<PAGE>
Income Funds - 1997 Annual Report
[LOGO]
INCOME FUNDS
1997 Annual Report
GOVERNMENT INCOME FUND
INTERMEDIATE BOND FUND
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
INSIDE: ACTION OR REACTION --
Which Guides Your Approach to Investing?
[PICTURE]
<PAGE>
[LOGO]
CONTENTS
President's Letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . 28
Federal Tax Information . . . . . . . . . . . . . . . . . . . . . . . . . 29
Shareholder Services . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Glossary***. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
GOVERNMENT INCOME FUND
Portfolio Managers' Letter . . . . . . . . . . . . . . . . . . . . . . . . .4
Financial Statements and Notes . . . . . . . . . . . . . . . . . . . . . . 12
Investments in Securities. . . . . . . . . . . . . . . . . . . . . . . . . 25
INTERMEDIATE BOND FUND
Portfolio Managers' Letter . . . . . . . . . . . . . . . . . . . . . . . . .7
Financial Statements and Notes . . . . . . . . . . . . . . . . . . . . . . 12
Investments in Securities. . . . . . . . . . . . . . . . . . . . . . . . . 26
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
Portfolio Managers' Letter . . . . . . . . . . . . . . . . . . . . . . . . 10
Financial Statements and Notes . . . . . . . . . . . . . . . . . . . . . . 12
Investments in Securities. . . . . . . . . . . . . . . . . . . . . . . . . 27
This report is intended for shareholders of Government Income Fund, Intermediate
Bond Fund and Adjustable Rate Mortgage Securities Fund, but may also be used as
sales literature if preceded or accompanied by a prospectus. The prospectus
gives details about the charges, investment results, risks and operating
policies of the funds.
*** - This report includes a glossary to help you understand financial terms
used in the portfolio managers' letters. When you see this symbol, it
indicates a word that is defined in the glossary.
ACTION
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WHICH GUIDES YOUR APPROACH TO INVESTING?
The market soars 150 points. The market plummets 150 points. One financial
commentator urges investors to sell stocks and buy bonds. Another promotes a
"can't miss" investment opportunity. One thing is for sure -- in today's
financial markets, it's easy to get the impression that investment experts
possess a secret formula for success. Yet many successful investors realize
there are no short-term secrets to investing. While others heed market
soothsayers and prophets, savvy investors work with investment professionals who
help them remain calm in the face of volatility. Guided by long-term investment
plans rather than by emotions, these investors stay the course while others
react to the latest trend. More important, successful investors employ several
time-tested investment strategies to help reach their goals, including
diversification and systematic investing.*
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WALL STREET'S WILD RIDE
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Dow Jones Industrial Average
8/1 8194
8/4 8198
8/5 8188
8/6 8259
High 8/6/97 8,259
8/7 8188
8/8 8031
8/11 8062
8/12 7961
8/13 7928
8/14 7942
8/15 7695
8/18 7803
8/19 7918
8/20 8021
8/21 7894
8/22 7888
8/25 7860
8/26 7782
8/27 7787
8/28 7694
8/29 7622
9/2 7880
9/3 7895
9/4 7867
9/5 7822
9/8 7835
9/9 7852
9/10 7719
9/11 7661
9/12 7743
9/15 7721
9/16 7896
9/17 7886
9/18 7923
9/19 7917
9/22 7997
9/23 7970
9/24 7907
9/25 7848
9/26 7922
9/29 7991
9/30 7945
10/1 8016
10/2 8028
10/3 8039
10/6 8100
10/7 8178
10/8 8095
10/9 8061
10/10 8045
10/13 8072
10/14 8096
10/15 8058
10/16 7939
10/17 7847
10/20 7921
10/21 8060
10/22 8035
10/23 7848
10/24 7715
10/27 7161
Low 10/27/97 7,161
10/28 7498
10/29 7507
10/30 7382
10/31 7442
DO YOUR EXPECTATIONS REFLECT MARKET REALITIES?
Investors' expectations have risen with the market -- and are in sharp contrast
to market realities. In the words of Federal Reserve Chairman Alan Greenspan,
there is an "irrational exuberance" based on unprecedented growth in recent
years. During the past few years, returns -- especially from stocks -- have been
much higher than at any other time in history. The chart below shows long-term
returns of various securities compared to the highly inflated results of the
past year.
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SHORT-TERM RETURNS VS. LONG-TERM RETURNS THROUGH SEPTEMBER 30, 1997
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The past year has provided investors with unusually high returns
[EDGAR REPRESENTATION OF GRAPH]
THE PAST YEAR PAST 71 YEARS
total return average annualized
total return, 1926-1997
Large-Company Stocks 40.49% 10.98%
Long-Term Corporate Bonds 12.67% 5.67%
Source: Ibbotson Associates. Past performance does not guarantee future
results. Stocks generally exhibit more volatility than bonds.
*** - This symbol represents a graduation cap, used throughout this report to
indicate terms defined in the glossary.
<PAGE>
OR REACTION
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What actions do successful investors take to weather the market's normal ups
and downs? First, they realize that markets move in cycles. In addition, they
diversify their holdings among a mix of funds that mirror their investment
objectives and risk tolerance and continue to purchase fund shares
systematically. By investing regularly* -- consistently buying shares through
market fluctuations -- educated investors steadily increase the number of shares
they own, while evening out their average cost per share over time.
THE MISGUIDED REACTIVE INVESTOR
The reactive investor believes that a shortcut to success is to chase today's
best-performing funds. After all, what could go wrong when you invest in these
winners? Plenty. The lure of a quick profit could fade to the reality of poor
returns for reactive investors who buy in at the peak of a fund's rally. They
often buy when prospects look bright and sell when prices drop -- behavior that
can devastate an investor's returns even while the market makes solid gains.
In contrast, educated investors don't succumb to emotions that could undermine
rational decisions. They're aware that few, if any, mutual funds can
significantly outperform their peers year after year. They also realize that
long-term investing helps reduce volatility. A buy-and-hold philosophy protects
investors against wild swings triggered by short-term market fluctuations -- and
helps them sleep better at night, too.
IT'S A FACT: INVESTORS PROFIT FROM THEIR ACTIONS, NOT THEIR REACTIONS
If you want to be successful in the financial marketplace, don't be swayed by
emotions or speculation. Keep in mind that markets change daily, yet your goals
may not change for years. Work with your Piper Jaffray Investment Executive to
develop an investment plan or to fine-tune your investment strategies as your
objectives change. A professional can help you ignore short-term volatility and
focus on long-term results. Your actions -- not your reactions -- ultimately
represent the difference between getting by ... and getting ahead.
* Keep in mind, investing regularly does not assure a profit and does not
protect against loss in declining markets.
TAKE THE GUESSWORK OUT OF INVESTING WITH THESE TRIED-AND-TRUE INVESTMENT
STRATEGIES
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X GET AN INVESTMENT PLAN An investment plan maps out your goals and
identifies effective ways to pursue them.
X INVEST SYSTEMATICALLY* Systematic investing is an effective way to build
wealth over time and helps you avoid hitting only market peaks and valleys.
X DIVERSIFY Diversification helps reduce volatility within your portfolio
and may also give you better long-term results.
X REASSESS YOUR RISK TOLERANCE Life's events may affect the amount of risk
that's comfortable.
A "BUY-AND-HOLD" PHILOSOPHY HELPS REDUCE YOUR RISK
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Your chance of losing money decreases the longer you hold stocks
[EDGAR REPRESENTATION OF GRAPH]
HOLDING STOCKS FOR ONE YEAR 29%
HOLDING STOCKS FOR FIVE YEARS 11%
HOLDING STOCKS FOR 10 YEARS 3%
Source: Based on rolling annual returns of the S&P 500 Index through 1996. The
S&P 500 is an unmanaged index of large-capitalization stocks. Past performance
does not guarantee future results.
<PAGE>
PRESIDENT'S LETTER
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[PHOTO]
PAUL A. DOW, CFA
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President
Piper Funds
November 13, 1997
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DEAR SHAREHOLDERS:
An athlete is sometimes said to be "in the zone." That's the time when the
difficult seems easy, the fast seems slow; essentially, the time when everything
comes together and performance soars. For the last few years, the investment
environment has been in the zone. The economy has maintained a steady growth
rate without increasing inflationary pressures. In fact, economic
prognosticators have consistently underestimated growth and overestimated
inflation - traditionally considered an impossible feat.
Fixed income investors have fared well during this period with broad bond market
total returns between 8% and 10%, annualized, for the past three years. Returns
have been attractive, although low compared to investor expectations and stock
performance and have been helped by steadily declining inflation expectations.
Non-government issues have further benefited from investors' increasing degree
of comfort with credit risk. As a result, the amount of additional yield
required by investors to take on credit risk has declined, as illustrated by the
chart on the following page. This is a normal occurrence during a period of
economic growth, but is not sustainable permanently.
This attractive environment for fixed income investors has not been without
setbacks, however. The year started in an interest rate environment that was
particularly good until February, when a series of stronger-than-expected
economic reports raised inflation concerns among investors and caused interest
rates to rise and bond prices to fall. Then in March, in a pre-emptive strike
against inflation, the Federal Reserve Board raised the federal funds rate by a
quarter of one percent. General bond market indexes finished the first calendar
quarter with slightly negative total returns in the -0.50% to -0.90% range. The
bond market made a strong rebound during the next quarter, helped along by
decelerating inflation and signs of a slowing economy. The market sustained this
rally throughout the fall.
During this time of buoyant investor confidence, it is important to be watchful
of significant changes that may alter the generally positive condition of the
U.S. investment environment. Late last month, we watched as turmoil in Hong Kong
dramatically affected our own markets. While the recent events in Southeast Asia
may seem irrelevant to the U.S. bond market, it's important to pay attention to
the long-term implications. For example, the deflation experienced in Japan last
month is spreading to other countries in the region, leading to overcapacity in
the goods they produce. This could result in lower global growth and interest
rates - as well as a slowing U.S. economy, which could jeopardize corporate
earnings growth and send a wave of defensive buying activity into the bond
markets.
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2 1997 Annual Report - Income Funds
<PAGE>
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When markets change, it is important to clearly understand, and be disciplined
in, your investment strategy. At Piper Funds, we believe that maintaining sound,
disciplined investment strategies is essential to achieving consistent,
competitive performance in an ever-changing environment. We also believe in
providing a higher level of quality service to shareholders. That means going
the extra step to make sure you understand your investments. Take a look at the
fund prospectus that accompanies this shareholder report. We've revised it to
make it simpler and easier to read. We hope the information in your new
prospectus, and in this shareholder report, is useful to you, and we look
forward to continuing to provide you with exceptional service. Thank you for
your continued confidence in the Piper Funds family.
Sincerely,
/s/ Paul A. Dow
Paul A. Dow
President, Piper Funds
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BOND YIELD SPREAD
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BAA Less AAA (Corporate Bonds)
[GRAPH - PLOT POINTS TO COME]
Sources: Moody's Investors Service - Copyright-C-1997 Crandall, Pierce & Company
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3 1997 Annual Report - Income Funds
<PAGE>
GOVERNMENT INCOME FUND
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[PHOTO]
BRUCE SALVOG
shares responsibility for the management of Government Income Fund. He has 27
years of financial experience.
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November 13, 1997
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DEAR SHAREHOLDERS:
FOR THE ONE-YEAR PERIOD ENDED SEPTEMBER 30, 1997, GOVERNMENT INCOME FUND
RECORDED A 10.49%* TOTAL RETURN WITH ALL DISTRIBUTIONS REINVESTED, BUT NOT
INCLUDING THE FUND'S SALES CHARGE. The fund outperformed its benchmark,***
the Merrill Lynch 5-10 Year Treasury Index (9.64%)** and the Lipper U.S.
Mortgage Funds Average (9.15%).+ Security selection, asset allocation and
decisions affecting effective duration*** were largely responsible for the
fund's relatively strong investment results.
THE FUND ENJOYED SOLID PERFORMANCE FROM SEVERAL DIFFERENT SECTORS. In March, as
interest rates rose, our overweighting*** in mortgage-backed securities proved
beneficial to the fund. When rates rise, mortgage-backed securities typically
outperform Treasuries. In July, as interest rates declined on news the economy
was slowing, the fund realized good performance from its exposure to Z-bonds and
U.S. Treasuries. Both tend to be more sensitive to interest-rate changes than
other fixed income securities. During the year, the fund enjoyed good investment
results from its positions in discount*** and seasoned*** premium mortgage
securities. Seasoned premium mortgage-backed securities provide relatively high
predictable income, while discount mortgage securities tend to appreciate more
than other mortgage-backed securities when interest rates decline.
