<PAGE>
1933 Act Registration No. 33-10261
1940 Act Registration No. 811-4905
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 31, 1997
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(Registration No. 33-10261)
Pre-Effective Amendment No. ______
Post-Effective Amendment No. 39
AND/OR -----
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
(Registration No. 811-4905)
Amendment No. 39
------
(Check appropriate box or boxes)
PIPER FUNDS INC.
(Exact Name of Registrant as Specified in Charter)
Piper Jaffray Tower, 222 South 9th Street, Minneapolis, MN 55402
----------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (6l2) 342-6384
Paul A. Dow
Piper Capital Management Incorporated
Piper Jaffray Tower
222 South 9th Street, Minneapolis, Minnesota 55402
--------------------------------------------------
(Name and Address of Agent for Service)
Copy to:
Kathleen L. Prudhomme
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, Minnesota 55402
X immediately upon filing pursuant to paragraph (b) of rule 485
- ---
___ on (specify date) pursuant to paragraph (b) of rule 485
___ 75 days after filing pursuant to paragraph (a) of rule 485, unless
effectiveness is accelerated by the staff of the Securities and
Exchange Commission
___ on (specify date) pursuant to paragraph (a) of rule 485
The Registrant has registered an indefinite number of its common shares
pursuant to Regulation 270.24f-2 under the Investment Company Act of 1940. A
Rule 24f-2 Notice for the fiscal year ended September 30, 1996 was filed on or
about November 27, 1996.
<PAGE>
PIPER FUNDS INC.
Registration Statement on Form N-1A
--------------------------------
CROSS REFERENCE SHEET
Pursuant to Rule 481(a)
--------------------------------
Item No. Prospectus Heading
-------- ------------------
1. Cover Page . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . Introduction; Fund Expenses
3. Financial Highlights . . . . . . . Financial Highlights
4. General Description of
Registrant. . . . . . . . . . . . Introduction; Investment Objective
and Policies; Special Investment
Methods
5. Management of the Fund . . . . . . Management
6. Capital Stock and Other
Securities. . . . . . . . . . . . General Information; Introduction;
Dividends and Distributions; Tax
Status
7. Purchase of Securities
Being Offered . . . . . . . . . . How to Purchase Shares;
Shareholder Services; Valuation of
Shares
8. Redemption or Repurchase . . . . . How to Redeem Shares; Shareholder
Services
9. Pending Legal Proceedings. . . . . General Information
Statement of Additional Information
-----------------------------------
Heading
-------
10. Cover Page . . . . . . . . . . . . Cover Page
11. Table of Contents. . . . . . . . . Cover Page
12. General Information
and History . . . . . . . . . . . General Information; Pending
Litigation
13. Investment Objectives
and Policies. . . . . . . . . . . Investment Policies and
Restrictions
14. Management of the Fund . . . . . . Directors and Executive Officers
<PAGE>
15. Control Persons and Principal
Holders of Securities . . . . . . Capital Stock and Ownership of
Shares
16. Investment Advisory and
Other Services. . . . . . . . . . Investment Advisory and Other
Services
17. Brokerage Allocation . . . . . . . Portfolio Transactions and
Allocation of Brokerage
18. Capital Stock and Other
Securities. . . . . . . . . . . . Capital Stock and Ownership of
Shares
19. Purchase, Redemption and
Pricing of Securities
Being Purchased . . . . . . . . . Net Asset Value and Public Offering
Price; Performance Comparisons;
Purchase of Shares; Redemption of
Shares
20. Tax Status . . . . . . . . . . . . Taxation
21. Underwriters . . . . . . . . . . . Investment Advisory and Other
Services; Portfolio Transactions
and Allocation of Brokerage
22. Calculations of
Performance Data. . . . . . . . . Performance Comparisons
23. Financial Statements . . . . . . . Financial Statements
<PAGE>
PROSPECTUS DATED JULY 31, 1997
MINNESOTA TAX-EXEMPT FUND
PIPER JAFFRAY TOWER
222 SOUTH NINTH STREET, MINNEAPOLIS, MINNESOTA 55402-3804
(800) 866-7778 (TOLL FREE)
MINNESOTA TAX-EXEMPT FUND has an investment objective of maximum current
income that is exempt from both federal and State of Minnesota income taxes,
consistent with prudent investment risk and preservation of capital. During
periods of normal market conditions, the Fund will invest at least 80% of its
net assets in securities that generate interest that is not includable in
federal gross income or in State of Minnesota taxable net income (except for
State of Minnesota franchise tax on corporations and financial institutions,
which is measured by income) and is not an item of tax preference for purposes
of the federal or State of Minnesota alternative minimum tax. Such securities
include, but are not limited to, securities of the State of Minnesota, its
agencies, instrumentalities and political subdivisions, and certain securities
of United States territories and possessions, and may also include derivative
tax-exempt securities. At least 95% of the exempt-interest dividends paid by the
Fund will be derived from such sources.
PLEASE REMEMBER, YOU COULD LOSE MONEY WITH THIS INVESTMENT. NEITHER SAFETY
OF PRINCIPAL NOR STABILITY OF INCOME IS GUARANTEED.
This Prospectus concisely describes the information about the Fund that you
ought to know before investing. Please read it carefully and retain it for
future reference.
A Statement of Additional Information about the Fund dated July 31, 1997 is
available free of charge. Write to the Fund at Piper Jaffray Tower, 222 South
Ninth Street, Minneapolis, Minnesota 55402 or telephone (800) 866-7778 (toll
free). The Statement of Additional Information has been filed with the
Securities and Exchange Commission and is incorporated in its entirety by
reference in this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO
THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE>
INTRODUCTION
Minnesota Tax-Exempt Fund (the "Fund") is a nondiversified series of Piper
Funds Inc. (the "Company"), an open-end management investment company the shares
of which are currently issued in twelve separate series. As a nondiversified
fund, the Fund may have a larger position in a single issuer than would be the
case if it were diversified. The share price of the Fund may therefore be
subject to greater fluctuation as a result of changes in the financial condition
or the market's assessment of an individual issuer. This Prospectus provides
information regarding the Class Y shares of the Fund. Class Y shares are
available only to investors making an initial investment of $1 million or more.
The Fund also offers Class A shares through a separate prospectus. To obtain
more information on the Fund's Class A shares, call the Fund at the telephone
number that appears on the cover of this Prospectus.
THE INVESTMENT ADVISER
The Fund is managed by Piper Capital Management Incorporated (the
"Adviser"), a wholly owned subsidiary of Piper Jaffray Companies Inc. The Fund
pays the Adviser a fee for managing its investment portfolio at an annual rate
of .50% on net assets up to $250 million. The fee is scaled downward as net
assets increase in size above $250 million. See "Management -- Investment
Adviser."
THE DISTRIBUTOR
Piper Jaffray Inc. ("Piper Jaffray"), a wholly owned subsidiary of Piper
Jaffray Companies Inc. and an affiliate of the Adviser, serves as Distributor of
the Fund's shares.
OFFERING PRICE
Class Y shares of the Fund are sold at net asset value without any initial
or deferred sales charges, and are not subject to any Rule 12b-1 fees. See "How
to Purchase Shares -- Purchase Price."
MINIMUM INITIAL AND SUBSEQUENT INVESTMENTS
The minimum initial investment is $1 million. There is no minimum for
subsequent investments. The Distributor, in its discretion, may waive the
minimum. See "How to Purchase Shares -- Minimum Investments."
EXCHANGES
You may exchange your shares for Class Y shares of any other mutual fund
managed by the Adviser that offers such shares and is eligible for sale in your
state of residence. All exchanges are subject to the minimum investment
requirements and other applicable terms set forth in the prospectus of the fund
whose shares you acquire. See "Shareholder Services -- Exchange Privilege."
REDEMPTION PRICE
Shares of the Fund may be redeemed at any time at their net asset value next
determined after a redemption request is received by your Piper Jaffray
Investment Executive or other broker-dealer. The Fund reserves the right, upon
30 days' written notice, to redeem your account if the net asset value of the
shares falls below $1 million as a result of a redemption or exchange request.
See "How to Redeem Shares."
CERTAIN RISK FACTORS TO CONSIDER
An investment in the Fund is subject to certain risks, as set forth in
detail under "Investment Objective and Policies" and "Special Investment
Methods." As with other mutual funds, there can be no assurance that the Fund
will achieve its objective. The Fund is subject to interest rate risk (the risk
that rising interest rates will make bonds issued at lower interest rates worth
less). As a result, the value of the Fund's shares will vary. The Fund is also
subject to credit risk (the risk that a bond issuer will fail to make timely
payments of interest
2
<PAGE>
or principal). In addition, if the bonds in the Fund's portfolio contain call
provisions that are currently exercisable, these securities are likely to be
redeemed during a period of declining interest rates and the Fund most likely
will have to reinvest the proceeds in lower yielding securities. To the extent
set forth under "Special Investment Methods," the Fund may engage in the
following investment practices: the use of repurchase agreements and reverse
repurchase agreements, the purchase and sale of securities on a when-issued or
delayed delivery basis, which may increase the volatility of the Fund's net
asset value, and the use of futures contracts and options on futures contracts
for hedging purposes. All of these techniques may increase the volatility of the
Fund's net asset value. The Fund may purchase derivative tax-exempt securities,
including inverse floating obligations, which may be more volatile than
traditional fixed-rate tax-exempt securities. Recent market experience has shown
that certain derivative securities may be extremely sensitive to changes in
interest rates and, as a result, the prices of such securities may be highly
volatile.
SHAREHOLDER INQUIRIES
Any questions or communications regarding a shareholder account should be
directed to your Piper Jaffray Investment Executive or, in the case of shares
held through another broker-dealer, to IFTC at (800) 874-6205. General inquiries
regarding the Fund should be directed to the Fund at the telephone number set
forth on the cover page of this Prospectus.
3
<PAGE>
FUND EXPENSES
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases......................................... None
Maximum Deferred Sales Charge..................................................... None
ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets)
Management Fees................................................................... .50 %
Rule 12b-1 Fees................................................................... None
Other Expenses.................................................................... .19 %
-----
Total Fund Operating Expenses..................................................... .69 %
</TABLE>
EXAMPLE
You would pay the following expenses on a $1,000 investment assuming a 5%
annual return and redemption at the end of each time period:
<TABLE>
<S> <C>
1 year................................................................ $ 7
3 years............................................................... $ 22
5 years............................................................... $ 38
10 years.............................................................. $ 86
</TABLE>
The purpose of the above Fund Expenses table is to assist you in
understanding the various costs and expenses that investors in the Fund will
bear directly or indirectly. THE EXAMPLE CONTAINED IN THE TABLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN.
The information set forth in the table is based on actual expenses incurred
by the Class A shares of the Fund during the fiscal year ended September 30,
1996, except that it reflects the fact that Class Y shares will not pay any Rule
12b-1 fees. The Fund did not offer Class Y shares during such fiscal year.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial highlights show certain per share data and selected
information for a Class A share of capital stock outstanding during the
indicated periods. This information, with the exception of the information for
the six months ended March 31, 1997, has been audited by KPMG Peat Marwick LLP,
independent auditors, and should be read in conjunction with the financial
statements of the Fund contained in its annual report. No Class Y shares were
outstanding during the indicated periods. Class A shares are subject to sales
charges and fees that may differ from those applicable to Class Y shares. An
annual report of the Fund is available without charge by contacting the Fund at
800-866-7778 (toll free). In addition to financial statements, the annual report
contains further information about the performance of the Fund.
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS
ENDED FISCAL YEAR ENDED SEPTEMBER 30,
MARCH 31, ------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988*
---------- ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period............................ $ 10.89 10.81 10.28 11.43 10.79 10.46 9.92 10.06 9.94 10.00
---------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Operations:
Net investment income............. 0.29 0.59 0.66 0.61 0.62 0.64 0.66 0.66 0.68 0.12
Net realized and unrealized gains
(losses) on investments......... (0.06) 0.07 0.53 (0.95) 0.68 0.33 0.54 (0.14) 0.12 (0.06)
---------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from operations........... 0.23 0.66 1.19 (0.34) 1.30 0.97 1.20 0.52 0.80 0.06
---------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Distributions from net investment
income++.......................... (0.29) (0.58) (0.66) (0.61) (0.62) (0.64) (0.66) (0.66) (0.68) (0.12)
Distributions from realized capital
gains -- net...................... (0.05) -- -- (0.20) (0.04) -- -- -- -- --
---------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions............. (0.34) (0.58) (0.66) (0.81) (0.66) (0.64) (0.66) (0.66) (0.68) (0.12)
---------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period...... $ 10.78 10.89 10.81 10.28 11.43 10.79 10.46 9.92 10.06 9.94
---------- ------ ------ ------ ------ ------ ------ ------ ------ ------
---------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total return(%)+.................... 2.10 6.24 11.38 (3.14) 12.52 9.56 12.49 5.30 8.23 0.58
Net assets, end of period (in
millions)......................... $ 126 126 134 162 169 132 83 63 51 9
Ratio of expenses to average daily
net assets(%)+++.................. 0.94** 0.90 0.91 0.89 0.91 0.93 0.92 0.87 0.80 0.80**
Ratio of net investment income to
average daily net assets(%)+++.... 5.26** 5.38 5.80 5.61 5.62 6.00 6.44 6.58 6.45 5.91**
Portfolio turnover rate (excluding
short-term securities)(%)......... 6 35 30 44 29 35 22 41 54 12
</TABLE>
- ------------
* Period from 7/11/88 (commencement of operations) to 9/30/88.
** Adjusted to an annual basis.
+ Total return is based on the change in net asset value during the year,
assumes reinvestment of all distributions and does not reflect a sales
charge.
++ Amounts included in distributions from net investment income that are
taxable for federal income tax purposes are $0.003, $0.001, $0.012, $0.011
and $0.020 per share for the years ended September 30, 1992, 1991, 1990 and
1989 and the period ended September 30, 1988, respectively.
+++ During the periods reflected above, the Adviser and the Distributor
voluntarily waived fees and expenses. Had the maximum Rule 12b-1 fee of
.30% been in effect and had the Fund paid all fees and expenses, the ratios
of expenses and net investment income to average daily net assets would
have been: 1.01%/5.19% (annualized) for the six months ended March 31,
1997, 0.99%/5.29% in fiscal 1996, 0.99%/5.72% in fiscal 1995, 0.99%/5.51%
in fiscal 1994, 1.00%/5.53% in fiscal 1993, 1.01%/5.92% in fiscal 1992,
1.05%/6.31% in fiscal 1991, 1.06%/6.39% in fiscal 1990, 1.33%/5.92% in
fiscal 1989 and 1.97%/4.74% in fiscal 1988. Beginning in fiscal 1995, the
expense ratio reflects the effect of gross expenses paid indirectly by the
Fund. Prior period expense ratios have not been adjusted.
5
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective listed below cannot be changed without shareholder
approval. The investment policies and techniques employed in pursuit of the
Fund's objective may be changed without shareholder approval, unless such policy
or technique is designated as "fundamental," in which case shareholder approval
is required.
The Fund has an investment objective of maximum current income that is
exempt from both federal and State of Minnesota income taxes, consistent with
prudent investment risk and preservation of capital. During periods of normal
market conditions, the Fund will invest at least 80% of its assets in Tax-Exempt
Securities the interest payable on which, in the opinion of bond counsel, is not
includable in federal gross income or in State of Minnesota taxable net income
under existing laws (except for State of Minnesota franchise tax on corporations
and financial institutions, which is measured by income) and is not an item of
tax preference for purposes of the federal or State of Minnesota alternative
minimum tax. Such securities include, but are not limited to, securities issued
by the State of Minnesota, its agencies, instrumentalities and political
subdivisions, and certain securities issued by United States territorial
possessions. Ninety-five percent or more of the exempt-interest dividends paid
by the Fund will be derived from interest income on obligations of the State of
Minnesota or its political or governmental subdivisions, municipalities,
governmental agencies or instrumentalities.
There are risks in any investment program, and there is no assurance that
the investment objective of the Fund will be achieved. The net asset value of
the Fund's shares will fluctuate with changes in the market values of the Fund's
investments. See "Investment Objective and Policies -- Investment Risks," below.
The Fund intends to emphasize investments in Tax-Exempt Securities with
long-term maturities. The Tax-Exempt Securities purchased by the Fund will be
securities rated, at the time of purchase, within the following grades assigned
by either Moody's Investors Services, Inc. ("Moody's") (Aaa, Aa, A or Baa for
long-term bonds; MIG-1 or MIG-2 for notes and other short-term obligations
having fixed maturities; VMIG-1 or VMIG-2 for notes and other short-term
obligations having a demand feature; and Prime-1 and Prime-2 for commercial
paper) or Standard & Poor's Ratings Services ("Standard & Poor's") (AAA, AA, A
or BBB for municipal bonds; SP-1 and SP-2 for state and municipal notes; and A-1
and A-2 for commercial paper) or will be unrated Tax-Exempt Securities which, at
the time of purchase, are judged by the Adviser to be of comparable quality.
Securities rated Baa or BBB have speculative characteristics and changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with higher
grade bonds. If the rating of a bond held by the Fund drops below Baa or BBB,
the Fund will conduct a credit analysis of the bond prior to determining whether
to retain or dispose of it. In no event, however, will more than 5% of the
Fund's net assets consist of securities that have been down-graded to a rating
lower than BBB or Baa or, if unrated, that are no longer of a quality comparable
to at least a BBB or Baa rating, as determined by the Adviser. The ratings of
Moody's and Standard & Poor's represent their opinions as to the quality of the
Tax-Exempt Securities which they undertake to rate. It should be emphasized,
however, that ratings are general, and not absolute, standards of quality.
Consequently, Tax-Exempt Securities of the same maturity, interest rate and
rating may have different yields, while Tax-Exempt Securities of the same
maturity and interest rate with different ratings may have the same yield. For a
discussion of the various ratings assigned by Moody's and Standard & Poor's see
Appendix A to the Statement of Additional Information.
Rated as well as unrated Tax-Exempt Securities will be analyzed by the
Adviser on the basis of available information as to creditworthiness and with a
view to various qualitative factors and trends affecting Tax-Exempt Securities
generally. It should be noted, however, that the amount of information about the
financial
6
<PAGE>
condition of an issuer of Tax-Exempt Securities may not be as extensive as that
which is made available by many issuers whose securities are more actively
traded.
During normal market conditions, the Fund may invest up to 20% of its net
assets in taxable obligations. Additionally, during periods of abnormal market
conditions when a defensive investment posture is warranted, the Fund
temporarily may invest up to 100% of its net assets in taxable obligations. Such
taxable obligations, whether purchased for liquidity or temporary defensive
purposes, may include the following: Tax-Exempt Securities rated within the
grades set forth above (or unrated and of comparable quality) that generate
interest that is an item of tax preference for purposes of the federal or State
of Minnesota alternative minimum tax; taxable municipal obligations rated within
the grades set forth above for Tax-Exempt Securities (or unrated and of
comparable quality); obligations of the United States government, its agencies
or instrumentalities (such as Treasury bills, notes and bonds); corporate bonds
rated within the three highest grades by either Moody's or Standard & Poor's;
commercial paper rated within the two highest grades by either of such rating
services; certificates of deposit and bankers' acceptances of domestic banks and
savings institutions having total assets at the time of investment in excess of
$1 billion or certificates of deposit of other domestic banks or savings
institutions which are fully insured by the Bank Insurance Fund or the Savings
Association Insurance Fund administered by the Federal Deposit Insurance
Corporation; and repurchase agreements with respect to any of the securities in
which the Fund may invest. The Fund may also hold its assets in cash.
The Fund will not invest more than 25% of its total assets in limited
obligation bonds payable only from revenues derived from facilities or projects
within a single industry, provided that bonds that have been refunded with
escrowed U.S. Government securities will not be subject to this limitation. As
to utility companies, gas, electric, water and telephone companies will be
considered as separate industries.
