising out of or attributable to
actions taken by Piper Jaffray pursuant to this Agreement, unless Piper Jaffray
has acted negligently or in bad faith. Without limitation of the foregoing:
2
<PAGE>
(i) at any time Piper Jaffray may apply to any officer of the Company
for instructions, and may consult with legal counsel for the Company or its
own legal counsel at the expense of the Company, with respect to any matter
arising in connection with its agency, and Piper Jaffray will not be liable
for any action taken or omitted by it in good faith reliance upon such
instructions or upon the opinion of such counsel; and
(ii) Piper Jaffray may rely upon and will be protected in acting upon
any paper or document reasonably believed by it to be genuine and to have
been signed by the proper person or persons and will not be held to have
notice of any change of authority of any person until receipt of written
notice thereof from the Company.
(b) Piper Jaffray will hold harmless and indemnify the Company from and
against any loss or liability arising out of Piper Jaffray's failure to comply
with the terms of this Agreement or arising out of Piper Jaffray's negligence,
misconduct or bad faith.
5. INTERPRETATION; GOVERNING LAW. This Agreement shall be subject to and
interpreted in accordance with all applicable provisions of law, including,
without limitation, the 1940 Act and the rules and regulations promulgated
thereunder. To the extent the provisions herein contained conflict with any
such applicable provisions of law, the latter shall control. The laws of the
State of Minnesota shall otherwise govern the construction, validity and effect
of this Agreement.
6. EFFECTIVE DATE; DURATION; TERMINATION.
(a) This Agreement shall be effective as of the date first set forth
above.
(b) Unless sooner terminated as hereinafter provided, this Agreement shall
continue in effect from year to year but only so long as such continuance is
specifically approved at least annually by the Board of Directors of the
Company, including a majority of the Directors who are not parties to this
Agreement or "interested persons" of any such party (as defined in the 1940
Act), by vote cast in person at a meeting called for the purpose of voting on
such approval.
(c) This Agreement may be terminated at any time without the payment of
any penalty by either party upon not less than 60 days' written notice to the
other party. Upon the effective termination date, subject to payment by the
Company to Piper Jaffray of all amounts due to Piper Jaffray as of said date,
Piper Jaffray shall make available to the Company or its designated record
keeping successor all of the records of the Company maintained under this
Agreement then in Piper Jaffray's possession.
3
<PAGE>
(d) This Agreement shall automatically terminate in the event of its
assignment (as defined by the provisions of the 1940 Act) unless such assignment
is approved in advance by the Board of Directors, including a majority of the
directors of the Company who are not parties to this Agreement or "interested
persons" of any such party (as defined in the 1940 Act).
7. AMENDMENTS. No material amendment to this Agreement shall be effective
until approved by Piper Jaffray and by a vote of the Board of Directors of the
Company, including a majority of the Directors who are not parties to this
Agreement or "interested persons" of any such party (as defined in the 1940
Act).
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their duly authorized officers as of the day and year first above
written.
ATTEST: PIPER FUNDS INC.
/s/ Jill Collins By /s/ Robert H. Nelson
- ---------------------------- ---------------------------
Its Senior Vice President
------------------------
ATTEST: PIPER JAFFRAY INC.
/s/ Jeffrey D. Haines By /s/ Richard J. Stream
- ---------------------------- ---------------------------
Its Managing Director
------------------------
4
<PAGE>
EXHIBIT A TO SHAREHOLDER ACCOUNT SERVICING AGREEMENT
SCHEDULE OF CHARGES
MONEY MARKET FUND ACCOUNTS
$9.00 per active account
$6.00 per inactive account
DAILY DIVIDEND ACCRUAL FUND ACCOUNTS (NOT INCLUDING MONEY MARKET FUNDS)
$7.50 per active account
$1.60 per closed account
NON-DAILY ACCRUAL FUND ACCOUNTS
$6.00 per active account
$1.60 per closed account
For Money Market Fund Accounts: An active account is defined as an account that
has a balance of shares and requires a statement for the current month. An
inactive account is defined as an account that has a balance of shares but does
not require a statement for the current month.
