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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. ___)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as
permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c)
or Section 240.14a-12
Institutional Government Income Portfolio, a series of Piper Funds Inc.
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(Name of Registrant as Specified in its Charter)
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[Insert Name]
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(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(4) Date Filed:
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[LOGO]
Piper Capital Management
222 South Ninth Street
Minneapolis, MN 55402-3804
612 342-6402
Dear Shareholders:
Attached is the proxy statement for a special meeting of shareholders of
Institutional Government Income Portfolio to be held September 12, 1996.
SHAREHOLDERS ARE BEING ASKED TO VOTE FOR A PROPOSAL TO ELIMINATE THE FUND'S
REQUIREMENT TO INVEST IN ONLY U.S. GOVERNMENT SECURITIES AND REPURCHASE
AGREEMENTS SECURED BY U.S. GOVERNMENT SECURITIES. If the proposal is approved,
the investment strategy of the fund will be revised to include investments in a
broad range of debt securities, and the fund will be reopened to new investors
under the new name of Piper Funds Inc. -- Intermediate Bond Fund. In addition,
the initial minimum investment will be lowered to $250, and the portfolio
management team will be expanded to three members.
THIS PROPOSAL, WHICH WAS RECOMMENDED BY THE FUND'S ADVISER, PIPER CAPITAL
MANAGEMENT, RECEIVED THE BOARD'S UNANIMOUS APPROVAL, AND THE BOARD RECOMMENDS
THAT SHAREHOLDERS APPROVE IT AS WELL. The shareholder Q&A and the proxy
statement on the following pages provide more detailed information about the
proposal.
PLEASE TAKE A MOMENT NOW TO READ THE INFORMATION AND SIGN AND RETURN THE PROXY
CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE. Your prompt attention to this proxy
statement will eliminate the need for additional mailings. If you haven't
already voted as the date of the meeting approaches, you may receive a telephone
call reminding you to exercise your right to vote. If you have questions about
these proposals, please contact your investment professional or call Piper
Capital Management at 1 800 866-7778.
Sincerely,
/s/ William H. Ellis
William H. Ellis
President
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[LOGO]
SHAREHOLDER Q&A
JULY 25, 1996
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PIPER CAPITAL MANAGEMENT INCORPORATED (PIPER CAPITAL) RECENTLY RECOMMENDED THAT
THE BOARD OF DIRECTORS OF INSTITUTIONAL GOVERNMENT INCOME PORTFOLIO APPROVE THE
DISCONTINUANCE OF THE FUND'S POLICY THAT LIMITS ITS INVESTMENTS TO U.S.
GOVERNMENT SECURITIES AND REPURCHASE AGREEMENTS SECURED BY U.S. GOVERNMENT
SECURITIES. IF SHAREHOLDERS APPROVE THE PROPOSAL, THE FUND WILL:
- BE RESTRUCTURED AS AN INTERMEDIATE BOND FUND,
- EXPAND ITS INVESTMENTS TO INCLUDE A BROAD RANGE OF INVESTMENT QUALITY DEBT
SECURITIES,
- CHANGE ITS NAME TO PIPER FUNDS INC. -- INTERMEDIATE BOND FUND,
- REOPEN TO NEW INVESTORS WITH A $250 MINIMUM INVESTMENT, AND
EXPAND ITS PORTFOLIO MANAGEMENT TEAM.
THE BOARD OF DIRECTORS APPROVED THE RECOMMENDATION AND RECOMMENDS SHAREHOLDERS
VOTE FOR THE PROPOSAL.
HOW WILL DISCONTINUING THIS POLICY AFFECT THE FUND'S INVESTMENT STRATEGY?
If shareholders approve the change, the fund will be allowed to invest in a
broad range of investment quality debt securities. These will include U.S.
government securities (including U.S. government mortgage-related securities);
privately issued mortgage-related securities; corporate fixed income securities;
asset-backed securities and Yankee bonds.
WHY WERE THESE CHANGES RECOMMENDED?
The fund's investment objective has remained the same -- to provide a high level
of current income consistent with preservation of capital. We believe this
objective could be more effectively pursued by investing in a wider range of
securities. We also feel that this investment strategy might appeal to a broader
range of fixed income investors, which would enhance prospects for future growth
of the fund and potentially allow shareholders to participate in a larger, more
economically viable fund.