TAX-EXEMPT SECURITIES
Tax-Exempt Securities, as the term is used in this prospectus, include
Municipal Obligations, Derivative Municipal Obligations and Municipal Lease
Obligations, as defined below.
MUNICIPAL OBLIGATIONS. Municipal Obligations include debt obligations
issued by states, cities, local authorities, and possessions and certain
territories of the United States, to obtain funds for various public purposes,
including the construction of such public facilities as airports, bridges,
highways, housing, hospitals, mass transportation, schools, streets and water
and sewer works. Other public purposes for which Municipal Obligations may be
issued include the refinancing of outstanding obligations and the obtaining of
funds for general operating expenses and for loans to other public institutions
and facilities. In addition, certain industrial development, private activity
and pollution control bonds may be included within the term Municipal
Obligations if the interest paid thereon qualifies as exempt from federal income
tax. Municipal Obligations include long-term obligations, often called municipal
bonds, as well as short-term municipal notes and tax-exempt commercial paper. As
noted above, however, the Fund intends to emphasize investments in Tax-Exempt
Securities with long-term maturities.
The two principal classifications of municipal bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source. Industrial
development, private activity and pollution control bonds are in most cases
revenue bonds and do not generally constitute the pledge of the credit or taxing
power of the issuer of such bonds. There are, of course, variations in the
security of Municipal Obligations, both within a particular classification and
between classifications, depending on numerous factors.
7
<PAGE>
Certain Municipal Obligations may carry variable or floating rates of
interest whereby the rate of interest is not fixed but varies with changes in
specified market rates or indexes, such as a bank prime rate or a tax-exempt
money market index. Accordingly, the yield on such obligations can be expected
to fluctuate with changes in prevailing interest rates.
Other Municipal Obligations are zero coupon securities, which are debt
obligations which do not entitle the holder to any periodic payments prior to
maturity and are issued and traded at a discount from their face amounts. The
discount varies depending on the time remaining until maturity, prevailing
interest rates, liquidity of the security and perceived credit quality of the
issuer. The market prices of zero coupon securities are generally more volatile
than the market prices of securities that pay interest periodically and are
likely to respond to changes in interest rates to a greater degree than do
securities having similar maturities and credit quality that do pay periodic
interest.
DERIVATIVE MUNICIPAL OBLIGATIONS. The Fund may also acquire Derivative
Municipal Obligations, which are custodial receipts or certificates underwritten
by securities dealers or banks that evidence ownership of future interest
payments, principal payments or both on certain Municipal Obligations. The
underwriter of these certificates or receipts typically purchases Municipal
Obligations and deposits the securities in an irrevocable trust or custodial
account with a custodian bank, which then issues receipts or certificates that
evidence ownership of the periodic unmatured coupon payments and the final
principal payment on the obligations. Although under the terms of a custodial
receipt the Fund typically would be authorized to assert its rights directly
against the issuer of the underlying obligation, the Fund could be required to
assert through the custodian bank those rights as may exist against the
underlying issuer. Thus, in the event the underlying issuer fails to pay
principal and/or interest when due, the Fund may be subject to delays, expenses
and risks that are greater than those that would have been involved if the Fund
had purchased a direct obligation of the issuer. In addition, in the event that
the trust or custodial account in which the underlying security has been
deposited is determined to be an association taxable as a corporation, instead
of a non-taxable entity, it would be subject to state income tax (but not
federal income tax) on the income it earned on the underlying security, and the
yield on the security paid to the Fund and its shareholders would be reduced by
the amount of taxes paid. Furthermore, amounts paid by the trust or custodial
account to the Fund would lose their tax-exempt character and become taxable,
for federal and state purposes, in the hands of the Fund and its shareholders.
However, custodial receipts in which the Fund will invest will be accompanied by
a tax opinion stating that interest payable on the receipts is tax exempt. If
the Fund invests in custodial receipts, it is possible that a portion of the
discount at which the Fund purchases the receipts might have to be accrued as
taxable income during the period that the Fund holds the receipts. See "Tax
Status -- Federal Taxation."
The principal and interest payments on the Municipal Obligations underlying
custodial receipts may be allocated in a number of ways. For example, payments
may be allocated such that certain custodial receipts may have variable or
floating interest rates and others may be stripped securities which pay only the
principal or interest due on the underlying Municipal Obligations. The Fund
currently does not invest in "interest only" or "principal only" custodial
receipts. The Fund may invest in floating rate custodial receipts without
limitation. The Fund may also invest up to 20% of its total assets in custodial
receipts which are "inverse floating obligations" (also sometimes referred to as
"residual interest bonds"). These securities pay interest rates that vary
inversely to changes in the interest rates of specified short-term Municipal
Obligations or an index of short-term Municipal Obligations. The interest rates
on inverse floating obligations will typically decline as short-term tax-exempt
market interest rates increase and increase as short-term tax-exempt market
rates decline. Such securities have the effect of providing a degree of
investment leverage, since the interest rates on such securities will generally
change at a rate which is a multiple (typically two) of the change in the
interest rates of the specified short-term Municipal Obligations or index. As a
result, the
8
<PAGE>
market values of inverse floating obligations will generally be more volatile
than the market values of fixed-rate Municipal Obligations and investments in
these types of obligations will increase the volatility of the net asset value
of shares of the Fund.
Types of Derivative Municipal Obligations other than those described above
can be expected to be developed and marketed from time to time. Consistent with
its investment limitations, the Fund expects to invest in those new types of
Derivative Municipal Obligations that the Adviser believes may assist the Fund
in achieving its investment objective. The Fund will notify its shareholders to
the extent that it intends to invest more than 5% of its net assets in such
obligations.
MUNICIPAL LEASE OBLIGATIONS. Also included within the general category of
Tax-Exempt Securities are lease obligations or installment purchase contract
obligations and participations therein issued by tax-exempt issuers such as
state and local governments and their agencies and instrumentalities to finance
the acquisition of equipment and facilities (hereinafter collectively called
"Municipal Lease Obligations"). The Fund may invest up to 20% of the value of
its net assets in Municipal Lease Obligations. Although Municipal Lease
Obligations do not constitute general obligations of the issuer for which such
issuer's taxing power is pledged, a Municipal Lease Obligation is ordinarily
backed by the issuer's covenant to budget for, appropriate and make the payments
due under the obligation. However, certain Municipal Lease Obligations contain
"non-appropriation" clauses which provide that the issuer has no obligation to
make lease or installment purchase payments in future years unless money is
appropriated for such purpose on a yearly basis. In the case of a
"non-appropriation" lease, the Fund's ability to recover under the lease in the
event of non-appropriation or default will be limited solely to the repossession
of the leased property, without recourse to the general credit of the lessee,
and disposition of the property in the event of foreclosure might prove
difficult. In determining Municipal Lease Obligations in which the Fund will
invest, the Adviser will carefully evaluate the outstanding credit rating of the
issuer (and the probable secondary market acceptance of such credit rating).
Additionally, the Adviser may require that certain municipal lease obligations
be issued or backed by a letter of credit or put arrangement with an independent
financial institution.
SPECIAL CONSIDERATIONS REGARDING INVESTMENTS IN MINNESOTA TAX-EXEMPT SECURITIES
As described herein, except during temporary defensive periods, the Fund
will invest in Minnesota Tax-Exempt Securities. The Fund is therefore
susceptible to political, economic or regulatory factors affecting issuers of
Minnesota Tax-Exempt Securities. The following information provides only a brief
summary of the complex factors affecting the financial situation in Minnesota.
This information is derived from sources that are generally available to
investors and is based in part on information obtained from various State and
local agencies in Minnesota. It should be noted that the creditworthiness of
obligations issued by local Minnesota issuers may be unrelated to the
creditworthiness of obligations issued by the State of Minnesota, and that there
is no obligation on the part of the State to make payment on such local
obligations in the event of default. For further information, see "Investment
Objectives, Policies and Restrictions" in the Statement of Additional
Information.
Minnesota's constitutionally prescribed fiscal period is a biennium, and
Minnesota operates on a biennial budget basis. Legislative appropriations for
each biennium are prepared and adopted during the final legislative session of
the immediately preceding biennium. Prior to each fiscal year of a biennium, the
State's Department of Finance allots a portion of the applicable biennial
appropriation to each agency or other entity for which an appropriation has been
made. An agency or other entity may not expend monies in excess of its
allotment. If revenues are insufficient to balance total available resources and
expenditures, the State's Commissioner of Finance, with the approval of the
Governor, is required to reduce allotments to the extent necessary to balance
expenditures and forecasted available resources for the then current biennium.
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The Governor may prefer legislative action when a large reduction in
expenditures appears necessary, and if the State's legislature is not in session
the Governor is empowered to convene a special session.
Diversity and a significant natural resource base are two important
characteristics of the Minnesota economy. Generally, the structure of the
State's economy parallels the structure of the United States economy as a whole.
There are, however, employment concentrations in durable goods and non-durable
goods manufacturing, particularly industrial machinery, instruments and
miscellaneous, food, paper and related industries, and printing and publishing.
During the period from 1980 to 1990, overall employment growth in Minnesota
lagged behind national employment growth, in large part due to declining
agricultural employment. The rate of non-farm employment growth in Minnesota
exceeded the rate of national growth, however, in the period of 1990 to 1996.
Job growth in Minnesota is expected to lag the national averages in 1997, due to
widespread labor shortages. Minnesota continues to have one of the lowest
unemployment rates in the nation. Since 1980, Minnesota per capita income
generally has remained above the national average.
The State relies heavily on a progressive individual income tax and a retail
sales tax for revenue, which results in a fiscal system that is sensitive to
economic conditions. Frequently in recent years, legislation has been required
to eliminate projected budget deficits by raising additional revenue, reducing
expenditures, including aids to political subdivisions and higher education,
reducing the State's budget reserve, imposing a sales tax on purchases by local
governmental units, and making other budgetary adjustments. The Minnesota
Department of Finance June 1997 Estimates project that, under current laws, the
State will complete its current biennium June 30, 1999 with a $32 million
surplus, plus a $350 million cash flow account balance and a $522 million budget
reserve. Total General Fund expenditures and transfers for the biennium are
projected to be $20.9 billion. The State is party to a variety of civil actions
that could adversely affect the State's General Fund. In addition, substantial
portions of State and local revenues are derived from federal expenditures, and
reductions in federal aid to the State and its political subdivisions and other
federal spending cuts may have substantial adverse effects on the economic and
fiscal condition of the State and its local governmental units. Risks are
inherent in making revenue and expenditure forecasts. Economic or fiscal
conditions less favorable than those reflected in state budget forecasts and
planning estimates may create additional budgetary pressures.
State grants and aids represent a large percentage of the total revenues of
cities, towns, counties and school districts in Minnesota. Even with respect to
bonds that are revenue obligations of the issuer and not general obligations of
the State, there can be no assurance that the fiscal problems referred to above
will not adversely affect the market value or marketability of the bonds or the
ability of the respective obligors to pay interest on and principal of the
bonds.
Both possible future changes in federal and State income tax laws, including
rate reductions, and recent Minnesota tax legislation could adversely affect the
value and marketability of Minnesota municipal bonds that are held by the Fund.
See "Tax Status -- Minnesota Taxation" below.
INVESTMENT RISKS
As a mutual fund investing in debt securities, the Fund is subject to
interest rate risk, which is the potential for a decline in the prices of
fixed-income securities in which the Fund invests due to rising interest rates.
When interest rates rise, the prices of long-term fixed-income securities
generally fall. Conversely, when interest rates fall, the prices of such
securities generally rise. The magnitude of these fluctuations will generally be
greater at times when the Fund's average maturity is longer. The Fund is also
subject to credit risk. Credit risk, also known as default risk, is the
possibility that an issuer of a security will fail to make timely payments of
interest or principal. Changes by recognized rating services in the credit
ratings of Tax-
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Exempt Securities, as well as changes in the perception of the ability of an
issuer to make payments of interest and principal, will also affect the value of
the Fund's investments. Changes in the value of the Fund's portfolio securities
will not affect interest income derived from those securities but will affect
the Fund's net asset value.
The Fund is also subject to call risk. Certain Tax-Exempt Securities which
may be held by the Fund permit the issuer at its option to "call," or redeem,
its securities. If an issuer were to redeem Tax-Exempt Securities held by the
Fund during a time of declining interest rates, the Fund might not be able to
reinvest the proceeds in Tax-Exempt Securities providing as high a level of
investment return as the securities redeemed.
Investments in inverse floating obligations also subject the Fund to risk.
Interest rates on these securities typically decline as short-term market
interest rates increase and increase as short-term market rates decline. As
discussed above, such securities have the effect of providing a degree of
investment leverage and, as a result, the market values of such securities will
generally be more volatile than the market values of fixed-rate Tax-Exempt
Securities. See "Investment Objective and Policies -- Tax-Exempt Securities --
Derivative Municipal Obligations."
The Fund may invest in unrated Tax-Exempt Securities determined by the
Adviser, at the time of investment, to be of comparable quality to the rated
securities in which the Fund invests. The Fund will be more dependent upon the
Adviser's investment analysis of such non-rated Tax-Exempt Securities than in
the case of rated securities.
The Adviser believes that, in general, the secondary market for Tax-Exempt
Securities is less liquid than that for taxable fixed-income securities.
Consequently, the ability of the Fund to buy and sell Tax-Exempt Securities may,
at any particular time and with respect to any particular securities, be
limited. The amount of information about the financial condition of an issuer of
Tax-Exempt Securities may not be as extensive as information about corporations
whose securities are publicly traded. Obligations of issuers of Tax-Exempt
Securities may be subject to provisions of bankruptcy, insolvency and other laws
affecting the rights and remedies of creditors, such as the United States
Bankruptcy Code and applicable state laws, which could limit the ability of the
Fund to recover payments of principal or interest on such obligations.
The Fund is a "nondiversified" fund under the 1940 Act. This means that it
may invest its assets in the securities of a limited number of issuers. Under
the Internal Revenue Code, however, the Fund generally may not invest more than
25% of its assets in securities of any one issuer, other than U.S. Government
securities. Also with respect to 50% of its total assets, the Fund may not
invest more than 5% of its total assets in the securities of any one issuer
(other than U.S. Government securities). Because of the relatively small number
of issuers of Minnesota Tax-Exempt Securities, the Fund is more likely to invest
a higher percentage of its assets in the securities of a single issuer or of a
limited number of issuers than a diversified investment company that invests in
a broader range of securities. This practice involves an increased risk of loss
to the Fund if the issuers are unable to make interest or principal payments or
if the market values of such securities decline.
The investment techniques used by the Fund also pose certain risks. See
"Special Investment Methods."
Because of the risks associated with fixed-income investments, the Fund is
intended to be a long-term investment vehicle and is not designed to provide
investors with a means of speculating on short-term interest rate movements. No
assurance can be given that the Fund will achieve its objective or that
shareholders will be protected from the risk of loss that is inherent in
fixed-income investing.
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SPECIAL INVESTMENT METHODS
The following discussion describes some of the investment management
practices that the Fund may employ from time to time to facilitate portfolio
management. Certain of these practices could be considered "derivative
transactions." The term "derivatives" has been used to identify a variety of
financial instruments; there is no discrete class of instruments that is covered
by the term. A "derivative" is commonly defined as a financial instrument whose
value is based upon, or derived from, an underlying index, reference rate (e.g.,
interest rates or currency exchange rates), security, commodity or other asset.
Options on securities, futures contracts, options on futures contracts and
when-issued securities transactions are derivative contracts. These derivative
contracts involve varying degrees and types of risk as set forth below.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with respect to securities
issued or guaranteed as to payment of principal and interest by the U.S.
Government, its agencies or instrumentalities. A repurchase agreement involves
the purchase by the Fund of securities with the condition that after a stated
period of time the original seller (a member bank of the Federal Reserve System
or a recognized securities dealer) will buy back the same securities
("collateral") at a predetermined price or yield. Repurchase agreements involve
certain risks not associated with direct investments in securities. In the event
the original seller defaults on its obligation to repurchase, as a result of its
bankruptcy or otherwise, the Fund will seek to sell the collateral, which action
could involve costs or delays. In such case, the Fund's ability to dispose of
the collateral to recover such investment may be restricted or delayed. While
collateral will at all times be maintained in an amount equal to the repurchase
price under the agreement (including accrued interest due thereunder), to the
extent proceeds from the sale of collateral were less than the repurchase price
the Fund would suffer a loss. Repurchase agreements maturing in more than seven
days are considered illiquid and subject to the Fund's restriction on investing
in illiquid securities. See "-- Illiquid Securities" below. Additionally,
interest earned by the Fund from repurchase agreements will not be treated for
federal or State of Minnesota income tax purposes as tax-exempt interest. For
additional information concerning repurchase agreements, see "Investment
Policies and Restrictions" in the Statement of Additional Information.
REVERSE REPURCHASE AGREEMENTS
The Fund may engage in "reverse repurchase agreements" with banks and
securities dealers. Reverse repurchase agreements are ordinary repurchase
agreements in which the Fund is the seller of, rather than the investor in,
securities and agrees to repurchase them at an agreed upon time and price. Use
of a reverse repurchase agreement may be preferable to a regular sale and later
repurchase of the securities because it avoids certain market risks and
transaction costs. Because certain of the incidents of ownership of the security
are retained by the Fund, reverse repurchase agreements are considered a form of
borrowing by the Fund from the buyer, collateralized by the security. At the
time the Fund enters into a reverse repurchase agreement, cash or liquid
securities having a value sufficient to make payments for the securities to be
repurchased will be segregated, and will be maintained throughout the period of
the obligation. Reverse repurchase agreements may be used as a means of
borrowing for investment purposes. This speculative technique is referred to as
leveraging. Leveraging may exaggerate the effect on net asset value of any
increase or decrease in the market value of the Fund's portfolio. Money borrowed
for leveraging will be subject to interest costs which may not be deductible for
tax purposes and which could possibly exceed interest income earned by the Fund
on the investment of such borrowed money. No more than 25% of the total assets
of the Fund will at any time be subject to reverse repurchase agreements.
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BORROWING
The Fund may borrow money from banks for temporary or emergency purposes in
an amount up to 10% of the value of its total assets. Interest paid by the Fund
on borrowed funds would decrease the net earnings of the Fund. The Fund will not
purchase portfolio securities while outstanding borrowings (other than reverse
repurchase agreements) exceed 5% of the value of the Fund's total assets. The
Fund may mortgage, pledge or hypothecate its assets in an amount not exceeding
10% of the value of its total assets to secure temporary or emergency borrowing.
The policies set forth in this paragraph are fundamental and may not be changed
without the approval of a majority of the Fund's shares.
WHEN-ISSUED SECURITIES
The Fund may purchase and sell Tax-Exempt Securities on a when-issued or
delayed delivery basis. When-issued and delayed delivery transactions arise when
securities are purchased or sold with payment and delivery beyond the regular
settlement date. (When-issued transactions normally settle within 30-45 days.)
On such transactions the payment obligation and the interest rate are fixed at
the time the buyer enters into the commitment. Pending delivery of the
securities, the Fund maintains in a segregated account cash or liquid securities
in an amount sufficient to meet its purchase commitments. The commitment to
purchase securities on a when-issued or delayed delivery basis involves an
element of risk because the value of the securities is subject to market
fluctuation. No interest accrues to the purchaser prior to the settlement of the
transaction and at the time of delivery the market value of the securities may
be less than cost. Purchasing securities on a when-issued or delayed delivery
basis involves the additional risk that the return available in the market when
the delivery takes place will be higher than that obtained in the transaction
itself. These risks could result in increased volatility of the Fund's net asset
value to the extent that the Fund purchases securities on a when-issued or
delayed delivery basis while remaining substantially fully invested. Although
the Fund will only make commitments to purchase such obligations with the
intention of actually acquiring the securities, the Fund may sell these
securities before the settlement date. If the Fund sells a when-issued or
delayed delivery security before the settlement date, any gain or loss would not
be exempt from federal or Minnesota income tax. For purposes of the Fund's
investment policies, the purchase of securities with a settlement date occurring
on the Public Securities Association approved settlement date is considered a
normal delivery and not a when-issued or delayed delivery purchase. For
additional information concerning when-issued and delayed delivery transactions,
see "Investment Objectives, Policies and Restrictions" in the Statement of
Additional Information.