For Non-Money Market Fund Accounts: An active account is defined as an account
that has a balance of shares. A closed account is defined as an account that
does not have a balance of shares but has had activity within the past 12
months.
<PAGE>
DORSEY & WHITNEY
PROFESSIONAL LIMITED LIABILITY PARTNERSHIP
PILLSBURY CENTER SOUTH
220 SOUTH SIXTH STREET
MINNEAPOLIS, MINNESOTA 55402-1498
(612) 340-2600
FAX (612) 340-2868
Piper Funds Inc.
222 South Ninth Street
Minneapolis, Minnesota 55402
Ladies and Gentlemen:
We have acted as counsel to Piper Funds Inc., a Minnesota corporation
(the "Fund"), in connection with a Registration Statement on Form N-1A (File No.
33-10261) (the "Registration Statement") relating to the sale by the Fund of an
indefinite number of shares of the Fund's Series M common stock, par value of
$.01 per share (the "Shares").
We have examined such documents and have reviewed such questions of
law as we have considered necessary and appropriate for the purposes of our
opinions set forth below. In rendering our opinions set forth below, we have
assumed the authenticity of all documents submitted to us as originals, the
genuineness of all signatures and the conformity to authentic originals of all
documents submitted to us as copies. We have also assumed the legal capacity
for all purposes relevant hereto of all natural persons and, with respect to all
parties to agreements or instruments relevant hereto other than the Fund, that
such parties had the requisite power and authority (corporate or otherwise) to
execute, deliver and perform such agreements or instruments, that such
agreements or instruments have been duly authorized by all requisite action
(corporate or otherwise), executed and delivered by such parties and that such
agreements or instruments are the valid, binding and enforceable obligations of
such parties. As to questions of fact material to our opinions, we have relied
upon certificates of officers of the Fund and of public officials. We have also
assumed that the Shares will be issued and sold as described in the Registration
Statement.
Based on the foregoing, we are of the opinion that the Shares have
been duly authorized by all requisite corporate action and, upon issuance,
delivery and payment therefore as described in the Registration Statement, will
be validly issued, fully paid and nonassessable.
Our opinions expressed above are limited to the laws of the State of
Minnesota.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
<PAGE>
Piper Funds, Inc.
April 7, 1995
Page 2
Counsel" on the back cover of the Prospectus constituting part of the
Registration Statement.
Dated: April 7, 1995
Very truly yours,
/s/ Dorsey & Whitney P.L.L.P.
KLP
<PAGE>
[KPMG Peat Marwick LLP letterhead]
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Piper Funds Inc.:
We consent to the use of our report incorporated by reference herein and the
references to our Firm under the headings "Financial Highlights" in each Part A
and "Financial Statements" in each Part B of the Registration Statement.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
November 24, 1995
<PAGE>
LETTER OF INVESTMENT INTENT
April 6, 1995
Piper Funds Inc.
222 South Ninth Street
Minneapolis, MN 55402
Dear Sir/Madam:
In connection with the purchase by Piper Capital Management
Incorporated (the "Purchaser") of 100 Series M Shares of Piper Funds Inc. (the
"Shares"), the Purchaser hereby represents that it is acquiring the Shares for
investment with no intention of reselling or otherwise distributing the Shares.
The Purchaser hereby further agrees that any transfer of any of the Shares or
any interest in it shall be subject to the following conditions:
1. The Purchaser shall furnish you and counsel satisfactory to
you, prior to the time of transfer, a written description of the
proposed transfer specifying its nature and consequence and giving the
name of the proposed transferee.
2. You shall have obtained from your counsel a written opinion
stating whether in the opinion of such counsel the proposed transfer
may be effected without registration under the Securities Act of 1933.
If such opinion states that such transfer may be so effected, the
Purchaser shall then be entitled to transfer the Shares in accordance
with the terms specified in its description of the transaction to you.
If such opinion states that the proposed transfer may not be so
effected, the Purchaser will not be entitled to transfer its Shares
unless such Shares are registered.
The Purchaser hereby authorizes you to take such action as you shall
reasonably deem appropriate to prevent any violation of the Securities Act of
1933 in connection with the transfer of Shares, including the imposition of a
requirement that any transferee of the Shares sign a letter agreement similar to
this one.