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PERFORMANCE THROUGH SEPTEMBER 30, 1997*
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Growth of $10,000 Invested Since Inception
Government Income
Fund, reflects the Merrill Lynch Lipper
fund's 2% 5-10 Year U.S. Mortgage
sales charge++ Treasury Index** Funds Average+
3/87 9,800 10,000 10,000
3/87 9,790 10,000 10,000
4/87 9,562 9,700 9,712
5/87 9,524 9,644 9,678
6/87 9,715 9,757 9,818
7/87 9,643 9,721 9,836
8/87 9,521 9,630 9,779
9/87 9,184 9,371 9,523
10/87 9,662 9,798 9,843
11/87 9,721 9,838 9,947
12/87 9,841 9,978 10,066
1/88 10,241 10,371 10,411
2/88 10,352 10,512 10,528
3/88 10,194 10,366 10,439
4/88 10,107 10,309 10,395
5/88 10,005 10,189 10,328
6/88 10,317 10,451 10,567
7/88 10,326 10,374 10,539
8/88 10,295 10,373 10,546
9/88 10,483 10,646 10,771
10/88 10,645 10,846 10,969
11/88 10,595 10,667 10,840
12/88 10,544 10,659 10,805
1/89 10,654 10,809 10,942
2/89 10,650 10,696 10,871
3/89 10,637 10,770 10,886
4/89 10,788 11,005 11,078
5/89 10,944 11,344 11,349
6/89 11,109 11,739 11,619
7/89 11,252 12,061 11,818
8/89 11,134 11,780 11,683
9/89 11,166 11,827 11,735
10/89 11,395 12,153 11,980
11/89 11,501 12,286 12,102
12/89 11,584 12,288 12,158
1/90 11,370 12,106 12,043
2/90 11,429 12,100 12,089
3/90 11,411 12,105 12,105
4/90 11,220 11,956 11,992
5/90 11,616 12,316 12,329
6/90 11,830 12,518 12,512
7/90 12,036 12,716 12,705
8/90 11,872 12,505 12,594
9/90 11,969 12,632 12,691
10/90 12,146 12,861 12,820
11/90 12,382 13,162 13,086
12/90 12,593 13,385 13,290
1/91 12,797 13,540 13,448
2/91 12,892 13,599 13,534
3/91 12,941 13,648 13,618
4/91 13,073 13,796 13,753
5/91 13,169 13,861 13,834
6/91 13,091 13,819 13,839
7/91 13,361 13,997 14,044
8/91 13,680 14,355 14,323
9/91 14,065 14,733 14,597
10/91 14,274 14,888 14,781
11/91 14,424 15,076 14,905
12/91 14,985 15,680 15,290
1/92 14,431 15,306 15,075
2/92 14,539 15,386 15,186
3/92 14,361 15,255 15,097
4/92 14,499 15,368 15,222
5/92 14,936 15,692 15,482
6/92 15,184 15,989 15,697
7/92 15,362 16,457 15,910
8/92 15,556 16,670 16,078
9/92 15,692 16,985 16,230
10/92 15,243 16,667 16,006
11/92 15,270 16,559 16,026
12/92 15,641 16,863 16,258
1/93 16,030 17,330 16,544
2/93 16,231 17,741 16,757
3/93 16,300 17,825 16,822
4/93 16,376 17,980 16,907
5/93 16,378 17,948 16,943
6/93 16,798 18,407 17,192
7/93 16,985 18,450 17,275
8/93 17,327 18,894 17,458
9/93 17,288 19,027 17,463
10/93 17,352 19,049 17,508
11/93 17,074 18,799 17,368
12/93 17,212 18,883 17,481
1/94 17,508 19,169 17,669
2/94 16,975 18,662 17,424
3/94 16,297 18,139 16,928
4/94 15,919 17,961 16,658
5/94 15,861 17,963 16,621
6/94 15,711 17,900 16,582
7/94 16,126 18,242 16,843
8/94 16,142 18,287 16,876
9/94 15,694 17,964 16,637
10/94 15,597 17,903 16,572
11/94 15,500 17,840 16,517
12/94 15,647 17,978 16,632
1/95 16,001 18,353 16,939
2/95 16,524 18,863 17,342
3/95 16,665 18,965 17,412
4/95 16,941 19,273 17,636
5/95 17,705 20,224 18,194
6/95 17,684 20,408 18,292
7/95 17,641 20,281 18,286
8/95 17,837 20,547 18,473
9/95 18,028 20,773 18,626
10/95 18,225 21,117 18,804
11/95 18,488 21,518 19,036
12/95 18,750 21,846 19,279
1/96 18,869 21,999 19,392
2/96 18,498 21,441 19,143
3/96 18,413 21,203 19,042
4/96 18,268 20,982 18,950
5/96 18,229 20,878 18,869
6/96 18,565 21,191 19,091
7/96 18,589 21,220 19,145
8/96 18,567 21,137 19,127
9/96 18,926 21,556 19,430
10/96 19,418 22,113 19,828
11/96 19,782 22,599 20,131
12/96 19,543 22,239 19,981
1/97 19,579 22,262 20,086
2/97 19,616 22,245 20,135
3/97 19,278 21,921 19,930
4/97 19,711 22,299 20,233
5/97 19,859 22,512 20,401
6/97 20,143 22,784 20,631
7/97 20,832 23,554 21,085
8/97 20,576 23,222 20,968
9/97 20,913 23,635 21,225
** An unmanaged index, that includes no expenses or transaction charges, of all
U.S. Treasury bonds that have maturities of five to 10 years.
+ The average total return, not including sales charges, of similar funds as
characterized by Lipper Analytical Services.
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Average Annualized Total Returns
Includes 2% maximum sales charge++
One Year 8.28%
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Five Year 5.48%
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Ten Year 8.35%
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Since Inception (3/16/87) 7.24%
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* PLEASE REMEMBER, YOU COULD LOSE MONEY WITH THIS INVESTMENT. PAST PERFORMANCE
DOES NOT GUARANTEE FUTURE RESULTS. The investment return and principal value of
an investment will fluctuate so that fund shares, when sold, may be worth more
or less than their original cost. Neither safety of principal nor stability of
income is guaranteed. During most periods, the fund's advisor waived or paid
certain expenses and/or the fund's distributor voluntarily waived certain 12b-1
fees. Without waivers, returns would have been lower.
All fund and benchmark returns include reinvested distributions.
++ Effective February 18, 1997, the fund's maximum sales charge was changed from
4% to 2%.
*** - This symbol represents a graduation cap, used throughout this report to
indicate terms defined in the glossary.
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4 1997 Annual Report - Income Funds
<PAGE>
GOVERNMENT INCOME FUND (CONTINUED)
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[PHOTO]
DAVID STEELE
shares responsibility for the management of Government Income Fund. He has 18
years of financial experience.
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WE MADE SEVERAL DECISIONS REGARDING EFFECTIVE DURATION THAT HAD A FAVORABLE
IMPACT ON PERFORMANCE. Our decision to extend the fund's average effective
duration in late April helped performance, as interest rates trended lower
through July. The decline in rates was due to key reports that showed the
economy was slowing as well as the Federal Reserve Board's decision to leave
short-term interest rates unchanged following its July Federal Open Market
Committee meeting. The announcement came at a time when economists were
generally divided on whether the Fed would raise rates to keep inflation
subdued. In late July, we shortened the fund's duration to help protect
shareholder capital in anticipation of higher interest rates. This strategy also
helped performance as stronger-than-expected economic reports in August caused
rates to edge higher.
THE FUND'S PORTFOLIO INCLUDED A WIDE VARIETY OF INVESTMENT VEHICLES THROUGHOUT
THE PERIOD. On September 30, 1997, approximately 82% of the fund's total assets
were invested in U.S. agency mortgage-backed securities. Mortgage-backed
securities include bonds issued by the Government National Mortgage Association
(Ginnie Maes), Federal National Mortgage Association (Fannie Maes) and Federal
Home Loan Mortgage Corporation (Freddie Mac). The fund had 11% in U.S. Treasury
notes and 4% in U.S. agency debentures. We continued to maintain a modest 5% to
10% position in the dollar-roll program.*** This program allows the fund to
generate fee income by committing to pay for securities in the future at today's
price. The dollar-roll program tends to increase the number of assets exposed to
interest rate risk, and, therefore, increase volatility of the fund's net asset
value. Our position in the program is modest compared to the past, as the
current interest rate environment makes participation less compelling.
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PORTFOLIO COMPOSITION
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As a percentage of total assets on September 30, 1997
[EDGAR REPRESENTATION OF CHART]
U.S. Agency Inverse Interest-Only Securities 1%
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U.S. Agency Fixed Rate Mortgage-Backed Securities 60%
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U.S. Agency Z-Bond Securities 14%
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U.S. Agency Debentures 4%
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U.S. Treasury Securities 11%
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U.S. Agency CMOs - Fixed 6%
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U.S. Agency Inverse Floating Rate Securities 1%
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Short-Term 2%
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Other Assets 1%
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*** - This symbol represents a graduation cap, used throughout this report to
indicate terms defined in the glossary.
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5 1997 Annual Report - Income Funds
<PAGE>
GOVERNMENT INCOME FUNDS (CONTINUED)
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LOOKING AHEAD, BONDS MAY COME UNDER PRESSURE NEAR TERM IF THE ECONOMY CONTINUES
TO SHOW ROBUST GROWTH, BUT WE BELIEVE THE LONGER-TERM OUTLOOK IS FAVORABLE
BECAUSE INFLATION IS STILL BENIGN. Moreover, real interest rates on bonds, which
equal current yields minus inflation, are at historically high levels. Given
this scenario, we intend to maintain our neutral effective duration compared to
the fund's benchmark in the coming weeks. Should yields move higher, we may
extend the fund's effective duration to enhance its long-term income-producing
potential.
Thank you for your investment in Government Income Fund. We appreciate the
opportunity to serve your investment needs.
Sincerely,
/s/ Bruce Salvog /s/ David Steele
Bruce Salvog David Steele
Portfolio Manager Portfolio Manager
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6 1997 Annual Report - Income Funds
<PAGE>
INTERMEDIATE BOND FUND
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[PHOTO]
WORTH BRUNTJEN
shares responsibility for the management of Intermediate Bond Fund. Bruntjen
will be leaving Piper Capital Management on January 1, 1998, and will no longer
be part of the fund's management team.
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November 13, 1997
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DEAR SHAREHOLDERS:
FOR THE ONE-YEAR PERIOD ENDED SEPTEMBER 30, 1997, INTERMEDIATE BOND FUND
CLASS A RECORDED AN 8.29%* TOTAL RETURN WITH ALL DISTRIBUTIONS REINVESTED,
BUT NOT INCLUDING THE FUND'S SALES CHARGE. This compares to 8.87% gains from
both the Lehman Brothers Intermediate Aggregate Index** and the Lipper
Intermediate Investment-Grade Debt Funds Average.+ We attribute the fund's
underperformance compared to the Lipper average to shorter duration*** bonds
held by the fund. The targeted effective duration of this fund is shorter
than that of the average fund in the Lipper category. This means that the
fund is less sensitive to changing interest rates than the average fund in
its category.
EARLY IN THE PERIOD, THE FUND HAD A SUBSTANTIAL POSITION IN U.S. AGENCY FIXED-
RATE, MORTGAGE-BACKED SECURITIES, WHICH GENERALLY PERFORM BETTER THAN OTHER
FIXED INCOME SECURITIES IN PERIODS OF INCREASING INTEREST RATES, AS WE SAW EARLY
IN 1997. Midway through the year, the fund reduced its position in
mortgage-backed securities and began to increase its exposure to corporate
bonds. This decision
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PERFORMANCE THROUGH SEPTEMBER 30, 1997*
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Growth of $10,000 Invested Since Inception
Intermediate Lipper
Bond Fund Intermediate
class A, reflects Lehman Brothers Investment-Grade
the fund's Intermediate Debt
2% sales charge++ Aggregate Index** Funds Average+
7/88 9,800 10,000 10,000
7/88 9,761 10,000 10,000
8/88 9,766 10,017 10,012
9/88 9,958 10,217 10,193
10/88 10,102 10,385 10,341
11/88 9,987 10,275 10,248
12/88 9,982 10,263 10,264
1/89 10,099 10,395 10,384
2/89 10,043 10,344 10,340
3/89 10,027 10,378 10,364
4/89 10,220 10,587 10,545
5/89 10,477 10,837 10,758
6/89 10,736 11,108 11,017
7/89 10,912 11,344 11,220
8/89 10,778 11,197 11,083
9/89 10,848 11,259 11,138
10/89 11,082 11,504 11,357
11/89 11,219 11,619 11,438
12/89 11,297 11,664 11,460
1/90 11,224 11,587 11,350
2/90 11,286 11,639 11,387
3/90 11,292 11,659 11,392
4/90 11,252 11,595 11,307
5/90 11,522 11,889 11,580
6/90 11,713 12,058 11,741
7/90 11,918 12,242 11,897
8/90 11,865 12,162 11,785
9/90 11,965 12,258 11,849
10/90 12,091 12,399 11,945
11/90 12,313 12,614 12,159
12/90 12,478 12,801 12,318
1/91 12,717 12,955 12,445
2/91 12,846 13,061 12,560
3/91 12,964 13,150 12,655
4/91 13,095 13,285 12,802
5/91 13,177 13,379 12,885
6/91 13,196 13,390 12,889
7/91 13,407 13,568 13,037
8/91 13,658 13,822 13,315
9/91 13,975 14,068 13,574
10/91 14,165 14,256 13,719
11/91 14,355 14,396 13,850
12/91 14,688 14,715 14,268
1/92 14,560 14,570 14,083
2/92 14,715 14,658 14,152
3/92 14,763 14,589 14,098
4/92 14,887 14,724 14,189
5/92 15,156 14,965 14,445
6/92 15,427 15,169 14,658
7/92 15,925 15,405 15,003
8/92 16,186 15,576 15,140
9/92 16,448 15,753 15,336
10/92 16,256 15,574 15,110
11/92 16,292 15,555 15,080
12/92 16,481 15,761 15,303
1/93 17,129 16,030 15,621
2/93 17,721 16,247 15,926
3/93 17,970 16,325 16,009
4/93 18,159 16,439 16,130
5/93 18,243 16,451 16,131
6/93 18,589 16,660 16,425
7/93 18,798 16,710 16,521
8/93 19,024 16,906 16,825
9/93 19,251 16,956 16,885
10/93 19,290 17,003 16,955
11/93 19,060 16,932 16,815
12/93 19,054 17,030 16,911
1/94 19,210 17,211 17,126
2/94 18,887 17,008 16,819
3/94 17,446 16,672 16,404
4/94 15,224 16,556 16,172
5/94 14,505 16,587 16,114
6/94 14,172 16,576 16,068
7/94 14,577 16,847 16,322
8/94 14,690 16,900 16,371
9/94 14,120 16,716 16,179
10/94 13,704 16,712 16,146
11/94 13,445 16,645 16,092
12/94 13,653 16,729 16,171
1/95 13,844 17,038 16,422
2/95 14,315 17,419 16,768
3/95 14,511 17,512 16,870
4/95 14,822 17,740 17,109
5/95 15,652 18,282 17,711
6/95 15,854 18,398 17,820
7/95 15,747 18,411 17,791
8/95 16,111 18,587 18,000
9/95 16,400 18,731 18,171
10/95 16,552 18,925 18,396
11/95 16,768 19,162 18,655
12/95 17,010 19,376 18,897
1/96 17,107 19,536 19,030
2/96 16,988 19,332 18,725
3/96 16,933 19,243 18,605
4/96 16,856 19,181 18,509
5/96 16,801 19,152 18,481
6/96 17,014 19,377 18,692
7/96 17,083 19,439 18,743
8/96 17,087 19,449 18,738
9/96 17,331 19,740 19,049
10/96 17,652 20,103 19,437
11/96 17,858 20,377 19,762
12/96 17,760 20,257 19,604
1/97 17,843 20,362 19,673
2/97 17,902 20,411 19,723
3/97 17,752 20,252 19,537
4/97 17,979 20,521 19,782
5/97 18,114 20,701 19,959
6/97 18,298 20,911 20,183
7/97 18,673 21,322 20,689
8/97 18,595 21,237 20,529
9/97 18,768 21,492 20,810
** An unmanaged index, that includes no expenses or transaction charges,
consisting of one- to 10-year government and corporate securities and all of the
mortgage- and asset-backed securities in the Lehman Brothers Aggregate Index.
+ The average total return, not including sales charges, of similar funds as
characterized by Lipper Analytical Services.