PUTS
The Fund may purchase Tax-Exempt Securities which provide for the right to
resell them to the issuer, a bank or a broker-dealer at a specified price within
a specified period of time prior to the maturity date of such obligations. Such
a right to resell, which is commonly known as a "put," may be sold, transferred
or assigned only with the underlying security or securities. The Fund may pay a
higher price for a Tax-Exempt Security with a put than would be paid for the
same security without a put. The primary purpose of purchasing Tax-Exempt
Securities with puts is to permit the Fund to be as fully invested as
practicable in Tax-Exempt Securities while at the same time providing the Fund
with appropriate liquidity. For additional information concerning puts, see
"Investment Objectives, Policies and Restrictions" in the Statement of
Additional Information.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The Fund may purchase and sell municipal bond index futures contracts and
interest rate futures contracts. The futures contracts in which the Fund may
invest have been developed by and are traded on national commodity exchanges.
Municipal bond index futures contracts are based upon The Bond Buyer
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Municipal Bond Index, an index comprised of tax-exempt bonds rated A- or higher
by Standard & Poor's or A or higher by Moody's, with remaining maturities of 19
years or more. A buyer entering into a municipal bond index futures contract
will, on a specified future date, pay or receive a final cash payment equal to
the difference between the actual value of the index on the last day of the
contract and the value of the index established by the contract. An interest
rate futures contract is an agreement to purchase or sell an agreed upon amount
of debt securities at a set price for delivery on a future date.
The purpose of the acquisition or sale of a futures contract by the Fund is
to hedge against fluctuations in the value of its portfolio without actually
buying or selling securities. For example, if interest rates are expected to
increase, the Fund might sell futures contracts. If interest rates did increase,
the value of the securities in the Fund's portfolio would decline, but the value
of the Fund's futures contracts would increase at approximately the same rate,
thereby keeping the net asset value of the Fund from declining as much as it
otherwise would have. If, on the other hand, the Fund held cash reserves and
short-term investments pending anticipated investment in long-term obligations
and interest rates were expected to decline, the Fund might purchase interest
rate or municipal bond index futures contracts. Since the behavior of such
contracts would generally be similar to that of long-term securities, the Fund
could take advantage of the anticipated rise in the value of long-term
securities without actually buying them until the market had stabilized. At that
time, the Fund could accept delivery under the futures contracts or the futures
contracts could be liquidated and the Fund's reserves could then be used to buy
long-term securities in the cash market. The Fund will engage in such
transactions only for hedging purposes, on either an asset-based or a liability-
based basis, in each case in accordance with the rules and regulations of the
Commodity Futures Trading Commission. See Appendix B to the Statement of
Additional Information.
The Fund may also purchase and sell put and call options on futures
contracts and enter into closing transactions with respect to such options to
terminate existing positions. The Fund may use such options on futures contracts
in connection with its hedging strategies in lieu of purchasing and selling the
underlying futures contracts.
There are risks in using futures contracts and options on futures contracts
as hedging devices. The primary risks associated with the use of futures
contracts and options thereon are (a) the prices of futures contracts and
options may not correlate perfectly with the market value of the securities
subject to the hedge and (b) the possible lack of a liquid secondary market for
a futures contract and the resulting inability to close a futures position prior
to its maturity date. With respect to municipal bond index futures contracts,
the degree of correlation will depend, among other things, upon the differences
between the municipal securities being hedged and the municipal securities
underlying the municipal bond index futures contract. The risk that the Fund
will be unable to close out a futures position will be minimized by entering
into such transactions on a national exchange with an active and liquid
secondary market.
Additional information with respect to futures contracts and options on
futures contracts is set forth in Appendix B to the Statement of Additional
Information.
OTHER HEDGING INSTRUMENTS
The Fund expects that new types of futures contracts, options thereon, and
put and call options on municipal securities and indexes may be developed in the
future that will further enable the Fund to hedge against changes in the value
of its portfolio securities. As new types of hedging futures and options
instruments are developed and offered to investors, the Adviser will, consistent
with the Fund's investment objective, policies and quality standards, be
permitted to invest in such new types of instruments, provided that any decision
to so invest will be followed by supplementation of this Prospectus.
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ILLIQUID SECURITIES
As a nonfundamental investment restriction which may be changed at any time
without shareholder approval, the Fund may invest up to 15% of its net assets in
illiquid securities. A security is considered illiquid if it cannot be sold in
the ordinary course of business within seven days at approximately the price at
which it is valued. Illiquid securities may offer a higher yield than securities
which are more readily marketable, but they may not always be marketable on
advantageous terms.
The sale of illiquid securities often requires more time and results in
higher brokerage charges or dealer discounts than does the sale of securities
eligible for trading on national securities exchanges or in the over-the-counter
markets. The Fund may be restricted in its ability to sell such securities at a
time when the Adviser deems it advisable to do so. In addition, in order to meet
redemption requests, the Fund may have to sell other assets, rather than such
illiquid or restricted securities, at a time which is not advantageous.
"Restricted securities" are securities which were originally sold in private
placements and which have not been registered under the Securities Act of 1933
(the "1933 Act"). Such securities generally have been considered illiquid, since
they may be resold only subject to statutory restrictions and delays or if
registered under the 1933 Act. In 1990, however, the SEC adopted Rule 144A under
the 1933 Act, which provides a safe harbor exemption from the registration
requirements of the 1933 Act for resales of restricted securities to "qualified
institutional buyers," as defined in the rule. The result of this rule has been
the development of a more liquid and efficient institutional resale market for
restricted securities. Thus, restricted securities are no longer necessarily
illiquid. The Fund is not subject to any limitation on its ability to invest in
securities simply because such securities are restricted. The Fund may therefore
invest in Rule 144A securities and treat them as liquid when they have been
determined to be liquid by the Board of Directors of the Company or by the
Adviser subject to the oversight of and pursuant to procedures adopted by the
Board of Directors. See "Investment Objectives, Policies and Restrictions --
Illiquid Securities" in the Statement of Additional Information. Similar
determinations may be made with respect to commercial paper issued in reliance
upon the so-called "private placement" exemption from registration under Section
4(2) of the 1933 Act and with respect to municipal lease obligations.
PORTFOLIO TURNOVER
While it is not the policy of the Fund to trade actively for short-term
profits, the Fund will dispose of securities without regard to the time they
have been held when such action appears advisable to the Adviser. Frequent
changes may result in higher transaction and other costs for the Fund. The
method of calculating portfolio turnover rate is set forth in the Statement of
Additional Information under "Investment Objectives, Policies and Restrictions
- -- Portfolio Turnover." Portfolio turnover rates for the Fund are set forth in
"Financial Highlights."
INVESTMENT RESTRICTIONS
The Fund has adopted certain fundamental and nonfundamental investment
restrictions in addition to those set forth above. Included among these
restrictions is the nonfundamental investment restriction, which may be changed
at any time without shareholder approval, that the Fund will not invest more
than 5% of its total assets in foreign securities. A list of the Fund's
fundamental and nonfundamental investment restrictions is set forth in the
Statement of Additional Information.
Except for the Fund's policy regarding borrowing, if a percentage
restriction set forth under "Investment Objective and Policies" or under
"Special Investment Methods" is adhered to at the time of an investment, a later
increase or decrease in percentage resulting from changes in values or assets
will not constitute a violation of such restriction.
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MANAGEMENT
BOARD OF DIRECTORS
The Company's Board of Directors has the primary responsibility for
overseeing the overall management of the Company and electing its officers.
INVESTMENT ADVISER
Piper Capital Management Incorporated has been retained under an Investment
Advisory and Management Agreement with the Company to act as the Fund's
investment adviser subject to the authority of the Board of Directors.
In addition to acting as the investment adviser for the other series of the
Company, the Adviser furnishes investment advice to a number of other open-end
and closed-end investment companies and to various other concerns including
pension and profit sharing funds, corporate funds and individuals. As of June
30, 1997, the Adviser rendered investment advice regarding approximately $9.5
billion of assets. The Adviser is a wholly owned subsidiary of Piper Jaffray
Companies Inc., a publicly held corporation which is engaged through its
subsidiaries in various aspects of the financial services industry. The address
of the Adviser is Piper Jaffray Tower, 222 South Ninth Street, Minneapolis,
Minnesota 55402.
The Adviser furnishes the Fund with investment advice and supervises the
management and investment program of the Fund. The Adviser furnishes at its own
expense all necessary administrative services, office space, equipment and
clerical personnel for servicing the investments of the Fund. The Adviser also
provides investment advisory facilities and executive and supervisory personnel
for managing the investments and effecting the portfolio transactions of the
Fund. In addition, the Adviser pays the salaries and fees of all officers and
directors of the Company who are affiliated with the Adviser.
Under the Investment Advisory and Management Agreement, the Fund pays the
Adviser a monthly advisory fee which is paid at an annual rate of .50% on
average daily net assets up to $250 million, .45% on average daily net assets
over $250 million and up to $500 million and .40% on average daily net assets
over $500 million.
PORTFOLIO MANAGEMENT
Ronald R. Reuss and Douglas J. White have shared primary responsibility for
the day-to-day management of the Fund since it commenced operations in 1988. Mr.
Reuss has been a Senior Vice President of the Adviser since 1989. He is the
Adviser's chief economist and also manages other open-end and closed-end mutual
funds and private accounts. Mr. Reuss earned an MA from Cleveland State
University and has 28 years of investment experience.
Mr. White has been a Senior Vice President of the Adviser since 1991, prior
to which he had been a Vice President since 1989. Mr. White manages other
open-end and closed-end mutual funds and private accounts. He is a Chartered
Financial Analyst, earned an MBA from the University of Minnesota and has 14
years of investment experience.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN
Investors Fiduciary Trust Company ("IFTC"), 127 West Tenth Street, Kansas
City, Missouri 64105, (800) 874-6205, serves as Custodian for the Fund's
portfolio securities and cash and as Transfer Agent and Dividend Disbursing
Agent for the Fund.
The Company has entered into Shareholder Account Servicing Agreements with
the Distributor and Piper Trust Company, an affiliate of the Distributor and the
Adviser. Under these agreements the Distributor
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and Piper Trust Company provide transfer agent and dividend disbursing agent
services for certain shareholder accounts. For more information, see "Investment
Advisory and Other Services -- Transfer Agent and Dividend Disbursing Agent" in
the Statement of Additional Information.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
The Adviser selects brokers or futures commission merchants to use for the
Fund's portfolio transactions. In making its selection, the Adviser may consider
a number of factors, which are more fully discussed in the Statement of
Additional Information, including, but not limited to, research services,
favorableness of net price, the reasonableness of commissions, and quality of
services and execution. A broker's sales of shares of any series of the Company
may also be considered a factor if the Adviser is satisfied that the Fund would
receive from that broker the most favorable price and execution then available
for a transaction. Transactions in Tax-Exempt Securities will generally be with
the issuer or with dealers acting on a principal basis. However, portfolio
transactions for the Fund which are executed on an agency basis may be effected
through the Distributor. For more information, see "Portfolio Transactions and
Allocation of Brokerage" in the Statement of Additional Information.
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SHAREHOLDER GUIDE TO INVESTING
HOW TO PURCHASE SHARES
GENERAL
Class Y shares of the Fund may be purchased from the Distributor and from
other broker-dealers who have sales agreements with the Distributor. The address
of the Distributor is that of the Fund. The Distributor reserves the right to
reject any purchase order. You should be aware that, because the Fund does not
issue stock certificates, Fund shares must be kept in an account with the
Distributor or with IFTC. All investments must be arranged through your Piper
Jaffray Investment Executive or other broker-dealer.
PURCHASE PRICE
You may purchase Class Y shares of the Fund at net asset value without any
initial or deferred sales charge. The purchase price will be equal to the net
asset value per share next calculated after receipt of your order by your Piper
Jaffray Investment Executive or other broker-dealer.
The Adviser makes ongoing payments out of its own assets to Piper Jaffray
Investment Executives and other broker-dealers who have sold Class Y shares of
the Fund. In addition, the Distributor or the Adviser, at their own expense,
provide promotional incentives to Investment Executives of the Distributor and
to broker-dealers who have sales agreements with the Distributor in connection
with sales of Fund shares and shares of other mutual funds for which the Adviser
acts as investment adviser. In some instances, these incentives may be made
available only to certain Investment Executives or broker-dealers who have sold
or may sell significant amounts of such shares. The incentives may include
payment for travel expenses, including lodging at luxury resorts, incurred in
connection with sales seminars.
MINIMUM INVESTMENTS
A minimum initial investment of $1 million is required to purchase Class Y
shares of the Fund. There is no minimum for subsequent investments. The
Distributor, in its discretion, may waive the minimum.
HOW TO REDEEM SHARES
NORMAL REDEMPTION
You may redeem all or a portion of your Class Y shares on any day that the
Fund values its shares. (Please refer to "Valuation of Shares" below for more
information.) Your shares will be redeemed at the net asset value next
calculated after the receipt of your instructions in good form by your Piper
Jaffray Investment Executive or other broker-dealer as explained below.
PIPER JAFFRAY INC. ACCOUNTS. To redeem your shares, please contact your
Piper Jaffray Investment Executive with an oral redemption request.
OTHER BROKER-DEALER ACCOUNTS. To redeem your shares, you may either contact
your broker-dealer with an oral request or send a written request directly to
the Fund's transfer agent, IFTC. This request should contain: the dollar amount
or number of Class Y shares to be redeemed, your Fund account number and either
a social security or tax identification number (as applicable). You should sign
your request in exactly the same way the account is registered. If there is more
than one owner of the shares, all owners must sign. A signature guarantee is
required for redemptions over $25,000. Please contact IFTC or refer to
"Redemption of Shares" in the Statement of Additional Information for more
details.
18
<PAGE>
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SHAREHOLDER GUIDE TO INVESTING
PAYMENT OF REDEMPTION PROCEEDS
After your shares have been redeemed, proceeds will normally be sent to you
or your broker-dealer within three business days. In no event will payment be
made more than seven days after receipt of your order in good form, except that
payment may be postponed or the right of redemption suspended for more than
seven days under unusual circumstances, such as when trading is not taking place
on the New York Stock Exchange. Payment of redemption proceeds may also be
delayed if the shares to be redeemed were purchased by a check drawn on a bank
which is not a member of the Federal Reserve System, until such checks have
cleared the banking system (normally up to 15 days from the purchase date).
INVOLUNTARY REDEMPTION
The Fund reserves the right to redeem your account at any time the net asset
value of the account falls below $1 million as the result of a redemption or
exchange request. You will be notified in writing prior to any such redemption
and will be allowed 30 days to make additional investments before the redemption
is processed.
SHAREHOLDER SERVICES
AUTOMATIC MONTHLY INVESTMENT PROGRAM
You may arrange to make additional automated purchases of Class Y shares of
the Fund. You can automatically transfer $100 or more per month from your bank,
savings and loan or other financial institution to purchase additional shares.
In addition, if you hold your shares in a Piper Jaffray account you may arrange
to make such additional purchases by having $25 or more automatically
transferred each month from any of the money market fund series of the Company.
You should contact your Piper Jaffray Investment Executive or IFTC to obtain
authorization forms or for additional information.
EXCHANGE PRIVILEGE
If your investment goals change, you may prefer a fund with a different
objective. If you are considering an exchange into another mutual fund managed
by the Adviser, you should carefully read the appropriate prospectus for
additional information about that fund. A prospectus may be obtained through
your Piper Jaffray Investment Executive, your broker-dealer or the Distributor.
To exchange your shares, please contact your Piper Jaffray Investment Executive,
your broker-dealer or IFTC.
You may exchange your Class Y shares for Class Y shares of any other mutual
fund managed by the Adviser that offers such shares. All exchanges are subject
to the eligibility of share purchases in your state as well as the minimum
investment requirements and any other applicable terms in the prospectus of the
fund being acquired. Exchanges are made on the basis of the net asset values of
the funds involved.
The Company reserves the right to change or discontinue the exchange
privilege, or any aspect of the privilege, upon 60 days' written notice.
TELEPHONE TRANSACTION PRIVILEGES
PIPER JAFFRAY INC. ACCOUNTS. If you hold your shares in a Piper Jaffray
account, you may telephone your Investment Executive to execute any transaction
or to apply for many shareholder services. In some cases, you may be required to
complete a written application.
OTHER BROKER-DEALER ACCOUNTS. If you hold your shares in an account with
your broker-dealer or at IFTC, you may authorize telephone privileges by
completing the Account Application and Services Form.
19
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SHAREHOLDER GUIDE TO INVESTING
Please contact your broker-dealer or IFTC (800-874-6205) for an application or
for more details. The Fund will employ reasonable procedures to confirm that a
telephonic request is genuine, including requiring that payment be made only to
the address of record or the bank account designated on the Account Application
and Services Form and requiring certain means of telephonic identification. If
the Fund employs such procedures, it will not be liable for following
instructions communicated by telephone that it reasonably believes to be
genuine. If the Fund does not employ such procedures, it may be liable for any
losses due to unauthorized or fraudulent telephone transactions. It may be
difficult to reach the Fund by telephone during periods when market or economic
conditions lead to an unusually large volume of telephone requests. If you
cannot reach the Fund by telephone, you should contact your broker-dealer or
issue written instructions to IFTC at the address set forth herein. See
"Management -- Transfer Agent, Dividend Disbursing Agent and Custodian." The
Fund reserves the right to suspend or terminate its telephone services at any
time without notice.
DIRECTED DIVIDENDS
You may direct income dividends and capital gains distributions to be
invested in Class Y shares of any other mutual fund managed by the Adviser that
offers such shares, provided such shares are eligible for purchase in your
state. This investment will be made at net asset value. It will not be subject
to a minimum investment amount except that you must hold shares in such fund
(including the shares being acquired with the dividend or distribution) with a
value at least equal to such fund's Class Y share minimum initial investment
amount.
SYSTEMATIC WITHDRAWAL PLAN
You may establish a Systematic Withdrawal Plan that allows you to receive
regular periodic payments by redeeming as many shares from your account as
necessary, provided you maintain a minimum account balance of $1 million. As
with other redemptions, a redemption to make a withdrawal is a sale for federal
income tax purposes. Payments made under a Systematic Withdrawal Plan cannot be
considered as actual yield or income since part of the payments may be a return
of capital.
A request to establish a Systematic Withdrawal Plan must be submitted in
writing to your Piper Jaffray Investment Executive or other broker-dealer. There
are no service charges for maintenance; the minimum amount that you may withdraw
each period is $100. You will be required to have any income dividends and any
capital gains distributions reinvested. You may choose to have withdrawals made
monthly, quarterly or semiannually. Please contact your Piper Jaffray Investment
Executive, other broker-dealer or IFTC for more information.
You should be aware that additional investments in an account that has an
active Systematic Withdrawal Plan may be inadvisable due to tax liabilities.
Please refer to "Redemption of Shares" in the Statement of Additional
Information for additional details.
ACCOUNT PROTECTION
If your Fund shares are held in a Piper Jaffray account, they are protected
in the unlikely event of Piper Jaffray's financial failure. Piper Jaffray is a
member of the Securities Investor Protection Corporation ("SIPC"), whose primary
purpose is to protect the customers of its members against losses of up to
$500,000 ($100,000 on claims for cash) in the event of a member's liquidation.