WHY THE NEW NAME?
If shareholders approve the proposal, the fund will be restructured as an
intermediate bond fund. The new name, Piper Funds Inc. -- Intermediate Bond
Fund, reflects this restructuring and the fund's new investment policies.
WHY IS THE FUND BEING RE-OPENED TO NEW INVESTORS NOW?
Since June 14, 1994, fund shares have been available for sale only to existing
shareholders. We believe the new investment strategy will be appealing to new
investors, who could contribute to the fund's growth. To appeal to a wider range
of investors, the minimum initial investment will be reduced from $25,000 to
$250.
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WHAT EXPERIENCE WILL THE NEW CO-MANAGERS BRING TO THE FUND?
If shareholders approve the proposal, Bruce D. Salvog and David M. Steele will
begin sharing primary responsibility for the day-to-day management of the fund
with Worth Bruntjen, who has been primarily responsible for the fund's
management since its inception in 1988. Bruce has been a senior vice president
of Piper Capital Management 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. David has been a senior vice
president of Piper Capital Management since 1992. He was a portfolio manager at
Kennedy Associates from 1987 to 1992. He has an MBA from the University of
Southern California and 16 years of financial experience.
WHEN IS MY PROXY DUE? WHERE DO I SEND IT?
We'd like to receive your completed, signed and dated proxy as soon as possible,
regardless of whether you plan to attend the shareholder meeting. A postage-paid
envelope is enclosed for mailing your proxy. If you have misplaced your
envelope, please mail your proxy to: Piper Capital Management, P.O. Box 9043,
Smithtown, NY 11787-9817. If you haven't returned your ballot as the meeting
date approaches, you may receive a telephone call reminding you to vote.
WHEN AND WHERE WILL THE SHAREHOLDER MEETING TAKE PLACE?
The special shareholder meeting will be held at 10 a.m. on Thursday, Sept. 12,
1996, on the eleventh floor of the Piper Jaffray Tower, 222 South Ninth Street,
Minneapolis, Minnesota. Piper Capital will validate parking at the Energy Center
Ramp located at South Ninth Street and Third Avenue South. Please bring your
parking ticket to the meeting for validation.
PLEASE READ THE FULL TEXT OF THE ATTACHED PROXY STATEMENT FOR FURTHER
INFORMATION.
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INSTITUTIONAL GOVERNMENT INCOME PORTFOLIO
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402-3804
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER 12, 1996
NOTICE IS HEREBY GIVEN that a special meeting of the shareholders of
Institutional Government Income Portfolio (the "Fund"), a series of Piper
Funds Inc., will be held at 10:00 a.m., Central Time, on Thursday,
September 12, 1996, on the eleventh floor of the Piper Jaffray Tower,
222 South Ninth Street, Minneapolis, Minnesota. The purposes of the meeting
are as follows:
1. To approve discontinuance of the Fund's fundamental policy limiting
the Fund's investments to U.S. Government Securities (securities
which are issued or guaranteed as to payment of principal and
interest by the U.S. government or its agencies or instrumentalities)
and repurchase agreements fully secured by U.S. Government Securities.
2. To transact such other business as may properly come before the
meeting.
Shareholders of record on July 15, 1996, are the only persons entitled to
notice of and to vote at the meeting.
Your attention is directed to the attached Proxy Statement. WHETHER OR
NOT YOU EXPECT TO BE PRESENT AT THE UPCOMING MEETING, PLEASE FILL IN, SIGN,
DATE, AND MAIL THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN ORDER TO SAVE
THE FUND FURTHER SOLICITATION EXPENSE. A stamped return envelope is enclosed
for your convenience.
Susan Sharp Miley, Secretary
Dated: July 25, 1996
<PAGE>
PROXY STATEMENT
INSTITUTIONAL GOVERNMENT INCOME PORTFOLIO
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402-3804
SPECIAL MEETING OF SHAREHOLDERS--September 12, 1996
The enclosed proxy is solicited by the Board of Directors of Piper Funds
Inc. (the "Company") in connection with a special meeting of the shareholders
of Institutional Government Income Portfolio (the "Fund"), a series of the
Company, to be held September 12, 1996, and any adjournments thereof. The
costs of solicitation, including the cost of preparing and mailing the Notice
of Meeting and this Proxy Statement, will be paid by the Fund, and such
mailing will take place on approximately July 29, 1996. Representatives of
Piper Capital Management Incorporated (the "Adviser"), the investment adviser
and manager of the Fund, may, without cost to the Fund, solicit proxies on
behalf of the management of the Fund by means of mail, telephone, or personal
calls. In addition, the Fund has engaged Shareholder Communications
Corporation to assist in the solicitation of proxies, the cost of which is
anticipated to be approximately $15,600. The address of the Adviser is that
of the Fund as provided above.
