<PAGE>
1933 Act Registration No. 33-10261
1940 Act Registration No. 811-4905
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 6, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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. 30
------
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
(Registration No. 811-4905)
Amendment No. 30
------
(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 LLP
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, 1996 will be filed on
or before November 30, 1996.
<PAGE>
PIPER FUNDS INC.
Registration Statement on Form N-1A
-------------------------------
CROSS REFERENCE SHEET
Pursuant to Rule 481(a)
-------------------------------
Item No. Prospectus Heading
-------- ------------------
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; Special
Investment Methods; Characteristics and
Risks of Securities and 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 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
<PAGE>
Explanatory Note
This Registration Statement for administrative convenience, contains the
combined Part A (Prospectus), Part B (Statement of Additional Information) and
Part C (Other Information) of two Registrants: one series of Piper Funds Inc.--
II and two series of Piper Funds Inc.
A separate registration statement which incorporates by reference the
aforementioned combined Part A, Part B and Part C is being filed for Piper Funds
Inc.--II . This registration statement contains only those exhibits which
relate to Piper Funds Inc.
<PAGE>
PROSPECTUS DATED NOVEMBER 6, 1996
GOVERNMENT INCOME FUND
INTERMEDIATE BOND FUND
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
PIPER JAFFRAY TOWER
222 SOUTH NINTH STREET, MINNEAPOLIS, MINNESOTA 55402-3804
(800) 866-7778 (TOLL FREE)
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.
INTERMEDIATE BOND FUND has an investment objective of a high level of
current income consistent with preservation of capital. The Fund seeks to
achieve its objective by investing primarily in a broad range of investment
quality debt securities.
ADJUSTABLE RATE MORTGAGE SECURITIES FUND has an investment objective of
providing the maximum current income that is consistent with low volatility of
principal. The Fund seeks to achieve its objective by investing primarily in
adjustable rate mortgage securities.
PLEASE REMEMBER, YOU COULD LOSE MONEY WITH THIS INVESTMENT. NEITHER SAFETY
OF PRINCIPAL NOR STABILITY OF INCOME IS GUARANTEED.
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. EACH FUND MAY INVEST A SIGNIFICANT PORTION OF ITS ASSETS IN
MORTGAGE-RELATED SECURITIES, INCLUDING DERIVATIVE MORTGAGE SECURITIES.
GOVERNMENT INCOME FUND AND ADJUSTABLE RATE MORTGAGE SECURITIES FUND ALSO 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 6, 1996
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 Intermediate Bond Fund ("Bond
Fund") (formerly Institutional Government Income Portfolio) are series of Piper
Funds Inc. ("Piper Funds"), an open-end management investment company the shares
of which are currently issued in twelve separate series. Adjustable Rate
Mortgage Securities Fund ("ARMS Fund") is the sole outstanding series of another
open-end management investment company, Piper Funds Inc.-II ("Piper Funds II").
Each of Government Fund, Bond Fund and ARMS Fund (sometimes referred to
individually as a "Fund" or collectively as the "Funds") has a 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 Funds are 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, Bond Fund and ARMS Fund are paid at annual rates of .50%, .30%
and .35%, respectively, of average daily net assets and are scaled downward as
assets increase in size above $250 million, $100 million and $500 million,
respectively. 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, 2% of
the offering price (2.04% of the net asset value) for Bond Fund and 1.50% of the
offering price (1.52% of the net asset value) for ARMS 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 1.00% for Government Fund, .30% for Bond Fund and .20% for ARMS Fund
will be imposed in the event of a redemption transaction occurring within 24
months following such a purchase. DURING THE SPECIAL OFFERING PERIOD, WHICH
EXTENDS THROUGH DECEMBER 31, 1996, SHARES OF THE FUNDS ARE BEING OFFERED TO THE
PUBLIC WITHOUT AN INITIAL SALES CHARGE. HOWEVER, FOR ANY PURCHASE THAT WOULD BE
SUBJECT TO AN INITIAL SALES CHARGE OUTSIDE OF THE SPECIAL OFFERING PERIOD, THE
FUNDS WILL IMPOSE A CONTINGENT DEFERRED SALES CHARGE OF 2% ON REDEMPTIONS DURING
THE FIRST 12 MONTHS AFTER PURCHASE, AND 1% ON REDEMPTIONS DURING THE SECOND 12
MONTHS. SEE "HOW TO PURCHASE SHARES--PURCHASE PRICE" AND "HOW TO REDEEM
SHARES--CONTINGENT DEFERRED SALES CHARGE."
MINIMUM INITIAL AND SUBSEQUENT INVESTMENTS
The minimum initial investment for each Fund is $250. There is no minimum
for subsequent investments. The Distributor, in its discretion, may waive the
minimum. See "How to Purchase Shares--Minimum Investments."
EXCHANGES
You may exchange your shares for shares of any other mutual fund managed by
the Adviser which is eligible for sale in your state of residence, provided
that, if you hold your Fund shares through a broker-dealer other than the
Distributor, the exchange privilege may not be available. Exchanges will be
permitted only if there is a valid sales agreement between your broker-dealer
and the Distributor for the fund into which the exchange will be made. All
exchanges are subject to the minimum investment requirements and
2
<PAGE>
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. However, ARMS Fund shares which were received in
the Merger may be exchanged into shares of a fund with a higher sales charge
without payment of an additional sales charge. 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 the Funds 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 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 any of the Funds 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 any 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, 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 by Government Fund and Bond Fund. In addition, Government Fund and ARMS
Fund may enter into reverse repurchase agreements, lend their portfolio
securities, engage in options transactions on the securities in which they may
invest and enter into interest rate futures contracts and options on futures
contracts and ARMS Fund may enter into interest rate transactions and invest in
Eurodollar instruments. 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. The Funds' investments in mortgage-related
securities 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.
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 INTERMEDIATE ADJUSTABLE RATE
INCOME BOND MORTGAGE
FUND FUND SECURITIES FUND
---------- ------------------ ------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)...... 4.00% 2.00% 1.50%
Exchange Fee (1)........................... $0 $0 $0
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees............................ .50% .25% .35%
Rule 12b-1 Fees (after voluntary limitation
for Government Fund and Bond Fund) (2)... .34% .22% .15%
Other Expenses............................. .27% .19% .26%
--- --- ---
Total Fund Operating Expenses (after
voluntary fee limitations for Government
Fund and Bond Fund)...................... 1.11% .66% .76%
</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 INTERMEDIATE ADJUSTABLE RATE
INCOME BOND MORTGAGE
FUND FUND SECURITIES FUND
---------- ------------------ ------------------
<S> <C> <C> <C>
1 Year...................................... $ 51 $ 27 $ 23
3 Years..................................... $ 74 $ 41 $ 39
5 Years..................................... $ 99 $ 56 $ 57
10 Years..................................... $170 $101 $108
</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, 1996, except
that Rule 12b-1 fees reflect a voluntary limitation by the Distributor of
amounts payable to it under the Fund's Rule 12b-1 Plan to .34% of average daily
net assets for the fiscal year ending September 30, 1997. Rule 12b-1 fees had
been limited to .32% of average daily net assets for the fiscal year ended
September 30, 1996 resulting in total fund operating expenses of 1.09% of
average daily net assets. Absent such limitation, total fund operating expenses
for Government Fund for the fiscal year ended September 30, 1996 would have been
1.28% of average daily net assets.
4
<PAGE>
The information set forth for Bond Fund is based on actual expenses incurred
by the Fund during the fiscal year ended September 30, 1996, except that Rule
12b-1 fees reflect a voluntary limitation by the Distributor of amounts payable
to it under the Fund's Rule 12b-1 plan to .22% of average daily net assets and
other expenses have been adjusted to reflect the fact that the Fund will not
incur excise taxes in fiscal 1997. During the fiscal year ended September 30,
1996, the Fund paid federal excise taxes in an amount equal to 0.08% of average
daily net assets and the Distributor limited its Rule 12b-1 fees to .20% of the
Fund's average daily net assets, resulting in total fund operating expenses of
0.72% of average daily net assets. Absent the Distributor's limitation of its
Rule 12b-1-fees, Bond Fund's total fund operating expenses for the fiscal year
ended September 30, 1996 would have been 0.82% of average daily net assets.
The information set forth for ARMS Fund is based on total fund operating
expenses for the fiscal year ended August 31, 1996, absent any expense
limitations. The Adviser voluntarily limited total fund operating expenses
during such fiscal year to .60% of average daily net assets, but has
discontinued such limitation.
Voluntary Rule 12b-1 fee limitations for Government Fund and Bond Fund may
be revised or terminated at any time after September 30, 1997. 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 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, such reports contain further
information about the performance of the Funds.
GOVERNMENT INCOME FUND
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30, PERIOD FROM
--------------------------------------------------------- 11/1/88 TO
1996 1995 1994 1993 1992 1991 1990 9/30/89
-------- -------- -------- -------- -------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period....... $ 8.99 8.42 10.01 9.86 9.69 9.02 9.18 9.50
-------- -------- -------- -------- -------- ------- ------- -----
Operations:
Net investment income.................... 0.60 0.60 0.69 0.80 0.90 0.84 0.81 0.76
Net realized and unrealized gains
(losses) on investments................ (0.16) 0.60 (1.58) 0.15 0.17 0.67 (0.16) (0.32)
-------- -------- -------- -------- -------- ------- ------- -----
Total from operations................ 0.44 1.20 (0.89) 0.95 1.07 1.51 0.65 0.44
-------- -------- -------- -------- -------- ------- ------- -----
Distributions from net investment income... (0.60) (0.63) (0.68) (0.80) (0.90) (0.84) (0.81) (0.76)
Distributions from net realized
gains.................................... -- -- (0.02) -- -- -- -- --
-------- -------- -------- -------- -------- ------- ------- -----
Total distributions.................. (0.60) (0.63) (0.70) (0.80) (0.90) (0.84) (0.81) (0.76)
-------- -------- -------- -------- -------- ------- ------- -----
Net asset value, end of period............. $ 8.83 8.99 8.42 10.01 9.86 9.69 9.02 9.18
-------- -------- -------- -------- -------- ------- ------- -----
-------- -------- -------- -------- -------- ------- ------- -----
Total return (c)........................... 4.99% 14.87% (9.26%) 10.06% 11.57% 17.51% 7.31% 4.78%
Net assets, end of period
(in millions)............................ $ 84 106 126 160 124 76 73 85
Ratio of expenses to average daily net
assets (d)............................... 1.09% 1.11% 1.05% 1.09% 1.11% 1.18% 1.08% 1.15%(b)
Ratio of net investment income to average
daily net assets (d)..................... 6.66% 7.02% 7.43% 8.10% 9.15% 9.00% 8.87% 8.81%(b)
Portfolio turnover rate (excluding
short-term securities)................... 32% 87% 121% 191% 118% 110% 202% 149%
<CAPTION>
PERIOD
FROM
YEAR 3/16/87(A)
ENDED TO
10/31/88 10/31/87
-------- ---------
<S> <C> <C>
Net asset value, beginning of period....... 9.40 10.00
-------- ---------
Operations:
Net investment income.................... 0.82 0.45
Net realized and unrealized gains
(losses) on investments................ 0.10 (0.60)
-------- ---------
Total from operations................ 0.92 (0.15)
-------- ---------
Distributions from net investment income... (0.82) (0.45)
Distributions from net realized
gains.................................... -- --
-------- ---------
Total distributions.................. (0.82) (0.45)
-------- ---------
Net asset value, end of period............. 9.50 9.40
-------- ---------
-------- ---------
Total return (c)........................... 10.18% 1.41%
Net assets, end of period
(in millions)............................ 62 75
Ratio of expenses to average daily net
assets (d)............................... 1.23% .70%(b)
Ratio of net investment income to average
daily net assets (d)..................... 8.68% 8.07%(b)
Portfolio turnover rate (excluding
short-term securities)................... 217% 281%
</TABLE>
- ------------------------------
(a) Commencement of operations.
(b) Adjusted to an annual basis.
(c) 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.
(d) During the periods reflected above, the Distributor voluntarily waived fees.
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: 1.28%/6.47% in fiscal 1996, 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 ratios reflect the effect of gross
expenses paid indirectly by the Fund. Prior period expense ratios have not
been adjusted.
6
<PAGE>
INTERMEDIATE BOND FUND*
<TABLE>
<CAPTION>
PERIOD FROM
FISCAL YEAR ENDED SEPTEMBER 30, 11/1/88
------------------------------------------------------------- TO
1996 1995 1994 1993 1992 1991 1990 9/30/89
-------- -------- -------- -------- -------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period....... $ 8.12 7.98 12.22 11.51 10.71 10.02 9.96 10.08
-------- -------- -------- -------- -------- ------- ------- -----------
Operations:
Net investment income.................... 0.53(b) 0.88 0.90 1.29 1.07 0.94 0.91 0.82
Net realized and unrealized gains
(losses) on investments................ (0.11) 0.31 (3.96) 0.56 0.73 0.67 0.08 (0.12)
-------- -------- -------- -------- -------- ------- ------- -----------
Total from operations................ 0.42 1.19 (3.06) 1.85 1.80 1.61 0.99 0.70
-------- -------- -------- -------- -------- ------- ------- -----------
Distributions:
From net investment income............... (1.04) (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.................. (1.04) (1.05) (1.18) (1.14) (1.00) (0.92) (0.93) (0.82)
-------- -------- -------- -------- -------- ------- ------- -----------
Net asset value, end of period............. $ 7.50 8.12 7.98 12.22 11.51 10.71 10.02 9.96
-------- -------- -------- -------- -------- ------- ------- -----------
-------- -------- -------- -------- -------- ------- ------- -----------
Total return (d)........................... 5.68% 16.15% (26.65%) 17.04% 17.70% 16.80% 10.30% 7.38%
Net assets, end of period (in millions).... $ 136 319 564 792 470 132 36 28
Ratio of expenses to average daily net
assets (e)(f)............................ 0.72% 0.97% 0.78% 0.70% 0.65% 0.75% 0.78% 0.85%(c)
Ratio of net investment income to average
daily net assets (e)..................... 6.65% 8.02% 9.33% 12.51% 11.01% 9.29% 9.00% 9.03%(c)
Portfolio turnover rate (excluding
short-term securities)................... 89% 136% 169% 109% 64% 29% 76% 23%
<CAPTION>
PERIOD
FROM
7/11/88(A)
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 (d)........................... 3.09%
Net assets, end of period (in millions).... 18
Ratio of expenses to average daily net
assets (e)(f)............................ 0.75%(c)
Ratio of net investment income to average
daily net assets (e)..................... 7.91%(c)
Portfolio turnover rate (excluding
short-term securities)................... 14%
</TABLE>
- ------------------------------
*On September 12, 1996, shareholders of Intermediate Bond Fund approved the
discontinuance of a fundamental policy requiring the Fund to invest only in
securities 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 such securities. In connection with the
discontinuance of this policy, the Fund's investment policies were revised to
permit investments in a broad range of investment quality debt securities and
the Fund's name was changed from Institutional Government Income Portfolio to
Intermediate Bond Fund.