In addition to the $500,000 SIPC protection, Piper Jaffray clients have
additional protection provided by Aetna Casualty and Surety Company. Your
investments in the Fund held in a Piper Jaffray PRIME or PAT
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SHAREHOLDER GUIDE TO INVESTING
Plus account are protected up to $49.5 million beyond the coverage provided by
SIPC for total account protection of $50 million. Investments held in all other
Piper Jaffray accounts are protected up to $24.5 million beyond the coverage
provided by SIPC for total account protection of $25 million. This protection
does NOT cover any declines in the net asset value of Fund shares.
CONFIRMATION OF TRANSACTIONS AND REPORTING OF OTHER INFORMATION
Each time there is a transaction involving your Fund shares, such as a
purchase, redemption or dividend reinvestment, you will receive a confirmation
statement describing that activity. This information will be provided to you
from either Piper Jaffray, your broker-dealer or IFTC. In addition, you will
receive various IRS forms after the first of each year detailing important tax
information and the Fund is required to supply annual and semiannual reports
that list securities held by the Fund and include the current financial
statements of the Fund.
HOUSEHOLDING. If you have multiple accounts with Piper Jaffray, you may
receive some of the above information in combined mailings. This will not only
help to reduce Fund expenses, it will help the environment by saving paper.
Please contact your Piper Jaffray Investment Executive for more information.
DIVIDENDS AND DISTRIBUTIONS
The net investment income of the Fund will be declared as dividends daily
and paid monthly. Net realized capital gains, if any, will be distributed at
least once annually. Each daily dividend is payable to Fund shareholders of
record at the time of its declaration. "Shareholders of record" includes holders
of shares purchased for which payment has been received by the Distributor or
IFTC, as appropriate, and excludes holders of shares redeemed on that day.
Shares redeemed will earn dividends through the day prior to settlement of the
redemption. Class Y shareholders generally will receive higher per share
dividends than Class A shareholders because Class Y shareholders are not subject
to Rule 12b-1 fees.
The Fund will not attempt to stabilize distributions and intends to
distribute to its shareholders substantially all of the net investment income
earned during any period. Thus, the Fund's dividends can be expected to vary
from month to month.
DISTRIBUTIONS OPTIONS. All net investment income dividends and net realized
capital gains distributions for the Fund generally will be payable in additional
Class Y shares of the Fund at net asset value ("Reinvestment Option"). If you
wish to receive your distributions in cash, you must notify your Piper Jaffray
Investment Executive or other broker-dealer. You may elect either to receive
income dividends in cash and capital gains distributions in additional Class Y
shares of the Fund at net asset value ("Split Option"), or to receive both
income dividends and capital gains distributions in cash ("Cash Option"). You
may also direct income dividends and capital gains distributions to be invested
in Class Y shares of another mutual fund managed by the Adviser that offers such
shares. See "Shareholder Services -- Directed Dividends," above. The taxable
status of income dividends and/or net capital gains distribution is not affected
by whether they are reinvested or paid in cash.
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<PAGE>
VALUATION OF SHARES
The Fund computes its net asset value on each day the New York Stock
Exchange (the "Exchange") is open for business. The calculation is made as of
the regular close of the Exchange (currently 4:00 p.m., New York time) after the
Fund has declared any applicable dividends.
The net asset value per share for the Fund is determined by dividing the
value of the securities owned by the Fund plus any cash and other assets
(including interest accrued and dividends declared but not collected) less all
liabilities by the number of Fund shares outstanding. For purposes of
determining the aggregate net assets of the Fund, cash and receivables will be
valued at their face amounts. Interest will be recorded as accrued. Financial
futures are valued at the settlement price established each day by the board of
trade or exchange on which they are traded.
The value of certain fixed-income securities will be provided by an
independent pricing service, which determines these valuations at a time earlier
than the close of the Exchange. Pricing services consider such factors as
security prices, yields, maturities, call features, ratings and developments
relating to specific securities in arriving at securities valuations.
Fixed-income securities for which prices are not available from an independent
pricing service but where an active market exists will be valued using market
quotations obtained from one or more dealers that make markets in the
securities. Occasionally events affecting the value of such securities may occur
between the time valuations are determined and the close of the Exchange. If
events materially affecting the value of such securities occur during such
period, or if the Company's management determines for any other reason that
valuations provided by the pricing service or through dealer quotations are
inaccurate, such securities will be valued at their fair value according to
procedures decided upon in good faith by the Company's Board of Directors. In
addition, any securities or other assets of the Fund for which market prices are
not readily available will be valued at their fair value in accordance with such
procedures.
Although the methodology and procedures for determining net asset value are
identical for each class of the Fund's shares, the net asset value per share of
the Class A and Class Y shares of the Fund may differ because of the differing
Rule 12b-1 fees and transfer agent fees charged to such classes.
TAX STATUS
FEDERAL TAXATION
The Fund qualified as a regulated investment company under the Internal
Revenue Code of 1986, as amended (the "Code") during its last taxable year and
intends to so qualify during the current taxable year. If so qualified, the Fund
will not be liable for federal income taxes to the extent it distributes its
taxable income to shareholders.
The Fund intends to take all actions required under the Code to ensure that
it may pay "exempt interest dividends." If the Fund meets these requirements,
distributions of net interest income from tax-exempt obligations that are
designated by the Fund as exempt-interest dividends will be excludable from the
gross income of the Fund's shareholders. The Fund's present policy is to
designate exempt-interest dividends annually. Shareholders are required for
information purposes to report exempt-interest dividends and other tax-exempt
interest on their tax returns. Distributions paid from other interest income and
from any net realized capital gains will be taxable to shareholders whether
received in cash or in additional shares. Capital gains from the sale or
exchange of shares are also subject to tax.
Exempt interest dividends attributable to interest income on certain
tax-exempt obligations issued after August 7, 1986 to finance private activities
are treated as an item of tax preference for purposes of
22
<PAGE>
computing the alternative minimum tax for individuals, estates and trusts. The
Fund may invest in such obligations, provided that at least 80% of the value of
the Fund's net assets will at all times be invested in tax-exempt obligations
the interest on which is not an item of tax preference. See "Taxation" in the
Statement of Additional Information.
If the Fund invests in custodial receipts (see "Investment Objective and
Policies -- Tax-Exempt Securities -- Derivative Municipal Obligations"), it is
possible that a portion of the discount at which the Fund purchases the receipts
might have to be accrued as taxable income during the period that the Fund holds
the receipts. Because of the requirement that the Fund distribute 90% of its net
investment income to maintain its status as a regulated investment company, the
Fund would be obligated to distribute taxable income to shareholders in the
amount of its accrued taxable income.
The Tax Reform Act of 1986 imposed new requirements on certain tax-exempt
bonds which, if not satisfied, could result in loss of tax exemption for
interest on such bonds, even retroactively to the date of issuance of the bonds.
Proposals may be introduced before Congress in the future, the purpose of which
will be to further restrict or eliminate the federal income tax exemption for
Tax-Exempt Securities. The Fund cannot predict what additional legislation may
be enacted that may affect shareholders. The Fund will avoid investment in
Tax-Exempt Securities which, in the opinion of the Adviser, pose a material risk
of the loss of tax exemption. Further, if a Tax-Exempt Security in the Fund's
portfolio loses its exempt status, the Fund will make every effort to dispose of
such investment on terms that are not detrimental to the Fund.
MINNESOTA TAXATION
The portion of exempt-interest dividends that is derived from interest
income on obligations of the State of Minnesota or its political or governmental
subdivisions, municipalities, governmental agencies or instrumentalities is
excluded from the Minnesota taxable net income of individuals, estates and
trusts, provided that the portion of the exempt-interest dividends from such
Minnesota sources paid to all shareholders represents 95% or more of the
exempt-interest dividends paid by the Fund. The remaining portion of such
dividends, and dividends that are not exempt-interest dividends or capital gain
dividends, are included in the Minnesota taxable net income of individuals,
estates and trusts. The Fund intends to meet this 95% requirement, so that the
dividends it pays that are attributable to interest on Minnesota obligations
will be excludable from the Minnesota taxable income of shareholders that are
individuals, estates and trusts. Exempt-interest dividends are not excluded from
the Minnesota taxable income of corporations and financial institutions.
Dividends qualifying for federal income tax purposes as capital gain dividends
are to be treated by shareholders as long-term capital gains under Minnesota
law. However, Minnesota has repealed the favorable treatment of long-term
capital gains, while retaining restrictions on the deductibility of capital
losses. As under federal law, the portion of Social Security benefits subject to
Minnesota income tax may be affected by the amount of exempt-interest dividends
received by the shareholders. Exempt-interest dividends attributable to interest
on certain private activity bonds issued after August 7, 1986 will be included
in Minnesota alternative minimum taxable income of individuals, estates and
trusts for purposes of computing Minnesota's alternative minimum tax.
The Minnesota Legislature has enacted a statement of intent that interest on
obligations of Minnesota governmental units and Indian tribes be included in net
income of individuals, estates and trusts for Minnesota income tax purposes if a
court determines that Minnesota's exemption of such interest unlawfully
discriminates against interstate commerce because interest on obligations of
governmental issuers located in other states is so included. This provision
applies to taxable years that begin during or after the calendar year in which
any such court decision becomes final, irrespective of the date on which the
obligations were issued. The Fund is not aware of any decision in which a court
has held that a state's
23
<PAGE>
exemption of interest on its own bonds or those of its political subdivisions or
Indian tribes, but not of interest on the bonds of other states or their
political subdivisions or Indian tribes, unlawfully discriminates against
interstate commerce or otherwise contravenes the United States Constitution.
Nevertheless, the Fund cannot predict the likelihood that interest on the
Minnesota Tax-Exempt Securities held by the Fund would become taxable under this
Minnesota statutory provision.
The foregoing discussion relates to federal and Minnesota income taxation as
of the date of this Prospectus. For a more detailed discussion of the income tax
consequences of investing in shares of the Fund, see "Taxation" in the Statement
of Additional Information.
PERFORMANCE COMPARISONS
Advertisements and other sales literature for the Fund may refer to its
"yield," "tax equivalent yield," "average annual total return" and "cumulative
total return." All such figures are based on historical earnings and are not
intended to indicate future performance. The return on and principal value of an
investment in the Fund will fluctuate, so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
The advertised yield of the Fund will be based upon a 30-day period stated
in the advertisement. Yield is calculated by dividing the net investment income
per share (as defined under Securities and Exchange Commission rules and
regulations) earned during the period by the maximum offering price per share on
the last day of the period. The result is then annualized using a formula that
provides for semiannual compounding of income.
Tax equivalent yield is calculated by applying the stated income tax rate
only to that portion of the yield that is exempt from taxation. The tax-exempt
portion of the yield is divided by the number 1 minus the stated income tax rate
(E.G., 1- 28% = 72%). The result is then added to that portion of the yield, if
any, that is not tax exempt.
The average annual total return is the average annual compounded rate of
return on a hypothetical $1,000 investment made at the beginning of the
advertised period. Cumulative total return is calculated by subtracting a
hypothetical $1,000 payment to the Fund from the redeemable value of such
payment at the end of the advertised period, dividing such difference by $1,000
and multiplying the quotient by 100. In calculating average annual and
cumulative total return for Class Y shares, all dividends and distributions are
assumed to be reinvested.
Comparative performance information may also be used from time to time in
advertising the Fund's shares. For example, advertisements may compare the
Fund's performance to that of various unmanaged market indices, or may include
performance data from Lipper Analytical Services, Inc., Morningstar, Inc. or
other entities or organizations that track the performance of investment
companies.
For additional information regarding comparative performance information and
the calculation of the Fund's yield, tax equivalent yield and total return, see
"Performance Comparisons" in the Statement of Additional Information.
Advertisements and other sales literature may also refer to the Fund's
effective duration. Effective duration estimates the interest rate risk (price
volatility) of a security, I.E., how much the value of the security is expected
to change with a given change in interest rates. The longer a security's
effective duration, the more sensitive its price is to changes in interest
rates. For example, if interest rates were to increase by 1%, the market value
of a bond with an effective duration of five years would decrease by about 5%,
with all other factors being constant. It is important to understand that, while
a valuable measure, effective duration
24
<PAGE>
is based upon certain assumptions and has several limitations. It is most
effective as a measure of interest rate risk when interest rate changes are
small, rapid and occur equally across all the different points of the yield
curve. In addition, effective duration is difficult to calculate precisely,
especially in the case of a bond that is callable prior to maturity.
GENERAL INFORMATION
The Company, which was organized under the laws of the State of Minnesota in
1986, is authorized to issue a total of 10 trillion shares of common stock, with
a par value of $.01 per share. Three hundred and ninety billion of these shares
have been authorized by the Board of Directors to be issued in twelve separate
series, as follows: Growth Fund, Emerging Growth Fund, Growth and Income Fund,
Small Company Growth Fund (formerly Equity Strategy Fund), Balanced Fund,
Government Income Fund, Intermediate Bond Fund (formerly Institutional
Government Income Portfolio), National Tax-Exempt Fund and Minnesota Tax-Exempt
Fund, each of which has ten billion authorized shares, and Money Market Fund,
Tax-Exempt Money Market Fund and U.S. Government Money Market Fund, each of
which has one hundred billion authorized shares.
The Board of Directors is empowered under the Company's Articles of
Incorporation to issue additional series of the Company's common stock without
shareholder approval. In addition, the Board of Directors may, without
shareholder approval, create and issue one or more additional classes of shares
within the Fund, as well as within any other series of the Company or any series
created in the future. See "Capital Stock and Ownership of Shares" in the
Statement of Additional Information.
All shares, when issued, will be fully paid and nonassessable and will be
redeemable. All shares have equal voting rights. They can be issued as full or
fractional shares. A fractional share has pro rata the same kind of rights and
privileges as a full share. The shares possess no preemptive or conversion
rights.
The two classes of the Fund's shares have the same rights and are identical
in all respects except that (a) expenses related to the distribution of each
class of shares are borne solely by such class; (b) to the extent they can
reasonably be identified as relating to a particular class of shares, transfer
agent fees will be allocated to that class; (c) the Class A shares have
exclusive voting rights with respect to approvals of the Rule 12b-1 distribution
plan related to that class; and (d) each class has different exchange
privileges.
Each share of a series has one vote (with proportionate voting for
fractional shares) irrespective of the relative net asset value of the series'
shares. On some issues, such as the election of directors, all shares of the
Company vote together as one series. On an issue affecting only a particular
series or class, the shares of the affected series or class vote separately.
Cumulative voting is not authorized. This means that the holders of more than
50% of the shares voting for the election of directors can elect 100% of the
directors if they choose to do so, and, in such event, the holders of the
remaining shares will be unable to elect any directors.
The Bylaws of the Company provide that shareholder meetings be held only
with such frequency as required under Minnesota law. Minnesota corporation law
requires only that the Board of Directors convene shareholder meetings when it
deems appropriate. In addition, Minnesota law provides that if a regular meeting
of shareholders has not been held during the immediately preceding 15 months, a
shareholder or shareholders holding 3% or more of the voting shares of the
Company may demand a regular meeting of shareholders by written notice given to
the chief executive officer or chief financial officer of the Company. Within 30
days after receipt of the demand, the Board of Directors shall cause a regular
meeting of shareholders to be called, which meeting shall be held no later than
90 days after receipt of the demand, all at the expense of the Company. In
addition, the 1940 Act requires a shareholder vote for all amendments to
25
<PAGE>
fundamental investment policies and restrictions and for certain amendments to
investment advisory contracts and Rule 12b-1 distribution plans.
PENDING LEGAL PROCEEDINGS
Complaints have been brought against the Adviser and the Distributor
relating to another series of the Company and to other investment companies for
which the Adviser acts or has acted as investment adviser or subadviser. These
lawsuits do not involve the Fund.
A number of complaints have been brought in federal and state court relating
to the Institutional Government Income Portfolio ("PJIGX") series of the Company
(such series has been renamed Intermediate Bond Fund). A consolidated class
action lawsuit was settled in February 1996. Two complaints remain pending. The
first complaint was brought on April 11, 1995 by Frank R. Berman, Trustee of
Frank R. Berman Professional CP Pension Plan Trust. The action was filed in the
Minnesota State District Court, Hennepin County, and removed to United States
District Court, District of Minnesota. Defendants are the Company, the
Distributor and certain individuals affiliated or formerly affiliated with the
Adviser and the Distributor. The second complaint was filed on June 22, 1995 in
the Montana Thirteenth Judicial District Court, Yellowstone County, by Beverly
Muth against the Distributor and an affiliated individual. In addition, two
arbitrations relating to PJIGX remain outstanding.
Complaints also have been filed in state and federal court relating to a
number of closed-end investment companies managed by the Adviser and two
open-end investment companies for which the Adviser has acted as subadviser. The
Adviser and the Distributor have been subject to regulatory inquiries related to
various funds or assets managed by the Adviser. Certain regulatory inquiries
have been settled, including inquiries by the National Association of Securities
Dealers, Inc. and the State of Minnesota. PJIGX remains the subject of an
investigation by the United States Securities and Exchange Commission. See
"Pending Litigation" in the Statement of Additional Information.
The Adviser and the Distributor do not believe that any outstanding
complaint or action in arbitration or regulatory inquiry will have a material
adverse effect on their ability to perform under their agreements with the
Company or a material adverse effect on the Fund.
26
<PAGE>
TAX-EXEMPT VS. TAXABLE INCOME
The table below shows the approximate yields that taxable securities must
earn to equal yields that are exempt from both federal and Minnesota income
taxes under selected combined federal/Minnesota income tax brackets, which
reflect effective combined rates after deducting Minnesota taxes from federal
income. The combined federal/Minnesota tax brackets assume federal rates, from
left to right, of 28%, 31%, 36% and 39.6% and a Minnesota income tax rate of
8.5% (except the 33.8% combined rate, which assumes a Minnesota rate of 8%). The
39.6% federal rate and the 8.5% Minnesota rate are the highest rates in effect
for individuals in 1997.
<TABLE>
<CAPTION>
EQUIVALENT TAXABLE YIELD
33.8% COMBINED 36.9% COMBINED 41.4% COMBINED 44.7% COMBINED
TAX-FREE FEDERAL/MINNESOTA FEDERAL/MINNESOTA FEDERAL/MINNESOTA FEDERAL/MINNESOTA
YIELD BRACKET BRACKET BRACKET BRACKET
-------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
4.00 % 6.04% 6.34% 6.83% 7.23%
4.50 6.80 7.13 7.68 8.14
5.00 7.55 7.92 8.53 9.04
5.50 8.31 8.72 9.39 9.95
6.00 9.06 9.51 10.24 10.85
6.50 9.82 10.30 11.09 11.75
7.00 10.57 11.09 11.95 12.66
7.50 11.33 11.89 12.80 13.56
8.00 12.08 12.68 13.65 14.47
</TABLE>
This chart does not take into consideration any federal or Minnesota
alternative minimum tax. In addition, the chart is based upon yields that are
derived solely from tax-exempt income. To the extent the Fund's advertised yield
is derived from taxable income, the Fund's equivalent taxable yield will be less
than set forth in the chart. The tax-free yields used in this chart should not
be considered as representations of any particular rates of return and are for
purposes of illustration only.
27
<PAGE>
COMPARISON OF THE EFFECT OF COMPOUNDING
ON TAXABLE AND TAX-EXEMPT INVESTMENTS
The graph below demonstrates the effect that compounding has on taxable and
tax-exempt investments with similar dividend yields for selected combined
federal/Minnesota tax brackets. Dividends on an after-tax basis are assumed to
be invested and compounded monthly.