A proxy may be revoked before the meeting by giving written notice of
revocation to the Secretary of the Fund, or at the meeting prior to voting.
Unless revoked, properly executed proxies in which choices are not specified
by the shareholders will be voted "for" each item for which no choice is
specified, in accordance with the recommendation of the Company's Board of
Directors. In instances where choices are specified by the shareholders in
the proxy, those proxies will be voted or the vote will be withheld in
accordance with the shareholder's choice. Abstentions may be specified on
any proposal and will be counted as present for purposes of determining
whether a quorum of shares is present at the meeting with respect to the item
on which the abstention is noted, but will be counted as a vote "against"
such item. Under the Rules of the New York Stock Exchange, if a proposal is
considered "non-discretionary," then brokers who hold Fund shares in street
name for customers are not authorized to vote on such proposal on behalf of
their customers without specific voting instructions from such customers. If
a broker returns a "non-vote" proxy, indicating a lack of authority to vote
on a proposal, then the shares covered by such non-vote shall not be counted
as present for purposes of calculating the vote with respect to such
proposal. So far as the Board of Directors is aware, no matters other than
those described in this Proxy Statement will be acted upon at the meeting.
Should any other matters properly come before the meeting calling for a vote
of shareholders, it is the intention of the persons named as proxies in the
enclosed proxy to vote upon such matters according to their best judgment.
Only shareholders of record on July 15, 1996, may vote at the meeting or
any adjournments thereof. As of that date, there were issued and outstanding
23,895,363 common shares, $.01 par value, of the Fund. Common shares
represent the only class of securities of the Fund. Each shareholder of the
Fund is entitled to one vote for each share held. As of July 15, 1996, no
person, to the knowledge of Fund management, was the beneficial owner of more
than 5% of the voting shares of the Fund, and the officers and directors of
the Fund, as a group, did not own more than 1% of the voting shares of the
Fund.
In the event that sufficient votes are not received for the adoption of
the proposal being put before shareholders, an adjournment or adjournments of
the meeting may be sought. Any adjournment
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would require a vote in favor of the adjournment by the holders of a majority
of the shares present at the meeting (or any adjournment thereof) in person
or by proxy. The persons named as proxies will vote all shares represented
by proxies which they are required to vote in favor of the proposals in favor
of an adjournment and will vote all shares which they are required to vote
against the proposal, against the adjournment.
COPIES OF THE FUND'S MOST RECENT ANNUAL REPORT AND SUBSEQUENT
SEMI-ANNUAL REPORT ARE AVAILABLE TO SHAREHOLDERS UPON REQUEST. IF YOU WOULD
LIKE TO RECEIVE A COPY, PLEASE CONTACT THE FUND AT 222 SOUTH NINTH STREET,
MINNEAPOLIS, MINNESOTA 55402, OR CALL 800-866-7778 AND PRESS #2, AND ONE
WILL BE SENT, WITHOUT CHARGE, BY FIRST-CLASS MAIL WITHIN THREE BUSINESS DAYS
OF YOUR REQUEST.
DISCONTINUANCE OF A FUNDAMENTAL POLICY
LIMITING FUND INVESTMENTS TO U.S. GOVERNMENT SECURITIES
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 U.S. Government Securities. In May
1996, the Adviser proposed to the Fund's Board of Directors that this
fundamental policy be discontinued. The Adviser made this proposal based on
its belief that the Fund's investment objective of a high level of current
income consistent with preservation of capital could be more effectively
pursued by investing in a broad range of investment quality debt securities.