Very truly yours,
PIPER CAPITAL MANAGEMENT
INCORPORATED
By /s/ Charles N. Hayssen
------------------------------
Its Vice President and C.O.O.
--------------------------
<PAGE>
PIPER FUNDS INC.
AMENDED AND RESTATED PLAN OF DISTRIBUTION
This Amended and Restated Plan of Distribution (the "Plan") is adopted by
Piper Funds Inc. (formerly Piper Jaffray Investment Trust Inc.), a Minnesota
corporation (the "Piper Funds"), with respect to Value Fund, Sector Performance
Fund, Balanced Fund, Government Income Fund, Money Market Fund, U.S. Government
Money Market Fund, Tax-Exempt Money Market Fund, Institutional Government Income
Portfolio, National Tax-Exempt Fund, Minnesota Tax-Exempt Fund, Emerging Growth
Fund and Growth and Income Fund (individually, a "Fund" and collectively, the
"Funds"), series of Piper Funds, pursuant to Rule 12b-1 (the"Rule") under the
Investment Company Act of 1940, as amended (the"1940 Act"), subject to the
following terms and conditions:
1. COMPENSATION. Each Fund will pay Piper Jaffray Inc. (the
"Distributor") a total fee in connection with the servicing of Fund shareholder
accounts and in connection with distribution-related services provided in
respect of the Fund, calculated daily and paid monthly at the annual rate of
that certain percentage of the value of the average daily net assets of the Fund
as set forth below:
Fund % Of Average Daily Net Assets
---- -----------------------------
Value Fund .50
Sector Performance Fund .50
Balanced Fund .50
Government Income Fund .50
Emerging Growth Fund .50
Growth and Income Fund .50
Money Market Fund .30
U.S. Government Money Market Fund .30
Tax-Exempt Money Market Fund .30
Institutional Government Income Portfolio .30
National Tax-Exempt Fund .30
Minnesota Tax Exempt Fund .30
A portion of such total fee will be payable as a Servicing Fee and a
portion will be payable as a Distribution Fee, as determined from time to time
by Piper Funds' Board of Directors.
2. EXPENSES COVERED BY THE PLAN.
(a) The Servicing Fee may be used by the Distributor to cover all
expenses incurred by the Distributor in connection with ongoing servicing
and/or maintenances of shareholder accounts with the Funds. Such expenses
include, but are not limited to, an allocation of the Distributor's
overhead and payments made to persons, including employees of the
Distributor, and
<PAGE>
institutions who respond to inquiries of shareholders of the Funds
regarding their ownership of shares or their accounts with the Funds or who
provide other administrative or accounting services not otherwise required
to be provided by the Funds' investment adviser, transfer agent or other
agents of the Funds.
(b) The Distribution Fee may be used by the Distributor to provide
initial and ongoing sales compensation to its investment executives and to
other broker-dealers in respect of sales of Fund shares and to pay for
other advertising and promotional expenses in connection with the
distribution of shares of a Fund. These advertising and promotional
expenses include, by way of example but not by way of limitation, costs of
printing and mailing prospectuses, statements of additional information and
shareholder reports to prospective investors; preparation and distribution
of sales literature; advertising of any type; an allocation of overhead and
other expenses of the Distributor related to the distribution of Fund
shares; and payments to, and expenses of, officers, employees or
representatives of the Distributor, of other broker-dealers, banks or other
financial institutions, and of any other persons who provide support
services in connection with the distribution of Fund shares, including
travel, entertainment and telephone expenses.
(c) Payments under the Plan are not tied exclusively to the expenses
for shareholder servicing and distribution-related activities actually
incurred by the Distributor, so that such payments may exceed expenses
actually incurred by the Distributor. Piper Funds' Board of Directors will
evaluate the appropriateness of the Plan and its payment terms on a
continuing basis and in doing so will consider all relevant factors,
including expenses borne by the Distributor and amounts it receives under
the Plan.
3. PAYMENTS BY ADVISER. The adviser to the Funds may, at its option,
make payments from its own resources to cover the costs of additional
distribution activities.