$10,000 Compounded at 5.00%
DOUBLE TAX-EXEMPT VERSUS A 6.50% BOND COMPOUNDED AFTER FEDERAL AND MINNESOTA TAX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MINNESOTA AND AFTER TAX 6.50% AFTER TAX 6.50%
FEDERAL TAX BOND MINNESOTA AND BOND MINNESOTA AND
FREE EARN 5.00% FEDERAL TAX BRACKET 36.9% FEDERAL TAX BRACKET 41.4%
<S> <C> <C> <C>
9/30/1996 10000 10000 10000
9/30/1997 10512 10418 10388
9/30/1998 11049 10853 10790
9/30/1999 11615 11307 11209
9/30/2000 12209 11780 11643
9/30/2001 12834 12272 12094
9/30/2002 13490 12785 12563
9/30/2003 14180 13319 13050
9/30/2004 14906 13876 13556
9/30/2005 15668 14456 14081
9/30/2006 16470 15060 14627
9/30/2007 17313 15689 15194
9/30/2008 18198 16345 15783
9/30/2009 19130 17028 16395
9/30/2010 20108 17740 17030
9/30/2011 21137 18481 17691
9/30/2012 22218 19254 18376
9/30/2013 23355 20058 19089
9/30/2014 24550 20897 19828
9/30/2015 25806 21770 20597
9/30/2016 27126 22680 21395
9/30/2017 28514 23628 22225
9/30/2018 29973 24616 23086
9/30/2019 31507 25644 23981
9/30/2020 33118 26716 24911
9/30/2021 34813 27833 25876
9/30/2022 36594 28996 26879
9/30/2023 38466 30208 27921
9/30/2024 40434 31470 29003
9/30/2025 42503 32786 30128
9/30/2026 44677 34156 31296
</TABLE>
The graph assumes that dividend yield and taxable income remain constant and
that taxable dividend income earned does not put an investor into a higher tax
bracket. The assumed dividend yields used in this graph should not be considered
as representations of any particular rates of return and are for purposes of
illustration only.
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS (AND/OR IN THE STATEMENT OF ADDITIONAL INFORMATION REFERRED TO
ON THE COVER PAGE OF THIS PROSPECTUS), AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND
OR PIPER JAFFRAY INC. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN THE STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION.
28
<PAGE>
PIPER FUNDS INC.
INVESTMENT ADVISER
Piper Capital Management Incorporated
DISTRIBUTOR
Piper Jaffray Inc.
CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
LEGAL COUNSEL
Dorsey & Whitney LLP
Table of Contents
<TABLE>
<CAPTION>
PAGE
<S> <C>
Introduction.............................................................. 2
Fund Expenses............................................................. 4
Financial Highlights...................................................... 5
Investment Objective and Policies......................................... 6
Special Investment Methods................................................ 12
Management................................................................ 16
SHAREHOLDER GUIDE TO INVESTING
How to Purchase Shares.................................................. 18
How to Redeem Shares.................................................... 18
Shareholder Services.................................................... 19
Dividends and Distributions............................................. 21
Valuation of Shares....................................................... 22
Tax Status................................................................ 22
Performance Comparisons................................................... 24
General Information....................................................... 25
Tax-Exempt vs. Taxable Income............................................. 27
Comparison of the Effect of Compounding on Taxable and Tax-Exempt
Investments.............................................................. 28
</TABLE>
- ----------------------------------------------
Prospectus
[LOGO]
--------------------------
Minnesota Tax-Exempt Fund
Institutional Shares (Class Y)
July 31, 1997
----------------------------------------
#30503 117-97
<PAGE>
PART B
NATIONAL TAX-EXEMPT FUND
MINNESOTA TAX-EXEMPT FUND
Series of Piper Funds Inc.
STATEMENT OF ADDITIONAL INFORMATION
July 31, 1997
Table of Contents
Page
----
Investment Policies and Restrictions . . . . . . . . . . . . . . . . . 2
Directors and Executive Officers . . . . . . . . . . . . . . . . . . . 6
Investment Advisory and Other Services . . . . . . . . . . . . . . . . 10
Portfolio Transactions and Allocation of Brokerage . . . . . . . . . . 16
Capital Stock and Ownership of Shares. . . . . . . . . . . . . . . . . 18
Net Asset Value and Public Offering Price. . . . . . . . . . . . . . . 19
Performance Comparisons. . . . . . . . . . . . . . . . . . . . . . . . 19
Purchase of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Redemption of Shares . . . . . . . . . . . . . . . . . . . . . . . . . 22
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
General Information. . . . . . . . . . . . . . . . . . . . . . . . . . 27
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 27
Pending Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Appendix A - Ratings of Tax-Exempt Securities and
Commercial Paper . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Appendix B - Futures Contracts and Options . . . . . . . . . . . . . . B-1
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information relates to two Prospectuses. One
Prospectus, dated November 27, 1996, as supplemented February 18, 1997, relates
to National Tax-Exempt Fund and the Class A shares of Minnesota Tax-Exempt Fund.
The other Prospectus, dated July 31, 1997 relates to the Class Y shares of
Minnesota Tax-Exempt Fund. This Statement of Additional Information should be
read in conjunction with the applicable Prospectus. Copies of these
Prospectuses may be obtained from the Funds at Piper Jaffray Tower, 222 South
Ninth Street, Minneapolis, Minnesota 55402-3804.
-1-
<PAGE>
INVESTMENT POLICIES AND RESTRICTIONS
The shares of Piper Funds Inc. (the "Company") are currently offered in
twelve series. This Statement of Additional Information relates to two of those
series, National Tax-Exempt Fund ("National Fund") and Minnesota Tax-Exempt Fund
("Minnesota Fund") (sometimes referred to herein as a "Fund" or, collectively,
as the "Funds"). The investment objectives and policies of the Funds are set
forth in the Prospectus. Certain additional investment information is set forth
below.
REPURCHASE AGREEMENTS
Each Fund may invest in repurchase agreements. The Funds' custodian will
hold the securities underlying any repurchase agreement or such securities will
be part of the Federal Reserve Book Entry System. The market value of the
collateral underlying the repurchase agreement will be determined on each
business day. If at any time the market value of the collateral falls below the
repurchase price of the repurchase agreement (including any accrued interest),
the respective Fund will promptly receive additional collateral (so the total
collateral is an amount at least equal to the repurchase price plus accrued
interest).
The Funds have received from the Securities and Exchange Commission an
exemptive order permitting the Funds, along with the other series of the
Company, closed-end and other open-end investment companies managed by Piper
Capital Management Incorporated (the "Adviser"), and all future series of the
Company and all future investment companies advised by the Adviser or its
affiliates, to deposit uninvested cash balances into a single joint account to
be used to enter into one or more large repurchase agreements.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
Each Fund may purchase securities on a "when-issued" basis and may purchase
or sell securities on a "forward commitment" basis. When a Fund purchases
securities on a when-issued or forward commitment basis, it will maintain in a
segregated account with its custodian cash or liquid securities having an
aggregate value equal to the amount of such purchase commitments until payment
is made; the Fund will likewise segregate securities it sells on a forward
commitment basis.
PUTS
To help assure appropriate liquidity, each Fund may acquire Tax-Exempt
Securities (as defined in the Funds' Prospectus) which provide for the right to
resell them to the issuer, a bank or a broker-dealer at a specified price within
a specified period of time prior to the maturity date of such obligation. Such
a right to resell, which is commonly known as a "put," may be sold, transferred
or assigned only with the underlying security or securities. If an issuer, bank
or broker-dealer should default on its obligation to repurchase a security, a
Fund might be unable to recover all or a portion of any loss sustained from
having to sell the security elsewhere. It
-2-
<PAGE>
will be each Fund's policy to enter into puts only with issuers, banks or
broker-dealers that are determined by the Adviser to present minimal credit
risks.
DIVERSIFICATION
Although Minnesota Fund is characterized as a nondiversified fund under the
Investment Company Act of 1940, as amended (the "1940 Act"), the Fund must meet
certain diversification requirements in order to qualify as a regulated
investment company for federal income tax purposes. To so qualify, the Fund
must diversify its holdings so that, at the close of each quarter of its taxable
year, (a) at least 50% of the value of its total assets consists of cash, cash
items, securities issued by the U.S. Government, its agencies and
instrumentalities, the securities of other regulated investment companies, and
other securities limited generally with respect to any one issuer to not more
than 5% of the total assets of the Fund and not more than 10% of the outstanding
voting securities of such issuer, and (b) not more than 25% of the value of its
total assets is invested in the securities of any issuer (other than securities
issued by the U.S. Government, its agencies or instrumentalities or the
securities of other regulated investment companies), or in two or more issuers
that the Fund controls and that are engaged in the same or similar trades or
businesses.
ILLIQUID SECURITIES
As set forth in the Prospectus, the Funds may invest in Rule 144A
securities, commercial paper issued pursuant to Rule 4(2) under the Securities
Act of 1933, and municipal lease obligations, and treat such securities as
liquid when they have been determined to be liquid by the Board of Directors of
the Company or by the Adviser subject to the oversight of and pursuant to
procedures adopted by the Board of Directors. Under these procedures, factors
taken into account in determining the liquidity of a security include (a) the
frequency of trades and quotes for the security; (b) the number of dealers
willing to purchase or sell the security and the number of other potential
purchasers; (c) dealer undertakings to make a market in the security; and
(d) the nature of the security and the nature of the marketplace trades (e.g.,
the time needed to dispose of the security, the method of soliciting offers and
the mechanics of transfer). With respect to Rule 144A securities, investing in
such securities could have the effect of increasing the level of Fund
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing these securities.
PORTFOLIO TURNOVER
Portfolio turnover is the ratio of the lesser of annual purchases or sales
of portfolio securities to the average monthly value of portfolio securities,
not including securities maturing in less than 12 months. A 100% portfolio
turnover rate would occur, for example, if the lesser of the value of purchases
or sales of portfolio securities for a particular year were equal to the average
monthly value of the portfolio securities owned during such year.
-3-
<PAGE>
INVESTMENT RESTRICTIONS
In addition to the investment objectives and policies set forth in the
Prospectus, each Fund is subject to certain fundamental and nonfundamental
investment restrictions, as set forth below. Fundamental investment
restrictions may not be changed without the vote of a majority of a Fund's
outstanding shares. "Majority," as used in the Prospectus and in this Statement
of Additional Information, means the lesser of (a) 67% of a Fund's outstanding
shares present at a meeting of the holders if more than 50% of the outstanding
shares are present in person or by proxy or (b) more than 50% of a Fund's
outstanding shares.
As fundamental investment restrictions, neither Fund will:
1. Issue any senior securities (as defined in the 1940 Act) other than as
set forth in restriction #2 below and except to the extent that using options
and futures contracts or purchasing or selling securities on a when-issued or
delayed delivery basis may be deemed to constitute issuing a senior security.
2. Borrow money (provided that each Fund may enter into reverse
repurchase agreements) except from banks for temporary or emergency purposes.
Each Fund may borrow money in an amount up to 10% of the value of its total
assets. With respect to each Fund, interest paid on borrowed funds will
decrease the net earnings of the Fund. Neither Fund will purchase portfolio
securities while outstanding borrowing exceeds 5% of the value of such Fund's
total assets. Neither Fund will borrow money for leverage purposes (provided
that each Fund may enter into reverse repurchase agreements for such purposes).
3. Mortgage, pledge or hypothecate its assets except in an amount not
exceeding 10% of the value of its total assets to secure temporary or emergency
borrowing. For purposes of this restriction, collateral arrangements for margin
deposits on futures contracts or with respect to the writing of options are not
deemed to be a pledge of assets.
4. Purchase or sell commodities or commodities futures contracts,
provided that each of the Funds may enter into financial futures contracts and
engage in related options transactions.
5. Purchase or sell real estate or real estate mortgage loans, except
that the Funds may invest in Tax-Exempt Securities secured by real estate or
interests therein.
6. Act as an underwriter of securities of other issuers, except insofar
as each Fund may be technically deemed an underwriter under the federal
securities laws in connection with the disposition of portfolio securities.
As nonfundamental investment restrictions that may be changed at any time
without shareholder approval, neither Fund will:
-4-
<PAGE>
1. Make short sales of securities, provided that each Fund for hedging
purposes may enter into financial futures contracts and engage in related
options transactions.
2. Purchase any securities on margin except to obtain such short-term
credits as may be necessary for the clearance of transactions and except that
the Funds may make margin deposits in connection with futures contracts.
3. Invest more than 15% of the value of its net assets in illiquid
securities.
4. Invest more than 5% of the value of its total assets in foreign
securities.
5. Invest in warrants.
The identification of the issuer of a Tax-Exempt Security depends on the
terms and conditions of the obligation. If the assets and revenues of an
agency, authority, instrumentality or other political subdivision are separate
from those of the government creating the subdivision, and the obligation is
backed only by the assets and revenues of the subdivision, such subdivision will
be regarded as the sole issuer. Similarly, in the case of a nongovernmental
user, such as an industrial corporation or a privately owned or operated
hospital, if the security is backed only by the assets and revenues of the
nongovernmental user then such non-governmental user will be deemed to be the
sole issuer. If in either case the creating government or another entity
guarantees an obligation, and the value of all securities issued or guaranteed
by the guarantor and owned by a Fund exceeds 10% of the value of such Fund's
total assets, the guarantee will be regarded as a separate security and treated
as an issue of such government or entity.
Any investment restriction or limitation referred to above or in the
Prospectus, except the borrowing policy, which involves a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after an acquisition of securities or
utilization of assets and such excess results therefrom.
SPECIAL CONSIDERATIONS REGARDING INVESTMENTS IN MINNESOTA TAX-EXEMPT SECURITIES
As described in the Prospectus, except during temporary defensive periods,
Minnesota Fund will invest in Minnesota Tax-Exempt Securities. The Fund is
therefore susceptible to political, economic or regulatory factors affecting
issuers of Minnesota Tax-Exempt Securities. The following information, together
with the information set forth in the Prospectus, provides only a brief summary
of the complex factors affecting the financial situation in Minnesota. This
information is derived from sources that are generally available to investors
and is based in part on information obtained from various state and local
agencies in Minnesota. It should be noted that the creditworthiness of
obligations issued by local Minnesota issuers may be unrelated to the
creditworthiness of obligations issued by the State of Minnesota, and that there
is no obligation on the part of the State to make payment on such local
obligations in the event of default.
-5-
<PAGE>
MINNESOTA ECONOMY. The State relies heavily on a progressive individual
income tax and a retail sales tax for revenue, which results in a fiscal system
unusually sensitive to economic conditions.
Diversity and a significant natural resource base are two important
characteristics of the Minnesota economy. Generally, the structure of the
State's economy parallels the structure of the United States economy as a whole.
There are, however, employment concentrations in durable goods and non-durable
goods manufacturing, particularly industrial machinery, instruments and
miscellaneous, food, paper and related industries, and printing and publishing.
During the period from 1980 to 1990, overall employment growth in Minnesota
lagged behind national employment growth, in large part due to declining
agricultural employment. The rate of non-farm employment growth in Minnesota
exceeded the rate of national growth, however, in the period of 1990 to 1995.
Since 1980, Minnesota per capita income generally has remained above the
national average. During 1994 and 1995, the State's monthly unemployment rate
was less than the national unemployment rate.
There can be no assurance that Minnesota's economy and fiscal condition
will not materially change in the future or that future difficulties will not
occur. Economic difficulties and the resultant impact on State and local
government finances may adversely affect the market value of obligations in
the portfolio of Minnesota Fund or the ability of respective obligors to make
timely payment of the principal and interest on such obligations.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and officers of the Company and their principal occupations
during the past five years are set forth below. Unless otherwise indicated, all
positions have been held for more than five years. The Company's directors and
officers also serves as directors or officers of various closed-end and open-end
investment companies managed by the Adviser.
Name, Address and (Age) Position with the Company
----------------------- --------------------------
William H. Ellis* (54) Chairman of the Board of Directors
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
David T. Bennett (56) Director
3400 City Center
33 South Sixth Street
Minneapolis, Minnesota 55402
Jaye F. Dyer (69) Director
4670 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402
-6-
<PAGE>
Karol D. Emmerich (47) Director
7302 Claredon Drive
Edina, Minnesota 55439
Luella G. Goldberg (59) Director
7019 Tupa Drive
Edina, Minnesota 55435
David A. Hughey (65) Director
134 Powers Road
Meredith, NH 03253
George Latimer (61) Director
754 Linwood Avenue
St. Paul, MN 55105
Paul A. Dow (45) President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Robert H. Nelson (33) Vice President
Piper Jaffray Tower and Treasurer
222 South Ninth Street
Minneapolis, Minnesota 55402
Susan S. Miley (39) Secretary
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
- ---------------
* Directors of the Company who are interested persons (as that term is
defined by the 1940 Act) of Piper Capital Management Incorporated and the
Funds.
William H. Ellis is President of Piper Jaffray Companies Inc.; Director and
Chairman of the Board of Piper Capital Management Incorporated ("the Adviser");
President of the Adviser since 1994; Director of Piper Jaffray Inc..
David T. Bennett is of counsel to the law firm of Gray, Plant, Mooty, Mooty
& Bennett, P.A., located in Minneapolis, Minnesota. Mr. Bennett is chairman of
a group of privately held companies and serves on the board of directors of a
number of nonprofit organizations.
Jaye F. Dyer has been President of Dyer Management Company, a private
management company, since 1991. Mr. Dyer serves on the board of directors of
Northwestern National Life Insurance Company, The ReliaStar Financial Corp. (the
holding company of Northwestern National Life Insurance Company) and various
privately held and nonprofit corporations.
-7-
<PAGE>
Karol D. Emmerich has been President of The Paraclete Group, a consultant
to nonprofit organizations, since 1993. Prior to that she was Vice President,
Chief Accounting Officer and Treasurer of Dayton Hudson Corporation from 1980 to
1993. Ms. Emmerich is an Executive Fellow at the University of St. Thomas
Graduate School of Business and serves on the board of directors of a number of
privately held and nonprofit organizations.
Luella G. Goldberg serves on the board of directors of Northwestern
National Life Insurance Company (since 1976), The ReliaStar Financial Corp.
(since 1989), TCF Bank Savings fsb (since 1985), TCF Financial Corporation
(since 1988), and Hormel Foods Corp. (since 1993). Ms. Goldberg also serves as
a Trustee of Wellesley College, and as a director of a number of other
organizations, including the University of Minnesota Foundation and the
Minnesota Orchestral Association. Ms. Goldberg was Chairman of the Board of
Trustees of Wellesley College from 1985 to 1993 and acting President from July
1, 1993 to October 1, 1993.
David A. Hughey is a Trustee of Bentley College. Prior to September 1996,
he was Executive Vice President and Chief Administrative Officer of Dean Witter
InterCapital Inc., Dean Witter Services Company Inc. and Dean Witter
Distributors Inc.; Director, Executive Vice President and Chief Administrative
Officer of Dean Witter Trust Company; Vice President of Dean Witter Family of
Funds and TCW/DW Family of Funds; and Director of ICI Mutual Insurance Company.
George Latimer has been Chief Executive Officer of National Equity Fund,
Chicago, Illinois since November 1995; prior thereto, Mr. Latimer was Director,
Special Actions Office, Office of the Secretary, Department of Housing and Urban
Development since 1993, and prior thereto he had been Dean of Hamline Law
School, Saint Paul, Minnesota from 1990 to 1993. Mr. Latimer also serves on the
board of directors of Digital Biometrics, Inc. and Payless Cashways, Inc.
Paul A. Dow is Chief Investment Officer and Senior Vice President of the
Adviser.
Robert H. Nelson has been a Senior Vice President of the Adviser since
1993; prior thereto he had been a Vice President of the Adviser from 1991 to
1993.
Susan S. Miley has been Senior Vice President and General Counsel of the
Adviser since 1995 and Secretary of the Adviser since 1996; prior thereto she
was counsel for American Express Financial Advisors, Minneapolis, Minnesota from
1994 to 1995 and an attorney at Simpson Thatcher & Bartlett, New York, New York
from 1984 to 1992.