(a) Commencement of operations.
(b) Based on average shares outstanding during the period.
(c) Adjusted to an annual basis.
(d) 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.
(e) During the years reflected above, the Distributor voluntarily waived fees.
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: 0.82%/6.55%
in fiscal 1996, 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 ratios
reflect the effect of gross expenses paid indirectly by the Fund. Prior
period expense ratios have not been adjusted.
(f) Includes federal excise taxes of 0.08%, 0.37%, 0.23%, 0.09% and 0.02% for
the fiscal years ended 9/30/96, 9/30/95, 9/30/94, 9/30/93 and 9/30/92,
respectively.
7
<PAGE>
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
<TABLE>
<CAPTION>
MONTH YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED
9/30/96 8/31/96 8/31/95 8/31/94 8/31/93 8/31/92(B)
------- ------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
PER-SHARE DATA (A)
Net asset value, beginning of period....... $ 8.03 $ 7.99 $ 8.10 $ 8.88 $ 8.95 $ 8.80
------- ------- ------- ------- ------- -----------
Operations:
Net investment income.................... 0.04 0.49 0.47 0.55 0.63 0.40
Net realized and unrealized gains
(losses) on investments................ 0.03 0.01 (0.05) (0.82) (0.09) 0.07
------- ------- ------- ------- ------- -----------
Total from operations.................. 0.07 0.50 0.42 (0.27) 0.54 0.47
------- ------- ------- ------- ------- -----------
Distributions to shareholders:
From net investment income............... (0.04) (0.46) (0.53) (0.51) (0.61) (0.32)
------- ------- ------- ------- ------- -----------
Net asset value, end of period........... $ 8.06 $ 8.03 $ 7.99 $ 8.10 $ 8.88 $ 8.95
------- ------- ------- ------- ------- -----------
------- ------- ------- ------- ------- -----------
SELECTED INFORMATION (A)
Total return (c)........................... 0.85% 6.40% 5.43% (3.18%) 6.24% 5.49%
Net assets at end of period (in
millions)................................ $ 263 $ 270 $ 409 $ 500 $ 551 $ 555
Ratio of expenses to average daily net
assets (d)............................... 0.82%(f) 0.60% 0.63% 0.60% 0.58% 0.58%(f)
Ratio of net investment income to average
daily net assets (d)..................... 5.82%(f) 5.74% 5.62% 6.39% 7.25% 7.70%(f)
Portfolio turnover rate (excluding
short-term securities)................... 2% 51% 36% 39% 39% 41%
Amount of borrowings outstanding at end of
period (in millions) (e)................. $ -- $ -- $ -- $ 145 $ 145 $ 145
Average amount of borrowings outstanding
during the period (in millions) (e)...... $ -- $ -- $ 57 $ 145 $ 149 $ 90
Average number of shares outstanding during
the period (in millions) (e)............. -- -- 53 62 62 52
Average per-share amount of borrowings
outstanding during the period (e)........ $ -- $ -- $ 1.09 $ 2.34 $ 2.41 $ 1.67
</TABLE>
- ------------------------------
(a) On September 1, 1995 four closed-end funds, American Adjustable Rate Term
Trust Inc.--1996, American Adjustable Rate Term Trust Inc.--1997, American
Adjustable Rate Term Trust Inc.--1998 ("DDJ") and American Adjustable Rate
Term Trust Inc.--1999 were combined to create the Fund. DDJ is considered
the surviving entity for financial reporting purposes. The financial
highlights presented for the periods prior to September 1, 1995 are those of
DDJ. The per-share historical information for such periods has been adjusted
to reflect the impact of additional shares created resulting from the
difference in the net asset value per share of DDJ at the time of the merger
($8.71) and the initial net asset value per share of the Fund ($8.00).
(b) Commencement of operations of DDJ was January 30, 1992.
(c) Total return is based on the change in net asset value, assumes reinvestment
of all distributions and does not reflect a sales charge.
(d) Various fees and expenses of the Fund were voluntarily waived or absorbed by
the Adviser during the year ending 8/31/96. Had the Fund paid all expenses,
the ratios of expenses and net investment income to average daily net assets
would have been 0.76%/5.58%, respectively. Beginning in the year ended
8/31/96, the expense ratios reflect the effect of gross expenses paid
indirectly by the Fund. Prior period expense ratios have not been adjusted.
(e) DDJ was a closed-end management investment company and was permitted to
enter into borrowings for other than temporary or emergency purposes. The
Fund may borrow only for temporary or emergency purposes.
(f) Adjusted to an annual basis.
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.
8
<PAGE>
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 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 engage in options and financial futures transactions
which relate to the securities in which it invests and may lend its portfolio
securities. See "Characteristics and Risks of Securities and Special Investment
Methods."
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."
The Adviser will attempt to maintain an average effective duration of three
to eight years for Government Fund's portfolio. Effective duration estimates the
interest rate risk of a portfolio of securities. 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.
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
9
<PAGE>
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."
INTERMEDIATE BOND FUND
On September 12, 1996, shareholders of Bond Fund approved the discontinuance
of a fundamental policy requiring the Fund to invest only in securities 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
such securities. In connection with the discontinuance of this policy, the
Fund's investment policies were revised to permit investments in a broad range
of investment quality debt securities and the Fund's name was changed from
Institutional Government Income Portfolio to Intermediate Bond Fund.
INVESTMENT OBJECTIVE. Intermediate Bond Fund ("Bond Fund") has an
investment objective of a high level of current income consistent with
preservation of capital.
INVESTMENT POLICIES AND TECHNIQUES. Bond Fund will seek to realize its
objective by investing in a diversified portfolio of debt securities. The Fund
will invest primarily (at least 65% of its total assets under normal
circumstances) in the following debt securities: 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-related
securities, asset-backed securities and U.S. dollar-denominated Yankee bonds.
Bond Fund also may 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. 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. See "Investment
Objectives, Policies and Restrictions--Short-Term Money Market Securities" in
the Statement of Additional Information. 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."
10
<PAGE>
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 or in any stripped
mortgage-backed securities.
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. 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 in an amount up to 25% of the value of its total
assets. In connection therewith, Bond Fund may enter into mortgage "dollar
rolls." See "Characteristics and Risks of Securities and Special Investment
Methods--When-Issued Securities" and "--Mortgage Dollar Rolls." Bond Fund will
not lend its portfolio securities, purchase or sell options on securities or
enter into futures contracts or options thereon.
Under normal circumstances, Bond Fund will attempt to maintain for its
portfolio a dollar-weighted average maturity of three to ten years. In
calculating maturity, the Fund will consider various factors, including
anticipated payments of principal. Bond Fund will also attempt to maintain under
normal circumstances an average effective portfolio duration of two to six
years. Effective duration estimates the interest rate risk of a portfolio of
securities. 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 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. Bond Fund is subject to prepayment risk and
extension risk to the extent it invests in mortgage-related securities. See
"Government Income Fund--Investment Risks" above.
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."
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
INVESTMENT OBJECTIVE. Adjustable Rate Mortgage Securities Fund ("ARMS
Fund") has an investment objective of providing the maximum current income that
is consistent with low volatility of principal.
INVESTMENT POLICIES AND TECHNIQUES. ARMS Fund invests primarily (at least
65% of total assets under normal market conditions) in a portfolio of
mortgage-related securities having adjustable interest rates which reset at
periodic intervals ("adjustable rate mortgage securities" or "ARMS"). ARMS
include both pass-through securities representing interests in adjustable rate
mortgage loans and floating rate collateralized mortgage obligations. The
balance of ARMS Fund's assets (up to 35% of total assets) may be invested in (a)
mortgage-related securities other
11
<PAGE>
than ARMS, (b) U.S. Government Securities (including, with respect to 10% of the
Fund's net assets. U.S. Government zero-coupon securities); (c) asset-backed
securities; and (d) corporate fixed-income securities. At least 85% of ARMS
Fund's total assets must be either U.S. Government Securities or securities
rated, as of the date of purchase, AA or better by Standard & Poor's, Aa or
better by Moody's, comparably rated by any other nationally recognized
statistical rating organization ("NRSRO") or, if unrated, of a comparable
quality as determined by the Adviser. Up to 15% of ARMS Fund's total assets may
be invested in securities rated, as of the date of purchase, A by Standard &
Poor's or Moody's, comparably rated by any other NRSRO or, if unrated, of
comparable quality as determined by the Adviser. The Fund may not invest in any
security rated, as of the date of purchase, lower than A by Standard & Poor's or
Moody's (or below a comparable rating by any other NRSRO) or, if unrated, of a
quality lower than A as determined by the Adviser. In the event that a security
is downgraded to a rating below A or, if unrated, is no longer of a quality
comparable to a security rated A, as determined by the Adviser, the Fund will
sell such a security as promptly as possible. For a discussion of Standard &
Poor's and Moody's ratings, see Appendix A to the Statement of Additional
Information.
ARMS Fund may engage in options and financial futures transactions which
relate to the securities in which it invests, may purchase and sell interest
rate caps and floors, may make investments in Eurodollar instruments for hedging
purposes, may purchase or sell securities on a when-issued or forward commitment
basis and may lend its portfolio securities. See "Characteristics and Risks of
Securities and Special Investment Methods."
For temporary defensive purposes ARMS Fund may invest without limitation in
cash and short-term money market 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.
The Adviser will attempt to maintain an average effective duration of one to
four years for ARMS Fund's portfolio. Effective duration estimates the interest
rate risk of a portfolio of securities. See "Characteristics and Risks of
Securities and Special Investment Methods--Effective Duration."
INVESTMENT RISKS. ARMS 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. Although the values of ARMS, like other debt securities,
generally vary inversely with changes in market 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 changes in prevailing interest rates are not immediately reflected in the
interest rates payable on the underlying adjustable rate mortgages. The Fund's
investments in ARMS and other mortgage-related securities are also subject to
prepayment risk and extension risk. See "Government Income Fund--Investment
Risks" above. In addition, the Fund is subject to credit risk to the extent it
invests in non-U.S. Government securities. 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 ARMS Fund also pose
certain risks. See "Characteristics and Risks of Securities and Special
Investment Methods."
12
<PAGE>
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 each Fund before investing. Certain securities in which the
Funds invest and certain investment techniques used by the Funds could be
considered "derivative instruments." The term "derivatives" has been used to
identify a variety of financial instruments; there is no discrete class of
instruments that is covered by the term. A "derivative" is commonly defined as a
financial instrument whose value is based upon, or derived from, an underlying
index, reference rate (e.g., interest rates or currency exchange rates),
security, commodity, or other asset. Securities in which one or more of the
Funds invest that could be considered derivatives include mortgage-related
securities and asset-backed securities, which derive their value from underlying
pools of mortgages and assets, respectively. In addition, interest rate caps and
floors, options on securities, futures contracts, options on futures contracts
and when-issued securities transactions are derivative contracts. Derivative
securities and contracts and other types of investments and investment
techniques that may be used by one or more 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.
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,
the market prices of zero-coupon securities are more volatile than the market
prices of securities of comparable quality and similar maturity that pay
interest periodically and may respond to a greater degree to fluctuations in
interest rates than do such non-zero-coupon securities. Although holders of
zero-coupon securities do not receive periodic payments of interest, income
accretes on such securities and is subject to the distribution
13
<PAGE>
requirements of the Internal Revenue Code of 1986, as amended. Because such
income may not be matched by a corresponding cash distribution to a Fund, a Fund
may be required to borrow money or dispose of other securities to be able to
make distributions to shareholders. ARMS Fund will limit its investments in zero
coupon securities to those issued by the U.S. Treasury through its STRIPS
program, which securities constitute direct obligations of the U.S. Government,
and will invest no more than 10% of its net assets in such securities.
Government Fund and Bond 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 for purposes of the Funds'
investment policies, although the underlying bond represented by such receipt is
a debt obligation of the U.S. Treasury.
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, 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
14
<PAGE>
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. Each Fund may also invest in
adjustable rate mortgage securities ("ARMS") and ARMS Fund must invest at least
65% of its total assets in such securities under normal market conditions. (For
purposes of ARMS Fund's 65% requirement, adjustable rate tranches of CMOs,
discussed below, are also considered 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. The extent to which the prices of ARMS fluctuate with
changes in interest rates will also be affected by the indices underlying the
ARMS. Some indices, such as the one-year constant maturity Treasury note rate,
closely mirror changes in market interest rate levels. Others, such as the 11th
District Federal Reserve Cost of Funds Index (often related to ARMS issued by
FNMA), tend to lag changes in market levels and tend to be somewhat less
volatile.
(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. Tranches
with variable or floating interest rates are considered ARMS for purposes of the
requirement that ARMS Fund invest at least 65% of its total assets in ARMS
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under normal market conditions. Floating rate CMOs are generally backed by fixed
rate mortgages and generally have lifetime caps on the coupon rate thereon.
These caps, similar to the caps on adjustable rate mortgages, represent a
ceiling beyond which the coupon rate on a floating rate CMO may not be increased
regardless of increases in the interest rate index to which the floating rate
CMO is geared, which may cause the security to be valued at a greater discount
than if the security was not subject to a ceiling.
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, 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.
Neither Bond Fund nor ARMS Fund will invest in inverse floating,
interest-only, principal-only or inverse interest-only tranches of CMOs. In
addition, ARMS Fund will not invest in Z tranches or residual interests of CMOS.