Class A Average Annualized Total Returns
Includes 2% maximum sales charge++
One Year 6.13%
- --------------------------------------------------------------------------------
Five Year 2.26%
- --------------------------------------------------------------------------------
Since Inception (7/11/88) 7.06%
- --------------------------------------------------------------------------------
Class Y Cumulative Total Returns
Sales charges do not apply to class Y shares.
Since Inception (2/18/97) 4.58%
- --------------------------------------------------------------------------------
* PLEASE REMEMBER, YOU COULD LOSE MONEY WITH THIS INVESTMENT. PAST PERFORMANCE
DOES NOT GUARANTEE FUTURE RESULTS. The investment return and principal value of
an investment will fluctuate so that fund shares, when sold, may be worth more
or less than their original cost. Neither safety of principal nor stability of
income is guaranteed. During most periods, the fund's advisor waived or paid
certain expenses and/or the fund's distributor voluntarily waived certain 12b-1
fees. Without waivers, the class A returns would have been lower.
All fund and benchmark returns include reinvested distributions.
++ Effective September 12 1996, the fund's maximum sales charge was changed from
1.5% to 2%.
*** - This symbol represents a graduation cap, used throughout this report to
indicate terms defined in the glossary.
- --------------------------------------------------------------------------------
7 1997 Annual Report - Income Funds
<PAGE>
INTERMEDIATE BOND FUND (CONTINUED)
- --------------------------------------------------------------------------------
[PHOTO]
BRUCE SALVOG
shares responsibility for the management of Intermediate Bond Fund. He has 27
years of financial experience.
- --------------------------------------------------------------------------------
proved beneficial to the fund as corporate bonds recorded attractive investment
results compared to other fixed income securities. Late in the period, the fund
also benefited from its position in discount*** and seasoned*** premium
mortgage-backed securities. Seasoned premium mortgage-backed securities provide
relatively high predictable income, while discount mortgage securities tend to
appreciate more than other mortgage-backed securities when interest rates
decline.
THE FUND'S DURATION STRATEGY SERVED SHAREHOLDERS WELL ON SEVERAL OCCASIONS
DURING THE PERIOD. In March, our decision to maintain a lower effective
duration compared to that of the fund's benchmark*** helped protect
shareholder capital as interest rates rose. The rise in rates was largely
precipitated by a 0.25% interest rate increase by the Federal Reserve Board
on March 25. It was the Fed's first rate hike in more than two years. From
late April through July, the fund's effective duration was longer than that
of its benchmark, which helped performance as interest rates declined on news
that inflation was slowing. Also helping the market in July was the Fed's
announcement that it would not raise interest rates following weeks of
speculation by many economists that a change in monetary policy was likely.
The market received an additional boost thanks to favorable comments that Fed
Chairman Alan Greenspan made about the stock market during testimony before
the Senate. In late July, our decision to shorten the fund's effective
duration contributed to its investment results following the release of
stronger-than-expected economic data in August and a modest rise in interest
rates.
- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
- --------------------------------------------------------------------------------
As a percentage of total assets on September 30, 1997
[EDGAR REPRESENTATION OF CHART]
U.S. Agency Debentures 9%
- --------------------------------------------------------------------------------
U.S. Treasury Securities 27%
- --------------------------------------------------------------------------------
U.S. Agency Fixed Rate Mortgage-Backed Securities 27%
- --------------------------------------------------------------------------------
Corporate Bonds 27%
- --------------------------------------------------------------------------------
Asset-Backed Securities 6%
- --------------------------------------------------------------------------------
Short-Term 3%
- --------------------------------------------------------------------------------
Other Assets 1%
- --------------------------------------------------------------------------------
*** - This symbol represents a graduation cap, used throughout this report to
indicate terms defined in the glossary.
- --------------------------------------------------------------------------------
8 1997 Annual Report - Income Funds
<PAGE>
INTERMEDIATE BOND FUND (CONTINUED)
- --------------------------------------------------------------------------------
[PHOTO]
DAVID STEELE
shares responsibility for the management of Intermediate Bond Fund. He has 18
years of financial experience.
- --------------------------------------------------------------------------------
WE CONTINUE TO HAVE A FAVORABLE OUTLOOK FOR THE FUND. Although the economy is
robust and the Fed may raise short-term interest rates in the coming months due
to the current strength of the economy, we believe inflation is still under
control. Inflation-adjusted yields remain at historically attractive levels. We
intend to maintain our overweighting*** in corporate bonds and our exposure to
discount and seasoned premium mortgage-backed securities. Should rates move
appreciably higher near-term, we intend to increase the fund's effective
duration to secure higher yields.
Thank you for your investment in Intermediate Bond Fund. We appreciate the
opportunity to help you pursue your investment goals.
Sincerely,
/s/ Worth Bruntjen /s/ Bruce Salvog /s/ David Steele
Worth Bruntjen Bruce Salvog David Steele
Portfolio Manager Portfolio Manager Portfolio Manager
*** - This symbol represents a graduation cap, used throughout this report to
indicate terms defined in the glossary.
- --------------------------------------------------------------------------------
9 1997 Annual Report - Income Funds
<PAGE>
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
- --------------------------------------------------------------------------------
[PHOTO]
TOM MCGLINCH, CFA
shares responsibility for the management of Adjustable Rate Mortgage Securities
Fund. He has 16 years of financial experience.
- --------------------------------------------------------------------------------
November 13, 1997
- --------------------------------------------------------------------------------
DEAR SHAREHOLDERS:
ADJUSTABLE RATE MORTGAGE SECURITIES FUND PROVIDED A TOTAL RETURN OF 7.16%*
FOR THE YEAR ENDED SEPTEMBER 30, 1997. This return reflects reinvested
distributions but not the fund's sales charge. Your fund's performance
surpassed the Lipper Adjustable Rate Mortgage Funds Average+ return of 6.46%
during the period. The fund's market-based benchmark,*** the Lehman Brothers
Adjustable Rate Mortgage Index,** returned 8.03%. The fund's strong
performance compared to Lipper was primarily due to its allocation to fixed
rate assets and its high income. In addition, we believe the fund had a
longer effective duration*** than that of the average fund in the Lipper
average.
DURING THE PERIOD, WE FOCUSED ON SECURITIES THAT OFFER ATTRACTIVE CURRENT INCOME
RATHER THAN POTENTIAL PRICE APPRECIATION, AND THAT IS THE PRIMARY REASON THE
FUND UNDERPERFORMED ITS BENCHMARK INDEX. To maintain an attractive current
yield, we avoided new adjustable rate mortgage securities (ARMs) with lower
"teaser" rates in favor of securities whose coupons have reset to reflect
prevailing interest rates.
SHORT-TERM INTEREST RATES REMAINED IN A RELATIVELY NARROW RANGE FOR THE PERIOD,
WITH THE TWO-YEAR TREASURY TRADING BETWEEN 5.5% AND 6.5%. This allowed the fund
to maintain an attractive yield and stable net asset value. If rates had jumped
significantly, our ARM securities' periodic rate caps may have prevented us from
taking advantage of the higher rates. Conversely, a sharp drop in rates might
have hurt our securities' prices with market worries about homeowners prepaying
ARMs to refinance at a lower rate.
- --------------------------------------------------------------------------------
PERFORMANCE THROUGH SEPTEMBER 30, 1997*
- --------------------------------------------------------------------------------
Growth of $10,000 Invested Since Inception
Adjustable Rate
Mortgage
Securities Fund, Lipper
reflects the Lehman Brothers Adjustable Rate
fund's 2% Adjustable Rate Mortgage
sales charge++ Mortgage Index** Funds Average+
1/92 9,800 10,000 10,000
1/92 9,790 10,000 10,000
2/92 9,780 9,957 10,041
3/92 9,707 9,918 10,060
4/92 9,799 10,026 10,115
5/92 9,953 10,117 10,184
6/92 10,087 10,222 10,253
7/92 10,149 10,267 10,279
8/92 10,338 10,354 10,330
9/92 10,390 10,410 10,377
10/92 10,314 10,325 10,369
11/92 10,292 10,340 10,389
12/92 10,312 10,437 10,446
1/93 10,496 10,544 10,496
2/93 10,632 10,636 10,554
3/93 10,681 10,684 10,583
4/93 10,738 10,747 10,627
5/93 10,818 10,773 10,648
6/93 10,888 10,886 10,710
7/93 10,935 10,936 10,747
8/93 10,982 11,002 10,795
9/93 11,041 11,004 10,819
10/93 11,112 11,009 10,836
11/93 11,115 10,979 10,832
12/93 11,148 11,061 10,857
1/94 11,321 11,135 10,899
2/94 11,110 11,100 10,896
3/94 10,790 11,012 10,849
4/94 10,727 10,954 10,801
5/94 10,656 10,945 10,772
6/94 10,620 10,969 10,783
7/94 10,656 11,036 10,818
8/94 10,644 11,090 10,827
9/94 10,608 11,044 10,795
10/94 10,535 11,036 10,769
11/94 10,477 11,005 10,694
12/94 10,419 11,062 10,630
1/95 10,631 11,246 10,673
2/95 10,783 11,472 10,766
3/95 10,885 11,527 10,833
4/95 10,938 11,649 10,898
5/95 11,054 11,838 11,022
6/95 11,121 11,886 11,018
7/95 11,174 11,929 11,045
8/95 11,222 12,002 11,108
9/95 11,299 12,087 11,144
10/95 11,365 12,162 11,155
11/95 11,434 12,265 11,229
12/95 11,519 12,358 11,278
1/96 11,603 12,445 11,351
2/96 11,632 12,474 11,360
3/96 11,686 12,496 11,386
4/96 11,712 12,512 11,422
5/96 11,753 12,528 11,463
6/96 11,823 12,617 11,533
7/96 11,880 12,679 11,579
8/96 11,940 12,755 11,630
9/96 12,042 12,854 11,711
10/96 12,161 13,000 11,813
11/96 12,253 13,125 11,889
12/96 12,297 13,167 11,918
1/97 12,370 13,243 12,008
2/97 12,431 13,317 12,064
3/97 12,460 13,343 12,096
4/97 12,533 13,447 12,181
5/97 12,610 13,530 12,250
6/97 12,703 13,619 12,325
7/97 12,796 13,737 12,418
8/97 12,811 13,772 12,449
9/97 12,904 13,885 12,499
** An unmanaged index, which includes no expenses or transaction charges, of
U.S. agency adjustable rate mortgage securities.
+ The average total return, not including sales charges, of similar funds as
characterized by Lipper Analytical Services.
Average Annualized Total Returns
Includes 2% maximum sales charge++
One Year 5.02%
- --------------------------------------------------------------------------------
Five Year 4.01%
- --------------------------------------------------------------------------------
Since Inception (1/30/92) 4.60%
- --------------------------------------------------------------------------------
* PLEASE REMEMBER, YOU COULD LOSE MONEY WITH THIS INVESTMENT. PAST PERFORMANCE
DOES NOT GUARANTEE FUTURE RESULTS. The investment return and principal value of
an investment will fluctuate so that fund shares, when sold, may be worth more
or less than their original cost. Neither safety of principal nor stability of
income is guaranteed. Performance prior to September 1, 1995, reflect historical
net asset value performance of American Adjustable Rate Term Trust 1998, the
fund's predecessor for financial reporting purposes. During most periods, the
fund's advisor waived or paid certain expenses and/or the fund's distributor
voluntarily waived certain 12b-1 fees. Without waivers, returns would have been
lower.
All fund and benchmark returns include reinvested distributions.
++ Effective February 18, 1997, the fund's maximum sales charge was changed from
1.5% to 2%.
*** - This symbol represents a graduation cap, used throughout this report to
indicate terms defined in the glossary.
- --------------------------------------------------------------------------------
10 1997 Annual Report - Income Funds
<PAGE>
ADJUSTABLE RATE MORTGAGE SECURITIES FUND (CONTINUED)
- --------------------------------------------------------------------------------
[PHOTO]
WAN-CHONG KUNG, CFA
shares responsibility for the management of Adjustable Rate Mortgage Securities
Fund. She has five years of financial experience.
- --------------------------------------------------------------------------------
OVER THE PERIOD, WE INCREASED THE FUND'S HOLDINGS OF FIXED RATE MORTGAGE
SECURITIES TO BENEFIT FROM FALLING INTEREST RATES. Fixed rate securities are
more sensitive than ARMs to interest rate movements, and when rates fall, the
prices of such securities generally rise (the reverse is also true). We
increased our fixed rate allocation from about 17% at the start of the period to
22% on September 30, and because rates came down during that time, our strategy
paid off. We believe the larger percentage of fixed rate securities is one
reason we outperformed many of our peers during the period.
GOING FORWARD, WE EXPECT FAVORABLE ECONOMIC CONDITIONS TO CONTINUE, BUT WE ARE
WATCHING CLOSELY FOR SIGNS OF CHANGE. Low unemployment and growing incomes
suggest that the economy will continue to grow. Inflation has remained low and
there are signs that pent-up demand in key economic sectors such as housing and
autos has been met. However, we think the Federal Reserve may be more likely to
raise rates rather than lower them, though such a move may not occur right away.
We will continue to monitor events and manage your fund accordingly.
Thank you for investing in Adjustable Rate Mortgage Securities Fund. We are
pleased to have provided you with a competitive return for the period, and we
will continue to deliver high-quality investment management and service.
Sincerely,
/s/ Tom McGlinch /s/ Wan-Chong Kung
Tom McGlinch Wan-Chong Kung
Portfolio Manager Portfolio Manager
- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
- --------------------------------------------------------------------------------
As a percentage of total assets on September 30, 1997
[EDGAR REPRESENTATION OF CHART]
U.S. Agency Fixed Rate Mortgage-Backed Securities 22%
- --------------------------------------------------------------------------------
U.S. Agency Adjustable Rate Mortgage-Backed Securities 63%
- --------------------------------------------------------------------------------
U.S. Treasury Securities 2%
- --------------------------------------------------------------------------------
Private Adjustable Rate Mortgage-Backed Securities 9%
- --------------------------------------------------------------------------------
Short-Term 3%
- --------------------------------------------------------------------------------
Other Assets 1%
- --------------------------------------------------------------------------------
U.S. agency mortgage-backed ARM securities include 9% of total assets in ARM
securities with coupons that reset in more than four years. All other ARM
security coupons in the fund reset in 12 months or less.
- --------------------------------------------------------------------------------
11 1997 Annual Report - Income Funds
<PAGE>
Financial Statements
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES September 30, 1997
................................................................................