Ms. Emmerich, Ms. Goldberg and Mr. Hughey are members of the Audit
Committee of the Board of Directors. Ms. Emmerich acts as the chairperson of
such committee. The Audit Committee oversees the Company's financial reporting
process, reviews audit results and recommends annually to the Company a firm of
independent certified public accountants.
-8-
<PAGE>
The Board of Directors also has a Committee of the Independent Directors,
consisting of Mr. Bennett, who serves as chairperson, Messrs. Dyer, Hughey and
Latimer, Ms. Emmerich and Ms. Goldberg, and a Derivatives Subcommittee
consisting of Ms. Emmerich, who serves as chairperson, Ms. Goldberg and Mr.
Dyer.
The functions of the Committee of the Independent Directors are: (a)
recommendation to the full Board of approval of any management, advisory, sub-
advisory and/or administration agreements; (b) recommendation to the full Board
of approval of any underwriting and/or distribution agreements; (c) review of
the fidelity bond and premium allocation; (d) review of errors and omissions and
any other joint insurance policies and premium allocation; (e) review of, and
monitoring of compliance with, procedures adopted pursuant to certain rules
promulgated under the 1940 Act; and (f) such other duties as the independent
directors shall, from time to time, conclude are necessary or appropriate to
carry out their duties under the 1940 Act. The functions of the Derivatives
Subcommittee are: (a) to oversee practices, policies and procedures of the
Adviser in connection with the use of derivatives; (b) to receive periodic
reports from management; and (c) to report periodically to the Committee of the
Independent Directors and the Board of Directors.
The directors of the Company who are officers or employees of the Adviser
or of its affiliates receive no remuneration from the Company. Each of the
other directors currently receives a quarterly retainer of $3,625 that is
allocated among the Funds and all other open-end funds managed by the Adviser on
the basis of the total assets of each such fund. In addition, each director
receives a fee from the Company for each regular quarterly and in-person special
meeting of the Board of Directors attended. (The per-meeting fee is based on
the combined total assets of the Company and Piper Institutional Funds Inc.)
The per-meeting fee is based upon asset size and is $250 if assets are under
$200 million, $500 if assets are $200 million and over but less than $500
million, $750 if asses are $500 million and over but less than $1 billion,
$1,000 if assets are $1 billion and over but less than $5 billion, and $1,500 if
assets are $5 billion or over. Members of the Audit Committee who are not
affiliated with the Adviser receive $1,000 for each Audit Committee meeting
attended ($2,000 for the chairperson of the Committee), and the chairperson of
the Committee of the Independent Directors receives $1,000 for each meeting of
such committee attended, with such fees being allocated evenly between the
Company and all other closed-end and open-end investment companies managed by
the Adviser. Members of the Committee of the Independent Directors and the
Derivatives Subcommittee (other than the chairperson of the Committee of the
Independent Directors) currently receive no additional compensation. In
addition, each Director who is not affiliated with the Adviser is reimbursed for
expenses incurred in connection with attending meetings.
The following table sets forth the compensation received by each director
from the Company during the fiscal year ended September 30, 1996, as well as the
total compensation received by each director from the Company and all other
registered investment companies managed by the Adviser or affiliates of the
Adviser during the calendar year ended December 31, 1996. Directors who are
officers or employees of the Adviser or any of its affiliates did not receive
any such
-9-
<PAGE>
compensation and are not included in the table. Mr. Hughey became a director of
the Company on September 3, 1996.
Aggregate Compensation Total Compensation
Director from the Company from Fund Complex*
- -------- ----------------------- ------------------
David T. Bennett $ 6,400 $ 56,250
Jaye F. Dyer $ 6,775 $ 58,750
Karol D. Emmerich $ 6,775 $ 58,750
Luella G. Goldberg $ 7,150 $ 60,750
George Latimer $ 6,400 $ 56,750
David A. Hughey $ -0- $ -0-
- ---------------
* Currently consists of 20 registered investment companies managed by the
Adviser or an affiliate of the Adviser, including the Company. During the 1996
calendar year, the Fund Complex consisted of up to 26 such investment companies,
several of which were merged or consolidated during the year. Each director
included in the table serves on the board of each such open-end and closed-end
investment company.
INVESTMENT ADVISORY AND OTHER SERVICES
The investment adviser for the Funds is Piper Capital Management
Incorporated (the "Adviser"). Its affiliate, Piper Jaffray Inc. (the
"Distributor"), acts as the Funds' distributor. Each will act as such pursuant
to a written agreement which will be periodically approved by the directors or
the shareholders of the Funds. The address of both the Adviser and the
Distributor is Piper Jaffray Tower, 222 South Ninth Street, Minneapolis,
Minnesota 55402.
CONTROL OF THE ADVISER AND THE DISTRIBUTOR
The Adviser and the Distributor are both wholly owned subsidiaries of Piper
Jaffray Companies Inc., a publicly held corporation which is engaged through
its subsidiaries in various aspects of the financial services industry.
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
The Adviser acts as the investment adviser of the Funds under an Investment
Advisory and Management Agreement which has been approved by the Board of
Directors (including a majority of the directors who are not parties to the
agreement, or interested persons of any such party, other than as directors of
the Funds) and the shareholders of the Funds.
The Investment Advisory and Management Agreement will terminate
automatically in the event of its assignment. In addition, the agreement is
terminable at any time, without penalty, by the Board of Directors of the
Company or by vote of a majority of the Company's outstanding voting securities
on not more than 60 days' written notice to the Adviser, and by the Adviser on
60 days' written notice to the Company. The agreement may be terminated with
respect to a particular Fund at any time by a vote of the holders of a majority
of the outstanding voting securities of such Fund, upon 60 days' written notice
to the Adviser. Unless sooner terminated, the agreement shall continue in
effect for more than two years
-10-
<PAGE>
after its execution only so long as such continuance is specifically approved at
least annually by either the Board of Directors or by a vote of a majority of
the outstanding voting securities of the Company, provided that in either event
such continuance is also approved by a vote of a majority of the directors who
are not parties to such agreement, or interested persons of such parties, cast
in person at a meeting called for the purpose of voting on such approval. If a
majority of the outstanding voting securities of either Fund approves the
agreement, the agreement shall continue in effect with respect to such approving
Fund whether or not the shareholders of the other Fund approve the agreement.
Pursuant to the Investment Advisory and Management Agreement, the Funds pay
the Adviser monthly advisory fees equal on an annual basis to a certain
percentage of each Fund's average net assets as set forth in the following
table.
Annual Advisory Fee
Average Net Asset Values as Percentage of
of each Fund Average Net Assets
------------------------- ---------------------
On the first $250,000,000 .50%
On the next $250,000,000 .45%
On average assets of over
$500,000,000 .40%
For the fiscal years ended September 30, 1994, 1995 and 1996, National Fund
paid $368,373, $298,729 and $258,789, respectively, and Minnesota Fund paid
$852,616, $706,675 and $660,926, respectively, to the Adviser pursuant to the
Investment Advisory and Management Agreement.
Under the Investment Advisory and Management Agreement, the Adviser
provides each Fund with advice and assistance in the selection and disposition
of that Fund's investments. All investment decisions are subject to review by
the Board of Directors of the Company. The Adviser is obligated to pay the
salaries and fees of any affiliates of the Adviser serving as officers or
directors of the Funds.
The same security may be suitable for one or both of the Funds and/or for
other series of the Company or other funds or private accounts managed by the
Adviser or its affiliates. If and when two or more funds or accounts
simultaneously purchase or sell the same security, the transactions will be
allocated as to price and amount in accordance with arrangements equitable to
each fund or account. The simultaneous purchase or sale of the same securities
by both Funds or by either of the Funds and other series of the Company or other
funds or accounts may have a detrimental effect on a Fund, as this may affect
the price paid or received by that Fund or the size of the position obtainable
or able to be sold by that Fund.
EXPENSES
The expenses of each Fund are deducted from their income before dividends
are paid. These expenses include, but are not limited to, organizational costs,
fees paid to the Adviser, fees and expenses of officers and directors who are
not affiliated
-11-
<PAGE>
with the Adviser, taxes, interest, legal fees, transfer agent, dividend
disbursing agent and custodian fees, audit fees, brokerage fees and commissions,
fees and expenses of registering and qualifying the Funds and their shares for
distribution under federal and state securities laws, expenses of preparing
prospectuses and statements of additional information and of printing and
distributing prospectuses and statements of additional information annually to
existing shareholders, the expenses of reports to shareholders, shareholders'
meetings and proxy solicitations, distribution expenses pursuant to the Rule
12b-1 plan, and other expenses which are not expressly assumed by the Adviser
under the Investment Advisory and Management Agreement. Any general expenses of
the Company that are not readily identifiable as belonging to a particular
series of the Company will be allocated among the series based upon the relative
net assets of the series at the time such expenses were incurred.
DISTRIBUTION PLAN
Rule 12b-1(b) under the 1940 Act provides that any payments made by the
Funds in connection with financing the distribution of their shares may only be
made pursuant to a written plan describing all aspects of the proposed financing
of distribution, and also requires that all agreements with any person relating
to the implementation of the plan must be in writing. Because some of the
payments described below to be made by the Funds are distribution expenses
within the meaning of Rule 12b-1, the Company has entered into an Underwriting
and Distribution Agreement with the Distributor pursuant to a Distribution Plan
adopted in accordance with such Rule.
Rule 12b-1(b)(1) requires that such plan be approved by a majority of a
Fund's outstanding shares, and Rule 12b-1(b)(2) requires that such plan,
together with any related agreements, be approved by a vote of the Board of
Directors and of the directors who are not interested persons of the Company and
who have no direct or indirect interest in the operation of the plan or in the
agreements related to the plan, cast in person at a meeting called for the
purpose of voting on such plan or agreement. Rule 12b-1(b)(3) requires that the
plan or agreement provide, in substance:
(a) that it shall continue in effect for a period of more than one
year from the date of its execution or adoption only so long as such
continuance is specifically approved at least annually in the manner
described in paragraph (b)(2) of Rule 12b-1;
(b) that any person authorized to direct the disposition of moneys
paid or payable by the Company pursuant to the plan or any related
agreement shall provide to the Company's Board of Directors, and the
directors shall review, at least quarterly, a written report of the amounts
so expended and the purposes for which such expenditures were made; and
(c) in the case of a plan, that it may be terminated at any time by a
vote of a majority of the members of the Board of Directors of the Company
who are not interested persons of the Company and who have no direct or
indirect financial interest in the operation of the plan or in any
agreements
-12-
<PAGE>
related to the plan or by a vote of a majority of the outstanding voting
securities of a Fund.
Rule 12b-1(b)(4) requires that such a plan may not be amended to increase
materially the amount to be spent for distribution without shareholder approval
and that all material amendments of the plan must be approved in the manner
described in paragraph (b)(2) of Rule 12b-1.
Rule 12b-1(c) provides that the Company may rely upon Rule 12b-1(b) only
if the selection and nomination of the Company's disinterested directors are
committed to the discretion of such disinterested directors. Rule 12b-1(e)
provides that the Company may implement or continue a plan pursuant to Rule
12b-1(b) only if the directors who vote to approve such implementation or
continuation conclude, in the exercise of reasonable business judgment and in
light of their fiduciary duties under state law, and under Sections 36(a) and
(b) of the 1940 Act, that there is a reasonable likelihood that the plan will
benefit the Company and its shareholders. The Board of Directors has
concluded that there is a reasonable likelihood that the Distribution Plan
will benefit the Company and its shareholders.
Pursuant to the provisions of the Distribution Plan, National Fund and
Minnesota Fund pay fees to the Distributor at monthly rates of 1/12 of .30% of
National Fund's average daily net assets and 1/12 of .30% of the average daily
net assets of Minnesota Fund attributable to such Fund's Class A shares. Such
fees are paid in connection with servicing of the Fund's shareholder accounts
and in connection with distribution-related services provided with respect to
the Funds. The Class Y shares of Minnesota Fund do not pay fees under the
Distribution Plan. A portion of each Fund's total fee (to be determined from
time to time by the Board of Directors) may be paid as a distribution fee and
will be used by the Distributor to cover expenses that are primarily intended to
result in, or that are primarily attributable to, the sale of shares of the
Funds ("Distribution Expenses"), and the remaining portion of the fee may be
paid as a shareholder servicing fee and will be used by the distributor to
provide compensation for ongoing servicing and/or maintenance of shareholder
accounts with respect to the Funds ("Shareholder Servicing Costs").
Distribution Expenses under the Plan include, but are not limited to, initial
and ongoing sales compensation (in addition to sales charges) paid to Investment
Executives of the Distributor and to other broker-dealers; expenses incurred in
the printing of prospectuses, statements of additional information and reports
used for sales purposes; expenses of preparation and distribution of sales
literature; expenses of advertising of any type; an allocation of the
Distributor's overhead; and payments to and expenses of persons who provide
support services in connection with the distribution of Fund shares.
Shareholder Servicing Costs include all expenses of the Distributor incurred in
connection with providing administrative or accounting services to shareholders,
including, but not limited to, an allocation of the Distributor's overhead and
payments made to persons, including employees of the Distributor, who respond to
inquiries of shareholders of the Funds regarding their ownership of shares or
their accounts with the Funds, or who provide other administrative or accounting
services not otherwise required to be provided by the Funds' Adviser or transfer
agent.
-13-
<PAGE>
For the fiscal years ended September 30, 1994, 1995 and 1996, the
Distributor voluntarily limited amounts payable under the Distribution Plan to
.20%, .22% and .22%, respectively, of average daily net assets for each Fund.
During such periods, National Fund paid distribution fees to the Distributor of
$147,349, $129,534 and $107,785 respectively, and Minnesota Fund paid
distribution fees to the Distributor of $341,046, $306,351 and $275,220,
respectively. The Distributor has voluntarily limited amounts payable under the
Distribution Plan during fiscal 1997 to an annual rate of .24% of the average
daily net assets of National Fund and .24% of Minnesota Fund's average daily net
assets attributable to such Fund's Class A shares. The Distributor may
terminate its voluntary fee limitation at any time in its discretion.
Distribution fees for the fiscal year ended September 30, 1996, were used
by the Distributor as follows:
National Fund Minnesota Fund
------------- --------------
Advertising $ 5,133 $ 13,106
Printing and Mailing of
Prospectuses to Other Than
Current Shareholders -0- -0-
Compensation to Underwriters
(trail fees to Investment Executives) 102,652 262,114
Compensation to Dealers -0- -0-
Compensation to Sales Personnel
Interest, Carrying or Other
Financing Charges -0- -0-
Other (Specify) -0- -0-
Total $ 107,785 $ 275,220
---------- ----------
UNDERWRITING AND DISTRIBUTION AGREEMENT
Pursuant to the Underwriting and Distribution Agreement, the Distributor
has agreed to act as the principal underwriter for the Funds in the sale and
distribution to the public of shares of the Funds, either through dealers or
otherwise. The Distributor has agreed to offer such shares for sale at all
times when such shares are available for sale and may lawfully be offered for
sale and sold. As compensation for its services, in addition to receiving its
distribution fees pursuant to the Distribution Plan discussed above, the
Distributor receives the sales load on sales of Fund shares set forth in the
Prospectus.
The following table sets forth the aggregate dollar amount of underwriting
commissions paid by each Fund for the fiscal years ended September 30, 1994,
1995 and 1996, the amount of such commissions retained by the Distributor and
the total dollar amount of brokerage commissions paid by each Fund to the
Distributor.
-14-
<PAGE>
<TABLE>
<CAPTION>
Underwriting Commissions Brokerage Commissions
Total Underwriting Commissions Retained by Distributor Paid to Distributor
-------------------------------- ------------------------------------- -----------------------------
Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal
year year year year year year year year year
ended ended ended ended ended ended ended ended ended
9/30/94 9/30/95 9/30/96 9/30/94 9/30/95 9/30/96 9/30/94 9/30/95 9/30/96
-------- -------- --------- --------- -------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
National $181,043 $36,355 $ 35,016 $105,005 $21,086 $20,659 $850 $-0- $-0-
Minnesota 389,325 83,956 138,945 225,809 48,694 81,978 850 -0- -0-
</TABLE>
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Investors Fiduciary Trust Company ("IFTC"), the transfer agent for the
Company, maintains certain omnibus shareholder accounts for each of the Funds.
Each such omnibus account represents the accounts of a number of individual
shareholders of a Fund. The Company has entered into Shareholder Account
Servicing Agreements with the Distributor and Piper Trust Company ("Piper
Trust"), pursuant to which the Distributor and Piper Trust provide certain
transfer agent and dividend disbursing agent services for the underlying
individual shareholder accounts held at the respective companies. Pursuant to
such Agreements, the Distributor and Piper Trust have agreed to perform the
usual and ordinary services of transfer agent and dividend disbursing agent not
performed by IFTC with respect to the underlying individual shareholder
accounts, including, without limitation, the following: maintaining all
shareholder accounts, preparing shareholder meeting lists, mailing shareholder
reports and prospectuses, tracking shareholder accounts for blue sky and Rule
l2b-1 purposes, withholding taxes on nonresident alien and foreign corporation
accounts, preparing and mailing checks for disbursement of income dividends and
capital gains distributions, preparing and filing U.S. Treasury Department Form
1099 for all shareholders, preparing and mailing confirmation forms to
shareholders and dealers with respect to all purchases, exchanges and
liquidations of series shares and other transactions in shareholder accounts for
which confirmations are required, recording reinvestments of dividends and
distributions in series shares, recording redemptions of series shares, and
preparing and mailing checks for payments upon redemption and for disbursements
to withdrawal plan holders. As compensation for such services, the Distributor
and Piper Trust are paid an annual fee of $7.50 per active shareholder account
(defined as an account that has a balance of shares) and $1.60 per closed
account (defined as an account that does not have a balance of shares, but has
had activity within the past 12 months) by each Fund. Such fee is payable on a
monthly basis at a rate of 1/12 of the annual per-account charge. Such fee
covers all services listed above, with the exception of preparing shareholder
meeting lists and mailing shareholder reports and prospectuses. These services,
along with proxy processing (if applicable) and other special service requests,
are billable as performed at a mutually agreed upon fee in addition to the
annual fee noted above, provided that such mutually agreed upon fee shall be
fair and reasonable in light of the usual and customary charges made by others
for services of the same nature and quality.
During the fiscal year ended September 30, 1996, National Fund paid $13,073
and Minnesota Fund paid $23,612 to the Distributor under the Shareholder Account
Servicing Agreement. The Funds did not make any payments to Piper Trust under
the Shareholder Account Servicing Agreement.
-15-
<PAGE>
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
Because each Fund's portfolio is composed exclusively of debt, rather than
equity securities, most of the Funds' portfolio transactions are effected
without the payment of brokerage commissions, but at net prices which usually
include a markup. Most of the Funds' transactions are with the issuer or with
major dealers on a principal basis acting for their own account and not as
brokers. However, portfolio transactions for the Funds which are executed on an
agency basis may be effected through the Distributor on a securities exchange if
the commissions, fees or other remuneration received by the Distributor are
reasonable and fair compared to the commissions, fees or other remuneration paid
to other brokers or other futures commission merchants in connection with
comparable transactions involving similar securities or similar futures
contracts or options on futures contracts being purchased or sold on an exchange
during a comparable period of time. In effecting portfolio transactions through
the Distributor, the Funds intend to comply with Section 17(e)(1) of the 1940
Act.
The Adviser is responsible for effecting securities transactions for each
Fund. In placing orders for securities transactions, the primary criterion for
the selection of a broker-dealer is the ability of the broker-dealer, in the
opinion of the Adviser, to secure prompt execution of the transactions at the
most favorable net price, considering the state of the market at the time.