Government Fund may invest in any CMO tranche, but will limit its aggregate
investments in inverse floaters and interest-only and principal-only 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. Neither Bond Fund nor ARMS Fund may 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
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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 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 and ARMS 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. The values of corporate fixed-income
securities typically will fluctuate in response to general economic conditions,
to changes in interest rates and, to a greater extent than the values of
mortgage-related securities, to business conditions affecting the specific
industries in which the issuers are engaged. Corporate fixed-income securities
will typically decrease in value as a result of increases in interest rates. The
Funds may invest in certain types of corporate fixed-income securities that have
been issued with original issue discount or market discount. An investment in
such securities poses certain economic risks and may have certain adverse cash
flow consequences to the investor.
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.
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ASSET-BACKED SECURITIES
Bond Fund and ARMS 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 due to the difference in the underlying
collateral, asset-backed securities involve certain risks that are not posed by
mortgage-related securities. For example, asset-backed securities are typically
collateralized with assets such as credit card receivables, automobile loans, or
lease contracts which have historically had higher loss experience than that of
mortgage-related securities. Although the credit enhancements for these
securities generally contemplate this higher loss experience, the difference in
lien status and underlying collateral quality could create a situation where the
proceeds from repossessed collateral may not be sufficient to maintain credit
quality or 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.
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,
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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-related 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-related 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 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 and ARMS 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. No more than 25% of the total assets of
Government Fund will be subject to reverse repurchase agreements. In the case of
ARMS Fund, reverse repurchase agreements are subject to the Fund's limitations
on borrowing, set forth below, and may be entered into only for temporary or
emergency purposes. In the case of Government Fund 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 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.
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
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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, Government Fund may lend portfolio
securities representing up to one-third of the value of its total assets and
ARMS Fund may lend portfolio securities representing up to 30% 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 their respective
Boards 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 respective 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
Government Fund, Bond Fund and ARMS Fund may borrow money from banks for
temporary or emergency purposes in amounts up to 10% (not including reverse
repurchase agreements), 5% and 10%, respectively, 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. Government Fund and ARMS Fund will not purchase portfolio
securities while outstanding borrowings (other than reverse repurchase
agreements in the case of Government Fund) exceed 5% of the value of the
respective 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 with
respect to Government Fund and Bond Fund) 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 of Government Fund and ARMS 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, 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 a 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. Each Fund receives 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.
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The aggregate value of the securities or other collateral underlying the
puts written by a Fund, determined as of the date the options are sold, will not
exceed 50% of net assets of the Fund. The Funds may write covered call options
without limit.
PURCHASING OPTIONS. Government Fund and ARMS 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.
Government Fund and ARMS Fund also may purchase call options solely for the
purpose of hedging against an increase in prices of securities that the
respective Fund ultimately wants to buy. Such protection is provided during the
life of the call option because a 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.
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. ARMS Fund will purchase and
write only exchange-traded put and call options.
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 and ARMS Fund may enter into contracts for the purchase or
sale for future delivery of fixed-income securities or contracts based on
financial indices including any index of securities in which the respective Fund
may invest ("futures contracts"). A "sale" of a futures contract means the
acquisition of a contractual obligation to deliver the securities called for by
the contract at a specified price on a specified date. The purchaser of a
futures contract on an index agrees to take or make delivery of an amount of
cash
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equal to the difference between a specified dollar multiple of the value of the
index on the expiration date of the contract ("current contract value") and the
price at which the contract was originally struck. Generally, no physical
delivery of the fixed-income securities underlying the index is made. The
futures contracts which the Funds may enter into have been developed by and are
traded on national commodity exchanges.
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, a 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 and ARMS 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 and ARMS 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 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 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.
EURODOLLAR INSTRUMENTS
ARMS Fund may make investments in Eurodollar instruments for hedging
purposes only. Eurodollar instruments are essentially U.S. dollar denominated
futures contracts or options thereon that are linked to LIBOR. Eurodollar
futures contracts enable purchasers to obtain a fixed rate for the lending of
funds and sellers to obtain a fixed rate for borrowings. ARMS Fund uses
Eurodollar futures contracts and options thereon to hedge against changes in
LIBOR, to which many short-term borrowings and floating rate securities are
linked. Eurodollar instruments are subject to the same limitations and risks as
other futures contracts and options thereon.
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INTEREST RATE TRANSACTIONS
ARMS Fund may purchase or sell interest rate caps and floors to preserve a
return or spread on a particular investment or portion of its portfolio or for
other non-speculative purposes. The aggregate purchase price of caps and floors
held by ARMS Fund may not exceed 5% of the Fund's total assets. ARMS Fund may
sell, I.E., write, caps and floors without limitation, subject to the segregated
account requirement described below. The Fund does not intend to use these
transactions for speculative purposes. The purchase of an interest rate cap
entitles the purchaser, to the extent a specified index exceeds a predetermined
interest rate, to receive payments of interest on a contractually-based
principal amount from the party selling such interest rate cap. The purchase of
an interest rate floor entitles the purchaser, to the extent a specified index
falls below a predetermined interest rate, to receive payments of interest on a
contractually-based principal amount from the party selling such interest rate
floor.
ARMS Fund may enter into interest rate caps and floors on either an
asset-based or liability-based basis, depending on whether it is hedging its
assets or its liabilities. To the extent the Fund sells, I.E., writes, caps and
floors, it will maintain in a segregated account cash or high quality liquid
debt securities having an aggregate net asset value at least equal to the full
amount, accrued on a daily basis, of the Fund's obligations with respect to any
caps or floors. ARMS Fund will not enter into any interest rate cap or floor
transaction unless the unsecured senior debt or the claims-paying ability of the
other party thereto is rated at least A by Standard & Poor's or Moody's or is
comparably rated by any other NRSRO. The Adviser will monitor the
creditworthiness of contra-parties on an ongoing basis. If there is a default by
the other party to such a transaction, the Fund will have contractual remedies
pursuant to the agreements related to the transaction. Interest rate caps and
floors are somewhat recent innovations for which standardized documentation has
not yet been developed and, accordingly, they are less liquid than many other
investments.
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.
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, Government Fund and Bond 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. ARMS Fund may not enter into such transactions. In a
mortgage dollar roll, the Fund gives up the right to receive principal and
23
<PAGE>
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, Government Fund and Bond Fund
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 Government Fund's and 25% of Bond 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 nonfundamental investment restrictions that may be changed at any time
without shareholder approval, neither Government Fund nor ARMS Fund will invest
more than 15% of its net assets in illiquid securities and Bond Fund will not
invest in such 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
24
<PAGE>
reliance on the so-called "private placement" exemption from registration under
Section 4(2) of the 1933 Act and with respect to interest-only, principal-only
and inverse floating classes of mortgage-related 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. 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."
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, except that, under
normal market conditions, ARMS Fund will invest 25% or more of the value of its
total assets in ARMS issued or guaranteed by the U.S. Government or its agencies
or instrumentalities or by private organizations. (Except for the requirement
that ARMS Fund invest 25% or more of its total assets in ARMS, 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. ARMS Fund will
determine the industry classification of asset-backed securities in its
portfolio based on the type of collateral underlying the securities and will
consider ARMS issued by the U.S. Government or its agencies or instrumentalities
and ARMS issued by private organizations to be securities of issuers in the same
industry.) In addition, as nonfundamental investment restrictions which may be
changed at any time without shareholder approval, neither Government Fund nor
Bond 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 and ARMS Fund will not invest in
foreign securities, provided that Bond Fund may invest in U.S. dollar-
denominated Yankee bonds. Each Fund operates as a diversified Fund, which means
that, with respect to 75% of its total assets, the Fund will not invest more
than 5% of the value of its total assets (taken at market value at the time of
purchase) in the outstanding securities of any one issuer, or own more than 10%
of the outstanding voting securities of any one issuer, in each case other than
securities issued or guaranteed by the U.S. Government or any agency or
instrumentality thereof. 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.
25
<PAGE>
MANAGEMENT
BOARD OF DIRECTORS
The Board of Directors of Piper Funds and Piper Funds II has the primary
responsibility for overseeing the overall management of each such company and
electing its officers.
INVESTMENT ADVISER
Piper Capital Management Incorporated (the "Adviser") has been retained
under Investment Advisory and Management Agreements with Piper Funds and Piper
Funds II 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
Piper Funds, 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 September 30, 1996, 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 Piper Funds and Piper Funds II 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 .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. The fee for ARMS Fund is paid at an annual rate of .35% on average
daily net assets up to $500 million and .30% on average daily net assets in
excess of $500 million.
PORTFOLIO MANAGEMENT
Bruce D. Salvog and David M. Steele have been primarily responsible for the
day-to-day management of Government Fund's portfolio since March 1995. Mr.
Salvog, Mr. Steele and Worth Bruntjen share primary responsibility for the
day-to-day management of Bond Fund's portfolio. Mr. Bruntjen has been primarily
responsible for Bond Fund's management since the Fund's inception in 1988, and
was joined by Mr. Salvog and Mr. Steele in September 1996. 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. Bruntjen is a
Senior Vice President of the Adviser and a fixed income manager for a variety of
client portfolios including foundations, pensions and profit-sharing plans. Mr.
Bruntjen has a BSBA from the University of Minnesota and 28 years of financial
experience.
Thomas S. McGlinch and Wan-Chong Kung are primarily responsible for the
day-to-day management of ARMS Fund's portfolio. Mr. McGlinch has managed the
portfolio since inception and Ms. Kung has been
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<PAGE>
a co-manager since December 1995. Mr. McGlinch is a Senior Vice President and
fixed income portfolio manager for the Adviser. Prior to joining the Adviser in
1992, Mr. McGlinch was an institutional mortgage-backed securities trader for
the Distributor during 1992. From 1988 to January 1992, Mr. McGlinch was a
speciality products trader at FBS Investment Services, Inc. He is a Chartered
Financial Analyst with an MBA from the University of St. Thomas. Ms. Kung is a
Vice President and portfolio manager for the Adviser. Prior to joining the
Adviser in 1993, she was a Senior Consultant at Cytrol Inc. in Edina, Minnesota
from 1989 to December 1992. Ms. Kung received a BS from the University of the
Philippines in Manila and an MBA from the University of Minnesota.
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.
Piper Funds and Piper Funds II have 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. Piper
Funds and Piper Funds II have each adopted Distribution Plans (the "Plans") as
required by Rule 12b-1 under the 1940 Act. Under the Plans, the Distributor is
paid a total fee in connection with the servicing of each Fund's shareholder
accounts and/or in connection with distribution related services provided with
respect to each Fund. This fee is calculated daily and paid quarterly at an
annual rate equal to .50% of the average daily net assets of Government Fund,
.30% of the average daily net assets of Bond Fund and .15% of the average daily
net assets of ARMS Fund.
With respect to Government Fund and Bond Fund, a portion of each Fund's
total fee equal to .25% of Government Fund's and .05% of Bond 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.
All of the Rule 12b-1 fee paid by ARMS Fund is categorized as a servicing fee.
The Distributor has voluntarily agreed to limit the total fees payable by
Government Fund and Bond Fund under the Plan to .34% and .22%, respectively, of
such Fund's average daily net assets. This limitation may be
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revised or terminated at any time after fiscal 1997 year end. Payments made
under the Plans 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 Plans 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,
.20% of the average daily net assets of Bond Fund or .15% of the average daily
net assets of ARMS 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, .20% of the average daily net assets of
Bond Fund or .15% of the average daily net assets of ARMS Fund attributable to
shares sold by the Investment Executive.
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SHAREHOLDER GUIDE TO INVESTING
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 ARMS FUND
------------------------------------ ------------------------------------ -----------------
SALES CHARGE SALES CHARGE SALES CHARGE
AS A PERCENTAGE AS A PERCENTAGE SALES CHARGE AS A PERCENTAGE SALES CHARGE
AMOUNT OF TRANSACTION AT OF OFFERING OF NET AS A PERCENTAGE OF NET AS A PERCENTAGE
OFFERING PRICE PRICE ASSET VALUE OF OFFERING PRICE ASSET VALUE OF OFFERING PRICE
- ----------------------------- ----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Less than $100,000........... 4.00% 4.17% 2.00% 2.04% 1.50%
$100,000 but less than
$250,000.................... 3.25% 3.36% 1.25% 1.27% 1.25%
$250,000 but less than
$500,000.................... 2.50% 2.56% 0.50% 0.50% 1.00%
$500,000 and over............ 0.00% 0.00% 0.00% 0.00% 0.00%
<CAPTION>
SALES CHARGE
AS A PERCENTAGE
AMOUNT OF TRANSACTION AT OF NET ASSET
OFFERING PRICE VALUE
- ----------------------------- -----------------
<S> <C>
Less than $100,000........... 1.52%
$100,000 but less than
$250,000.................... 1.27%
$250,000 but less than
$500,000.................... 1.01%
$500,000 and over............ 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.
During the Special Offering Period, which extends through December 31, 1996,
you may purchase shares of the Funds without an initial sales charge. For any
purchase that would be subject to a sales charge outside of the Special Offering
Period, the Funds will impose a contingent deferred sales charge of 2% on
redemptions during the first 12 months after purchase, and 1% on redemptions
during the second 12 months. See "How to Redeem Shares--Contingent Deferred
Sales Charge." The Adviser will pay the Distributor, out of its own assets, a
fee equal to 2% of the net asset value of any shares sold during this period
that would be subject to a sales charge outside of the Special Offering Period.
This fee also will be paid in connection with certain sales that are not subject
to a sales charge outside of the Special Offering Period, including (a)
purchases by 401(k) plans, by certain plans which are qualified plans under
Section 401(a) of the Internal Revenue Code and by tax-sheltered annuities, (b)
purchases funded by the proceeds from the sale of shares of any non-money market
open-end mutual fund within 30 days after such sale, (c) purchases of $500,000
or more, (d) exchanges of shares of ARMS Fund that were originally acquired in
the Merger, and (e) purchases made with distributions received in connection
with the dissolution of American Government Term Trust Inc., a closed-end fund
previously managed by the Adviser. The Distributor will pay a portion of its 2%
fee to Piper Jaffray Investment Executives and other broker-dealers selling
shares of the Funds. Please contact your Piper Jaffray Investment Executive or
other broker-dealer for more information.