<TABLE>
<CAPTION>
ADJUSTABLE RATE
MORTGAGE
GOVERNMENT INTERMEDIATE SECURITIES
INCOME FUND BOND FUND FUND
------------- -------------- ----------------
<S> <C> <C> <C>
ASSETS:
Investments in securities at market value* (including
repurchase agreements of $1,719,000, $1,999,000 and
$5,814,000, respectively) (note 2) ....................... $ 72,194,451 $ 78,214,027 $ 184,450,033
Cash in bank on demand deposit ............................. 24,498 26,726 24,689
Receivable for investment securities sold .................. 24,219 -- --
Receivable for fund shares sold ............................ 243,213 17,633 1,870
Principal receivable on mortgage securities ................ -- -- 448,616
Accrued interest receivable ................................ 466,893 1,002,108 1,216,077
------------- -------------- ----------------
Total assets ............................................. 72,953,274 79,260,494 186,141,285
------------- -------------- ----------------
LIABILITIES:
Dividends payable to shareholders .......................... 350,352 325,177 889,165
Payable for investment securities purchased on a when-issued
basis (note 2) ........................................... 4,996,094 -- --
Payable for fund shares redeemed ........................... 291,737 516,953 477,201
Accrued investment management fee .......................... 27,806 19,738 53,992
Accrued distribution and service fees ...................... 18,908 11,881 23,139
------------- -------------- ----------------
Total liabilities ........................................ 5,684,897 873,749 1,443,497
------------- -------------- ----------------
Net assets applicable to outstanding capital stock ....... $ 67,268,377 $ 78,386,745 $ 184,697,788
------------- -------------- ----------------
------------- -------------- ----------------
COMPOSITION OF NET ASSETS:
Capital stock and additional paid-in capital ............... $ 80,635,273 $ 353,636,682 $ 329,924,909
Distributions in excess of net investment income ........... -- (125,225) --
Accumulated net realized loss on investments ............... (16,129,109) (276,210,068) (146,955,780)
Unrealized appreciation of investments ..................... 2,762,213 1,085,356 1,728,659
------------- -------------- ----------------
Total - representing net assets applicable to outstanding
capital stock .......................................... $ 67,268,377 $ 78,386,745 $ 184,697,788
------------- -------------- ----------------
------------- -------------- ----------------
* Investments in securities at identified cost ........... $ 69,432,238 $ 77,128,671 $ 182,721,374
------------- -------------- ----------------
------------- -------------- ----------------
NET ASSET VALUE AND OFFERING PRICE:
CLASS A (NOTE 1):
Net assets ................................................. $ 67,268,377 $ 64,401,442 $ 184,697,788
Shares outstanding (authorized 10 billion, four billion and
10 billion shares, respectively, of $0.01 par value) ..... 7,340,354 8,391,288 22,661,426
Net asset value ............................................ $ 9.16 $ 7.67 $ 8.15
Maximum offering price per share (net asset value plus 2% of
offering price) .......................................... $ 9.35 $ 7.83 $ 8.32
CLASS Y:
Net assets ................................................. $ -- $ 13,985,303 $ --
Shares outstanding (authorized one billion shares of $0.01
par value) ............................................... -- 1,821,360 --
Net asset value and offering price per share ............... $ -- $ 7.68 $ --
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
12 1997 Annual Report - Income Funds
<PAGE>
Financial Statements (continued)
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS For the Year Ended September 30,
1997
................................................................................
<TABLE>
<CAPTION>
ADJUSTABLE
RATE
MORTGAGE
GOVERNMENT INTERMEDIATE SECURITIES
INCOME FUND BOND FUND FUND
----------- ----------- --------------
<S> <C> <C> <C>
INCOME:
Interest ................................................... $5,567,190 $6,803,262 $14,568,689
Fee income (note 2) ........................................ 96,491 -- --
----------- ----------- --------------
Total income ............................................. 5,663,681 6,803,262 14,568,689
----------- ----------- --------------
EXPENSES (NOTE 5):
Investment management fee .................................. 377,386 303,718 766,709
Distribution and service fees:
CLASS A .................................................. 377,385 280,844 327,317
CLASS Y .................................................. -- -- --
Custodian and accounting fees .............................. 79,052 93,074 212,249
Transfer agent and dividend disbursing agent fees .......... 62,155 55,019 262,590
Registration fees .......................................... 20,296 33,120 23,635
Reports to shareholders .................................... 32,143 66,139 77,233
Directors' fees ............................................ 7,968 7,968 18,158
Audit and legal fees ....................................... 40,063 53,627 57,467
Other expenses ............................................. 18,657 23,964 34,284
----------- ----------- --------------
Total expenses ........................................... 1,015,105 917,473 1,779,642
Less Class A expenses waived by the distributor ........ (121,393) (74,832) --
----------- ----------- --------------
Net expenses before expenses paid indirectly ............. 893,712 842,641 1,779,642
Less expenses paid indirectly .......................... (61) (1,396) (506)
----------- ----------- --------------
Total net expenses ....................................... 893,651 841,245 1,779,136
----------- ----------- --------------
Net investment income .................................... 4,770,030 5,962,017 12,789,553
----------- ----------- --------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gain (loss) on investments (note 3) ........... 851,876 281,651 (392,095)
Net realized loss on closed futures contracts .............. (153,975) -- --
----------- ----------- --------------
Net realized gain (loss) on investments .................. 697,901 281,651 (392,095)
Net change in unrealized appreciation or depreciation of
investments .............................................. 2,063,487 2,015,896 3,059,243
----------- ----------- --------------
Net gain on investments .................................. 2,761,388 2,297,547 2,667,148
----------- ----------- --------------
Net increase in net assets resulting from operations ... $7,531,418 $8,259,564 $15,456,701
----------- ----------- --------------
----------- ----------- --------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
13 1997 Annual Report - Income Funds
<PAGE>
Financial Statements (continued)
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
................................................................................
<TABLE>
<CAPTION>
GOVERNMENT INTERMEDIATE
INCOME FUND BOND FUND
-------------------------------- -------------------------------
Year Ended Year Ended Year Ended Year Ended
9/30/97 9/30/96 9/30/97 9/30/96
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income ...................................... $ 4,770,030 $ 6,314,212 $ 5,962,017 $ 15,762,040
Net realized gain (loss) on investments .................... 697,901 85,416 281,651 (12,736,864)
Net change in unrealized appreciation or depreciation of
investments .............................................. 2,063,487 (1,752,271) 2,015,896 10,497,685
--------------- -------------- -------------- --------------
Net increase in net assets resulting from operations ..... 7,531,418 4,647,357 8,259,564 13,522,861
--------------- -------------- -------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS:
CLASS A:
From net investment income ............................... (4,771,839) (6,318,402) (5,402,892) (34,266,074)
CLASS Y:
From net investment income ............................... -- -- (559,127) --
--------------- -------------- -------------- --------------
Total distributions ...................................... (4,771,839) (6,318,402) (5,962,019) (34,266,074)
--------------- -------------- -------------- --------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
CLASS A .................................................... (19,319,777) (20,364,506) (73,660,708) (162,043,566)
CLASS Y .................................................... -- -- 13,912,070 --
--------------- -------------- -------------- --------------
Decrease in net assets from capital share transactions ... (19,319,777) (20,364,506) (59,748,638) (162,043,566)
--------------- -------------- -------------- --------------
Total decrease in net assets ............................. (16,560,198) (22,035,551) (57,451,093) (182,786,779)
Net assets at beginning of period .......................... 83,828,575 105,864,126 135,837,838 318,624,617
--------------- -------------- -------------- --------------
Net assets at end of period ................................ $ 67,268,377 $ 83,828,575 $ 78,386,745 $ 135,837,838
--------------- -------------- -------------- --------------
--------------- -------------- -------------- --------------
Undistributed (distributions in excess of) net investment
income ................................................... $ -- $ 1,809 $ (125,225) $ (125,223)
--------------- -------------- -------------- --------------
--------------- -------------- -------------- --------------
<CAPTION>
ADJUSTABLE RATE
MORTGAGE SECURITIES FUND
------------------------------------------------
Year Ended Month Ended Year Ended
9/30/97 9/30/96 8/31/96
-------------- -------------- --------------
<S> <C> <C> <C>
OPERATIONS:
Net investment income ...................................... $ 12,789,553 $ 1,272,222 $ 24,706,910
Net realized gain (loss) on investments .................... (392,095) (68,233) (2,674,311)
Net change in unrealized appreciation or depreciation of
investments .............................................. 3,059,243 867,679 6,114,992
-------------- -------------- --------------
Net increase in net assets resulting from operations ..... 15,456,701 2,071,668 28,147,591
-------------- -------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS:
CLASS A:
From net investment income ............................... (12,789,553) (1,272,222) (24,649,898)
CLASS Y:
From net investment income ............................... -- -- --
-------------- -------------- --------------
Total distributions ...................................... (12,789,553) (1,272,222) (24,649,898)
-------------- -------------- --------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
CLASS A .................................................... (80,802,728) (7,914,495) (142,855,401)
CLASS Y .................................................... -- -- --
-------------- -------------- --------------
Decrease in net assets from capital share transactions ... (80,802,728) (7,914,495) (142,855,401)
-------------- -------------- --------------
Total decrease in net assets ............................. (78,135,580) (7,115,049) (139,357,708)
Net assets at beginning of period .......................... 262,833,368 269,948,417 409,306,125
-------------- -------------- --------------
Net assets at end of period ................................ $ 184,697,788 $ 262,833,368 $ 269,948,417
-------------- -------------- --------------
-------------- -------------- --------------
Undistributed (distributions in excess of) net investment
income ................................................... $ -- $ -- $ --
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
14 1997 Annual Report - Income Funds
<PAGE>
Notes to Financial Statements
- --------------------------------------------------------------------------------
(1) ORGANIZATION
................................
Piper Funds Inc. (Piper Funds) and Piper Funds Inc.-II
(Piper Funds II) are each registered under the Investment
Company Act of 1940 (as amended) as single, open-end
management investment companies. Piper Funds currently has
12 series, including Government Income Fund and
Intermediate Bond Fund. Each fund is classified as a
diversified series. Piper Funds II currently has one
series, Adjustable Rate Mortgage Securities Fund, which is
classified as a diversified series.
On September 1, 1995, four closed-end funds, American
Adjustable Rate Term Trust 1996 (BDJ), American Adjustable
Rate Term Trust 1997 (CDJ), American Adjustable Rate Term
Trust 1998 (DDJ) and American Adjustable Rate Term Trust
1999 (EDJ) merged into Adjustable Rate Mortgage Securities
Fund (ARMS Fund). DDJ is considered the surviving entity
for financial reporting purposes.
The articles of incorporation of Piper Funds and Piper
Funds II permit the boards of directors to create
additional series in the future.
Intermediate Bond Fund commenced offering Class Y shares
on February 18, 1997. All shares existing prior to that
date were classified as Class A shares. Key features of
each class are:
CLASS A:
- Subject to a front-end sales charge
- Subject to distribution and service fees
CLASS Y:
- Requires a minimum initial investment of $1 million
- No front-end or contingent deferred sales charges
- No distribution and service fees
The classes of shares of Intermediate Bond Fund have the
same rights and are identical in all respects except that
each class bears different distribution expenses, has
exclusive voting rights with respect to matters affecting
that class and has different exchange privileges.
Government Income Fund and Adjustable Rate Mortgage
Securities Fund each have a single class of shares, which
are shown as Class A in the financial statements.
Government Income Fund invests primarily in securities
issued or guaranteed as to payment of principal and
interest by the U.S. government, its agencies or
instrumentalities, including mortgage-backed securities.
Intermediate Bond Fund invests primarily in a broad range
of investment-quality debt securities.
Adjustable Rate Mortgage Securities Fund invests primarily
in adjustable rate mortgage securities.
- --------------------------------------------------------------------------------
15 1997 Annual Report - Income Funds
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
(2) SUMMARY OF
SIGNIFICANT
ACCOUNTING POLICIES
................................
INVESTMENTS IN SECURITIES
Portfolio securities for which market quotations are
readily available are valued at current market value. If
market quotations or valuations are not available, or if
such quotations or valuations are believed to be
inaccurate, unreliable or not reflective of market value,
portfolio securities are valued according to procedures
adopted by the funds' board of directors in good faith at
"fair value", that is, a price that the fund might
reasonably expect to receive for the security or other
asset upon its current sale.
The current market value of certain fixed income
securities is provided by an independent pricing service.
Fixed income securities for which prices are not available
from an independent pricing service but where an active
market exists are valued using market quotations obtained
from one or more dealers that make markets in the
securities or from a widely-used quotation system.
Short-term securities with maturities of 60 days or less
are valued at amortized cost, which approximates market
value. Financial futures are valued at the last settlement
price established each day by the board of trade or
exchange on which they are traded.
Securities transactions are accounted for on the date
securities are purchased or sold. Realized gains and
losses are calculated on the identified-cost basis.
Interest income, including amortization of bond discount
and premium, is recorded on an accrual basis.
FUTURES TRANSACTIONS
In order to gain exposure to or protect from changes in
the market, Government Income Fund and Adjustable Rate
Mortgage Securities Fund may buy and sell financial
futures contracts and related options. Risks of entering
into futures contracts and related options include the
possibility that there may be an illiquid market and that
a change in the value of the contract or option may not
correlate with changes in the value of the underlying
securities.
Upon entering into a futures contract, the funds are
required to deposit either cash or securities in an amount
(initial margin) equal to a certain percentage of the
contract value. Subsequent payments (variation margin) are
made or received by the funds each day. The variation
margin payments are equal to the daily changes in the
contract value and are recorded as unrealized gains and
losses. The funds recognize a realized gain or loss when
the contract is closed or expires.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS
Delivery and payment for securities that have been
purchased by the funds on a when-issued or
forward-commitment basis can take place a month or more
after the transaction date. During this period, such
securities do not earn interest, are subject to market
fluctuation and may increase or decrease in value prior to
their delivery. The funds segregate, with their custodian,
assets with a market value equal to the amount of their
purchase commitments. The purchase of securities on a
when-issued or forward-commitment basis may increase the
volatility of the funds' net asset value if the funds make
such purchases while remaining substantially fully
invested. As of September 30, 1997, Government Income Fund
had entered into outstanding when-issued or forward
commitments of $4,996,094.
- --------------------------------------------------------------------------------
16 1997 Annual Report - Income Funds
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
In connection with their ability to purchase securities on
a when-issued or forward-commitment basis, Government
Income Fund and Intermediate Bond Fund may enter into
mortgage dollar rolls in which the funds sell securities
purchased on a forward commitment basis and simultaneously
contract with a counterparty to repurchase similar (same
type, coupon and maturity) but not identical securities on
a specified future date. As an inducement to "roll over"
their purchase commitments, the funds receive negotiated
fees. For the year ended September 30, 1997, such fees
earned amounted to $96,491 for Government Income Fund.