Frequently the Adviser selects a broker-dealer to effect a particular
transaction without contacting all broker-dealers who might be able to effect
such transaction, because of the volatility of the money market and the desire
to accept a particular price for a security because the price offered by the
broker-dealer meets a Fund's guidelines for profit, yield, or both.
When consistent with the objectives of prompt execution and favorable net
price, business may be placed with broker-dealers who furnish investment
research or services to the Adviser. Such research or services include advice,
both directly and in writing, as to the value of securities; the advisability of
investing in, purchasing or selling securities; and the availability of
securities, or purchasers or sellers of securities; as well as analyses and
reports concerning issues, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts. This allows the Adviser to
supplement its own investment research activities and enables the Adviser to
obtain the views and information of individuals and research staffs of many
different securities firms prior to making investment decisions for the Funds.
To the extent portfolio transactions are effected with broker-dealers who
furnish research services to the Adviser, the Adviser receives a benefit, not
capable of evaluation in dollar amounts, without providing any direct monetary
benefit to the Funds from these transactions. The Adviser believes that most
research services obtained by it generally benefit several or all of the
investment companies and private accounts which it manages, as opposed to solely
benefiting one specific managed fund or account. Normally, research services
obtained through managed funds or accounts investing in common stocks would
primarily benefit the managed funds or accounts which invest in common stock;
similarly, services obtained from transactions in fixed-income securities would
normally be of greater benefit to the managed funds or accounts which invest in
debt securities. The Funds will not purchase at a higher price or sell at a
lower price
-16-
<PAGE>
in connection with transactions effected with a dealer, acting as principal, who
furnishes research services to the Adviser than would be the case if no weight
were given by the Adviser to the dealer's furnishing of such services.
The Adviser has not entered into any formal or informal agreements with any
broker-dealers, nor does it maintain any "formula" which must be followed in
connection with the placement of the Funds' portfolio transactions in exchange
for research services provided the Adviser, except as noted below. However, the
Adviser does maintain an informal list of broker-dealers, which is used from
time to time as a general guide in the placement of the Funds' business, in
order to encourage certain broker-dealers to provide the Adviser with research
services which the Adviser anticipates will be useful to it. Because the list
is merely a general guide, which is to be used only after the primary criterion
for the selection of broker-dealers (discussed above) has been met, substantial
deviations from the list are permissible and may be expected to occur. In the
event any transactions are executed on an agency basis, the Adviser will
authorize the Funds to pay an amount of commission for effecting a securities
transaction in excess of the amount of commission another broker-dealer would
have charged only if the Adviser determines in good faith that such amount of
commission is reasonable in relation to the value of the brokerage and research
services provided by such broker-dealer, viewed in terms of either that
particular transaction or the Adviser's overall responsibilities with respect to
the accounts as to which it exercises investment discretion. If the Funds
execute any transactions on an agency basis, they will generally pay higher than
the lowest commission rates available.
Any portfolio transactions for the Funds executed on an agency basis,
including transactions in futures contracts and options thereon, may be effected
through the Distributor. In determining the commissions to be paid to the
Distributor in connection with transactions effected on a securities exchange,
it is the policy of the Funds that such commissions will, in the judgment of the
Adviser, subject to review by the Board of Directors, be both (a) at least as
favorable as those which would be charged by other qualified brokers or futures
commission merchants in connection with comparable transactions involving
similar securities being purchased or sold on an exchange during a comparable
period of time, and (b) at least as favorable as commissions contemporaneously
charged by the Distributor on comparable transactions for its most favored
comparable unaffiliated customers. While the Funds do not deem it practicable
and in their best interest to solicit competitive bids for commission rates on
each transaction, consideration will regularly be given to posted commission
rates as well as to other information concerning the level of commissions
charged on comparable transactions by other qualified brokers and futures
commission merchants.
For the fiscal year ended September 30, 1994, National Fund and Minnesota
Fund each paid $850 in brokerage commissions in connection with options and
futures transactions. For the fiscal years ended September 30, 1995 and 1996,
neither Fund paid any brokerage commissions.
From time to time the Funds may acquire the securities of their regular
brokers or dealers or parent companies of such brokers or dealers. Neither Fund
-17-
<PAGE>
purchased securities of its regular brokers or dealers or parent companies of
such brokers or dealers during the 1996 fiscal year.
CAPITAL STOCK AND OWNERSHIP OF SHARES
The Board of Directors is empowered under the Company's Articles of
Incorporation to issue additional series of the Company's common stock without
shareholder approval. On an issue affecting only a particular series, the
shares of the affected series vote separately. An example of such an issue
would be a fundamental investment restriction pertaining to only one series. In
voting on the Investment Advisory and Management Agreement (the "Agreement"),
approval of the Agreement by the shareholders of a particular series would make
the Agreement effective as to that series whether or not it had been approved by
the shareholders of the other series.
The assets received by the Company for the issue or sale of shares of each
series, and all income, earnings, profits and proceeds thereof, subject only to
the rights of creditors, are allocated to such series, and constitute the
underlying assets of such series. The underlying assets of each series are
required to be segregated on the books of account, and are to be charged with
the expenses in respect to such series and with a share of the general expenses
of the Company. Any general expenses of the Company not readily identifiable as
belonging to a particular series shall be allocated among the series based upon
the relative net assets of the series at the time such expenses were accrued.
The Board of Directors may, without shareholder approval, create and issue
one or more additional classes of shares within the Fund, as well as within any
other series of the Company or any additional series created in the future. All
classes of shares in a Fund would be identical except that each class of shares
would be available through a different distribution channel and certain classes
might incur different expenses for the provision of distribution services or the
provision of shareholder services or administration assistance by institutions.
Shares of each class would share equally in the gross income of a series, but
any variation in expenses would be charged separately against the income of the
particular class incurring such expenses. This would result in variations in
net investment income accrued and dividends paid by and in the net asset value
of the different classes of a series. This ability to create multiple classes
of shares within each series of the Company will allow the Company in the future
the flexibility to better tailor its methods of marketing, administering and
distributing shares of the Funds to the needs of particular investors and to
allocate expenses related to such marketing, administration and distribution
methods to the particular classes of shareholders of the Fund incurring such
expenses.
As of June 30, 1997, no shareholder owns of record or was known by the
Funds to own beneficially 5% or more of the outstanding shares of either Fund.
The directors and officers of the Funds as a group owned less than 1% of the
outstanding shares of each Fund as of such date. For Minnesota Fund, the
foregoing ownership information relates to such Fund's Class A shares; there
were no Class Y shares of Minnesota Fund outstanding as of such date.
-18-
<PAGE>
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the public offering price of Fund shares is
summarized in the Prospectus in the text following the headings "How to Purchase
Shares--Purchase Price" and "Valuation of Shares." The net asset value of each
Fund's shares is determined on each day on which the New York Stock Exchange is
open, provided that the net asset value need not be determined on days when no
Fund shares are tendered for redemption and no order for Fund shares is
received. The New York Stock Exchange is not open for business on the following
holidays (or on the nearest Monday or Friday if the holiday falls on a weekend):
New Year's Day, Presidents' Day, Good Friday, Memorial Day, July 4th, Labor Day,
Thanksgiving and Christmas.
The portfolio securities in which each Fund invests fluctuate in value, and
hence the net asset value per share of each Fund also fluctuates. On
September 30, 1996, the net asset value per share for each Fund (Class A shares
of Minnesota Fund) was calculated as follows:
NATIONAL FUND
Net Assets ($45,934,895) = Net Asset Value Per Share
------------------------------------- ($10.81)
Shares Outstanding (4,247,615)
MINNESOTA FUND
Net Assets ($125,676,782) = Net Asset Value Per Share
----------------------------------- ($10.89)
Shares Outstanding (11,537,228)
In the case of National Fund and the Class A shares of Minnesota Fund, a
sales charge of 2.04% of the net asset value (in the case of sales of less than
$100,000) will be added to the net asset value per share to determine the public
offering price per share. No sales charge will be added in the case of the
Class Y shares of Minnesota Fund. No Minnesota Fund Class Y shares were
outstanding as of September 30, 1996.
PERFORMANCE COMPARISONS
Advertisements and other sales literature for the Funds may refer to
"yield," "tax equivalent yield," "average annual total return" and "cumulative
total return." Such amounts are calculated as follows:
Yield is computed by dividing the net investment income per share (as
defined under Securities and Exchange Commission rules and regulations) earned
during the computation period by the maximum offering price per share on the
last day of the period, according to the following formula:
YIELD = 2[(a-b + 1)6 - 1]
---
cd
-19-
<PAGE>
Where: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of
reimbursements);
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends; and
d = the maximum offering price per share on the last day of
the period.
National Fund's yield for the 30-day period ended September 30, 1996
was 5.03%. For the same period, the yield for Minnesota Fund's Class A shares
was 5.11%. (No Minnesota Fund Class Y shares were outstanding during such
period.) Had the Distributor not voluntarily waived a portion of its Rule 12b-
1 fees, the 30-day yield as of September 30, 1996 for National Fund and the
Class A shares of Minnesota Fund would have been 4.93% and 5.02%, respectively.
Tax equivalent yield is computed by dividing that portion of the yield of a
Fund (as computed pursuant to the above paragraph) which is tax-exempt by one
minus a stated income tax rate and adding the product to that portion, if any,
of the yield of the Fund that is not tax-exempt.
National Fund's tax equivalent yield for the 30-day period ended
September 30, 1996 was 7.29%, assuming a federal income tax rate of 31%. For
the same period, Minnesota Fund's Class A share tax equivalent yield was 8.46%,
assuming a combined federal/Minnesota income tax rate of 39.6%. (No Minnesota
Fund Class Y shares were outstanding during this period.) Had the Distributor
not voluntarily waived a portion of its Rule 12b-1 fees, the 30-day tax-
equivalent yield as of September 30, 1996 for National Fund and Minnesota Fund's
Class A shares would have been 7.14% and 8.31%, respectively.
Average annual total return figures are computed by finding the average
annual compounded rates of return over the periods indicated in the
advertisement that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of
such period.
This calculation deducts the maximum sales charge from the initial hypothetical
$1,000 investment, assumes all dividends and capital gains distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus, and includes all recurring fees, such as investment advisory
and management fees, charged to all shareholder accounts.
-20-
<PAGE>
During the periods for which average annual total return is calculated, the
Adviser waived or paid certain expenses of the Funds and/or the Distributor
voluntarily limited Rule 12b-1 fees, thereby increasing average annual total
return. These expenses may or may not be waived or paid in the future, in the
Adviser's and the Distributor's discretion.
The following table sets forth the average annual total return of each Fund
(Class A shares of Minnesota Fund) for various periods ended September 30, 1996.
There were no Class Y shares of Minnesota Fund outstanding during such periods.
<TABLE>
<CAPTION>
Average Annual Total Return
---------------------------------------------------------
Absent Voluntary Fee Waivers
Actual and Expense Payments
-------------------------- -----------------------------
Since Since
1 Year 5 Year Inception 1 Year 5 Year Inception
------ ------ --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
National Fund
(Inception 7/11/88) 2.16% 6.17% 7.11% 2.07% 6.05% 6.83%
Minnesota Fund
(Inception 7/11/88) 1.99% 6.28% 7.03% 1.89% 6.18% 6.84%
</TABLE>
Cumulative total return is computed by finding the cumulative compounded
rate of return over the period indicated in the advertisement that would equate
the initial amount invested to the ending redeemable value, according to the
following formula:
CTR = (ERV-P) 100
-----
P
Where: CTR = Cumulative total return
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of
such period; and
P = initial payment of $1,000
This calculation assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus and includes all recurring fees, such as investment advisory
and management fees, charged to all shareholder accounts.
The cumulative total returns for the period from July 11, 1988
(commencement of operations) through September 30, 1996 for National Fund and
the Class A shares of Minnesota Fund were 75.95% and 74.90%, respectively.
There were no Class Y shares of Minnesota Fund outstanding during this period.
The Adviser waived or paid certain expenses of the Funds and/or the Distributor
voluntarily limited Rule 12b-1 fees during this time period and such expenses
and fees may or may not be waived or paid in the future. Absent any voluntary
fee waivers or expense payments, National Fund's cumulative total return for the
same period would have been 72.22% and Minnesota Fund's Class A share cumulative
total return would have been 72.35%.
-21-
<PAGE>
In addition to advertising total return and yield, comparative performance
information may be used from time to time in advertising the Funds' shares,
including data from Lipper Analytical Services, Inc. ("Lipper"), Morningstar,
other industry publications and other entities or organizations which track the
performance of investment companies. The performance of each Fund may be
compared to that of its unmanaged benchmark index and to the performance of
similar funds as reported by Lipper. Each Fund's benchmark index and comparison
group are set forth below.
Performance information for the Funds also may be compared to other
unmanaged indices. Unmanaged indices do not reflect deductions for
administrative and management costs and expenses. The Funds may also include in
advertisements and communications to Fund shareholders evaluations of a Fund
published by nationally recognized ranking services and by financial
publications that are nationally recognized, such as BARRON'S, BUSINESS WEEK,
FORBES, INSTITUTIONAL INVESTOR, INVESTOR'S DAILY, MONEY, KIPLINGER'S PERSONAL
FINANCE MAGAZINE, MORNINGSTAR MUTUAL FUND VALUES, THE NEW YORK TIMES, USA TODAY
and THE WALL STREET JOURNAL.
The performance of National Fund may be compared to the performance of the
General Municipal Bond Funds Average, as reported by Lipper, and to the
performance of the Lehman Brothers Municipal Index. The performance of
Minnesota Fund may be compared to the performance of the Minnesota Municipal
Bond Funds Average, as reported by Lipper, and to the performance of the Lehman
Brothers Municipal Index.
PURCHASE OF SHARES
For shares of National Fund and the Class A shares of Minnesota Fund, an
investor may qualify for a reduced sales charge immediately by signing a
nonbinding Letter of Intent stating the investor's intention to invest within a
13-month period, beginning not earlier than 90 days prior to the date of
execution of the Letter, a specified amount which, if made at one time, would
qualify for a reduced sales charge. Reinvested dividends will be treated as
purchases of additional shares. Any redemptions made during the term of the
Letter of Intent will be subtracted from the amount of purchases in determining
whether the Letter of Intent has been completed. During the term of a Letter of
Intent, IFTC will hold shares representing 5% of the amount that the investor
intends to invest during the 13-month period in escrow for payment of a higher
sales charge if the full amount indicated in the Letter of Intent is not
purchased. Dividends on the escrowed shares will be paid to the shareholder.
The escrowed shares will be released when the full amount indicated has been
purchased. If the full indicated amount is not purchased within the 13-month
period, the investor will be required to pay, either in cash or by liquidating
escrowed shares, an amount equal to the difference in the dollar amount of sales
charge actually paid and the amount of sales charge the investor would have paid
on his or her aggregate purchases if the total of such purchases had been made
at a single time.
-22-
<PAGE>
REDEMPTION OF SHARES
GENERAL
Redemption of shares, or payment, may be suspended at times (a) when the
New York Stock Exchange is closed for other than customary weekend or holiday
closings, (b) when trading on said Exchange is restricted, (c) when an emergency
exists, as a result of which disposal by the Funds of securities owned by them
is not reasonably practicable, or it is not reasonably practicable for the Funds
fairly to determine the value of their net assets, or (d) during any other
period when the Securities and Exchange Commission, by order, so permits,
provided that applicable rules and regulations of the Securities and Exchange
Commission shall govern as to whether the conditions prescribed in (b) or (c)
exist.
Shareholders who purchased shares through a broker-dealer other than the
Distributor may also redeem such shares by written request to IFTC at the
address set forth in the Prospectus. To be considered in proper form, written
requests for redemption should indicate the dollar amount or number of shares to
be redeemed, refer to the shareholder's Fund account number, and give either a
social security or tax identification number. The request should be signed in
exactly the same way the account is registered. If there is more than one owner
of the shares, all owners must sign. If shares to be redeemed have a value of
$10,000 or more ($25,000 or more in the case of Class Y shares of Minnesota Tax-
Exempt Fund) or redemption proceeds are to be paid to someone other than the
shareholder at the shareholder's address of record, the signature(s) must be
guaranteed by an "eligible guarantor institution," which includes a commercial
bank that is a member of the Federal Deposit Insurance Corporation, a trust
company, a member firm of a domestic stock exchange, a savings association or a
credit union that is authorized by its charter to provide a signature guarantee.
IFTC may reject redemption instructions if the guarantor is neither a member of
nor a participant in a signature guarantee program. Signature guarantees by
notaries public are not acceptable. The purpose of a signature guarantee is to
protect shareholders against the possibility of fraud. Further documentation
will be requested from corporations, administrators, executors, personal
representatives, trustees and custodians. Redemption requests given by
facsimile will not be accepted. Unless other instructions are given in proper
form, a check for the proceeds of the redemption will be sent to the
shareholder's address of record.
REINSTATEMENT PRIVILEGE
A shareholder who has redeemed shares of National Fund or Class A shares of
Minnesota Fund may reinvest all or part of the redemption proceeds in shares of
any fund managed by the Adviser (the Class A shares of any such fund that offers
multiple classes of shares) within 30 days without payment of an additional
sales charge. If the shareholder paid a contingent deferred sales charge
("CDSC") in connection with such redemption, the Distributor will refund a
proportional amount of such CDSC. Such refund will be based upon the ratio of
the net asset value of shares purchased in the reinvestment to the net asset
value of shares redeemed. Reinvestments will be allowed at net asset value,
without the payment
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of a front-end sales charge, irrespective of the amounts of the reinvestment,
but shall be subject to the same pro rata CDSC that was applicable to the
earlier investment; however, the period during which the CDSC shall apply on the
newly issued shares shall be the period applicable to the redeemed shares
extended by the number of days between the redemption and the reinvestment dates
(inclusive).
SYSTEMATIC WITHDRAWAL PLAN
To establish a Systematic Withdrawal Plan for any Fund and receive regular
periodic payments, an account must have a value of $5,000 or more ($1 million or
more in the case of Class Y shares of Minnesota Fund). A request to establish a
Systematic Withdrawal Plan must be submitted in writing to an investor's Piper
Jaffray Investment Executive or other broker-dealer. There are no service
charges for maintenance; the minimum amount that may be withdrawn each period is
$100. (This is merely the minimum amount allowed and should not be interpreted
as a recommended amount.) The holder of a Systematic Withdrawal Plan will have
any income dividends and any capital gains distributions reinvested in full and
fractional shares at net asset value. To provide funds for payment, the
appropriate Fund will redeem as many full and fractional shares as necessary at
the redemption price, which is net asset value. Redemption of shares may reduce
or possibly exhaust the shares in your account, particularly in the event of a
market decline. As with other redemptions, a redemption to make a withdrawal
payment is a sale for federal income tax purposes. Payments made pursuant to a
Systematic Withdrawal Plan cannot be considered as actual yield or income since
part of such payments may be a return of capital.
A confirmation of each transaction showing the sources of the payment and
the share and cash balance remaining in the account will be sent. The plan may
be terminated on written notice by the shareholder or the appropriate Fund, and
it will terminate automatically if all shares are liquidated or withdrawn from
the account or upon the death or incapacity of the shareholder. The amount and
schedule of withdrawal payments may be changed or suspended by giving written
notice to your Piper Jaffray Investment Executive or other broker-dealer at
least seven business days prior to the end of the month preceding a scheduled
payment.
TAXATION
Pursuant to the Internal Revenue Code of 1986 (the "Code"), each Fund will
be subject to a nondeductible excise tax equal to 4% of the excess, if any, of
the amount required to be distributed pursuant to the Code for each calendar
year over the amount actually distributed. In order to avoid the imposition of
this excise tax, each Fund generally must declare dividends by the end of a
calendar year representing 98% of the Fund's ordinary income for the calendar
year and 98% of its capital gain net income (both long-term and short-term
capital gains) for the 12-month period ending October 31 of the calendar year.