4. APPROVAL BY SHAREHOLDERS. The Plan will not take effect with respect
to any Fund, and no fee will be payable in accordance with Section 1 of the
Plan, until the Plan has been approved by a vote of at least a majority of the
outstanding voting securities of that Fund.
5. APPROVAL BY DIRECTORS. Neither the Plan nor any related agreements
will take effect until approved by a majority vote of both (a) the full Board of
Directors of Piper Funds and (b) those Directors who are not interested persons
of Piper Funds and who have no direct or indirect financial interest in the
operation of the Plan or in any agreements related to it (the independent
Directors"), cast in
-2-
<PAGE>
person at a meeting called for the purpose of voting on the Plan and the related
agreements.
6. CONTINUANCE OF THE PLAN. The Plan will continue in effect from year
to year so long as its continuance is specifically approved annually by vote of
Piper Funds' Board of Directors in the manner described in Section 5 above.
7. TERMINATION. The Plan may be terminated at any time, without penalty,
by vote of a majority of the Independent Directors or, with respect to any Fund,
by a vote of a majority of the outstanding voting securities of that Fund.
8. AMENDMENTS. The Plan may not be amended to increase materially the
amount of the fees payable by any Fund, as described in Section 1 above, unless
the amendment is approved by a vote of at least a majority of the outstanding
voting securities of that Fund, and all material amendments to the Plan must
also be approved by Piper Funds' Board of Directors in the manner described in
Section 5 above.
9. SELECTION OF CERTAIN DIRECTORS. While the Plan is in effect, the
selection and nomination of Piper Funds' Directors who are not interested
persons of Piper Funds will be committed to the discretion of the Directors then
in office who are not interested persons of Piper Funds.
10. WRITTEN REPORTS. In each year during which the Plan remains in
effect, the Distributor and any person authorized to direct the disposition of
monies paid or payable by the Funds pursuant to the Plan or any related
agreement will prepare and furnish to Piper Funds' Board of Directors, and the
Board will review, at least quarterly, written reports, complying with the
requirements of the Rule, which set out the amounts expended under the Plan and
the purposes for which those expenditures were made.
11. PRESERVATION OF MATERIALS. Piper Funds will preserve copies of the
Plan, any agreement relating to the Plan and any report made pursuant to Section
10 above, for a period of not less than six years (the first two years in an
easily accessible place) from the date of the Plan, agreement or report.
12. MEANINGS OF CERTAIN TERMS. As used in the Plan, the terms "interested
person" and majority of the outstanding voting securities" will be deemed to
have the same meaning that those terms have under the 1940 Act and the rules and
regulations under the 1940 Act, subject to any exemption that may be granted to
Piper Funds under the 1940 Act by the Securities and Exchange Commission.
13. EFFECTIVE DATE. The Plan will become effective with respect to each
Fund on the date approved by the shareholders of such Fund.
-3-
<PAGE>
SUPPLEMENT
DATED APRIL 10, 1995
TO
PIPER FUNDS INC.
PLAN OF DISTRIBUTION
WHEREAS, an Amended and Restated Plan of Distribution has been adopted by
Piper Funds Inc., a Minnesota corporation ("the Corporation").
WHEREAS, the Plan currently applies to twelve series of the Corporation:
Value Fund, Equity Strategy Fund, Balanced Fund, Government Income Fund, Money
Market Fund, U.S. Government Money Market Fund, Tax-Exempt Money Market Fund,
Institutional Government Income Portfolio, National Tax-Exempt Fund, Minnesota
Tax-Exempt Fund, Emerging Growth Fund and Growth and Income Fund.
WHEREAS, pursuant to a resolution of the Board of Directors of the
Corporation, Short-Intermediate Bond Fund has been formed as an additional
series of the Corporation.
NOW, THEREFORE, the following supplement shall be made to the Plan;
1. All of the terms and provisions set forth in the Plan with respect to
the aforementioned twelve series of the Corporation shall apply to the Short-
Intermediate Bond Fund series as well, provided that the compensation to be paid
to Piper Jaffray Inc. by Short-Intermediate Bond Fund pursuant to Section 1 of
the Plan shall be equal, on an annual basis, to .20% of such Fund's average
daily net assets.