FEDERAL TAXES
Each fund is treated separately for federal income tax
purposes. Each fund intends to comply with the
requirements of the Internal Revenue Code applicable to
regulated investment companies and not be subject to
federal income tax. Therefore, no income tax provision is
required. The funds also intend to distribute their
taxable net investment income and realized gains, if any,
to avoid the payment of any federal excise taxes.
Net investment income and net realized gains (losses) may
differ for financial statement and tax purposes primarily
because of losses deferred due to "wash sale" transactions
and the timing of recognition of income on certain
collateralized mortgage-backed securities. The character
of distributions made during the year from net investment
income or net realized gains may differ from its ultimate
characterization for federal income tax purposes. In
addition, due to the timing of dividend distributions, the
fiscal year in which amounts are distributed may differ
from the year that the income or realized gains (losses)
were recorded by the funds.
ALLOCATION OF INCOME, EXPENSES AND GAINS (LOSSES)
Income, expenses (other than class-specific expenses) and
realized and unrealized gains and losses for Intermediate
Bond Fund are allocated daily to each class of shares
based upon the relative proportion of net assets
represented by such class. Class-specific expenses, which
include distribution and service fees, are charged
directly to such class.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders from net investment income
for Government Income Fund and Adjustable Rate Mortgage
Securities Fund are declared daily and paid monthly.
Distributions to shareholders from net investment income
for Intermediate Bond Fund are declared separately for
each class daily and paid monthly. Net realized gains
distributions for the funds, if any, will be made at least
annually. Distributions are payable in cash or reinvested
in additional shares of the same class.
REPURCHASE AGREEMENTS
For repurchase agreements entered into with certain
broker-dealers, the funds, along with other affiliated
registered investment companies, may transfer uninvested
cash balances to a joint trading account, the daily
aggregate of which is invested in repurchase agreements
secured by U.S. government or agency obligations.
Securities pledged as collateral for all individual and
joint
- --------------------------------------------------------------------------------
17 1997 Annual Report - Income Funds
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
repurchase agreements are held by the funds' custodian
bank until maturity of the repurchase agreement.
Provisions for all agreements ensure that the daily market
value of the collateral is in excess of the repurchase
amount, including accrued interest, to protect the funds
in the event of a default.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts in the financial statements. Actual
results could differ from these estimates.
(3) INVESTMENT
SECURITY
TRANSACTIONS
................................
Cost of purchases and proceeds from sales of securities,
other than temporary investments in short-term securities,
for the year ended September 30, 1997, were as follows:
<TABLE>
<CAPTION>
ADJUSTABLE RATE
GOVERNMENT INTERMEDIATE MORTGAGE
INCOME FUND BOND FUND SECURITIES FUND
----------- ------------ ----------------
<S> <C> <C> <C>
Purchases .............................. $16,741,252 $ 82,262,456 $ 54,501,200
Proceeds from sales .................... $42,501,054 $122,277,720 $132,770,723
</TABLE>
Including dollar rolls for Government Income Fund,
purchases and sales aggregated $41,701,408 and $67,461,210
respectively.
(4) CAPITAL SHARE
TRANSACTIONS
................................
Capital share transactions for the funds were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------------ --------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
GOVERNMENT INCOME FUND:
Sales of fund shares ................. 686,546 $ 6,139,195 822,655 $ 7,312,999
Issued for reinvested
distributions ...................... 406,146 3,630,952 706,427 6,312,741
Redemptions of fund shares ........... (3,247,825) (29,089,924) (3,808,707) (33,990,246)
---------- ------------ ----------- -------------
(2,155,133) $(19,319,777) (2,279,625) $ (20,364,506)
---------- ------------ ----------- -------------
---------- ------------ ----------- -------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1997(a) SEPTEMBER 30, 1996
------------------------ --------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
INTERMEDIATE BOND FUND:
CLASS A
Sales of fund shares ................. 412,880 $ 3,127,050 884,830 $ 6,934,686
Issued for reinvested
distributions ...................... 467,515 3,535,885 4,706,970 37,022,030
Redemptions of fund shares ........... (8,391,651) (63,548,352) (26,737,969) (206,000,282)
Redemptions in exchange for Class Y
shares ............................. (2,201,482) (16,775,291) -- --
---------- ------------ ----------- -------------
(9,712,738) $(73,660,708) (21,146,169) $(162,043,566)
---------- ------------ ----------- -------------
---------- ------------ ----------- -------------
CLASS Y
Sales of fund shares ................. 37,581 $ 284,580 -- $ --
Sales in exchange for Class A
shares ............................. 2,201,482 16,775,291 -- --
Issued for reinvested
distributions ...................... 41,735 316,060 -- --
Redemptions of fund shares ........... (459,438) (3,463,861) -- --
---------- ------------ ----------- -------------
1,821,360 $ 13,912,070 -- $ --
---------- ------------ ----------- -------------
---------- ------------ ----------- -------------
</TABLE>
(a) REPRESENTS PERIOD FROM FEBRUARY 18 (COMMENCEMENT OF
OFFERING OF SHARES) TO SEPTEMBER 30, 1997, FOR CLASS
Y.
- --------------------------------------------------------------------------------
18 1997 Annual Report - Income Funds
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED MONTH ENDED YEAR ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 AUGUST 31, 1996
--------------------------- -------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ ------------ ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
ADJUSTABLE RATE MORTGAGE SECURITIES
FUND:
Sales of fund
shares .............. 317,414 $ 2,570,801 14,416 $ 115,577 370,239 $ 2,964,814
Issued for reinvested
distributions ....... 626,711 5,084,891 93,048 747,173 1,637,616 13,155,273
Issued in connection
with the merger of
BDJ, CDJ, DDJ, and
EDJ (note 7) ........ -- -- -- -- 104,403,211 801,742,686
Issued in connection
with the merger of
Institutional
Government Adjustable
Portfolio (PIFAX)
(note 7) .......... -- -- 579,823 4,661,948 -- --
Redemptions of fund
shares . (10,899,377) (88,458,420) (1,672,368) (13,439,193) (119,875,424) (960,718,174)
------------ ------------ ----------- ------------ ------------- -------------
(9,955,252) $(80,802,728) (985,081) $ (7,914,495) (13,464,358) $(142,855,401)
------------ ------------ ----------- ------------ ------------- -------------
------------ ------------ ----------- ------------ ------------- -------------
</TABLE>
Sales charges received by Piper Jaffray Inc. (Piper
Jaffray), the funds' distributor, for distributing the
funds' shares for the year ended September 30, 1997, were
as follows:
<TABLE>
<CAPTION>
INTERMEDIATE
BOND FUND ADJUSTABLE RATE
GOVERNMENT ------------------- MORTGAGE
INCOME FUND CLASS A CLASS Y SECURITIES FUND
------------ -------- -------- ----------------
<S> <C> <C> <C> <C>
Front-end sales charges ................ $5,362 $ 307 $-- $1,930
Contingent deferred sales charges ...... 1,345 1,308 -- 4,573
------------ -------- --- --------
$6,707 $1,615 $-- $6,503
------------ -------- --- --------
------------ -------- --- --------
</TABLE>
(5) EXPENSES
................................
INVESTMENT MANAGEMENT FEE
Piper Funds and Piper Funds II have entered into
investment management agreements with Piper Capital
Management Incorporated (Piper Capital) under which Piper
Capital manages each fund's assets and furnishes related
office facilities, equipment, research and personnel. The
agreements require each fund to pay Piper Capital a
monthly fee based on average daily net assets. The fees
for each fund are as follows: Government Income Fund, an
annual rate of 0.50% of the first $250 million in net
assets and decreasing percentages thereafter to 0.40% of
net assets in excess of $500 million; Intermediate Bond
Fund, an annual rate of 0.30% of the first $100 million in
net assets, 0.25% of the next $150 million and 0.20% of
net assets in excess of $250 million; Adjustable Rate
Mortgage Securities Fund, an annual rate of 0.35% on the
first $500 million in net assets and 0.30% of net assets
in excess of $500 million. For the year ended September
30, 1997, the effective management fee paid by the funds
was 0.50%, 0.30% and 0.35% on an annual basis for
Government Income Fund, Intermediate Bond Fund and
Adjustable Rate Mortgage Securities Fund, respectively.
DISTRIBUTION AND SERVICE FEES
Each fund also pays Piper Jaffray fees accrued daily and
paid quarterly for providing shareholder services and
distribution-related services. The fees for each fund,
which were being voluntarily limited for Government Income
Fund and Class A of Intermediate Bond Fund for the year
ended September 30, 1997, are stated below as a percent of
average daily net assets attributable to such shares.
- --------------------------------------------------------------------------------
19 1997 Annual Report - Income Funds
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERMEDIATE
BOND FUND ADJUSTABLE RATE
GOVERNMENT ----------------- MORTGAGE
INCOME FUND CLASS A CLASS Y SECURITIES FUND
----------- ------- ------- ---------------
<S> <C> <C> <C> <C>
Distribution fee ....................... 0.25% 0.05% -- --
Service fee ............................ 0.25% 0.25% -- 0.15%
----- ------- ------- -----
Total distribution and service
fees ............................... 0.50% 0.30% -- 0.15%
----- ------- ------- -----
----- ------- ------- -----
Total distribution and service fees
after voluntary limitation ......... 0.34% 0.22% -- 0.15%
----- ------- ------- -----
----- ------- ------- -----
</TABLE>
SHAREHOLDER ACCOUNT SERVICING FEES
The company has also entered into shareholder account
servicing agreements under which Piper Jaffray and Piper
Trust Company (Piper Trust) perform various transfer and
dividend disbursing agent services for accounts held at
the respective company. The fees, which are paid monthly
to Piper Jaffray and Piper Trust for providing these
services, are equal to an annual rate of $7.50 per active
shareholder account and $1.60 per closed account. For the
year ended September 30, 1997, Piper Jaffray and Piper
Trust received the following amounts in connection with
the shareholder account servicing agreements:
<TABLE>
<CAPTION>
ADJUSTABLE RATE
GOVERNMENT INTERMEDIATE MORTGAGE
INCOME FUND BOND FUND SECURITIES FUND
------------ ------------- ----------------
<S> <C> <C> <C>
Piper Jaffray .......................... $38,499 $16,406 $60,613
Piper Trust ............................ 6,162 2,737 --
------------ ------------- ----------------
$44,661 $19,143 $60,613
------------ ------------- ----------------
------------ ------------- ----------------
</TABLE>
OTHER FEES AND EXPENSES
In addition to the investment management, distribution and
shareholder account servicing fees, each fund is
responsible for paying most other operating expenses
including: outside directors' fees and expenses; custodian
fees; registration fees; printing and shareholder reports;
transfer agent fees and expenses; legal, auditing and
accounting services; insurance; interest; taxes and other
miscellaneous expenses.
Expenses paid indirectly represent a reduction of
custodian fees for earnings on miscellaneous cash balances
maintained by the funds.
(6) CAPITAL LOSS
CARRYOVER
................................
For federal income tax purposes, the following funds had
capital loss carryovers at September 30, 1997, which, if
not offset by subsequent capital gains, will expire on the
funds' fiscal year-ends as indicated below. It is unlikely
the board of directors will authorize a distribution of
any net realized capital gains until the available capital
loss carryovers have been offset or expire. Due to the
limits on utilization of the capital loss carryovers which
Adjustable Rate Mortgage Securities Fund acquired in the
mergers described in note 7, the utilization of these
capital loss carryovers in subsequent years is limited to
$69,945,971 per year.
- --------------------------------------------------------------------------------
20 1997 Annual Report - Income Funds
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GOVERNMENT
INCOME FUND INTERMEDIATE ADJUSTABLE RATE MORTGAGE
----------------------- BOND FUND SECURITIES FUND
CAPITAL ---------------------------- ----------------------------
LOSS CAPITAL LOSS CAPITAL LOSS
CARRYOVER EXPIRATION CARRYOVER EXPIRATION CARRYOVER EXPIRATION
----------- ---------- --------------- ---------- --------------- ----------
<S> <C> <C> <C> <C> <C>
$ 842,317 2002 $ 180,309,397 2003 $ 600,056 1998
13,367,115 2003 95,748,876 2004 4,923,055 1999
1,723,511 2004 146,313 2006 38,088,524 2000
----------- ---------------
$15,932,943 $ 276,204,586 99,472,115 2001
----------- ---------------
----------- ---------------
765,529 2002
1,311,310 2003
1,340,246 2004
454,744 2006
---------------
$ 146,955,579
---------------
---------------
</TABLE>
(7) MERGERS
................................
As described in note 1 to the financial statements, on
September 1, 1995, the net assets of BDJ, CDJ, DDJ and EDJ
were combined in a tax-free merger to form ARMS Fund. In
addition, on September 16, 1996, the net assets of
Institutional Government Adjustable Portfolio (PIFAX) were
acquired by ARMS Fund via a tax-free merger. The following
table presents the shares of ARMS Fund issued in exchange
for the net assets of each of the merged funds and the
composition of such net assets as of the merger dates.
<TABLE>
<CAPTION>
MERGER MERGER OF
OF PIFAX BDJ, CDJ, DDJ AND EDJ
9/16/96 9/1/95
------------ ----------------------
<S> <C> <C>
Shares issued in connection with the
mergers* ............................. 579,823 104,403,211
------------ ----------------------
------------ ----------------------
Net assets immediately after the
mergers .............................. $269,963,724 $1,211,749,182
------------ ----------------------
------------ ----------------------
Composition of net assets merged into
ARMS Fund**
Capital stock ........................ $ 7,987,753 $ 900,831,012
Accumulated net realized loss on
investments ........................ (3,325,805) (94,949,571)
Unrealized depreciation of
investments ........................ -- (4,138,755)
------------ ----------------------
Total net assets merged .............. $ 4,661,948 $ 801,742,686
------------ ----------------------
------------ ----------------------
</TABLE>
* SHARES ISSUED ARE DETERMINED BY THE RATIO OF EACH
MERGED FUND'S NET ASSET VALUE TO ARMS FUND'S NET ASSET
VALUE ON THE DATES OF THE MERGERS.
** DDJ IS CONSIDERED THE SURVIVOR OF THE SEPTEMBER 1,
1995, MERGER FOR FINANCIAL REPORTING PURPOSES.
THEREFORE, THE NET ASSETS MERGED ON 9/1/95 ARE THOSE
OF BDJ, CDJ AND EDJ, WHICH ARE CONSIDERED TO HAVE
MERGED INTO ARMS FUND.
- --------------------------------------------------------------------------------
21 1997 Annual Report - Income Funds
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
(8) FINANCIAL
HIGHLIGHTS
................................