In addition, the Adviser expressed the belief that this investment strategy
might appeal to a broader range of fixed income investors, thereby enhancing
prospects for future growth of the Fund and potentially allowing shareholders
to participate in a larger, more economically viable Fund. AT A MEETING HELD
JUNE 18, 1996, THE FUND'S BOARD OF DIRECTORS CONCLUDED THAT THE PROPOSAL WAS
IN THE BEST INTEREST OF SHAREHOLDERS AND UNANIMOUSLY APPROVED, AND
RECOMMENDED THAT SHAREHOLDERS APPROVE, DISCONTINUANCE OF THE FUND'S
FUNDAMENTAL POLICY LIMITING FUND INVESTMENTS TO U.S. GOVERNMENT SECURITIES
AND REPURCHASE AGREEMENTS FULLY SECURED BY U.S. GOVERNMENT SECURITIES. In
making its determination, the Board reviewed, among other things, a
memorandum furnished by the Adviser setting forth the basis for the Adviser's
recommendation and a memorandum from legal counsel to the independent
directors advising them of their responsibilities in evaluating the Adviser's
proposal.
As described in more detail below, if shareholder approval is obtained,
the Fund will invest in a broad range of investment quality debt securities,
including U.S. Government Securities (both mortgage-related and
non-mortgage-related), privately issued mortgage-related securities,
corporate fixed-income securities, asset-backed securities and Yankee bonds.
In addition, the Fund's name will be changed to Intermediate Bond Fund, the
Fund will be opened to new investors (the Fund has been closed to new
investors since June 14, 1994) and the Fund's portfolio management team will
be expanded. These changes are discussed in more detail below.
CHANGES IN INVESTMENT POLICIES
If shareholder approval of the proposal is obtained, the Fund will
invest in a broad range of investment grade or comparable quality debt
securities. The 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 Ratings Services ("S&P")) 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 the Fund to below investment grade, or if an unrated security falls
to below investment-grade quality, the Fund will have the ability to retain
the portfolio security if the Adviser deems it in the
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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 or, if unrated, judged to be of comparable
quality by the Adviser. 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 S&P as having an adequate capacity to pay principal and
interest.
The Fund will invest primarily (at least 65% of its total assets under
normal circumstances) in the following types of debt securities: U.S.
Government Securities (including mortgage-related securities), corporate
fixed-income securities, and other fixed-income securities, including
privately issued mortgage-related securities, asset-backed securities and
U.S. dollar-denominated Yankee bonds. A description of these types of
securities and the risks of investing therein is set forth in Appendix A to
this proxy statement. In connection with its investments in mortgage-related
securities, the Fund will not invest in inverse floaters or in interest only,
principal only or inverse interest only tranches of collateralized mortgage
obligations. The Fund also will be permitted to invest in cash and
short-term money market securities and, for temporary defensive purposes,
will be permitted to invest more than 35% of its total assets in such
securities. The Fund's investments in short-term money market securities may
include time deposits, bank certificates of deposit, bankers' acceptances,
high-grade commercial paper and other money market instruments. In addition,
the Fund will be permitted to invest in repurchase agreements with respect to
U.S. Government Securities. See Appendix A for a discussion of repurchase
agreements.
Under normal circumstances, the Fund will attempt to maintain for its
portfolio a dollar-weighted average maturity of three to ten years and an
effective duration of two to six years. Effective duration estimates the
interest rate risk of a security. See Appendix A.
The investment policies discussed in this section will be nonfundamental
and therefore may be changed without shareholder approval.
OPENING OF FUND, NAME CHANGE AND OTHER CHANGES
The Board of Directors has approved opening the Fund to new investors if
shareholder approval of the proposal is obtained. Fund shares have not been
available for sale to new investors since June 14, 1994. In addition, the
Fund's bylaws will be amended to rename the Fund "Intermediate Bond Fund,"
which more appropriately reflects the revised investment policies of the
Fund. Finally, the Fund's minimum initial investment will be decreased from
$25,000 to $250.
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. If
shareholder approval of the proposal is obtained, Bruce D. Salvog and David
M. Steele will share primary responsibility for the day-to-day management of
the Fund with Mr. Bruntjen. 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.
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OTHER CONSIDERATIONS
As of April 30, 1996, approximately 7% of the Fund's outstanding shares,
with a net asset value of approximately $14 million, was held by
municipalities and other State of Minnesota government entities. Until
recently, Minnesota government entities were permitted to invest in a
registered investment company if such company's portfolio consisted
exclusively of U.S. Government Securities, general obligation tax-exempt
securities rated A or better by a national bond rating service, and
repurchase agreements or reverse repurchase agreements fully collateralized
by such securities. If shareholder approval of the proposal is obtained, the
Fund will no longer meet these requirements and Minnesota government entities
holding Fund shares will be required to immediately redeem such shares. Such
redemptions will have the immediate effect of increasing Fund expense ratios.