2. The Corporation represents that this Supplement has been approved, in
accordance with Section 5 of the Plan, by the Board of Directors of the
Corporation and by the Independent Directors of the Corporation, as defined in
the Plan.
<PAGE>
PIPER FUNDS, INC.
POWER OF ATTORNEY
The undersigned, duly elected directors and/or officers of Piper Funds
Inc., (the "Fund") hereby appoints, William H. Ellis, Paul A. Dow and David E.
Rosedahl, and each of them individually, as attorneys-in-fact for purposes of
signing their names and on their behalf as directors and/or officers of the
Fund any and all amendments to the Fund's Registration Statement on Form N-1A
and filing the same with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, for the purpose of
registering shares of any series of common stock of the Fund under the
Securities Act of 1933 and amending the registration of the Fund under the
Investment Company Act of 1940.
/s/ Paul A. Dow /s/ William H. Ellis
- ------------------------------ -----------------------------
Paul A. Dow William H. Ellis
President of the Fund Director of the Fund
/s/ Charles N. Hayssen /s/ Karol D. Emmerich
- ------------------------------ -----------------------------
Charles N. Hayssen Karol D. Emmerich
Treasurer (Principal Financial Director of the Fund
and Accounting Officer)
of the Fund
/s/ David T. Bennett /s/ Luella G. Goldberg
- ------------------------------ -----------------------------
David T. Bennett Luella G. Goldberg
Director of the Fund Director of the Fund
/s/ Jaye F. Dyer /s/ George Latimer
- ------------------------------ -----------------------------
Jaye F. Dyer George Latimer
Director of the Fund Director of the Fund
Dated: November 27, 1995
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<NAME> MINNESOTA TAX-EXEMPT FUND
<S> <C>
<PERIOD-TYPE> YEAR
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<PERIOD-START> OCT-01-1994
<PERIOD-END> SEP-30-1995
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<NET-CHANGE-IN-ASSETS> (28,610,461)
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000806177
<NAME> PIPER FUNDS INC.
<SERIES>
<NUMBER> 10
<NAME> INSTITUTIONAL GOVERNMENT INCOME PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> SEP-30-1995
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<NET-INVESTMENT-INCOME> 31,383,950
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000806177
<NAME> PIPER FUNDS INC.
<SERIES>
<NUMBER> 11
<NAME> EMERGING GROWTH FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> SEP-30-1995
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<OVERDISTRIBUTION-GAINS> 0
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<NET-INVESTMENT-INCOME> (1,114,400)
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<OVERDIST-NET-GAINS-PRIOR> 0
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<INTEREST-EXPENSE> 0
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<PER-SHARE-NAV-BEGIN> 19.26
<PER-SHARE-NII> (0.11)
<PER-SHARE-GAIN-APPREC> 6.79
<PER-SHARE-DIVIDEND> 0
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000806177
<NAME> PIPER FUNDS INC.
<SERIES>
<NUMBER> 12
<NAME> GROWTH AND INCOME
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 55,118,857
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<OVERDISTRIBUTION-GAINS> 0
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<NET-ASSETS> 73,430,985
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<PER-SHARE-NAV-BEGIN> 10.27
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000806177
<NAME> PIPER FUNDS INC.
<SERIES>
<NUMBER> 13
<NAME> SHORT-INTERMEDIATE BOND FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> APR-10-1995<F1>
<PERIOD-END> SEP-30-1995
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<INVESTMENTS-AT-VALUE> 137,969
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<SHARES-COMMON-PRIOR> 0
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<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 567
<NET-ASSETS> 144,110
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,106
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 4,106
<REALIZED-GAINS-CURRENT> 403
<APPREC-INCREASE-CURRENT> 567
<NET-CHANGE-FROM-OPS> 5,076
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<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 19,569
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<SHARES-REINVESTED> 284
<NET-CHANGE-IN-ASSETS> 143,110
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 268
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 15,470
<AVERAGE-NET-ASSETS> 140,635
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.28
<PER-SHARE-GAIN-APPREC> 0.09
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<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.09
<EXPENSE-RATIO> 0.0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>Inception
</TABLE>