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SHAREHOLDER GUIDE TO INVESTING
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 1.00% in the case of Government Fund, .30% in the case of Bond Fund
and .20% in the case of ARMS Fund 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:
GOVERNMENT FUND AND BOND FUND
<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% 0.30%
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>
ARMS FUND
<TABLE>
<CAPTION>
FEE AS
A PERCENTAGE
AMOUNT OF TRANSACTION OF OFFERING PRICE
- ----------------------------------------------------------------------------- -----------------
<S> <C>
First $3,000,000............................................................. .20%
Next $2,000,000.............................................................. .15%
Next $5,000,000.............................................................. .10%
Above $10,000,000............................................................ .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.
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SHAREHOLDER GUIDE TO INVESTING
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 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
over a 13-month period, beginning not earlier than 90 days prior to the date you
sign
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SHAREHOLDER GUIDE TO INVESTING
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 their spouses.
- Employees, retirees and their spouses.
- Sales representatives and their spouses.
- Children, grandchildren, parents, grandparents or siblings of any of the
above, or spouses of any of these persons.
- Any trust, pension, profit-sharing or other benefit plan for any of the
above.
All persons in the first four groups set forth above may continue to add to
their accounts even after their company relationships have ended.
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 that is not managed by
the Adviser. This privilege is available for 30 days after the sale.
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SHAREHOLDER GUIDE TO INVESTING
- Individuals who received cash proceeds from settlement of the amended
consolidated class action lawsuit title In Re: PIPER FUNDS INC.
INSTITUTIONAL GOVERNMENT INCOME PORTFOLIO LITIGATION, discussed on pages
40-41, may invest those proceeds in shares of Bond Fund at net asset value
without payment of a sales charge and without any minimum investment
requirement through December 31, 1996.
- Former shareholders of American Government Term Trust Inc. may invest the
distributions received by them in connection with the dissolution of such
fund in shares of the Funds without payment of a sales charge.
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 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, or if you purchased shares during the Special Offering Period, you may
incur a contingent deferred sales charge if you redeem within 24 months. In the
case of investments of $500,000 or more, for all redemptions made during the
24-month period this charge will be equal to 1.00% in the case of Government
Fund, .30% in the case of Bond Fund, and .20% in the case of ARMS Fund, of the
lesser of the net asset value of the shares at the time of purchase or at the
time of redemption. In the case of purchases made during the Special Offering
Period that would otherwise be subject to a front-end sales charge, the
contingent deferred sales charge will be equal to 2% of
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SHAREHOLDER GUIDE TO INVESTING
the lesser of the net asset value of the shares at the time of purchase or at
the time of redemption for redemptions made during the first 12 months after
purchase, and 1% during the second 12 months. In both cases, the contingent
deferred sales 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 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).
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SHAREHOLDER GUIDE TO INVESTING
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 Piper Funds. 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 any of the Funds, you may be eligible to
reinvest in shares of any fund managed by the Adviser 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. You may reinvest
through a broker-dealer other than the Distributor only if there is a valid
sales agreement between your broker-dealer and the Distributor for the fund in
which you wish to invest.
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. 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. However, exchanges of ARMS Fund shares received in the Merger will
be permitted without payment of an additional sales charge.
If you hold your Fund shares through a broker-dealer other than the
Distributor, the exchange privilege may not be available. Exchanges will be
permitted only if there is a valid sales agreement between your broker-dealer
and the Distributor for the fund into which you wish to exchange.
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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SHAREHOLDER GUIDE TO INVESTING
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) 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. This privilege may not be available if you hold your
Fund shares through a broker-dealer other than the Distributor. Distributions
may be invested in another mutual fund managed by the Adviser only if there is a
valid sales agreement for that fund between your broker-dealer and the
Distributor.
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.
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SHAREHOLDER GUIDE TO INVESTING
ACCOUNT PROTECTION
If you purchased your shares of the Funds through a Piper Jaffray Investment
Executive, you may choose from several account options. Your investments in the
Funds held in a Piper Jaffray PRIME or PAT Plus account would be protected in an
amount up to $50 million. Investments held in all other Piper Jaffray accounts
are protected up to $25 million. In each case, the Securities Investor
Protection Corporation ("SIPC") provides up to $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.
The Funds will not attempt to stabilize distributions, and intend to
distribute to their shareholders substantially all of the net investment income
earned during any period. Thus, each Fund's dividends can be expected to vary
from month to month.
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,
Bond Fund, and ARMS Fund had capital loss carryovers at September 30, 1996 of
$16,784,819, $276,491,719 and $146,563,691, respectively. ARMs Fund is limited
in its utilization of capital loss carryovers to $69,945,971 per year. Such
capital loss carryovers, if not offset by subsequent capital gains, will expire
September 30, 2002-2004 for
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SHAREHOLDER GUIDE TO INVESTING
Government Fund, September 30, 2003-2004 for Bond Fund and September 30,
1997-2004 for ARMS Fund. It is unlikely that the Board of Directors will
authorize a distribution of any net realized capital gains for a Fund until such
Fund's available capital loss carryover has been offset or has expired.
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 a 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 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. Each 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 imposition
of this excise tax, a 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.
Bond Fund retained income subject to the 4% excise tax for the 1995, 1994, 1993
and 1992 excise tax years. Bond Fund intends hereafter to distribute sufficient
amounts to avoid payment of the excise tax.
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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 the Funds, you should
check the consequences of your local and state tax laws.
PERFORMANCE COMPARISONS
Advertisements and other sales literature for the Funds 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. 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
Piper Funds, 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. Three hundred and ninety
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billion of these shares have been authorized by the Board of Directors to be
issued in twelve separate series, as follows: Growth Fund, Emerging Growth Fund,
Small Company Growth Fund (formerly Equity Strategy Fund), Growth and Income
Fund, Balanced Fund, Government Income Fund, Intermediate Bond Fund (formerly
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.
Piper Funds II, which was organized under the laws of the State of Minnesota
on April 10, 1995, is authorized to issue a total of 100 billion shares of
common stock, with a par value of $.01 per share. Ten billion of those shares
have been designated as Series A Common Shares, which are the shares of common
stock of ARMS Fund. Currently, Series A is the only outstanding series of shares
of Piper Funds II.
For both Piper Funds and Piper Funds II, the Board of Directors is empowered
under the Articles of Incorporation to issue additional series of 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 Piper Funds or Piper Funds II
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 Piper
Funds or Piper Funds II 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 both Piper Funds and Piper Funds II 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 a corporation may demand a regular meeting of
shareholders by written notice given to the chief executive officer or chief
financial officer of the corporation. 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 corporation. In addition, the 1940 Act
requires a shareholder vote for all amendments to fundamental investment
policies and restrictions, for all amendments to investment advisory contracts
and for certain amendments to Rule 12b-1 distribution plans.
PENDING LEGAL PROCEEDINGS
Complaints have been brought against the Adviser and the Distributor
relating to Bond Fund, to the closed-end investment companies that merged into
Piper Funds II and to other investment companies for which the Adviser acts or
has acted as investment adviser or subadviser. These lawsuits do not involve
Government Fund.
A number of complaints have been brought in federal and state court against
Bond Fund (formerly named Institutional Government Income Portfolio ("PJIGX")),
the Adviser, the Distributor, and certain
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individuals affiliated or formerly affiliated with the Adviser and the
Distributor. On February 13, 1996, a Settlement Agreement became effective for
the consolidated class action lawsuit, titled In Re: PIPER FUNDS INC.
INSTITUTIONAL GOVERNMENT INCOME PORTFOLIO LITIGATION. The Amended Consolidated
Class Action Complaint was filed on October 5, 1994, in the United States
District Court, District of Minnesota, against PJIGX, the Adviser, the
Distributor, William H. Ellis and Edward J. Kohler, and had alleged the making
of materially misleading statements in the prospectus, common law negligent
misrepresentation and breach of fiduciary duty. The Settlement Agreement will
provide approximately $67.5 million, together with interest earned, less certain
disbursements and attorney fees, to class members in payments scheduled over
approximately three years. Such payments will be made by Piper Jaffray Companies
Inc. and the Adviser and will not be an obligation of Piper Funds. A number of
lawsuits and arbitrations brought by some of the investors who requested
exclusion from the settlement class remain pending.
American Adjustable Rate Term Trust Inc.--1996 ("BDJ"), American Adjustable
Rate Term Trust Inc.-- 1997 ("CDJ"), American Adjustable Rate Term Trust
Inc.--1998 ("DDJ") and American Adjustable Rate Term Trust Inc.--1999 ("EDJ")
(collectively, the "Trusts") merged into Piper Funds II on September 1, 1995.
Piper Funds II may be deemed to be a successor by merger to such Trusts and, as
such, may succeed to their liabilities, including damages sought in any
litigation.
On October 20, 1994, Herman D. Gordon filed a complaint in the U.S. District
Court for the District of Minnesota against DDJ and EDJ, the Adviser, the
Distributor, Piper Jaffray Companies Inc. ("Piper") and certain associated
individuals (the "Gordon Litigation"). A second complaint was filed by Frank
Donio, I.R.A., and other plaintiffs on April 14, 1995, in the U.S. District
Court for the District of Minnesota against BDJ, CDJ, DDJ and EDJ, the Adviser,
the Distributor, Piper and certain associated individuals (the "Donio
Litigation"). Plaintiffs in both actions filed a Consolidated Amended Class
Action Complaint on May 23, 1995. The consolidated complaint, which purports to
be a class action, alleges that the defendants violated certain federal and
state securities laws by making materially misleading statements in prospectuses
and other disclosures concerning risks associated with investing in the Trusts,
compliance with the Trusts' investment policies, and the reasons for proposing
and the benefits to be obtained by shareholders from the Merger and by allegedly
breaching their fiduciary duties. Damages are being sought in an unspecified
amount. On August 23, 1996, the Court granted final approval to the parties'
agreement to settle all outstanding claims of the purported class action. The
Effective Date of the Settlement Agreement was September 23, 1996. The
Settlement Agreement provides for $14 million in principal payments consisting
of $500,000 which was paid upon the Court's preliminary approval, $1.5 million
which was paid upon the Effective Date of the Settlement Agreement, and payments
of $3 million on each anniversary of the Effective Date for the next four years,
with accrued interest payments of up to $1.8 million. Such payments have been or
will be made by Piper Jaffray Companies, Inc. and the Adviser and will not be an
obligation of Piper Funds II.
In addition to the complaints described above, complaints have been filed in
state and federal court relating to a number of other 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.
In addition to the Settlement Agreements discussed above,
agreements-in-principle have been reached to settle certain other complaints.
The Adviser and the Distributor also are subject to regulatory inquiries related
to various funds or assets managed by the Adviser. See "Pending Litigation" in
the Statement of Additional Information.
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The Adviser and the Distributor do not believe that the settlements
discussed above, any agreement-in-principle to settle, or any outstanding
complaint, action in arbitration or regulatory inquiry will have a material
adverse effect on their ability to perform under their agreements with Piper
Funds or Piper Funds II or a material adverse effect on the Funds.
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.
42
<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 LLP
Table of Contents
<TABLE>
<CAPTION>
PAGE
<S> <C>
Introduction........................... 2
Fund Expenses.......................... 4
Financial Highlights................... 6
Investment Objectives and Policies..... 8
Characteristics and Risks of Securities
and Special Investment Methods........ 13
Management............................. 26
Distribution of Fund Shares............ 27
SHAREHOLDER GUIDE TO INVESTING
How to Purchase Shares............... 29
Reducing Your Sales Charge........... 31
Special Purchase Plans............... 32
How to Redeem Shares................. 33
Shareholder Services................. 35
Dividends and Distributions.......... 37
Valuation of Shares.................... 38
Tax Status............................. 38
Performance Comparisons................ 39
General Information.................... 39
</TABLE>
- ----------------------------------------------------------
Prospectus
[LOGO]
------------------------------
INCOME FUNDS
Government Income Fund
Intermediate Bond Fund
Adjustable Rate Mortgage
Securities Fund
November 6, 1996
--------------------------------
30400 021-97
<PAGE>
PART B
GOVERNMENT INCOME FUND
INTERMEDIATE BOND FUND
each a series of Piper Funds Inc.
and
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
a series of Piper Funds Inc.--II
STATEMENT OF ADDITIONAL INFORMATION
November 6, 1996
Table of Contents
Page
----
Investment Policies and Restrictions . . . . . . . . . . . . . . 2
Directors and Executive Officers . . . . . . . . . . . . . . . . 14
Investment Advisory and Other Services . . . . . . . . . . . . . 18
Portfolio Transactions and Allocation of Brokerage . . . . . . . 26
Capital Stock and Ownership of Shares. . . . . . . . . . . . . . 28
Net Asset Value and Public Offering Price. . . . . . . . . . . . 29
Performance Comparisons. . . . . . . . . . . . . . . . . . . . . 30
Purchase of Shares . . . . . . . . . . . . . . . . . . . . . . . 34
Redemption of Shares . . . . . . . . . . . . . . . . . . . . . . 34
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
General Information. . . . . . . . . . . . . . . . . . . . . . . 38
Financial Statements . . . . . . . . . . . . . . . . . . . . . . 39
Pending Litigation . . . . . . . . . . . . . . . . . . . . . . . 39
Appendix A - Corporate Bond, Preferred Stock and
Commercial Paper Ratings . . . . . . . . . . . . . . . . . . . A-1
Appendix B - Interest Rate Futures Contracts
and Related Options. . . . . . . . . . . . . . . . . . . . . . B-1
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information relates to a combined prospectus of
Government Income Fund and Intermediate Bond Fund (series of Piper Funds Inc.)
and Adjustable Rate Mortgage Securities Fund (a series of Piper Funds Inc.--II),
dated November 6, 1996. This Statement of Additional Information should be read
in conjunction with the Prospectus. Copies of the Prospectus may be obtained
from the Funds at Piper Jaffray Tower, 222 South Ninth Street, Minneapolis,
Minnesota 55402-3804.
<PAGE>
INVESTMENT POLICIES AND RESTRICTIONS
This Statement of Additional Information relates to Government Income Fund
and Intermediate Bond Fund (formerly Institutional Government Income Portfolio),
each of which is a series of Piper Funds Inc. ("Piper Funds"), and Adjustable
Rate Mortgage Securities Fund, which is a series of Piper Funds Inc.--II ("Piper
Funds--II"). These series are sometimes referred to herein individually as a
"Fund" or, collectively, as the "Funds." Piper Funds and Piper Funds--II are
sometimes referred to herein individually as a "Company" or, collectively, as
the "Companies." The investment objectives and policies of the Funds are set
forth in the Funds' respective Prospectus. Certain additional investment
information is set forth below.