Per-share data for a share of capital stock outstanding
throughout each period and selected information for each
period are as follows:
GOVERNMENT INCOME FUND
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period ... $ 8.83 $ 8.99 $ 8.42 $10.01 $ 9.86
------ ------ ------ ------ ------
Operations:
Net investment income ................ 0.57 0.60 0.60 0.69 0.80
Net realized and unrealized gains
(losses) on investments ............ 0.33 (0.16) 0.60 (1.58) 0.15
------ ------ ------ ------ ------
Total from operations .............. 0.90 0.44 1.20 (0.89) 0.95
------ ------ ------ ------ ------
Distributions to shareholders:
From net investment income ........... (0.57) (0.60) (0.63) (0.68) (0.80)
From net realized gains .............. -- -- -- (0.02) --
------ ------ ------ ------ ------
Total distributions to
shareholders ..................... (0.57) (0.60) (0.63) (0.70) (0.80)
------ ------ ------ ------ ------
Net asset value, end of period ......... $ 9.16 $ 8.83 $ 8.99 $ 8.42 $10.01
------ ------ ------ ------ ------
------ ------ ------ ------ ------
SELECTED INFORMATION
Total return (a) ....................... 10.49% 4.99% 14.87% (9.26)% 10.06%
Net assets at end of period (in
millions) ............................ $ 67 $ 84 $ 106 $ 126 $ 160
Ratio of expenses to average daily net
assets ............................... 1.19% 1.09% 1.11% 1.05% 1.09%
Ratio of net investment income to
average daily net assets ............. 6.32% 6.66% 7.02% 7.43% 8.10%
Portfolio turnover rate (excluding
short-term securities and dollar roll
transactions) ........................ 21% 32% 87% 121% 191%
Ratios before waivers by the
distributor:
Ratio of expenses to average daily net
assets before waivers . 1.35% 1.28% 1.29% 1.24% 1.27%
Ratio of net investment income to
average daily net assets before
waivers ............................ 6.16% 6.47% 6.84% 7.24% 7.92%
</TABLE>
(a) TOTAL RETURN ASSUMES REINVESTMENT OF DISTRIBUTIONS AND DOES NOT REFLECT A
SALES CHARGE.
- --------------------------------------------------------------------------------
22 1997 Annual Report - Income Funds
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
(8) FINANCIAL
HIGHLIGHTS
................................
Per-share data for a share of capital stock outstanding
throughout each period and selected information for each
period are as follows:
INTERMEDIATE BOND FUND
<TABLE>
<CAPTION>
CLASS A
--------------------------------------
Year Ended September 30,
--------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period ... $ 7.50 $ 8.12 $ 7.98 $12.22 $11.51
------ ------ ------ ------ ------
Operations:
Net investment income ................ 0.44 0.53(c) 0.88 0.90 1.29
Net realized and unrealized gains
(losses) on investments ............ 0.17 (0.11) 0.31 (3.96) 0.56
------ ------ ------ ------ ------
Total from operations .............. 0.61 0.42 1.19 (3.06) 1.85
------ ------ ------ ------ ------
Distributions to shareholders:
From net investment income ........... (0.44) (1.04) (1.05) (0.95) (0.90)
From net realized gains .............. -- -- -- (0.23) (0.24)
------ ------ ------ ------ ------
Total distributions to
shareholders ..................... (0.44) (1.04) (1.05) (1.18) (1.14)
------ ------ ------ ------ ------
Net asset value, end of period ......... $ 7.67 $ 7.50 $ 8.12 $ 7.98 $12.22
------ ------ ------ ------ ------
------ ------ ------ ------ ------
SELECTED INFORMATION
Total return (a) ....................... 8.29% 5.68% 16.15% (26.65)% 17.04%
Net assets at end of period (in
millions) ............................ $ 64 $ 136 $ 319 $ 564 $ 792
Ratio of expenses to average daily net
assets (b) ........................... 0.85% 0.72% 0.97% 0.78% 0.70%
Ratio of net investment income to
average daily net assets ............. 5.83% 6.65% 8.02% 9.33% 12.51%
Portfolio turnover rate (excluding
short-term securities) ............... 86% 89% 136% 169% 109%
Ratios before waivers by the
distributor:
Ratio of expenses to average daily net
assets before waivers . 0.93% 0.82% 1.07% 0.85% 0.77%
Ratio of net investment income to
average daily net assets before
waivers ............................ 5.75% 6.55% 7.92% 9.26% 12.44%
</TABLE>
<TABLE>
<CAPTION>
CLASS Y
-------------------------
Period Ended
September 30, 1997(d)
-------------------------
<S> <C>
PER-SHARE DATA
Net asset value, beginning of period ... $ 7.62
--------
Operations:
Net investment income ................ 0.28
Net realized and unrealized gains on
investments ........................ 0.06
--------
Total from operations .............. 0.34
--------
Distributions to shareholders:
From net investment income ........... (0.28)
--------
Net asset value, end of period ......... $ 7.68
--------
--------
SELECTED INFORMATION
Total return (a) ....................... 4.58%
Net assets at end of period (in
millions) ............................ $ 14
Ratio of expenses to average daily net
assets ............................... 0.57%(e)
Ratio of net investment income to
average daily net assets ............. 6.06%(e)
Portfolio turnover rate (excluding
short-term securities) ............... 86%
</TABLE>
(a) TOTAL RETURN ASSUMES REINVESTMENT OF DISTRIBUTIONS AND DOES NOT REFLECT A
SALES CHARGE.
(b) INCLUDES FEDERAL EXCISE TAXES OF 0.08%, 0.37%, 0.23% AND 0.09% FOR FISCAL
1996, 1995, 1994 AND 1993 RESPECTIVELY.
(c) BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD.
(d) COMMENCEMENT OF OFFERING OF CLASS Y SHARES WAS FEBRUARY 18, 1997.
(e) ANNUALIZED.
- --------------------------------------------------------------------------------
23 1997 Annual Report - Income Funds
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
(8) FINANCIAL
HIGHLIGHTS
................................
Per-share data for a share of capital stock outstanding
throughout each period and selected information for each
period are as follows:
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
<TABLE>
<CAPTION>
Year Ended August 31,
Year Ended Month Ended ------------------------------
September 30, 1997 September 30, 1996 1996 1995 1994 1993
------------------- ------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
PER-SHARE DATA (a)
Net asset value, beginning of
period ..................... $ 8.06 $ 8.03 $ 7.99 $ 8.10 $ 8.88 $ 8.95
------- ------- ------ ------ ------ ------
Operations:
Net investment income ...... 0.47 0.04 0.49 0.47 0.55 0.63
Net realized and unrealized
gains (losses) on
investments .............. 0.09 0.03 0.01 (0.05) (0.82) (0.09)
------- ------- ------ ------ ------ ------
Total from operations .... 0.56 0.07 0.50 0.42 (0.27) 0.54
------- ------- ------ ------ ------ ------
Distributions to shareholders:
From net investment
income ................... (0.47) (0.04) (0.46) (0.53) (0.51) (0.61)
------- ------- ------ ------ ------ ------
Net asset value, end of
period ....................... $ 8.15 $ 8.06 $ 8.03 $ 7.99 $ 8.10 $ 8.88
------- ------- ------ ------ ------ ------
------- ------- ------ ------ ------ ------
SELECTED INFORMATION (a)
Total return (b) ............. 7.16% 0.85% 6.40% 5.43% (3.18)% 6.24%
Net assets at end of period
(in millions) .............. $ 185 $ 263 $ 270 $ 409 $ 500 $ 551
Ratio of expenses to average
daily net assets ........... 0.81% 0.82%(d) 0.60% 0.63% 0.60% 0.58%
Ratio of net investment income
to average daily net
assets ..................... 5.84% 5.82%(d) 5.74% 5.62% 6.39% 7.25%
Portfolio turnover rate
(excluding short-term
securities) ................ 25% 2% 51% 36% 39% 39%
Amount of borrowings
outstanding at end of period
(in millions)(c) ........... $ -- $ -- $ -- $ -- $ 145 $ 145
Average amount of borrowings
outstanding during the
period (in millions) (c) ... $ -- $ -- $ -- $ 57 $ 145 $ 149
Average number of shares
outstanding during the
period (in millions) (c) ... -- -- -- 53 62 62
Average per-share amount of
borrowings outstanding
during the period (c) ...... $ -- $ -- $ -- $ 1.09 $ 2.34 $ 2.41
Ratios before waivers by the
adviser:
Ratio of expenses to average
daily net assets before
waivers .................. -- 0.76%(d) -- -- -- --
Ratio of net investment
income to average daily
net assets before waivers -- 5.58%(d) -- -- -- --
</TABLE>
(a) ON SEPTEMBER 1, 1995 FOUR CLOSED-END FUNDS, AMERICAN ADJUSTABLE RATE TERM
TRUST 1996, AMERICAN ADJUSTABLE RATE TERM TRUST 1997, AMERICAN ADJUSTABLE
RATE TERM TRUST 1998 (DDJ) AND AMERICAN ADJUSTABLE RATE TERM TRUST 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
INFORMATION FOR SUCH PERIODS HAS BEEN RESTATED 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) TOTAL RETURN ASSUMES REINVESTMENT OF DISTRIBUTIONS AND DOES NOT REFLECT A
SALES CHARGE.
(c) DDJ WAS A CLOSED-END MANAGEMENT INVESTMENT COMPANY AND WAS PERMITTED TO
ENTER INTO BORROWINGS FOR OTHER THAN TEMPORARY OR EMERGENCY PURPOSES.
ADJUSTABLE RATE MORTGAGE SECURITIES FUND MAY BORROW ONLY FOR TEMPORARY OR
EMERGENCY PURPOSES.
(d) ANNUALIZED.
- --------------------------------------------------------------------------------
24 1997 Annual Report - Income Funds
<PAGE>
Investments in Securities
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GOVERNMENT INCOME FUND September 30, 1997
.......................................................................................
Principal Market
Description of Security Amount Value (a)
- --------------------------------------------------------- ----------- ------------
<S> <C> <C>
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS)
U.S. GOVERNMENT AND AGENCY SECURITIES (104.8%):
U.S. AGENCY DEBENTURES (4.4%):
5.80%, FNMA, 12/10/03 ............................. $ 2,000,000 $ 1,955,420
6.63%, FNMA, 3/21/06 .............................. 1,000,000 1,017,000
------------
2,972,420
------------
U.S. AGENCY MORTGAGE-BACKED SECURITIES (88.6%):
FIXED RATE (71.6%):
7.50%, FHLMC, 11/1/09 ............................. 1,231,127 1,265,747
7.50%, FHLMC, 10/1/09 ............................. 2,083,961 2,142,562
7.50%, FHLMC, 12/1/09 ............................. 2,745,665 2,822,873
7.00%, FHLMC, 11/1/25 ............................. 2,736,530 2,736,530
11.00%, FNMA, 10/1/20 ............................. 1,266,229 1,435,587
7.00%, FNMA, 12/1/07 .............................. 5,561,419 5,663,971
6.50%, FNMA, 8/1/23 ............................... 7,062,367 6,927,759
6.00%, FNMA, 10/1/23 .............................. 719,137 689,695
9.00%, FNMA, 7/1/24 ............................... 707,702 753,703
10.00%, FNMA, 10/1/17 ............................. 676,982 746,163
6.50%, FNMA, 9/1/25 ............................... 4,633,896 4,533,016
6.50%, FNMA, 4/1/04 ............................... 5,000,000(b) 4,992,150
10.00%, FNMA, Series 1989-15, Class D, 9/25/18 .... 117,523 119,785
6.50%, FNMA, Series 1996-23, Class G, 7/25/26 ..... 4,250,000 3,935,245
7.00%, GNMA, 3/15/09 .............................. 1,304,335 1,329,613
9.00%, GNMA, 10/15/24 ............................. 571,143 612,551
7.00%, GNMA, 2/15/09 .............................. 1,478,465 1,509,883
7.00%, GNMA, 3/15/09 .............................. 1,874,976 1,911,313
10.00%, GNMA, 1/15/10 ............................. 1,134,998 1,256,306
9.00%, GNMA, 8/15/25 .............................. 2,619,832 2,795,858
------------
48,180,310
------------
INVERSE FLOATER (c) (1.2%):
3.77%, FHLMC, Series 1419, Class G, LIBOR,
11/15/97 ........................................ 813,803 783,277
------------
INVERSE INTEREST-ONLY (c) (1.0%):
14.56%, FHLMC G, Series 12, Class AB, LIBOR,
12/25/08 ........................................ -- 662,158
------------
Z-BOND (c) (14.8%):
8.29%, FHLMC, Series 1339, Class PZ, 7/15/22 ...... 3,890,795 4,138,988
7.60%, FHLMC, Series 1677, Class Z, 7/15/23 ....... 3,946,213 4,092,894
8.04%, FHLMC, Series 1694, Class Z, 3/15/24 ....... 989,003 871,262
7.59%, FNMA, Series 1993-160, Class ZA, 9/25/23 ... 935,583 843,007
------------
9,946,151
------------
U.S. GOVERNMENT SECURITIES (11.8%):
7.25%, U.S. Treasury Bond, 5/15/16 ................ 2,000,000 2,174,320
8.13%, U.S. Treasury Bond, 8/15/19 ................ 1,000,000 1,190,990
5.75%, U.S. Treasury Note, 8/15/03 ................ 500,000 492,355
</TABLE>
<TABLE>
<CAPTION>
Principal Market
Description of Security Amount Value (a)
- --------------------------------------------------------- ----------- ------------
<S> <C> <C>
7.25%, U.S. Treasury Note, 5/15/04 ................ $ 1,000,000 $ 1,062,320
6.25%, U.S. Treasury Note, 5/31/00 ................ 1,000,000 1,009,690
5.88%, U.S. Treasury Note, 6/30/00 ................ 2,000,000 2,001,460
------------
7,931,135
------------
Total U.S. Government and Agency Securities
(cost: $67,713,238) .......................... 70,475,451
------------
SHORT-TERM SECURITIES (2.5%):
Repurchase agreement with Goldman Sachs, acquired
on 9/30/97, interest of $294, 6.15%, 10/1/97
(cost: $1,719,000) .............................. 1,719,000(d) 1,719,000
------------
Total Investments in Securities
(cost: $69,432,238)(e) ....................... $ 72,194,451
------------
------------
</TABLE>
NOTES TO INVESTMENTS IN SECURITIES:
(a) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO
THE FINANCIAL STATEMENTS.
(b) ON SEPTEMBER 30, 1997, THE TOTAL COST OF INVESTMENTS PURCHASED ON A WHEN-
ISSUED BASIS WAS $4,996,094.