The Adviser believes, however, that this adverse effect will most likely be
offset by the prospects for future growth that will result from the Fund's
new investment strategy. In addition, legislation has been recently enacted
in the State of Minnesota that restricts investments by government entities
in registered investment companies to those investment companies that have
received the highest credit rating and one of the two highest risk ratings
from at least one nationally recognized statistical rating organization and
that are invested in financial instruments with a final maturity no longer
than 13 months. This restriction goes into effect January 1, 1997. Thus,
Minnesota municipalities and other Minnesota government entities holding Fund
shares will be required to redeem such shares in the near future regardless
of whether shareholder approval of the proposal is obtained.
Shareholders should also consider that, to the extent the Fund sells
securities in its portfolio as a result of the new investment strategy, gains
or losses may be realized. These unrealized gains and losses are already
reflected in the Fund's net asset value; however, by selling these
securities, any potential for future appreciation (or depreciation) will be
lost. Any capital gains realized as a result of selling portfolio securities
will be offset against the Fund's existing capital loss carryforward and will
not have to be distributed to shareholders.
EFFECTIVE DATE OF CHANGES
If shareholders approve the proposal to discontinue the Fund's
fundamental policy limiting investments to U.S. Government Securities and
repurchase agreements fully secured by U.S. Government Securities, such
change, and the investment policy, portfolio management and other changes
discussed above, will be implemented upon effectiveness of an amendment to
the Fund's registration statement incorporating such changes, which is
expected to occur on or about September 13, 1996.
REQUIRED VOTE
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS OF THE FUND VOTE IN
FAVOR OF THE PROPOSAL TO ELIMINATE THE FUND'S FUNDAMENTAL POLICY LIMITING
INVESTMENTS TO U.S. GOVERNMENT SECURITIES AND REPURCHASE AGREEMENTS FULLY
SECURED BY U.S. GOVERNMENT SECURITIES. Approval of the proposal requires the
favorable vote of a majority of the outstanding shares of the Fund, as
defined in the Investment Company Act of 1940, as amended, which means the
lesser of the vote of (a) 67% of the shares of the Fund present at a meeting
where more than 50% of the outstanding shares are present in person or by
proxy, or (b) more than 50% of the outstanding shares of the Fund. Unless
otherwise instructed, the proxies will vote to approve the proposed
elimination of this fundamental policy.
SHAREHOLDER PROPOSALS
As a series of a Minnesota corporation, the Fund is not required to hold
annual shareholder meetings. Since the Fund does not hold regular meetings
of shareholders, the anticipated date of the next shareholder meeting cannot
be provided. Any shareholder proposal which may properly be included in the
proxy solicitation material for a special shareholder meeting must be
received by the Fund no later than four months prior to the date proxy
statements are mailed to shareholders.
Dated: July 25, 1996 Susan Sharp Miley, Secretary
4
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APPENDIX A
CHARACTERISTICS AND RISKS OF SECURITIES
IN WHICH THE FUND MAY INVEST
The following describes the different types of securities in which the
Fund may invest if the proposal being presented to shareholders is approved,
and the risks of investing in such securities.
U.S. GOVERNMENT SECURITIES
The 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 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.
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 Fund
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, 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.
MORTGAGE-RELATED SECURITIES
The 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 Appendix,
include guaranteed mortgage pass-through securities, private mortgage
pass-through securities, adjustable rate mortgage securities and derivative
mortgage securities such as collateralized mortgage obligations.
Mortgage-related securities fall into three categories: (a) those issued or
guaranteed by the U.S. 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 U.S. Government or one of its agencies or
instrumentalities; and (c) those issued by non-governmental issuers that
represent an interest
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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-government 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.
(a) GUARANTEED MORTGAGE PASS-THROUGH SECURITIES. The government
guaranteed mortgage pass-through securities in which the 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.
(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, 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 support. See "Credit Support"
below.
(c) ADJUSTABLE RATE MORTGAGE SECURITIES. The Fund may also invest in
adjustable rate mortgage securities ("ARMS"). 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. The Fund may invest, within
the limits discussed below, in CMOs (collateralized mortgage obligations and
multi-class 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.