On September 1, 1995, four closed-end investment companies, American
Adjustable Rate Term Trust Inc.--1996, American Adjustable Rate Term Trust
Inc.--1997, American Adjustable Rate Term Trust Inc.--1998 and American
Adjustable Rate Term Trust Inc.--1999, merged into Adjustable Rate Mortgage
Securities Fund (the "Merger"). Adjustable Rate Mortgage Securities Fund had no
history of operations prior to the Merger. In this Statement of Additional
Information, certain performance and financial information is provided for
Adjustable Rate Mortgage Securities Fund for periods prior to September 1, 1995.
Such information relates to American Adjustable Rate Term Trust Inc.--1998
("DDJ"), the surviving entity of the Merger for financial reporting purposes.
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 Piper
Funds, closed-end and other open-end investment companies currently managed by
Piper Capital Management Incorporated (the "Adviser"), and all future series of
each 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.
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<PAGE>
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
Each 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.
SHORT-TERM MONEY MARKET SECURITIES
As set forth in the Prospectus, each Fund 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. The Funds will not invest more than 15% of their net assets in time
deposits and other illiquid securities. (Intermediate Bond Fund may not invest
in illiquid 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.
-3-
<PAGE>
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 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 each 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 the Funds purchase 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.
-4-
<PAGE>
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 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 semiannually 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 semiannually 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
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<PAGE>
FNMA Certificates and the full return of principal. Like GNMA Certificates,
FNMA Certificates are assumed to be prepaid fully in their twelfth year.
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 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.
RESTRICTIONS ON INVESTMENTS BY ADJUSTABLE RATE MORTGAGE SECURITIES FUND.
As set forth in the Prospectus, Adjustable Rate Mortgage Securities Fund will
not invest in any inverse floating, interest-only, principal-only or Z tranches
of CMOs or in stripped mortgage-related securities. In addition, the Fund will
not invest in any other mortgage-related securities that are considered "high
risk" under applicable supervisory policies of the Office of the Comptroller of
the Currency (the "OCC"). In
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<PAGE>
OCC Banking Circular 228 (Rev.) (January 10, 1992), the OCC defined a "high-risk
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:
(a) AVERAGE LIFE TEST. The mortgage derivative product has an
expected weighted average life greater than 10.0 years.
(b) AVERAGE LIFE SENSITIVITY TEST. The expected weighted average
life of the mortgage derivative product:
(i) extends by more than 4.0 years, assuming an immediate and
sustained parallel shift in the yield curve of plus 300 basis points;
or
(ii) shortens by more than 6.0 years, assuming an immediate and
sustained parallel shift in the yield curve of minus 300 basis points.
(c) 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 interest-only and
principal-only classes of stripped mortgage-related securities, inverse floating
CMOs and certain zero-coupon Treasury securities.
OPTIONS
As set forth in the Prospectus, Government Income Fund and Adjustable Rate
Mortgage Securities 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,
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<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 Fund 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.
ILLIQUID SECURITIES
To the extent 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, except for Adjustable Rate Mortgage Securities
Fund, may invest in interest-only and principal-only classes of mortgage-related
securities issued by the U.S. Government or its agencies or instrumentalities,
and treat such securities as
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<PAGE>
liquid when they have been determined to be liquid by the Board of Directors of
the Companies 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. For purposes
of calculating portfolio turnover, the maturity of investment purchases and
sales related to dollar roll transactions is considered to be less than 12
months. See "Special Investment Methods--Mortgage Dollar Rolls" 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.
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<PAGE>
With respect to Government Income Fund, as fundamental investment
restrictions, the Fund will not:
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. 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 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 the 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.
Interest paid on borrowed funds will decrease the net earnings of the Fund. The
Fund will not purchase portfolio securities while outstanding borrowing exceeds
5% of the value of the Fund's total assets. The Fund will not borrow money for
leverage purposes (provided that the 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 Fund 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 Fund 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 the Fund may be technically deemed an underwriter under the federal
securities laws in connection with the disposition of portfolio securities.
With respect to Intermediate Bond Fund, as fundamental investment
restrictions, the Fund will not:
1. Issue any senior securities, as defined in the 1940 Act.
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<PAGE>
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 bonds, debentures, or other debt securities will not be considered
the making of a loan.
9. Loan its portfolio securities.
With respect to Adjustable Rate Mortgage Securities Fund, as fundamental
investment restrictions, the Fund will not:
1. With respect to 75% of its total assets, invest more than 5% of the
value of its total assets (taken at market value at the time of purchase) in the
outstanding securities of any one issuer, or own more than 10% of the
outstanding voting securities of any one issuer, in each case other than
securities issued or guaranteed by the U. S. Government or any agency or
instrumentality thereof.
2. 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,
except that, under normal market conditions, the Fund will invest 25% or more of
the value of its total assets in ARMS issued or guaranteed by the U.S.
Government or its agencies or instrumentalities or by private organizations.
Except for the requirement that the Fund invest 25% or more of its total assets
in ARMS, the foregoing restriction does not apply to securities of the U.S.
Government or its agencies or instrumentalities or repurchase agreements
relating thereto.
3. Issue any senior securities, as defined in the 1940 Act, other than as
set forth in restriction #4 below and except to the extent that using options
and futures
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<PAGE>
contracts or purchasing or selling securities on a when-issued or forward
commitment basis may be deemed to constitute issuing a senior security.
4. Borrow money, except for temporary or emergency purposes. The amount
of such borrowing (including borrowing through reverse repurchase agreements)
may not exceed 10% of the value of the Fund's total assets. The Fund will not
purchase portfolio securities while outstanding borrowings exceeds 5% of the
value of the Fund's total assets. The Fund will not borrow for leverage
purposes.
5. 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.
6. Purchase or sell commodities or commodity futures contracts, except
that the Fund may enter into financial futures contracts and engage in related
options transactions.
7. Purchase or sell real estate or interests therein (other than
securities backed by mortgages and similar instruments).
8. 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.
9. Make loans of money or property to any person, except through loans of
portfolio securities, the purchase of debt obligations in which the Fund may
invest consistent with the Fund's investment objective and policies or the
acquisition of securities subject to repurchase agreements.
For purposes of determining compliance with fundamental investment
restriction number 2, relating to industry concentration, the various types of
utilities companies, such as gas, electric, telephone, telegraph, satellite and
microwave communications companies, are considered separate industries and ARMS
issued by private organizations are considered to be securities of issuers in
the same industry. In addition, the industry classification of asset-backed
securities will be determined based on the type of collateral underlying the
securities. For example, asset-backed securities backed by automobile
receivables will be considered to be in a different industry than asset-backed
securities backed by credit card receivables.
As nonfundamental investment restrictions that may be changed at any time
without shareholder approval, no Fund will:
1. Invest in warrants.
2. Make short sales of securities.
-12-
<PAGE>
3. 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.
4. Purchase or retain the securities of any issuer if, to the Fund's
knowledge, those officers or directors of the respective 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. Purchase the securities of other investment companies except as part
of a merger, consolidation or acquisition of assets.
8. Invest in real estate limited partnerships.
9. Invest more than 5% of total assets in the securities of foreign
issuers, provided that Intermediate Bond Fund will not invest in the securities
of foreign issuers other than U.S. dollar-denominated Yankee bonds and
Adjustable Rate Mortgage Securities Fund will not invest in the securities of
foreign issuers.
10. Invest more than 15% of net assets in illiquid securities, except that
Intermediate Bond Fund will not invest in illiquid securities.
11. Except for Adjustable Rate Mortgage Securities Fund, 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.)
12. Write, purchase or sell puts, calls or combinations thereof, except
that Government Income Fund and Adjustable Rate Mortgage Securities Fund may
write put and call options with respect to the securities in which they may
invest, may purchase put and call options, and may engage in financial futures
contracts and related options transactions. With respect to Adjustable Rate
Mortgage Securities Fund, the Fund is subject to the following limitations:
a. The Fund will not write puts if, as a result, more than 50% of its
assets would be required to be segregated.
-13-
<PAGE>
b. The aggregate premiums paid on all put and call options purchased by
the Fund, including options on futures contracts, may not exceed 20% of the
Fund's net assets.
c. The Fund's aggregate margin deposits in connection with futures
contracts and options thereon will not exceed 5% of the Fund's total
assets.
d. The Fund will not purchase or write over-the-counter put and call
options.
Any investment restriction or limitation referred to above or in the
Prospectus 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 directors and officers of each Company and their principal occupations
during the past five years are set forth below. Unless otherwise indicated, all
positions have been held for more than five years. Each Company's directors and
officers also serves as a director or officer of various closed-end and open-end
investment companies managed by the Adviser.
Name, Address and (Age) Position with the Companies
----------------------- ---------------------------
William H. Ellis* (54) Chairman of the Board of Directors
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
David T. Bennett (56) Director
3400 City Center
33 South Sixth Street
Minneapolis, Minnesota 55402
Jaye F. Dyer (69) Director
4670 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402
Karol D. Emmerich (47) Director
7302 Claredon Drive
Edina, Minnesota 55439
Luella G. Goldberg (59) Director
7019 Tupa Drive
Edina, Minnesota 55435
-14-
<PAGE>
Name, Address and (Age) Position with the Companies
----------------------- ---------------------------
David A. Hughey (65) Director
134 Powers Road
Meredith, NH 03253
George Latimer (61) Director
754 Linwood Avenue
St. Paul, MN 55105
Paul A. Dow (45) President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Robert H. Nelson (33) Vice President
Piper Jaffray Tower and Treasurer
222 South Ninth Street
Minneapolis, Minnesota 55402
Susan S. Miley (39) Secretary
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
Fund.
William H. Ellis is President of Piper Jaffray Companies Inc.; Director and
Chairman of the Board of Piper Capital Management Incorporated ("the Adviser");
President of the Adviser since 1994; Director of Piper Jaffray Inc..
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 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 was Vice President,
Chief
-15-
<PAGE>
Accounting Officer and Treasurer of Dayton Hudson Corporation from 1980 to 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 serves on the board of directors of Northwestern
National Life Insurance Company (since 1976), The ReliaStar Financial Corp.
(since 1989), TCF Bank Savings fsb (since 1985), TCF Financial Corporation
(since 1988), 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.
David A. Hughey is a Trustee of Bentley College. Prior to September 1996,
he was Executive Vice President and Chief Administrative Officer of Dean Witter
InterCapital Inc., Dean Witter Services Company Inc. and Dean Witter
Distributors Inc.; Director, Executive Vice President and Chief Administrative
Officer of Dean Witter Trust Company; Vice President of Dean Witter Family of
Funds and TCW/DW Family of Funds; and Director of ICI Mutual Insurance Company.
George Latimer has been Chief Executive Officer of National Equity Fund,
Chicago, Illinois since November 1995; prior thereto, Mr. Latimer was Director,
Special Actions Office, Office of the Secretary, Department of Housing and Urban
Development since 1993, and prior thereto 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 is Chief Investment Officer and Senior Vice President of the
Adviser.
Robert H. Nelson has been a Senior Vice President of the Adviser since
1993; prior there he had been a Vice President of the Adviser from 1991 to 1993.
Susan S. Miley has been Senior Vice President and General Counsel of the
Adviser since 1995 and Secretary of the Adviser since 1996; prior to which she
was counsel for American Express Financial Advisors, Minneapolis, Minnesota from
1994 to 1995 and an attorney at Simpson Thacher & Bartlett, New York, New York
from 1984 to 1992.
Ms. Emmerich, Ms. Goldberg Mr. Hughey are members of the Audit Committee of
the Board of Directors. Ms. Emmerich acts as the chairperson of such committee.
The Audit Committee oversees each Company's financial reporting process, reviews
audit results and recommends annually to the Companies a firm of independent
certified public accountants.
The Board of Directors also has a Committee of the Independent Directors,
consisting of Messrs. Bennett, Dyer, Hughey and Latimer, Ms. Emmerich and Ms.
-16-
<PAGE>
Goldberg, and a Derivatives Subcommittee 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
Subcommittee 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 (c) to report periodically to the Committee of the
Independent Directors and the Board of Directors.
The directors of each Company who are officers or employees of the Adviser
or of its affiliates receive no remuneration from the Companies. Each of the
other directors currently receives a quarterly retainer of $3,625 that is
allocated among the Funds and all other open-end funds managed by the Adviser on
the basis of the total assets of each such fund. In addition, each director
receives a fee from each Company for each regular quarterly and in-person
special meeting of the Board of Directors attended. (The per-meeting fee of
Piper Funds is based on the combined total assets of Piper Funds and Piper
Institutional Funds Inc.) The per-meeting fee is based upon asset size and is
$250 if assets are under $200 million, $500 if assets are $200 million and over
but less than $500 million, $750 if asses are $500 million and over but less
than $1 billion, $1,000 if assets are $1 billion and over but less than $5
billion, and $1,500 if assets are $5 billion or over. Members of the Audit
Committee who are not affiliated with the Adviser receive $1,000 for each Audit
Committee meeting attended ($2,000 for the chairperson of the Committee), and
the chairperson of the Committee of the Independent Directors receives $1,000
for each meeting of such committee attended, with such fees being allocated
evenly between the Companies and all other closed-end and open-end investment
companies managed by the Adviser. Members of the Committee of the Independent
Directors and the Derivatives Subcommittee (other than the chairperson of the
Committee of the Independent Directors) currently receive no additional
compensation. In addition, each Director who is not affiliated with the Adviser
is reimbursed for expenses incurred in connection with attending meetings.
The following table sets forth the compensation received by each director
from Piper Funds for the fiscal year ended September 30, 1996 from Piper
Funds--II for the fiscal year ended August 31, 1996 and for the fiscal period
ended September 30, 1996, and from the from the Companies and all other
registered investment companies managed by the Adviser or affiliates of the
Adviser during the calendar year ended December 31, 1995. Directors who are
officers or employees of the Adviser or any of its affiliates did not receive
any such compensation and are not
-17-
<PAGE>
included in the table. Mr. Hughey became a director of each Company on
September 3, 1996.