(c) PORTFOLIO ABBREVIATIONS AND DEFINITIONS:
LIBOR - LONDON INTERBANK OFFERED RATE
INVERSE FLOATER - REPRESENTS SECURITIES THAT PAY INTEREST AT RATES THAT
INCREASE (DECREASE) WITH A DECLINE (INCREASE) IN THE SPECIFIED INDEX.
THE INTEREST RATE PAID BY THE INVERSE FLOATER WILL GENERALLY CHANGE
AT A MULTIPLE OF ANY CHANGE IN THE INDEX. INTEREST RATES DISCLOSED
ARE IN EFFECT ON SEPTEMBER 30, 1997.
INVERSE INTEREST-ONLY - REPRESENTS SECURITIES THAT ENTITLE HOLDERS TO
RECEIVE ONLY INTEREST PAYMENTS ON THE UNDERLYING MORTGAGES. INTEREST
IS PAID AT A RATE THAT INCREASES (DECREASES) WITH A DECREASE
(INCREASE) IN THE SPECIFIED INDEX. THE YIELD TO MATURITY OF AN
INVERSE INTEREST-ONLY IS EXTREMELY SENSITIVE TO THE RATE OF PRINCIPAL
PAYMENTS ON THE UNDERLYING MORTGAGE ASSETS. A RAPID (SLOW) RATE OF
PRINCIPAL REPAYMENTS MAY HAVE AN ADVERSE (POSITIVE) EFFECT ON YIELD
TO MATURITY. INTEREST RATES DISCLOSED REPRESENT CURRENT YIELDS BASED
UPON THE CURRENT COST BASIS AND ESTIMATED TIMING AND AMOUNT OF FUTURE
CASH FLOWS.
Z-BOND - REPRESENTS SECURITIES THAT PAY NO INTEREST OR PRINCIPAL DURING
THEIR INITIAL ACCRUAL PERIODS, BUT ACCRUE ADDITIONAL PRINCIPAL AT
SPECIFIED RATES. INTEREST RATE DISCLOSED REPRESENTS CURRENT YIELD
BASED UPON THE COST BASIS AND ESTIMATED TIMING OF FUTURE CASH FLOWS.
(d) REPURCHASE AGREEMENT IN A JOINT TRADING ACCOUNT WHICH IS COLLATERALIZED BY
U.S. GOVERNMENT AGENCY SECURITIES. ACCRUED INTEREST SHOWN REPRESENTS
INTEREST DUE AT MATURITY OF THE REPURCHASE AGREEMENT.
(e) ON SEPTEMBER 30, 1997, THE COST OF INVESTMENTS IN SECURITIES FOR FEDERAL
INCOME TAX PURPOSES WAS $69,632,860. THE AGGREGATE GROSS UNREALIZED
APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS
COST WERE AS FOLLOWS:
<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION ...... $ 2,901,802
GROSS UNREALIZED DEPRECIATION ...... (340,211)
------------
NET UNREALIZED APPRECIATION ...... $ 2,561,591
------------
------------
</TABLE>
- --------------------------------------------------------------------------------
25 1997 Annual Report - Income Funds
<PAGE>
Investments in Securities
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERMEDIATE BOND FUND September 30, 1997
.......................................................................................
Principal Market
Description of Security Amount Value (a)
- --------------------------------------------------------- ----------- ------------
<S> <C> <C>
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS)
U.S. GOVERNMENT AND AGENCY SECURITIES (63.3%):
U.S. AGENCY DEBENTURES (9.1%):
8.65%, FNMA, 2/10/98 .............................. $ 2,000,000 $ 2,024,460
7.40%, FNMA, 7/1/04 ............................... 2,000,000 2,121,580
6.18%, FNMA, 3/15/01 .............................. 1,000,000 1,004,330
6.16%, FNMA, 4/3/01 ............................... 2,000,000 2,007,360
------------
7,157,730
------------
U.S. AGENCY MORTGAGE-BACKED SECURITIES (27.3%):
FIXED RATE (27.3%):
7.00%, FHLMC, 9/1/10 .............................. 2,121,304 2,149,814
10.00%, FNMA, 11/1/18 ............................. 2,358,065 2,587,976
7.00%, FNMA, 11/1/10 .............................. 2,161,760 2,186,750
9.00%, FNMA, 12/1/20 .............................. 1,971,347 2,104,157
9.50%, FNMA, 6/1/21 ............................... 2,341,360 2,530,120
9.00%, GNMA, 5/20/25 .............................. 1,985,909 2,105,679
8.50%, GNMA, 7/20/25 .............................. 2,766,474 2,886,650
9.00%, GNMA, 8/15/21 .............................. 4,525,306 4,871,764
------------
21,422,910
------------
U.S. GOVERNMENT SECURITIES (26.9%):
7.25%, U.S. Treasury Note, 8/15/04 ................ 3,000,000 3,190,740
6.75%, U.S. Treasury Note, 4/30/00 ................ 2,000,000 2,042,340
5.50%, U.S. Treasury Note, 12/31/00 ............... 5,000,000 4,939,250
8.00%, U.S. Treasury Note, 8/15/99 ................ 4,000,000 4,154,160
7.88%, U.S. Treasury Note, 11/15/99 ............... 3,500,000 3,641,645
6.50%, U.S. Treasury Note, 10/15/06 ............... 3,000,000 3,065,070
------------
21,033,205
------------
Total U.S. Government and Agency Securities
(cost: $49,134,009) .......................... 49,613,845
------------
CORPORATE BONDS (27.8%):
CONSUMER NON-DURABLES (2.6%):
Coca-Cola Enterprises, 6.70%, 10/15/36 ............ 2,000,000 2,051,880
------------
CONSUMER SERVICES (2.5%):
Hertz Corp, 6.30%, 11/15/06 ....................... 2,000,000 1,994,700
------------
FINANCIAL SERVICES (15.3%):
American Express Credit, 6.50%, 8/1/00 ............ 1,000,000 1,007,970
First Chicago, 7.63%, 1/15/03 ..................... 1,000,000 1,048,610
Ford Motor Credit Co.,
7.00%, 9/25/01 .................................. 3,000,000 3,071,490
General Motors Acceptance Corp., 8.50%, 1/1/03 .... 1,500,000 1,635,645
Lehman Brothers Inc., 7.50%, 8/1/26 ............... 2,000,000 2,110,840
</TABLE>
<TABLE>
<CAPTION>
Principal Market
Description of Security Amount Value (a)
- --------------------------------------------------------- ----------- ------------
<S> <C> <C>
Morgan Stanley Group Inc., 8.10%, 6/24/02 ......... $ 1,000,000 $ 1,066,290
Smith Barney Holdings,
7.00%, 3/15/04 .................................. 2,000,000 2,037,380
------------
11,978,225
------------
RETAIL TRADE (1.3%):
Nordstrom Credit Inc., 6.70%, 7/1/05 .............. 1,000,000 1,001,820
------------
UTILITIES (6.1%):
Hydro-Quebec, 9.40%, 2/1/21 ....................... 2,300,000 2,854,691
Korea Electric Power ADS, 6.38%, 12/1/03 .......... 2,000,000 1,922,740
------------
4,777,431
------------
Total Corporate Bonds
(cost: $21,216,369) .......................... 21,804,056
------------
ASSET-BACKED SECURITIES (6.1%):
Daimler-Benz Vehicle Trust, 1996-A, Class A, 5.85%,
7/20/03 ......................................... 1,281,972 1,283,971
Norwest Automobile Trust, 1996-A, Class A3, 5.90%,
3/15/00 ......................................... 1,500,000 1,502,355
Citibank Credit Card Master Trust I, Series 1997-7,
Class A, 6.35%, 8/15/02 ......................... 2,000,000 2,010,800
------------
Total Asset-Backed Securities
(cost: $4,779,293) ........................... 4,797,126
------------
SHORT-TERM SECURITIES (2.6%):
Repurchase agreement with Goldman Sachs, acquired
on 9/30/97, interest of $342, 6.15%, 10/1/97
(cost: $1,999,000) .............................. 1,999,000(b) 1,999,000
------------
Total Investments in Securities
(cost: $77,128,671)(c) ....................... $ 78,214,027
------------
------------
</TABLE>
NOTES TO INVESTMENTS IN SECURITIES:
(a) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO
THE FINANCIAL STATEMENTS.
(b) REPURCHASE AGREEMENT IN A JOINT TRADING ACCOUNT WHICH IS COLLATERALIZED BY
U.S. GOVERNMENT AGENCY SECURITIES. ACCRUED INTEREST SHOWN REPRESENTS
INTEREST DUE AT MATURITY OF THE REPURCHASE AGREEMENT.
(c) ON SEPTEMBER 30, 1997, THE COST OF INVESTMENTS IN SECURITIES FOR FEDERAL
INCOME TAX PURPOSES WAS $77,134,153. THE AGGREGATE GROSS UNREALIZED
APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS
COST WERE AS FOLLOWS:
<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION ...... $ 1,084,753
GROSS UNREALIZED DEPRECIATION ...... (4,879)
------------
NET UNREALIZED APPRECIATION ...... $ 1,079,874
------------
------------
</TABLE>
- --------------------------------------------------------------------------------
26 1997 Annual Report - Income Funds
<PAGE>
Investments in Securities
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADJUSTABLE RATE MORTGAGE SECURITIES FUND September 30, 1997
........................................................................................
Principal Market
Description of Security Amount Value (a)
- --------------------------------------------------------- ----------- -------------
<S> <C> <C>
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS)
U.S. GOVERNMENT AND AGENCY SECURITIES (87.4%):
U.S. AGENCY MORTGAGE-BACKED SECURITIES (85.7%):
ADJUSTABLE RATE (b) (63.9%):
7.38%, FHLMC, 11/1/16 ............................. $ 6,804,104 $ 7,039,322
7.25%, FHLMC, 1/1/17 .............................. 767,392 792,670
7.77%, FHLMC, 6/1/18 .............................. 1,359,911 1,421,393
6.26%, FHLMC, 12/1/26 ............................. 4,812,428 4,782,157
6.52%, FHLMC, 2/1/27 .............................. 4,923,346 4,888,341
7.57%, FHLMC, 8/1/20 .............................. 6,893,456 7,184,153
6.44%, FHLMC, Series 1684, Class OA, LIBOR,
3/15/24 ......................................... 5,827,591 5,831,204
5.49%, FMNA, Series 1992-196, Class FA, COFI,
11/25/07 ........................................ 2,331,612 2,196,844
7.23%, FNMA, 11/1/17 .............................. 7,047,831 7,265,257
7.63%, FNMA, 1/1/20 ............................... 1,346,998 1,411,641
7.69%, FNMA, 2/1/22 ............................... 1,227,320 1,287,434
6.93%, FNMA, 3/1/28 ............................... 5,357,629 5,439,279
7.31%, FNMA, 10/1/25 .............................. 6,339,500 6,466,163
5.99%, FNMA, Series 1994-12, Class FB, COFI,
1/25/09 ......................................... 5,010,300 4,941,959
7.13%, GNMA, 7/20/22 .............................. 5,772,916 5,946,854
7.38%, GNMA, 5/20/23 .............................. 7,534,956 7,754,901
7.13%, GNMA, 9/20/23 .............................. 5,852,920 6,025,815
7.38%, GNMA, 6/20/24 .............................. 7,042,298 7,243,215
7.00%, GNMA, 8/20/25 .............................. 8,749,888 8,963,823
7.00%, GNMA, 9/20/25 .............................. 8,854,122 9,071,225
7.13%, GNMA, 8/20/21 .............................. 5,295,287 5,458,275
6.88%, GNMA, 10/20/21 ............................. 5,148,384 5,291,663
6.88%, GNMA II, 11/20/25 .......................... 1,276,097 1,311,892
-------------
118,015,480
-------------
FIXED RATE (21.8%):
5.50%, FHLMC, 4/1/03 .............................. 2,050,936 1,996,464
5.50%, FHLMC, 4/1/03 .............................. 1,683,834 1,639,111
5.50%, FHLMC, 4/1/03 .............................. 2,079,724 2,024,487
5.50%, FHLMC, 4/1/03 .............................. 1,079,829 1,051,149
5.50%, FHLMC, 4/1/03 .............................. 1,776,755 1,729,565
6.00%, FHLMC, 6/1/04 .............................. 4,901,168 4,823,044
6.00%, FHLMC, 6/1/03 .............................. 4,870,942 4,826,811
6.50%, FNMA, 3/1/03 ............................... 4,257,436 4,264,078
6.50%, FNMA, 3/1/03 ............................... 8,571,890 8,585,262
7.00%, FNMA, 3/1/03 ............................... 3,476,963 3,520,425
9.00%, GNMA, 5/15/16 .............................. 918,091 988,958
10.00%, GNMA, 2/15/25 ............................. 1,936,804 2,143,190
9.00%, GNMA, 4/15/21 .............................. 2,426,346 2,631,833
-------------
40,224,377
-------------
</TABLE>
<TABLE>
<CAPTION>
Principal Market
Description of Security Amount Value (a)
- --------------------------------------------------------- ----------- -------------
<S> <C> <C>
U.S. GOVERNMENT SECURITIES (1.7%):
7.75%, U.S. Treasury Note, 1/31/00 ................ $ 3,000,000 $ 3,123,150
-------------
Total U.S. Government and Agency Securities
(cost: $159,602,863) ......................... 161,363,007
-------------
PRIVATE MORTGAGE-BACKED SECURITIES (9.4%):
FLOATING RATE (b) (9.4%):
7.67%, Capstead Mortgage Securities Corporation,
Series 1993-2H, Class A1, Treasury, 9/25/23 ..... 8,638,228 8,827,055
8.00%, Resolution Trust Corporation, Series 1991-8,
Class A1, Treasury, 12/25/20 .................... 8,337,196 8,445,971
-------------
17,273,026
-------------
Total Private Mortgage-Backed Securities
(cost: $17,304,511) .......................... 17,273,026
-------------
SHORT-TERM SECURITIES (3.1%):
Repurchase agreement with Goldman Sachs, acquired
on 9/30/97, interest of $993, 6.15%, 10/1/97
(cost: $5,814,000) .............................. 5,814,000(c) 5,814,000
-------------
Total Investments in Securities
(cost: $182,721,374)(d) ...................... $ 184,450,033
-------------
-------------
</TABLE>
NOTES TO INVESTMENTS IN SECURITIES:
(a) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO
THE FINANCIAL STATEMENTS.