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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 several 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. 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, interest only and principal only tranches and Z
tranches, 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
yields on these tranches generally may be more volatile.
The Fund will not invest in inverse floaters or in interest only,
principal only or inverse interest only tranches of CMOs. The Fund may
invest in any other tranches of CMOs, including Z tranches. 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 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.
(e) CREDIT SUPPORT. To lessen the effect of failures by obligors on
underlying mortgages to make payments, mortgage-related 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 Fund 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.
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<PAGE>
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.
CORPORATE FIXED-INCOME SECURITIES
The 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.
The 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 values of securities that distribute income
regularly. In addition, zero coupon, pay-in-kind and delayed interest
securities may be more speculative than securities that distribute income
regularly. Accordingly, the values of these securities may be highly
volatile as interest rates rise or fall. In addition, the Fund's investments
in zero coupon, pay-in-kind and delayed interest securities will result in
special tax considerations. 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
The 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
8
<PAGE>
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 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
The 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 prominent 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. The Fund will invest only in Yankee bonds that meet the Fund's
quality standards.
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 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 the 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.
9
<PAGE>
EFFECTIVE DURATION
Effective duration estimates the interest 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. 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 is subject to certain risks in addition to those set forth
above. 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 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
To the extent the Fund invests in mortgage-related securities, it will
be subject to prepayment risk and extension 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.
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.
10
<PAGE>
INSTITUTIONAL GOVERNMENT
INCOME PORTFOLIO
NOTICE OF SPECIAL
MEETING OF SHAREHOLDERS
TIME:
THURSDAY, SEPTEMBER 12, 1996
AT 10:00 A.M.
PLACE:
PIPER JAFFRAY TOWER, ELEVENTH FLOOR
222 SOUTH NINTH STREET
MINNEAPOLIS, MINNESOTA
IMPORTANT:
PLEASE DATE AND SIGN YOUR
PROXY CARD AND RETURN IT PROMPTLY
USING THE ENCLOSED REPLY ENVELOPE.
<PAGE>
INSTITUTIONAL GOVERNMENT INCOME PORTFOLIO
THIS PROXY IS SOLICITED ON BEHALF OF MANAGEMENT
The undersigned appoints William H. Ellis, Susan S. Miley and Robert H.
Nelson, and each of them, with power to act without the other and with the
right of substitution in each, the proxies of the undersigned to vote all
shares of Institutional Government Income Portfolio (the "Fund"), held by the
undersigned at the special meeting of shareholders of the Fund to be held on
September 12, 1996, and at any adjournments thereof, with all the powers the
undersigned would possess if present in person. All previous proxies given
with respect to the meeting are revoked.
THE PROXIES ARE INSTRUCTED:
To vote: FOR ___ AGAINST ___ ABSTAIN ___ discontinuance of the Fund's
fundamental policy limiting the Fund's investments to U.S. Government
Securities (securities which are issued or guaranteed as to payment of
principal and interest by the U.S. government or its agencies or
instrumentalities) and repurchase agreements fully secured by U.S. Government
Securities.
In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the special meeting or any adjournments
or postponements thereof.
THIS PROXY WILL BE VOTED AS INSTRUCTED ON THE ABOVE MATTERS. IT IS
UNDERSTOOD THAT, IF NO CHOICE IS SPECIFIED, THIS PROXY WILL BE VOTED "FOR"
ALL ITEMS. UPON ALL OTHER MATTERS THE PROXIES SHALL VOTE AS THEY DEEM IN THE
BEST INTERESTS OF THE FUND. RECEIPT OF NOTICE OF MEETING AND PROXY STATEMENT
IS ACKNOWLEDGED BY YOUR EXECUTION OF THIS PROXY. SIGN, DATE, AND RETURN IN
THE ADDRESSED ENVELOPE-NO POSTAGE REQUIRED. PLEASE MAIL PROMPTLY TO SAVE THE
FUND FURTHER SOLICITATION EXPENSE.
Dated: ___________________, 1996
_________________________________
_________________________________
IMPORTANT: Please date and sign this
proxy. If the stock is held jointly,
signature should include both names.
Executors, administrators, trustees,
guardians, and others signing in a
representative capacity should give
their full title as such.