<TABLE>
<CAPTION>
Compensation from Compensation from
Piper Funds Piper Funds--II
----------------- -------------------------------- Total
Year Ended One-month Year Ended Compensation from
9/30/96 Ended 9/30/96 8/31/96 Fund Complex *
- -------- ------------------ -------------- -------------- -----------------
<S> <C> <C> <C> <C>
Jaye F. Dyer $6,775 $0 $6,531 $67,700
Karol D. Emmerich $6,775 $0 $6,531 $67,700
Luella G. Goldberg $7,150 $0 $6,562 $70,700
George Latimer $6,400 $0 $6,500 $64,700
David T. Bennett $6,400 $0 $6,500 $61,700
David A. Hughey $0 $0 $0 $0
</TABLE>
* Currently consists of 20 open-end and closed-end investment companies managed
by the Adviser, including the Companies. During the 1995 calendar year, the
Fund Complex consisted of up to 27 such investment companies, managed by the
Adviser or an affiliate of the Adviser, several of which were merged or
consolidated during the year. Each director included in the table serves on the
board of each such open-end and closed-end investment company.
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 Investment
Advisory and Management Agreements which have been approved by the Board of
Directors (including a majority of the directors who are not parties to the
agreements, or interested persons of any such party, other than as directors of
the Funds) and the shareholders of the Funds.
Each Investment Advisory and Management Agreement will terminate
automatically in the event of its assignment. In addition, each 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. An agreement may be terminated with
respect to a
-18-
<PAGE>
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, each 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 an 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 each 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
------------------------ --------------------
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%
Intermediate Bond Fund On the first $100,000,000 .30%
On the next $150,000,000 .25%
On average assets of over
$250,000,000 .20%
Adjustable Rate Mortgage On the first $500,000,000 .35%
Securities Fund One average assets of over .30%
$500,000,000
The table below sets forth the advisory fees paid by Government Income Fund
and Intermediate Bond Fund for the periods indicated:
<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, 1994 September 30, 1995 September 30, 1996
- ---- ------------------- ------------------ ------------------
<S> <C> <C> <C>
Government Income Fund $ 734,950 $ 576,359 $ 474,589
Intermediate Bond Fund $ 1,645,922 $ 959,379 $ 634,796
</TABLE>
With respect to Adjustable Rate Mortgage Securities Fund, the Adviser
received compensation of $1,487,059 for the fiscal year ended August 31,
1996 and $76,672 for the fiscal period from September 1, 1996 to
September 30, 1996. Prior to the Merger, the Adviser also acted as the
investment adviser of DDJ, the
-19-
<PAGE>
surviving entity of the Merger for financial reporting purposes. Pursuant to
the Investment Advisory and Management Agreement between DDJ and the Adviser,
the Adviser received a monthly management fee at the per annum rate of .35% of
DDJ's average weekly net assets. Under such agreement, the Adviser received
compensation of $1,857,513 and $1,462,719, respectively, for the fiscal years
ended August 31, 1994 and 1995.
Prior to the Merger, the Adviser also acted as the administrator of DDJ
pursuant to an Administration Agreement under which the Adviser received a
monthly administration fee at the per annum rate of .15% of DDJ's average weekly
net assets. Under such agreement, the Adviser received compensation of $796,077
and $626,880, respectively, for the fiscal years ended August 31, 1994 and 1995.
Adjustable Rate Mortgage Securities Fund has not entered into such an agreement
with the Adviser.
Under the Investment Advisory and Management Agreements, 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 respective 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 Companies 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
Companies 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 applicable Investment Advisory and Management Agreement. Any general
expenses of the Companies that are not readily identifiable as belonging to a
particular series of a Company will be allocated
-20-
<PAGE>
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, each 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 each such plan be approved by a majority of
a Fund's outstanding shares, and Rule 12b-1(b)(2) requires that each 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 respective
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.
-21-
<PAGE>
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 Plans will benefit the Companies and their shareholders.
Pursuant to the provisions of its Distribution Plan, Government Income Fund
pays a monthly fee to the Distributor equal, on an annual basis to .50% of its
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. Intermediate Bond Fund and Adjustable Rate Mortgage
Securities Fund each pay a monthly fee under their Distribution Plans equal, on
an annual basis to .30% and .15% of the Fund's average daily net assets,
respectively. Except with respect to Adjustable Rate Mortgage Securities Fund,
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
ongoing servicing and/or maintenance of shareholder accounts with respect to
such Fund ("Shareholder Servicing Costs"). All of the Rule 12b-1 fee paid by
Adjustable Rate Mortgage Securities Fund is categorized as a servicing fee.
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 Government Income
Fund and Intermediate Bond Fund for the periods indicated.
-22-
<PAGE>
<TABLE>
<CAPTION>
Distribution fees Distribution fees Distribution fees
for the fiscal for the fiscal for the fiscal
year ended year ended year ended
Fund September 30, 1994 September 30, 1995 September 30, 1996
- ---- ------------------- ------------------ ------------------
<S> <C> <C> <C>
Government Income Fund $461,794 $365,759 $292,676
Intermediate Bond Fund 1,553,536 781,067 475,345
</TABLE>
With respect to Adjustable Rate Mortgage Securities Fund, distribution fees
paid by the Fund for the fiscal year ended August 31, 1996 and the fiscal period
from September 1, 1996 to September 30, 1996 were $638,422 and $32,843
respectively. The Distribution Plan for Adjustable Rate Mortgage Securities
Fund was not in effect during prior fiscal years.
The Distributor voluntarily limited the amount payable under the
Distribution Plan to an annual rate of .21% and .31% of average daily net assets
for Intermediate Bond Fund and Government Income Fund, respectively, for the
fiscal year ended September 30, 1994. For the fiscal years ended September 30,
1995 and 1996, the Distributor voluntarily limited the amounts payable under
such Distribution Plan to annual rates of .20% and .32% of average daily net
assets for Intermediate Bond Fund and Government Income Fund, respectively. The
voluntary limitations for the fiscal year ending September 30, 1997 are
.22% and .34% of average daily net assets for Intermediate Bond Fund and
Government Income Fund, respectively. The Distributor may terminate its
voluntary fee limitation at any time in its discretion.
Fees payable under the Piper Funds Distribution Plan for the fiscal year
ended September 30, 1996, were used by the Distributor as follows:
<TABLE>
<CAPTION>
Government Intermediate
Income Fund Bond Fund
----------- ---------
<S> <C> <C>
Advertising $ 0 $ 0
Printing and mailing of prospectuses to
other than current shareholders $ 9,441 $ 0
Compensation to underwriters (trail
fees to investment executives) $ 283,235 $ 475,345
Compensation to dealers $ 0 $ 0
Compensation to sales personnel $ 0 $ 0
Interest, carrying or other
financing charge $ 0 $ 0
Other (specify) $ 0 $ 0
----------- ----------
Total $ 292,676 $ 475,345
</TABLE>
With respect to Adjustable Rate Mortgage Securities Fund, total
servicing fees in the amount of $638,422 were paid under such Fund's
Distribution Plan for the fiscal year ended August 31, 1996 and were used
for compensation to underwriters (trail fees to investment executives). For
the fiscal period from September 1, 1996 to September 30, 1996, servicing fees
in the amount of $32,843 were paid under the Plan and also were used for
compensation to underwriters.
-23-
<PAGE>
UNDERWRITING AND DISTRIBUTION AGREEMENT
Pursuant to Underwriting and Distribution Agreements with Piper Funds and
Piper Funds--II, 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 fees pursuant to the Distribution Plans 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 the Funds for the periods indicated and the
amount of such commissions retained by the Distributor.
<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, 1994 Sept. 30, 1995 Sept. 30, 1996 Sept. 30, 1994 Sept. 30, 1995 Sept. 30, 1996
----------------- ----------------- ----------------- ------------------ ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Government
Income Fund $ 439,716 $ 111,536 $ 42,651 $ 255,000 $ 64,691 $ 17,487
Intermediate
Bond Fund 1,340,277 43,458 12,517 777,361 25,206 5,132
</TABLE>
With respect to Adjustable Rate Mortgage Securities Fund, total
underwriting commissions paid and underwriting commissions retained by the
Distributor for the fiscal year ended August 31, 1996 were $9,280 and $0,
respectively, and total underwriting commissions paid and underwriting
commissions retained by the Distributor for the fiscal period from
September 1, 1996 to September 30, 1996 were $3,805 and $0, respectively.
The Underwriting and Distribution Agreement between the Distributor and Piper
Funds--II was not in effect prior to the fiscal year ended August 31, 1996.
For the same periods, in addition to retaining the underwriting commissions
set forth above, the Distributor received brokerage commissions as set forth
below.
<TABLE>
<CAPTION>
Brokerage Commissions Paid to Distributor
----------------------------------------------------------
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
September 30, 1994 September 30, 1995 September 30, 1996
------------------ ------------------ ------------------
<S> <C> <C> <C>
Government Income Fund $41,650 $1,700 $ 0
Intermediate Bond Fund 0 0 0
</TABLE>
Adjustable Rate Mortgage Securities Fund did not pay any brokerage
commissions to the Distributor during the fiscal year ended August 31, 1996 and
the fiscal period from September 1, 1996 to September 30, 1996.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Investors Fiduciary Trust Company ("IFTC"), the transfer agent for the
Companies, 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 Shareholder Account
-24-
<PAGE>
Servicing Agreements with the Distributor and Piper Trust Company ("Piper
Trust"), pursuant to which the Distributor and Piper Trust provide certain
transfer agent and dividend disbursing agent services for the underlying
individual shareholder accounts held at the respective companies. Pursuant to
such Agreements, the Distributor and Piper Trust have 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, 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
and Piper Trust are paid annual fees of $7.50 per active shareholder account
(defined as an account that has a balance of shares) by each Fund and $1.60 per
closed account (defined as an account that does not have a balance of shares but
has had activity within the past 12 months) by each Fund. Such fees are payable
on a monthly basis at a rate of 1/12 of the annual per-account charge. Such
fees cover 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, 1996, Government Income Fund
paid $51,052 and Intermediate Bond Fund paid $31,433 to the Distributor
under the Shareholder Account Servicing Agreement. During the fiscal year
ended September 30, 1996, Government Income Fund paid $6,955 and
Intermediate Bond Fund paid $2,939 to Piper Trust under the Shareholder
Account Servicing Agreement.
Adjustable Rate Mortgage Securities Fund paid $86,239 to the Distributor
and $0 to Piper Trust during the fiscal year ended August 31, 1996 and for
the fiscal period from September 1, 1996 to September 30, 1996, the Fund paid
$7,365 to the Distributor and $0 to Piper Trust.
-25-
<PAGE>
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 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
-26-
<PAGE>
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 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 paid the following brokerage commissions for the periods
indicated:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
September 30, 1994 September 30, 1995 September 30, 1996
------------------ ------------------ ------------------
<S> <C> <C> <C>
Government Income Fund $ 65,620 $ 15,300 $ 7,650
Intermediate Bond Fund 24,022 11,833 0
</TABLE>
The following table sets forth additional information with respect to
brokerage commissions paid during the fiscal year ended September 30, 1996:
<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>
Government Income Fund $ 7,650 $ 0 0 % 2 %
Intermediate Bond Fund * 0 0 0 0
</TABLE>
-27-
<PAGE>
For the fiscal years ended August 31, 1994 and 1995, DDJ paid
aggregate brokerage commissions of $69,650 and $3,740, respectively. Of such
amounts, $63,325 and $1,700, respectively, were paid to the Distributor. For
the fiscal year ended August 31, 1996 Adjustable Rate Mortgage Securities Fund
paid no brokerage commissions. For the fiscal period from September 1, 1996
to September 30, 1996, Adjustable Rate Mortgage Securities Fund paid no
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. None of the
Funds held any such securities at fiscal year end or purchased any such
securities during the fiscal year or fiscal period.
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 Companies 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
The Board of Directors is empowered under each Company's Articles of
Incorporation to issue additional series of a Company's common stock without
shareholder approval. 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 a Company's 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 any other series.
-28-
<PAGE>
The assets received by a 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, will be 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 relating to such series and with a share of the general expenses of
the Company. Any general expenses of a Company not readily identifiable as
belonging to a particular series shall be allocated among the series based on
the relative net assets of the series at the time such expenses were accrued.
The Board of Directors may, without shareholder approval, create and issue
one or more additional classes of shares within a Fund, as well as within any
series of a Company created in the future. All classes of shares in a series
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 a Company will allow the Companies in the future
the flexibility to better tailor their 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 Funds incurring such
expenses.
As of November 1, 1996, no shareholder was known by the Funds to own
beneficially 5% or more of the outstanding shares of any of the Funds. The
directors and officers of each Company as a group owned less than 1% of the
outstanding shares of each 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 "How to Purchase
Shares--Purchase 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,
-29-
<PAGE>
1996, the net asset value per share for each Fund was calculated as follows:
Government Income Fund
----------------------
Net Assets ($ 83,828,575) = Net Asset Value Per Share
- ----------------------------------------------
Shares Outstanding (9,495,487) ($ 8.83)
Intermediate Bond Fund
----------------------
Net Assets ($ 135,837,838) = Net Asset Value Per Share
- ----------------------------------------------
Shares Outstanding (18,104,026) ($ 7.50)
Adjustable Rate Mortgage Securities Fund
----------------------------------------
Net Assets ($ 262,833,368) = Net Asset Value Per Share
- ----------------------------------------------
Shares Outstanding (32,616,678) ($ 8.06)
For Government Income 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. The sales
charges for Intermediate Bond Fund and Adjustable Rate Mortgage Securities Fund
are 2.04% and 1.52%, respectively, of the net asset value (in case of sales of
less than $100,000).
PERFORMANCE COMPARISONS
Advertisements and other sales literature for the Funds may refer to
"average annual total return," "cumulative total return" and "yield."
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:
P(1+T)(n) = 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.