(b) PORTFOLIO ABBREVIATIONS AND DEFINITIONS:
LIBOR - LONDON INTERBANK OFFERED RATE
COFI (11TH DISTRICT) - COST OF FUNDS INDEX OF THE FEDERAL RESERVE'S
11TH DISTRICT
ADJUSTABLE OR FLOATING RATE - REPRESENTS SECURITIES THAT PAY INTEREST
AT RATES THAT INCREASE (DECREASE) WITH AN INCREASE (DECREASE) IN THE
SPECIFIED INDEX. INTEREST RATES DISCLOSED ARE IN EFFECT ON SEPTEMBER
30, 1997.
(c) REPURCHASE AGREEMENT IN A JOINT TRADING ACCOUNT WHICH IS COLLATERALIZED BY
U.S. GOVERNMENT AGENCY SECURITIES. ACCRUED INTEREST SHOWN REPRESENTS
INTEREST DUE AT MATURITY OF THE REPURCHASE AGREEMENT.
(d) ON SEPTEMBER 30, 1997, THE COST OF INVESTMENTS IN SECURITIES FOR FEDERAL
INCOME TAX PURPOSES WAS $182,721,581. THE AGGREGATE GROSS UNREALIZED
APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS
COST WERE AS FOLLOWS:
<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION ...... $ 1,917,676
GROSS UNREALIZED DEPRECIATION ...... (189,224)
------------
NET UNREALIZED APPRECIATION ...... $ 1,728,452
------------
------------
</TABLE>
- --------------------------------------------------------------------------------
27 1997 Annual Report - Income Funds
<PAGE>
Independent Auditors' Report
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS AND SHAREHOLDERS
PIPER FUNDS INC.
PIPER FUNDS INC. II:
We have audited the accompanying statements of assets and
liabilities, including the schedules of investments in
securities, of Government Income Fund and Intermediate
Bond Fund (funds within Piper Funds Inc.) and Adjustable
Rate Mortgage Securities Fund (a fund within Piper Funds
Inc.-II) as of September 30, 1997, and the related
statements of operations for the year then ended, the
statements of changes in net assets for each of the years
in the two-year period ended September 30, 1997, for
Government Income Fund and Intermediate Bond Fund and the
year ended September 30, 1997, the month ended September
30, 1996, and the year ended August 31, 1996, for
Adjustable Rate Mortgage Securities Fund, and the
financial highlights presented in note 8 to the financial
statements. These financial statements and the financial
highlights are the responsibility of the funds'
management. Our responsibility is to express an opinion on
these financial statements and the financial highlights
based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and the
financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are
confirmed to us by the custodian. As to securities
purchased but not received, we request confirmations from
brokers and, where replies are not received, we carry out
other appropriate auditing procedures. An audit also
includes assessing the accounting principles used and
significant estimates made by management, as well as
evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and the financial
highlights referred to above present fairly, in all
material respects, the financial position of Government
Income Fund, Intermediate Bond Fund and Adjustable Rate
Mortgage Securities Fund as of September 30, 1997, and the
results of their operations, the changes in their net
assets and the financial highlights for the periods stated
in the first paragraph above, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
November 7, 1997
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28 1997 Annual Report - Income Funds
<PAGE>
Federal Income Tax Information
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The following per-share information describes the federal
tax treatment of distibutions made during the fiscal year.
Distributions for the calender year will be reported to
you on Form 1099-DIV. Please consult a tax advisor on how
to report these distributions at the state and local
levels.
INCOME DISTRIBUTIONS (TAXABLE AS ORDINARY DIVIDENDS, NONE
QUALIFYING FOR DEDUCTION BY CORPORATIONS)
<TABLE>
<CAPTION>
INTERMEDIATE
GOVERNMENT BOND FUND ADJUSTABLE RATE
INCOME ----------------------------- MORTGAGE
PAYABLE DATE FUND CLASS A CLASS Y SECURITIES FUND
- --------------------------------------------- ------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C>
October 1, 1996 ............................. $0.0485 $ 0.0770 $ -- $0.0382
November 1, 1996 ............................ 0.0492 0.0387 -- 0.0398
December 2, 1996 ............................ 0.0492 0.0387 -- 0.0416
January 2, 1997 ............................. 0.0496 0.0380 -- 0.0393
February 3, 1997 ............................ 0.0465 0.0353 -- 0.0380
March 3, 1997 ............................... 0.0469 0.0350 0.0146 0.0399
April 1, 1997 ............................... 0.0465 0.0370 0.0393 0.0393
May 1, 1997 ................................. 0.0457 0.0353 0.0365 0.0372
June 2, 1997 ................................ 0.0465 0.0366 0.0412 0.0399
July 1, 1997 ................................ 0.0469 0.0364 0.0378 0.0397
August 1, 1997 .............................. 0.0468 0.0354 0.0368 0.0395
September 2, 1997 ........................... 0.0466 0.0378 0.0393 0.0397
------------ ------------ ------------ -----------------
Total ..................................... $0.5689 $ 0.4812 $ 0.2455 $0.4721
------------ ------------ ------------ -----------------
------------ ------------ ------------ -----------------
</TABLE>
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29 1997 Annual Report - Income Funds
<PAGE>
THIS PAGE WAS INTENTIONALLY LEFT BLANK.
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30 1997 Annual Report - Income Funds
<PAGE>
AS A SHAREHOLDER IN PIPER FUNDS, YOU HAVE ACCESS TO A FULL RANGE OF SERVICES AND
BENEFITS.
CHECK YOUR PROSPECTUS FOR DETAILS ABOUT SERVICES AND ANY LIMITATIONS THAT MIGHT
APPLY TO YOUR FUND.
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
Low Minimum Investments
You may become a shareholder in Piper Funds class A shares or class B shares
with an initial investment of $250 or more. Class Y shares have a minimum
initial investment of $1 million. Add to your existing investment with any
amount, at any time.
Automatic Monthly Investment Programs
To purchase shares as part of a savings discipline, you may automatically
transfer $100 or more each month to any Piper fund from your bank, savings and
loan or other financial institution. Or, transfer $25 or more per month from any
of the Piper money market funds.*
Receiving Dividends and Other Distributions
Dividend and capital gains distributions may be reinvested in additional shares
of the fund you own, invested in shares of a different Piper fund offered in
your state, or distributed in cash. Any reinvestments must be in the same class
of shares.
Reducing the Class A Front-End Sales Charge
You may reduce, or even eliminate, the class A front-end sales charge if: your
initial investment exceeds a specified amount, your investment combined with the
value of your existing Piper Funds investments (or a related account's
investments) exceeds a specified amount or if your investments combined during a
13-month period exceed a specified amount. See your prospectus for details.
Confirmation of Transactions
You receive a confirmation statement following every transaction, except in the
money market funds. All transactions are reflected on your account statement.
Exchanging Shares
If your investment goals or your financial needs change, you may move from one
Piper fund to the same class of another Piper fund, if the shares of that fund
are legally available in your state. There is no fee to exchange shares.
Exchanges are generally made based on the net asset value per share of each fund
at the time of the exchange. However, if your new fund has a higher sales
charge, you must pay the difference.
Taking Systematic Withdrawals
If your account has a value of $5,000 or more, you may make automatic
withdrawals from your account. You may withdraw $100 or more monthly, quarterly,
or semiannually by authorizing the sale of the appropriate number of shares on a
periodic basis.
Reinvesting After a Sale
If you sell class A shares, you may reinvest in class A shares of that fund or
another Piper fund within 30 days without a sales charge. If you sell class B
shares (or other shares subject to a CDSC) and elect to reinvest within 30 days,
that charge will be credited to your account and the reinvested shares will
continue to be subject to the CDSC.
Account Statements
Whenever you add to or withdraw from your account, you will receive a monthly
statement from Piper Jaffray. Accounts with no activity receive a quarterly
statement instead. Periodic dividend and capital gains distributions, if any,
also appear on your statement.
* An investment in a Piper money market fund is neither insured nor guaranteed
by the U.S. government, and there can be no assurance that the fund will be able
to maintain a stable net asset value of $1 per share.
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31 1997 Annual Report - Income Funds
<PAGE>
GLOSSARY OF TERMS***
- --------------------------------------------------------------------------------
Benchmark
A benchmark is an established basis of comparison for an investment's
performance. A benchmark may be an unmanaged market index or a group of similar
investments.
Discount
Securities that trade below par because their coupon rates are lower than
current market coupon rates.
Dollar-roll program
The dollar-roll program allows a fund to generate fee income by committing to
pay for securities in the future at today's prices. Participation in the
dollar-roll program increases the cost of assets exposed to market and interest
rate risk, and therefore may, to the extent the fund remains fully invested,
increase a fund's net asset value volatility.
Duration (See Effective duration)
Effective duration
Effective duration estimates how much the value of a security is expected to
change with a given change in interest rates. Longer effective durations
indicate more sensitivity 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 remember that effective duration is based on
certain assumptions and has several limitations. It is most effective as a
measure when interest rate changes are small, rapid and occur equally across all
the different points of the yield curve. In addition, effective duration is
difficult to calculate precisely for bonds with prepayment options, such as
mortgage-backed securities.
If a fund has an aggressive effective duration, it means its managers have set a
longer duration posture in comparison to the fund's benchmark. A fund with a
long effective duration is more sensitive to changing interest rates.
If a fund has a defensive effective duration, it means its managers have set a
shorter duration posture in comparison to the fund's benchmark, to make the fund
less sensitive to changing interest rates.
If a fund has a neutral effective duration, the duration is approximately the
same as its benchmark.
Overweighted or overweighting
In portfolio management, overweighting means a fund's portfolio contains a
higher percentage of a certain sector than its benchmark.
Seasoned
For mortgage-backed securities, a seasoned premium security is a relatively high
coupon security trading at a premium, in which the underlying mortgages have
already gone through a refinancing cycle, making the security less likely to
prepay principal at an accelerated rate if market conditions exist to make
refinancing attractive.
*** - This symbol represents a graduation cap, used throughout this report to
indicate terms defined in the glossary.
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32 1997 Annual Report - Income Funds
<PAGE>
DIRECTORS
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DAVID T. BENNETT, Chairman, Highland Homes, Inc., USL Products, Inc., Kiefer
Built, Inc., of Counsel, Gray, Plant, Mooty, Mooty & Bennett, P.A.
JAYE F. DYER, President, Dyer Management Company
WILLIAM H. ELLIS, Retired President, Piper Jaffray Companies Inc., Piper Capital
Management Incorporated
KAROL D. EMMERICH, President, The Paraclete Group
LUELLA G. GOLDBERG, Director, TCF Financial, ReliaStar Financial Corp., Hormel
Foods Corp.
DAVID A. HUGHEY, Retired Executive Vice President and Chief Administrative
Officer of Dean Witter InterCapital Inc. and Dean Witter Trust Co.
GEORGE LATIMER, Chief Executive Officer, National Equity Funds
OFFICERS
- --------------------------------------------------------------------------------
WILLIAM H. ELLIS, Chairman of the Board
PAUL A. DOW, President
ROBERT H. NELSON, Vice President and Treasurer
SUSAN SHARP MILEY, Secretary
INVESTMENT ADVISOR
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PIPER CAPITAL MANAGEMENT INCORPORATED
222 South Ninth Street, Minneapolis, MN 55402-3804
TRANSFER AND DIVIDEND DISBURSING AGENTS
- --------------------------------------------------------------------------------
INVESTORS FIDUCIARY TRUST COMPANY
1004 Baltimore, Kansas City, MO 64105-1614
PIPER JAFFRAY INC.
222 South Ninth Street, Minneapolis, MN 55402-3804
PIPER TRUST COMPANY
222 South Ninth Street, Minneapolis, MN 55402-3804
CUSTODIAN AND ACCOUNTING AGENT
- --------------------------------------------------------------------------------
INVESTORS FIDUCIARY TRUST COMPANY
801 Pennsylvania, Kansas City, MO 64105-1307
INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
KPMG PEAT MARWICK LLP
4200 Norwest Center, Minneapolis, MN 55402
LEGAL COUNSEL
- --------------------------------------------------------------------------------
DORSEY & WHITNEY LLP
220 South Sixth Street, Minneapolis, MN 55402
FOR MORE INFORMATION
By Phone [GRAPHIC]
800 866-7778
FOR GENERAL INFORMATION
press 5, our Mutual Fund Services representatives are ready to answer
your questions.
TO ORDER LITERATURE
press 5, ask a service representative to mail you additional literature,
including a Quarterly Update. You can also request to be put on a mailing list
to receive this information automatically each quarter.
By Mail [GRAPHIC]
Piper Capital Management
Attn: Mutual Fund Services
222 South Ninth Street
Minneapolis, MN 55402-3804
In an effort to reduce costs to our shareholders, we have implemented a process
to reduce duplicate mailings of the funds' shareholder reports. This
householding process should allow us to mail one report to each address where
one or more registered shareholders with the same last name reside. If you would
like to have additional reports mailed to your address, please call our Mutual
Fund Services area at 800 866-7778, or mail a request to us.
On-Line [GRAPHIC]
http://www.piperjaffray.com/
<PAGE>
INCOME FUNDS
INTERNATIONAL GROWTH FUNDS
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Emerging Markets Growth Fund
Pacific-European Growth Fund
U.S. GROWTH FUNDS
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Small Company Growth Fund
Emerging Growth Fund
Growth Fund
GROWTH AND INCOME FUNDS
- --------------------------------------------------------------------------------
Growth and Income Fund
Balanced Fund
INCOME FUNDS
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Government Income Fund
Intermediate Bond Fund
Adjustable Rate Mortgage Securities Fund
TAX-EXEMPT INCOME FUNDS
- --------------------------------------------------------------------------------
National Tax-Exempt Fund
Minnesota Tax-Exempt Fund
CASH MANAGEMENT FUNDS*
- --------------------------------------------------------------------------------
Money Market Fund
U.S. Government Money Market Fund
Tax-Exempt Money Market Fund
Institutional Money Market Fund
Many traditional investment strategies rely on the steady, dependable investment
income generated by debt obligations of corporations and government entities.
Piper Funds provide you with the flexibility to help you pursue your financial
goals. Among our funds, we offer a spectrum of investment objectives and
convenient shareholder services to meet the varied needs of today's investors.
Contact your Piper Jaffray Investment Executive for more information, including
prospectuses, about the Piper Funds or call Mutual Fund Services at 800
866-7778. Please read the prospectuses carefully before investing or
sending money.
*An investment in a Piper money market fund is neither insured nor guaranteed by
the U.S. government and there can be no assurance that the fund will be able to
maintain a stable net asset value of $1 per share.
PIPER JAFFRAY INC., FUND DISTRIBUTOR AND NASD MEMBER.
#10400 11/1997 267-97
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222 South Ninth Street Permit No. 3008
Minneapolis, MN 55402-3804 Mpls., MN
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