-30-
<PAGE>
The following table sets forth the average annual total returns for each
Fund for one year, five years and since inception for the period ending
September 30, 1996:
Average Annual Total Returns
----------------------------
1 Year 5 Years Since Inception
------ ------- ---------------
Government Income Fund (1) 0.79% 5.25% 6.68%
Intermediate Bond Fund (2) 3.57% 3.97% 6.91%
Adjustable Rate Mortgage
Securities Fund (3) 4.97% N/A 4.17%
____________________
(1) Inception date: 3/16/87
(2) Inception date: 7/11/88. The Fund's investment policies were revised on
September 13, 1996 to permit investments in a broad range of investment
quality debt securities. Prior to that date, the Fund was named
Institutional Government Income Portfolio, and was permitted to invest only
in U.S. Government Securities and repurchase agreements for such
securities. Total return calculations deduct the current maximum sales
charge of 2%. The maximum sales charge prior to September 13, 1996 was
1.5%.
(3) Inception date: 1/30/92. Performance for periods prior to September 1,
1995 is that of DDJ, the Fund's predecessor for financial reporting
purposes.
The Distributor has voluntarily limited Rule 12b-1 fees and the Adviser has
paid certain expenses of some of the Funds, thereby increasing total return and
yield. These fees and expenses may or may not waived or paid in the future in
the Adviser's discretion. Absent any voluntary expense payments or fee waivers,
the average annual total returns for such Funds for one year, five years and
since inception for the period ending September 30, 1996 would have been:
Average Annual Total Returns
----------------------------
(absent voluntary waivers and reimbursements)
1 Year 5 Years Since Inception
------ ------- ---------------
Government Income Fund (1) 0.67% 5.06% 6.44%
Intermediate Bond Fund (2) + 3.95% 6.67%
_______________
(1) Inception date: 3/16/87.
(2) Inception date: 7/11/88.
+ There were no voluntary expense waivers or payments by the Adviser during
this time.
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:
-31-
<PAGE>
CTR = (ERV-P) 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 each Fund
from inception to September 30, 1996:
Cumulative Total Returns
Cumulative (absent voluntary fee waivers
Total Returns and expense reimbursements)
------------- ---------------------------
Government Income Fund (1) 85.40% 81.43%
Intermediate Bond Fund (2) 73.31% 70.11%
Adjustable Rate Mortgage
Securities Fund (3) 21.03% 20.88%
(1) Inception date: 3/16/87
(2) Inception date: 7/11/88. The Fund's investment policies were revised on
September 13, 1996 to permit investments in a broad range of investment
quality debt securities. Prior to that date, the Fund was named
Institutional Government Income Portfolio, and was permitted to invest only
in U.S. Government Securities and repurchase agreements for such
securities. Total return calculations deduct the current maximum sales
charge of 2%. The maximum sales charge prior to September 13, 1996 was
1.5%.
(3) Inception date: 1/30/92. Performance for periods prior to September 1,
1995 is that of DDJ, the Fund's predecessor for financial reporting purposes.
The Funds 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:
-32-
<PAGE>
6
YIELD = 2[(a-b + 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, 1996, Government Income Fund,
Intermediate Bond Fund and Adjustable Rate Mortgage Securities Fund had
yields of 6.53%, 6.53% and 5.94%, respectively. (The yield for Intermediate
Bond Fund has been restated to reflect the Fund's current 2% maximum sales
charge. The maximum sales charge prior to September 13, 1996 was 1.5%.)
Absent voluntary expense payments or fee waivers, the 30-day yield as of
September 30, 1996 would have been 6.34% and 6.43% for Government Income Fund
and Intermediate Bond Fund, 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. The performance of each Fund may be
compared to that of its benchmark index and to the performance of similar funds
as reported by Lipper. Each Fund's benchmark index and comparison group are set
forth below.
Performance information for the Funds also may be compared to other
unmanaged indices. Unmanaged indices do not reflect deductions for
administrative and management costs and expenses. The Funds may also include in
advertisements and communications to Fund shareholders evaluations of the Funds
published by nationally recognized ranking services and by financial
publications that are nationally recognized, such as BARRON'S, BUSINESS WEEK,
FORBES, INSTITUTIONAL INVESTOR, INVESTOR'S DAILY, MONEY, KIPLINGER'S PERSONAL
FINANCE MAGAZINE, MORNINGSTAR MUTUAL FUND VALUES, THE NEW YORK TIMES, USA TODAY
AND THE WALL STREET JOURNAL.
The performance of Intermediate Bond Fund may be compared to the
performance of the U.S. Mortgage Funds Average, as reported by Lipper,
and to the performance of the Lehman Brothers Intermediate Aggregate Index.
The performance of the Government Fund may be compared to the performance of
U.S. Mortgage Fund Average, as reported by Lipper, and the Merrill Lynch 5-10
Year Treasury Index. The performance of Adjustable Rate Mortgage Securities
Fund may be compared to the performance of the Adjustable Rate Mortgage Funds
Average, as reported by Lipper, and to the performance of the Lehman Brothers
Adjustable Rate Mortgage Index.
-33-
<PAGE>
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 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
-34-
<PAGE>
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
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.
-35-
<PAGE>
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
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
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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 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.
Certain Funds may make investments that produce income that is not matched
by corresponding distributions to such Funds, such as investments in obligations
having original issue discount, such as zero coupon securities, or market
discount (if a Fund elects to accrue the market discount on a current basis with
respect to such instruments). Such income would be treated as income earned by
a
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Fund and therefore would be subject to the distribution requirements of the
Code. Because such income may not be matched by a corresponding cash
distribution to a Fund, such Fund may be required to borrow money or dispose of
other securities to be able to make distributions to shareholders.
As noted in the Prospectus, for federal income tax purposes, Government
Income Fund, Intermediate Bond Fund and Adjustable Rate Mortgage Securities Fund
had capital loss carryovers at September 30, 1996 of $16,784,819, $276,491,719
and $146,563,691, respectively. Adjustable Rate Mortgage Securities Fund is
limited in its utilization of capital loss carryovers to $69,945,971 per year.
If these loss carryovers are not offset by subsequent capital gains, they will
expire September 30, 2002-2004 for Government Fund, September 30, 2003-2004 for
Intermediate Bond Fund and September 30, 1997-2004 for Adjustable Rate Mortgage
Securities Fund. It is unlikely that the Board of Directors will authorize a
distribution of any net realized capital gains for a Fund until such Fund's
available capital loss carryover has been offset or has expired.
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
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 Securities
Act of 1933 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 the Company limit the liability of
directors to the fullest extent permitted by Minnesota law and the 1940 Act.
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FINANCIAL STATEMENTS
The audited financial statements and supplementary schedules for the Funds
as of September 30, 1996 (as of August 31, 1996 and September 30, 1996 for
Adjustable Rate Mortgage Securities Fund) and have been incorporated by
reference into this Statement of Additional Information from the Funds' annual
reports to shareholders in reliance on the reports 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. On
February 13, 1996, a Settlement Agreement became effective for the consolidated
class action lawsuit, titled IN RE: PIPER FUNDS INC. INSTITUTIONAL GOVERNMENT
INCOME PORTFOLIO LITIGATION. The Amended Consolidated Class Action Complaint
was filed on October 5, 1994, in the United States District Court, District of
Minnesota, against Institutional Government Income Portfolio (a series of Piper
Funds Inc.), the Adviser, the Distributor, William H. Ellis and Edward J.
Kohler, and had alleged the making of materially misleading statements in the
prospectus, common law negligent misrepresentation and breach of fiduciary duty.
The Settlement Agreement will provide approximately $67.5 million, together with
interest earned, less certain disbursements and attorney fees, to class members
in payments scheduled over approximately three years. Such payments will be
made by Piper Jaffray Companies Inc. and the Adviser and will not be an
obligation of Piper Funds Inc.
Two additional complaints relating to the Institutional Government Income
Portfolio remain pending. These complaints were brought by investors who
requested exclusion from the settlement class and are based on claims similar to
those asserted in the consolidated Class Action complaint. The first pending
complaint was brought on April 11, 1995, and filed in the Minnesota State
District Court, Hennepin County. This action was removed to United States
District Court, District of Minnesota. 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, Piper Funds
Inc., Morton Silverman and Worth Bruntjen. A second pending complaint relating
to the Institutional Government Income Portfolio 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 some of
individual investors who requested exclusion from the settlement class in the IN
RE: PIPER FUNDS INC. action.
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
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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. On August 23, 1996, the Court granted final approval to the
parties' agreement to settle all outstanding cliams of the purported class
action. The Effective Date of the Settlement Agreement was September 23, 1996.
The Settlement Agreement provides for $14 million in principal payments
consisting of $500,000 which was paid upon the Court's preliminary approval,
$1.5 million which was paid on the Effective Date of the Settlement Agreement,
and payments of $3 million on each anniversary of the Effective Date for the
next four years, with accrued interest payments of up to $1.8 million.
Two additional complaints relating to the American Adjustable Rate Term
Trusts, which are based on claims similar to those asserted in the Gordon/Donio
Consolidated Complaint, remain pending. The first of these additional
complaints was filed against the Distributor on August 11, 1995 in Washington
State District Court, King County, by plaintiff Ernest Volinn. The second
complaint was filed against the Distributor on November 1, 1995 in the United
States District Court, District of Idaho, by plaintiff Ewing Company Profit
Sharing Plan. In addition to the above complaints, a number of actions have
been commenced in arbitration by individual investors in the American Adjustable
Rate Term Trusts.
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 ("BSP"), 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. ("OIF"), 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. ("AAF"), American Government
Income Fund Inc. ("AGF"), American Government Term Trust, Inc., American
Strategic Income Portfolio Inc. ("ASP"), American Strategic Income Portfolio
Inc. -- II, American Strategic Income Portfolio Inc. -- III ("CSP"), American
Opportunity Income Fund Inc., American Select Portfolio Inc., Piper Jaffray
Companies Inc., the Distributor, the Adviser and
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<PAGE>
certain associated individuals. By Order filed October 5, 1995, the complaints
were consolidated. Plaintiffs filed a second amended complaint on February 5,
1996 and a third amended complaint on June 4, 1996. The third amended third
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. The named plaintiffs and defendants have
reached an agreement-in-principle on a proposed settlement. If approved by the
Court, a settlement agreement consistent with the terms of the
agreement-in-principle would provide $15.5 million to class members in payments
by Piper Jaffray Companies Inc. and the Adviser over the next four years. The
settlement also includes an agreement that each of OIF, AAF, and AGF would offer
to repurchase up to 25% of their outstanding shares from current shareholders at
net asset value. If the discounts between net asset value and market price of
these funds do not decrease to 5% or less within approximately two years after
the effective date of the settlement, the fund boards may submit shareholder
proposals to convert these funds to an open-end format. Finally, the agreement
stipulates that each of ASP, BSP, CSP and SLA would offer to repurchase up to
10% of their outstanding shares from current shareholders at net asset value.
Four additional complaints are pending which involve the funds named as
defendants in the Nelson/Christian Fellowship Consolidated Action and are based
on claims similar to that action. The first additional complaint was filed
against the Distributor and Richard Tallent in Montana State District Court,
Silver Bow County on November 1, 1995 by plaintiff John Darlington. The second
complaint was filed against the Distributor and Richard Tallent on April 11,
1996 in Montana State District Court, Silver Bow County by plaintiff Kenneth
Schneider. The third complaint was filed against the Distributor and Richard
Tallent on April 11, 1996 in Montana State District Court, Silver Bow County by
plaintiff Margaret Nagel. The fourth complaint was filed against the
Distributor on August 7, 1996 by plaintiff Kenneth Gennerman as Trustee of the
Nicole Bowlin Trust in Wisconsin Circuit Court, Waukesha County. In addition to
the above complaints, a number of arbitrations have been commenced by individual
investors in the funds named as defendants in the Nelson/Christian Fellowship
Consolidated Action.
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
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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 named plaintiff and defendants have reached an
agreement-in-principle on a proposed settlement. If approved by the Court and a
sufficiently large percentage of the putative class members, a settlement
agreement consistent with the terms of the agreement-in-principle would provide
to class members up to a total of $1.5 million collectively from The Managers
Funds, L.P. and the Adviser on the effective date of the settlement. A third
complaint relating to both the Managers Intermediate Mortgage Fund and the
Managers Short Government Fund was filed on October 26, 1995 in Connecticut
State Superior Court, Stamford/Norwalk District. The complaint was filed by
First Commercial Trust Company, N.A. against the Managers Funds, Managers Short
Government Fund, Managers Intermediate Mortgage Fund, Managers Short and
Intermediate Bond Fund, The Managers Funds, L.P., EAIMC Holdings Corporation,
Evaluation Associates Holding Corporation, EAI Partners, L.P., Evaluation
Associates, Inc., Robert P. Watson, William W. Graulty, Madeline H. McWhinney,
Steven J. Paggioli, Thomas R. Schneeweis, William J. Crerend, the Adviser, Piper
Jaffray Companies Inc., Worth Bruntjen, Standish, Ayer & Wood, Inc., TCW Funds
Managements, Inc., and TCW Management Company. The complaint alleges claims
under Connecticut common law and violation of the Connecticut Securities Act and
the Connecticut Unfair and Deceptive Trade Practices Act.
The Adviser and Distributor do not believe that the settlements described
above, or any of the above lawsuits and arbitrations, will have a material
adverse effect upon their ability to perform under their agreements with the
Company, and they intend to defend the remaining lawsuits vigorously.
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PART C
OTHER INFORMATION
Government Income Fund, Intermediate Bond Fund
and Adjustable Rate Mortgage Securities Fund
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements are incorporated by reference to the
Registrants' Annual Reports previously filed with the Commission.
(b-1) Exhibits of Government Income Fund and Intermediate Bond Fund:
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 September 13, 1996 (1)
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 (2)
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 *
---------------------
* Incorporated by reference to Post-Effective Amendment No. 27 to the
Registrant's Registration Statement on Form N-1A filed with the
Commission on November 27, 1995.
(1) Incorporated by reference to Post-Effective Amendment No. 29 to the
Registrant's Registration Statement on Form N-1A filed with the
Commission on September 13, 1996.
(2) Filed herewith.
<PAGE>
(b-2) Exhibits of Adjustable Rate Mortgage Securities Fund:
1.1 Articles of Incorporation (1)
1.2 Amendment to Articles of Incorporation (1)
2 Bylaws (1)
5 Investment Advisory and Management Agreement (2)
6.1 Underwriting and Distribution Agreement (2)
6.2 Dealer Agreement (2)
8 Custody and Investment Accounting Agreement (2)
9.1 Agency Agreement (2)
9.2 Shareholder Account Servicing Agreement (4)
10 Opinion and Consent of Dorsey & Whitney P.L.L.P. (2)
11 Consent of KPMG Peat Marwick LLP (5)
15 Plan of Distribution (1)
16 Computation of Performance Quotations (3)
25 Power of Attorney (2)
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(1) Incorporated by reference to the Registrant's Registration Statement
on Form N-14, File No. 33-58849.
(2) Incorporated by reference to the initial Registration Statement of
Piper Funds Inc.--II on Form N-1A filed June 23, 1995.
(3) Incorporated by reference to Post-Effective Amendment No. 1 to the
Registration Statement of Piper Funds Inc.--II on Form N-1A filed
September 5, 1995.
(4) Incorporated by reference to Post-Effective Amendment No. 2 to the
Registration Statement of Piper Funds Inc.--II on Form N-1A filed
December 18, 1995.
(5) Incorporated by reference to Post-Effective Amendment No. 3 to the
Registration Statement of Piper Funds Inc.--II filed November 6, 1996.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANTS
No person is directly or indirectly controlled by or under common control
with the Registrants.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of November 1, 1996: Number of
Title of Class Record Holders
-------------- --------------
Government Income Fund Common Shares 5,239
Intermediate Bond Fund Common Shares 2,773
Adjustable Rate Mortgage
Securities Fund Common Shares 17,385
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
2
<PAGE>
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.
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:
Name Title
---- -----
William H. Ellis President, Director and Chairman of
the Board
Charles N. Hayssen Director
Bruce C. Huber Director
David E. Rosedahl Director
Momchilo Vucenich Director
3
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Paul A. Dow Senior Vice President and
Chief Investment Officer
Susan S. Miley Senior Vice President, General
Counsel and Secretary
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 F. Gudmundson Senior Vice President
Robert C. Hannah Senior Vice President
Lynne Harrington Senior Vice President
Kim Jenson Senior Vice President
Lisa A. Kenyon Senior Vice President
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
Bruce D. Salvog Senior Vice President
John K. Schonberg Senior Vice President
Sandra K. Shrewsbury Senior Vice President
David M. Steele 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
Joyce A. K. Halbe Vice President
Joan L. Harrod Vice President
Mary M. Hoyme Vice President
Amy K. Johnson Vice President
Russell J. Kappenman Vice President
Kimberly F. Kaul Vice President
John D. Kightlinger Vice President
Wan-Chong Kung Vice President
Steven Meyer Vice President
Thomas Moore Vice President
Chris Neuharth Vice President
Paul D. Pearson Vice President
Eric L. Siedband Vice President
Catherine M. Stienstra Vice President
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<PAGE>
Shaista Tajamal Vice President
Jill A. Thompson Vice President
Jane K. Welter Vice President
Marcy K. Winson Vice President
Fong P. Woo Vice President
Principal occupations of Messrs. Ellis, Dow, Nelson and Ms. Miley are set
forth in the Statement of Additional Information under the heading "Directors
and Officers." MR. HAYSSEN is a Director of the Adviser and has been Chief
Information Officer of Piper Jaffray Companies Inc. since January 1996 and a
Managing Director of Piper Jaffray Inc. ("Piper Jaffray") since 1986, prior to
which he was a Managing Director of Piper Jaffray Companies Inc. from 1987 to
1995, Chief Financial Officer of Piper Jaffray from 1988 to 1995, Chief
Financial Officer of the Adviser from 1989 to 1995 and Chief Operating Officer
of the Adviser from 1994 to 1995. MR. HUBER has been a Director of the Adviser
since 1985 and a Managing Director of Piper Jaffray since 1986. MR. ROSEDAHL is
a Director of the Adviser and Managing Director and Secretary for Piper Jaffray
and Managing Director, Secretary and General Counsel for Piper Jaffray Companies
Inc. MR. VUCENICH has been a Director of the Adviser since 1994 and a Managing
Director of Piper Jaffray Inc. since 1993.
MR. BRUNTJEN has been a Senior Vice President of the Adviser since 1988.
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. FILIPPONE has been a Senior Vice President of the Adviser since 1991.
MR. GIBAS has been a Senior Vice President of the Adviser since 1992, prior to
which he had been a Vice President of the Adviser from 1987 to 1992. MS.
GOLDSTEIN has been a Senior Vice President of the Adviser since 1993, prior to
which she was a Vice President of the Adviser from 1991 to 1993. MR. GROTTE has
been a Senior Vice President of the Adviser since 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 1995, prior to which he was an
Executive Vice President at Resource Capital Advisers from 1991 to 1995. MR.
HANNAH has been a Senior Vice President of the Adviser since 1995, prior to
which he was manager of Craig and Associates in Seattle, Washington from 1993 to
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 1991 to 1992. MS. HARRINGTON has been a Senior Vice President of the
Adviser since 1995, prior to which she was a Managing Director at Piper Jaffray
Inc. in the Public Finance Department. MS. KENYON has been a Senior Vice
President of the Adviser since 1992, prior to which she had been a financial
adviser for a private family in Los Angeles. MS. JENSON has been a Senior Vice
President of the Adviser since 1996, prior to which she was a Managing Director
at Piper Trust since 1991. MR. MCGLINCH has been a Senior Vice President of
the Adviser since 1995, prior to which he had been a Vice President of the
Adviser since 1992 and, prior thereto, he had been a specialty products
trader at FBS Investment Services from 1990 to 1992. MR. MCLEOD has been a
Senior Vice President of the Adviser since 1995, prior to which he had been
an analyst at the Adviser since 1988. MR. MARKUSEN has
5
<PAGE>
been a Senior Vice President of the Adviser since 1993, prior to which had been
a senior vice president of Investment Advisers, Inc., in Minneapolis, Minnesota
from 1989 to 1993. MS. MEYER has been a Senior Vice President of the Adviser
since 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. OLSEN has been a Senior
Vice President of the Adviser since 1991. MR. REUSS has been a Senior Vice
President of the Adviser since 1989. MR. SALVOG has been a Senior Vice
President of the Adviser since 1992, prior to which he had been a portfolio
manager at Kennedy & Associates in Seattle, Washington from 1984 to 1992. MR.
SCHONBERG has been a Senior Vice President of the Adviser since 1995, prior to
which he was a Vice President of the Adviser from 1992 to 1995 and a portfolio
manager for the Adviser since 1989. MS. SHREWSBURY has been a Senior Vice
President of the Adviser since 1993, prior to which she had been a Managing
Director of Piper Jaffray since 1992, and a Vice President of Piper Jaffray
since 1990. MR. STEELE has been a Senior Vice President of the Adviser since
1992, prior to which he had been a portfolio manager at Kennedy & Associates in
Seattle, Washington from 1987 to 1992. MR. WEIDENHAMMER has been a Senior Vice
President of the Adviser since 1991. MR. WENKER has been a Senior Vice
President of the Adviser since 1993, prior to which he had been a Managing
Director of Piper Jaffray from 1992 to 1993, and prior thereto, the Director of
Revitalization Resources of the Minneapolis Community Development Agency from
1990 to 1992. MR. WHITE has been a Senior Vice President of the Adviser since
1991.
MS. CASTLE has been a Vice President of the Adviser since 1994, prior to
which she was a client service associate 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 aVice President of the Adviser
since 1994, prior to which she was an Accounting Manager from 1993 to 1994 and
mutual fund accountant from 1991 to 1993 with the Adviser. MS. DEUTZ 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 1992 to September 1995 and a
manager of financial reporting at The Churchill Companies from 1991 to 1992.
MS. HALBE has been a Vice President of the Adviser since 1996, prior to which
she was a Vice President at First Asset Management since 1990. MS. HARROD has
been a Vice President of the Adviser since 1992 and has been a trader for the
Adviser since 1989. MS. HOYME has been a Vice President of the Adviser since
1996, prior to which she had been a Vice President at First Asset Management
since 1989. MS. JOHNSON has been a Vice President of the Adviser since 1994,
prior to which she was an Accounting Manager from 1993 to 1994 and mutual fund
accountant from 1991 to 1993 with the Adviser. 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 1991. MR. KIGHTLINGER
has been a Vice President of the Adviser since 1991. MS. KUNG has been a Vice
President of the Adviser since 1993, prior to which she had been a Senior
Consultant at Cytrol Inc. from 1989 to 1992. MR. MEYER has been a Vice
President of the Adviser since 1994 and manager of Systems Integration for the
Adviser since 1991. 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
6
<PAGE>
to 1992 and a broker at Hanifen Capital Management from 1990 to 1992. MR.
NEUHARTH has been a Vice President of the Adviser since 1996, prior to which he
had been a senior mortgage trader at FBS Mortgage since 1995, and prior thereto,
a fixed income portfolio manager at Fortis Financial since 1987. MR. PEARSON
has been a Vice President of the Adviser since 1995, prior to which he was
Mutual Funds Accounting Manager of the Adviser from 1994 to 1995 and prior
thereto, Director of Fund Operations at Norwest Bank, Minneapolis from 1992 to
1994. 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 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. THOMPSON has been a Vice President of the Adviser since 1994, prior
to which she had been a Vice President at First Asset Management since 1991.
MS. WELTER has been a Vice President of the Adviser since 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. MS. 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. MR. WOO has been a Vice President of the Adviser since 1994,
prior to which he was a municipal credit analyst of the Adviser since 1992 and 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 Funds Inc. -- II,
the shares of which are currently offered in one series, Piper Institutional
Funds Inc., the shares of which are currently offered in one series and Piper
Global Funds Inc., the shares of which are currently offered in two 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:
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
---- --------------------- ------------------------
Addison L. Piper Chairman of the Board of None
Directors and Chief Executive
Officer
Ralph W. Burnet Member of the Board None
of Directors
William H. Ellis Member of the Board None
of Directors
7
<PAGE>
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
---- --------------------- ------------------------
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 and None
General Counsel
Lloyd K. Benson Managing Director None
Gary J. Blauer Managing Director None
Karen M. Bohn Managing Director None
Sean K. Boyea Managing Director None
Ronald O. Braun 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
Antonio J. Cecin Managing Director None
Joyce E. Chaney Managing Director None
Kenneth P. Clark Managing Director None
Linda A. Clark Managing Director None
Stephen B. Clark Managing Director None
8
<PAGE>
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
---- --------------------- ------------------------
David P. Crosby Managing Director None
Mark A. Curran Managing Director None
George S. Dahlman Managing Director None
Jack C. Dillingham Managing Director None
Mark T. Donahoe Managing Director None
Darci L. Doneff Managing Director None
Andrew S. Duff Managing Director None
Andrew W. Dunleavy 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
G. Richard 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
Paul D. Grangaard Managing Director None
James S. Harrington Managing Director None
Charles N. Hayssen Managing Director None
9
<PAGE>
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
---- --------------------- ------------------------
William P. Henderson Managing Director None
Allan F. Hickok Managing Director None
Richard L. Hines Managing Director None
David B. Holden 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
Paul P. Karos Managing Director None
Richard G. Kiss Managing Director None
Gordon E. Knudsvig Managing Director None
Jerome P. Kohl Managing Director None
Eric W. Larson Managing Director None
Dan L. Lastavich Managing Director None
Robert J. Magnuson Managing Director None
Robert E. Mapes Managing Director None
Peter T. Mavroulis Managing Director None
Michael P. McMahon Managing Director None
G. Terry McNellis Managing Director None
Thomas A. Medlin Managing Director None
10
<PAGE>
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
---- --------------------- ------------------------
Darryl L. Meyers Managing Director None
Joseph E. Meyers Managing Director None
John V. Miller Managing Director None
Dennis V. Mitchell Managing Director None
Edward P. Nicoski Managing Director None
Barry J. Nordstrand Managing Director None
Benjamin S. Oehler Managing Director None
Brooks G. O'Neil Managing Director None
John P. O'Neill Managing Director None
John Otterlei 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
Robert P. Rinek Managing Director None
Wesley L. Ringo Managing Director None
Jim M. Roane Managing Director None
Deborah K. Roesler Managing Director None
Russ E. Rogers Managing Director None
David E. Rosedahl Managing Director None
and Secretary
Terry D. Sandven Managing Director None
11
<PAGE>
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
---- --------------------- -----------------------
Thomas P. Schnettler Managing Director None
Steven R. Schroll Managing Director None
Joyce Nelson Schuette Managing Director None
Lawrence M. Schwartz, Jr. 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
D. Greg Sundberg Managing Director None
Robert D. Swerdling Managing Director None
William H. Teeter Managing Director None
Ann C. Tillotson Managing Director None
Marie Uhrich Managing Director None
Momchilo Vucenich Managing Director None
Charles M. Webster, Jr. Managing Director None
Darrell L. Westby Managing Director None
David R. Westcott Managing Director None
Douglas R. Whitaker Managing Director None
James H. Wilford Managing Director None
Stephen W. Woodard Managing Director None
12
<PAGE>
Mark Wren Managing Director None
Saul Yaari Managing Director None
Beverly J. Zimmer Managing Director None
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 Registrants
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 Registrants' 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 Registrants may
request the latest Annual Report of such series, and such Annual Report will be
furnished by the Registrants 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 5th day of November 1996.
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:
/s/ Paul A. Dow President (principal November 5, 1996
- ------------------------------- executive officer)
Paul A. Dow
/s/ Robert H. Nelson Treasurer (principal November 5, 1996
- ------------------------------- financial and
Robert H. Nelson accounting officer)
David T. Bennett* Director
Jaye F. Dyer* Director
William H. Ellis* Director
Karol D. Emmerich* Director
Luella G. Goldberg* Director
- ------------------------------- Director
David A. Hughey
George Latimer* Director
*By /s/ William H. Ellis November 5, 1996
---------------------------
William H. Ellis, Attorney-in-Fact
<PAGE>
EXHIBIT INDEX
TO
REGISTRATION STATEMENT
OF
PIPER FUNDS INC.
Exhibit Page No.
- ------- --------
11 Consent of KPMG Peat Marwick LLP
<PAGE>
Exhibit 11
[LETTERHEAD]
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Piper Funds Inc.:
We consent to the use of our report dated October 18, 1996 incorporated by
reference herein and to the references to our Firm under the headings
"FINANCIAL HIGHLIGHTS" in Part A and "FINANCIAL STATEMENTS" in Part B of the
Registration Statement.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
November 1, 1996