Ordinarily, distributions and redemption proceeds earned by a Fund
shareholder are not subject to withholding of federal income tax. However, 31%
of a Fund shareholder's distributions and redemption proceeds must be withheld
if a
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Fund shareholder fails to supply the Fund or its agent with such shareholder's
taxpayer identification number or if a Fund shareholder who is otherwise exempt
from withholding fails to properly document such shareholder's status as an
exempt recipient.
Any loss on the sale or exchange of shares of a Fund generally will be
disallowed to the extent that a shareholder acquires or contracts to acquire
shares of the same Fund within 30 days before or after such sale or exchange.
In addition, if a shareholder disposes of shares within 90 days of acquiring
such shares and purchases other shares of the Company or another mutual fund
managed by the Adviser at a reduced sales charge, the shareholder's tax basis
for determining gain or loss on the shares which are disposed of is reduced by
the lesser of the amount of the sales charge that was paid when the shares
disposed of were acquired or the amount by which the sales charge for the new
shares is reduced. If a shareholder's tax basis is so reduced, the amount of
the reduction is treated as part of the tax basis of the new shares.
Any loss on the sale or exchange of shares of a Fund held for six months or
less (although regulations may reduce this time period to 31 days) will be
disallowed for federal and Minnesota income tax purposes to the extent of the
amount of any exempt-interest dividend received with respect to such shares.
This loss disallowance rule applies to Minnesota taxpayers (including
corporations) even though all or a portion of such dividend is not excluded from
Minnesota taxable income. Certain deductions otherwise allowable to financial
institutions and property and casualty insurance companies will be eliminated or
reduced by reason of the receipt of certain exempt-interest dividends.
Under the Code, interest on indebtedness incurred or continued to purchase
or carry shares of an investment company paying exempt-interest dividends, such
as each Fund, will not be deductible by a shareholder in proportion to the ratio
of exempt-interest dividends to all dividends other than those treated as
long-term capital gains. Indebtedness may be allocated to shares of either Fund
even though not directly traceable to the purchase of such shares. Federal law
also restricts the deductibility of other expenses allocable to shares of each
Fund. Similar nondeductibility rules apply under Minnesota law to individuals,
estates and trusts, even as to exempt-interest dividends that are not excluded
from Minnesota taxable net income.
For federal income tax purposes, an alternative minimum tax ("AMT") is
imposed on taxpayers to the extent that such tax exceeds a taxpayer's regular
income tax liability (with certain adjustments). Exempt-interest dividends
attributable to interest income on certain tax-exempt obligations issued after
August 7, 1986 to finance certain private activities are treated as an item of
tax preference that is included in alternative minimum taxable income for
purposes of computing the federal alternative minimum tax for all taxpayers and
the federal environmental tax on corporations. The Funds may invest in
obligations the interest on which is treated as an item of tax preference, to
the extent set forth in the Prospectus. In addition, a portion of all other
tax-exempt interest received by a corporation, including exempt-interest
dividends, will be included in adjusted current earnings
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and earnings and profits for purposes of determining the federal corporate
alternative minimum tax, the environmental tax imposed on corporations by
Section 59A of the Code, and the branch profits tax imposed on foreign
corporations under Section 884 of the Code.
Because liability for AMT will depend upon the regular tax liability and
tax preference items of a specific taxpayer, the extent, if any, to which any
tax preference items resulting from investment in a Fund will be subject to the
tax will depend upon each shareholder's individual situation. For shareholders
with substantial tax preferences, the AMT could reduce the after-tax economic
benefits of an investment in the Fund. Each shareholder is advised to consult
his or her tax adviser with respect to the possible effects of such tax
preference items.
For shareholders who are or may become recipients of Social Security
benefits, exempt-interest dividends are includable in computing "modified
adjusted gross income" for purposes of determining the amount of Social Security
benefits, if any, that is required to be included in gross income. The maximum
amount of Social Security benefits includable in gross income is 85%.
The Code also forbids a regulated investment company from earning 30% or
more of its gross income from the sale or other disposition of securities,
futures contracts and options held less than three months.
The Code requires a regulated investment company to diversify its holdings.
The Internal Revenue Service has not made its position clear regarding the
treatment of futures contracts and options for purposes of the diversification
test, and the extent to which a Fund could buy or sell futures contracts and
options may be limited by this requirement.
Gain or loss on futures contracts and options is taken into account when
realized by entering into a closing transaction or by exercise. In addition,
with respect to many types of futures contracts and options held at the end of a
Fund's taxable year, unrealized gain or loss on such contracts is taken into
account at the then current fair market value thereof under a special
"marked-to-market, 60/40 system," and such gain or loss is recognized for tax
purposes. The gain or loss from such futures contracts and options (including
premiums on certain options that expire unexercised) is treated as 60% long-term
and 40% short-term capital gain or loss, regardless of their holding period.
The amount of any capital gain or loss actually realized by a Fund in a
subsequent sale or other disposition of such futures contracts will be adjusted
to reflect any capital gain or loss taken into account by the Fund in a prior
year as a result of the constructive sale under the "marked-to-
market, 60/40 system." Notwithstanding the rules described above, with respect
to certain futures contracts, a Fund may make an election that will have the
effect of exempting all or a part of those identified futures contracts from
being treated for federal income tax purposes as sold on the last business day
of the Fund's taxable year. All or part of any loss realized by the Fund on any
closing of a futures contract may be deferred until all of the Fund's offsetting
positions with respect to the futures contracts are closed.
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The foregoing relates only to federal and Minnesota income taxation.
Prospective shareholders should consult their tax advisers as to the possible
application of other state and local income tax laws to Fund distributions.
GENERAL INFORMATION
Minnesota has enacted legislation which authorizes corporations to
eliminate or limit the personal liability of a director to the corporation or
its shareholders for monetary damages for breach of the fiduciary duty of "care"
(the duty to act with the care an ordinarily prudent person in a like position
would exercise under similar circumstances). Minnesota law does not, however,
permit a corporation to eliminate or limit the liability of a director (a) for
any breach of the director's duty of "loyalty" to the corporation or its
shareholders (the duty to act in good faith and in a manner reasonably believed
to be in the best interest of the corporation), (b) for acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of law,
(c) for authorizing a dividend, stock repurchase or redemption or other
distribution in violation of Minnesota law or for violation of certain
provisions of Minnesota securities laws, or (d) for any transaction from which
the director derived an improper personal benefit. Minnesota law does not
permit elimination or limitation of a director's liability under the 1933 Act or
the Securities Exchange Act of 1934, and the 1940 Act prohibits elimination or
limitation of a director's liability for acts involving willful malfeasance, bad
faith, gross negligence or reckless disregard of the duties of a director. The
Articles of Incorporation of the Company limit the liability of directors to the
fullest extent permitted by Minnesota law and the 1940 Act.
FINANCIAL STATEMENTS
The audited financial statements for the Funds as of September 30, 1996, as
set forth in the Funds' annual report to shareholders and the unaudited
financial statements for the Funds as of March 31, 1997, as set forth in the
Funds' semiannual report to shareholders, are incorporated by reference into
this Statement of Additional Information. The audited financial statements are
provided in reliance on the report of KPMG Peat Marwick LLP, 4200 Norwest
Center, Minneapolis, Minnesota 55402, independent auditors of the Funds, given
on the authority of such firm as experts in accounting and auditing.
PENDING LITIGATION
Complaints have been brought in federal and state court relating to one
open-end and twelve closed-end investment companies managed by the Adviser and
to two open-end funds for which the Adviser has acted as sub-adviser. On
February 13, 1996, a Settlement Agreement became effective for the consolidated
class action lawsuit, titled IN RE: PIPER FUNDS INC. INSTITUTIONAL GOVERNMENT
INCOME PORTFOLIO LITIGATION. The Amended Consolidated Class Action Complaint
was filed on October 5, 1994, in the United States District Court, District of
Minnesota, against Institutional Government Income Portfolio (a series of Piper
Funds Inc.), the Adviser, the Distributor, William H. Ellis and Edward J.
Kohler, and had alleged the making of materially misleading statements in the
prospectus, common law
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negligent misrepresentation and breach of fiduciary duty. The Settlement
Agreement will provide approximately $67.5 million, together with interest
earned, less certain disbursements and attorney fees, to class members in
payments scheduled over approximately three years. Such payments will be made
by Piper Jaffray Companies Inc. and the Adviser and will not be an obligation of
Piper Funds Inc.
Two additional complaints relating to the Institutional Government Income
Portfolio remain pending. These complaints were brought by investors who
requested exclusion from the settlement class and are based on claims similar to
those asserted in the consolidated Class Action complaint. The first pending
complaint was brought on April 11, 1995, and filed in the Minnesota State
District Court, Hennepin County. This action was removed to United States
District Court, District of Minnesota. The plaintiff, Frank R. Berman, Trustee
of Frank R. Berman Professional CP Pension Plan Trust, sued individually and not
on behalf of any putative class. Defendants are the Distributor, Piper Funds
Inc., Morton Silverman and Worth Bruntjen. A second pending complaint relating
to the Institutional Government Income Portfolio was filed on June 22, 1995 in
the Montana Thirteenth Judicial District Court, Yellowstone County by Beverly
Muth against the Distributor and Teresa L. Darnielle. In addition to the above
complaints, actions have been commenced in arbitration by some of individual
investors who requested exclusion from the settlement class in the IN RE: PIPER
FUNDS INC. action.
A complaint was filed by Gary E. Nelson on June 28, 1995 in the United
States District Court for the Western District of Washington at Seattle against
American Strategic Income Portfolio Inc. -- II ("BSP"), the Adviser, the
Distributor, Piper Jaffray Companies Inc., Worth Bruntjen, Charles N. Hayssen,
Michael Jansen, William H. Ellis and Edward J. Kohler. A second complaint was
filed by the same individual in the same court on July 12, 1995 against American
Opportunity Income Fund Inc. ("OIF"), the Adviser, the Distributor, Piper
Jaffray Companies Inc., Worth Bruntjen, Charles N. Hayssen, Michael Jansen,
William H. Ellis and Edward J. Kohler. On September 7, 1995, Christian
Fellowship Foundation Peace United Church of Christ, Gary E. Nelson and Lloyd
Schmidt filed an amended complaint purporting to be a class action in the United
States District Court for the District of Washington. The complaint was filed
against American Government Income Portfolio, Inc. ("AAF"), American Government
Income Fund Inc. ("AGF"), American Government Term Trust, Inc., American
Strategic Income Portfolio Inc. ("ASP"), American Strategic Income Portfolio
Inc. -- II, American Strategic Income Portfolio Inc. -- III ("CSP"), American
Opportunity Income Fund Inc., American Select Portfolio Inc., Piper Jaffray
Companies Inc., the Distributor, the Adviser and certain associated individuals.
By Order filed October 5, 1995, the complaints were consolidated. Plaintiffs
filed a second amended complaint on February 5, 1996 and a third amended
complaint on June 4, 1996. The third amended third complaint alleges generally
that the prospectus and financial statements of each investment company were
false and misleading. Specific violations of various federal securities laws
are alleged with respect to each investment company. The complaint also alleges
that the defendants violated the Racketeer Influenced and Corrupt Organizations
Act, the Washington State Securities Act and the Washington Consumer Protection
Act. The named plaintiffs and defendants have executed a
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Settlement Agreement and the Court has granted preliminary approval of such
Settlement Agreement. The Final Order of Judgment is under advisement pending a
decision on the motion for an award of attorneys' fees. The Settlement
Agreement provides $15.5 million to class members in payments by Piper Jaffray
Companies Inc. and the Adviser over the next four years. The settlement also
includes an agreement that each of OIF, AAF, and AGF would offer to repurchase
up to 25% of their outstanding shares from current shareholders at net asset
value. If the discounts between net asset value and market price of these funds
do not decrease to 5% or less within approximately two years after the effective
date of the settlement, the fund boards may submit shareholder proposals to
convert these funds to an open-end format. Finally, the agreement stipulates
that each of ASP, BSP, CSP and SLA would offer to repurchase up to 10% of their
outstanding shares from current shareholders at net asset value.
Four additional complaints are pending which involve the funds named as
defendants in the Nelson/Christian Fellowship Consolidated Action and are based
on claims similar to that action. The first additional complaint was filed
against the Distributor and Richard Tallent in Montana State District Court,
Silver Bow County on November 1, 1995 by plaintiff John Darlington. The second
complaint was filed against the Distributor and Richard Tallent on April 11,
1996 in Montana State District Court, Silver Bow County by plaintiff Kenneth
Schneider. The third complaint was filed against the Distributor and Richard
Tallent on April 11, 1996 in Montana State District Court, Silver Bow County by
plaintiff Margaret Nagel. The fourth complaint was filed against the
Distributor on August 7, 1996 by plaintiff Kenneth Gennerman as Trustee of the
Nicole Bowlin Trust in Wisconsin Circuit Court, Waukesha County. In addition to
the above complaints, a number of arbitrations have been commenced by individual
investors in the funds named as defendants in the Nelson/Christian Fellowship
Consolidated Action.
Complaints have also been filed relating to two open-end funds for which
the Adviser has acted as sub-adviser, Managers Intermediate Mortgage Fund and
Managers Short Government Fund. A complaint was filed on September 26, 1994 in
the United States District Court, District of Connecticut, by Florence R. Hosea,
Bobby W. Hosea, Getrud B. Dale and Peter M. Dale, Andrew Poffel and Diane Poffel
as tenants by the Entireties, Myrone Sarone, Donna M. DiPalo, Bernard B. Geltner
and Gail Geltner and Paul Delman. The complaint was filed against The Managers
Funds, The Managers Funds, L.P., Robert P. Watson, the Adviser, the Distributor,
an individual associated with the Adviser, Evaluation Associates, Inc. and
Managers Intermediate Mortgage Fund. The complaint, which is a putative class
action, alleges certain violations of federal securities laws, including the
making of false and misleading statements in the prospectus, and alleges
negligent misrepresentation, breach of fiduciary duty and common law
fraud. A similar complaint was filed as a putative class action in the same
court on November 4, 1994. The complaint was filed by Karen E. Kopelman against
The Managers Fund, The Managers Funds, L.P., Robert P. Watson, the Adviser, the
Distributor, Worth Bruntjen, Evaluation Associates, Inc. and Managers
Intermediate Mortgage Fund. The two putative class actions were consolidated by
court order on December 13, 1994. Plaintiffs filed an Amended and Restated
Complaint on July 19, 1995. A complaint relating to the Managers Short
Government Fund was filed on
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November 18, 1994 in the United States District Court, District of Minnesota.
The complaint was filed by Robert Fleck as a putative class action against The
Managers Funds, The Managers Funds, L.P., the Adviser, the Distributor, Worth
Bruntjen, Evaluation Associates, Inc., Robert P. Watson, John E. Rosati, William
M. Graulty, Madeline H. McWhinney, Steven J. Pasggioli, Thomas R. Schneeweis and
Managers Short Government Fund, F/K/A/ Managers Short Government Income Fund.
The complaint alleges certain violations of federal securities laws, including
the making of false and misleading statements in the prospectus, and negligent
misrepresentation. The named plaintiff and defendants have entered into a
Settlement Agreement. If granted final approval by the Court, the settlement
agreement will provide to class members up to a total of $1.5 million
collectively from The Managers Funds, L.P. and the Adviser on the effective date
of the settlement. A third complaint relating to both the Managers Intermediate
Mortgage Fund and the Managers Short Government Fund was filed on October 26,
1995 in Connecticut State Superior Court, Stamford/Norwalk District. The
complaint was filed by First Commercial Trust Company, N.A. against the Managers
Funds, Managers Short Government Fund, Managers Intermediate Mortgage Fund,
Managers Short and Intermediate Bond Fund, The Managers Funds, L.P., EAIMC
Holdings Corporation, Evaluation Associates Holding Corporation, EAI Partners,
L.P., Evaluation Associates, Inc., Robert P. Watson, William W. Graulty,
Madeline H. McWhinney, Steven J. Paggioli, Thomas R. Schneeweis, William J.
Crerend, the Adviser, Piper Jaffray Companies Inc., Worth Bruntjen, Standish,
Ayer & Wood, Inc., TCW Funds Managements, Inc., and TCW Management Company. The
complaint alleges claims under Connecticut common law and violation of the
Connecticut Securities Act and the Connecticut Unfair and Deceptive Trade
Practices Act.
The Adviser and Distributor do not believe that the settlements described
above, or any of the above lawsuits and arbitrations, will have a material
adverse effect upon their ability to perform under their agreements with the
Company, and they intend to defend the remaining lawsuits vigorously.
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APPENDIX A
RATINGS OF TAX-EXEMPT
SECURITIES AND COMMERCIAL PAPER
The four highest ratings of Moody's Investors Service, Inc. ("Moody's") for
tax exempt securities are Aaa, Aa, A and Baa. Tax exempt securities rated Aaa
are judged to be of the "best quality." The rating of Aa is assigned to tax
exempt securities which are of "high quality by all standards," but as to which
margins of protection or other elements make long term risks appear somewhat
larger than Aaa rated tax exempt securities. The Aaa and Aa rated tax exempt
securities comprise what are generally known as "high grade bonds." Tax exempt
securities which are rated A by Moody's possess many favorable investment
attributes and are considered "upper medium grade obligations." Factors giving
security to principal and interest of A rated tax exempt securities are
considered adequate, but elements may be present which suggest a susceptibility
to impairment sometime in the future. Tax exempt securities rated Baa are
considered as "medium grade" obligations. They are neither highly protected nor
poorly secured. Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such tax exempt
securities lack outstanding investment characteristics and in fact have
speculative characteristics as well. Those securities in the A and Baa groups
which Moody's believes possess the strongest investment attributes are
designated by the symbols A 1 and Baa 1. Other A and Baa securities comprise
the balance of their respective groups. These rankings (1) designate the
securities which offer the maximum in security within their quality group, (2)
designate securities which can be bought for possible upgrading in quality and
(3) additionally afford the investor an opportunity to gauge more precisely the
relative attractiveness of offerings in the market place.
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade (MIG). This distinction is in
recognition of the differences between short-term credit risk and long-term
risk. Factors affecting the liquidity of the borrower and short-term cyclical
elements are critical in short-term ratings, while other factors of major
importance in bond risk may be less important over the short run. A short-term
rating may also be assigned on an issue having a demand feature. Such ratings
will be designated as VMIG if the demand feature is rated. Short-term ratings
on issues with demand features are differentiated to reflect such
characteristics as payment upon periodic demand rather than fixed maturity dates
and payment relying on external liquidity. Loans bearing the MIG-1 or VMIG-1
designation are of the best quality, enjoying strong protection from established
cash flows of funds for their servicing or from established and broad-based
access to the market for refinancing, or both. Loans bearing the MIG-2 or
VMIG-2 designation are of high quality, with margins of protection ample
although not so large as in the preceding group. Loans bearing the MIG-3 or
VMIG-3 and MIG-4 or VMIG-4 designations are of lower quality.
The four highest ratings of Standard & Poor's Ratings Services ("Standard &
Poor's") for tax exempt securities are AAA, AA, A and BBB. Tax exempt
securities rated AAA bear the highest rating assigned by Standard & Poor's to a
debt obligation
A-1
<PAGE>
and indicates an extremely strong capacity to pay principal and interest. Tax
exempt securities rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree. Securities rated A
have a strong capacity to pay principal and interest, although they are somewhat
more susceptible to the adverse effects of changes in circumstances and economic
conditions. The BBB rating, which is the lowest "investment grade" security
rating by Standard & Poor's, indicates an adequate capacity to pay principal and
interest. Whereas they normally exhibit adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay principal and interest for securities in this category
than for securities in the A category.
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The designation SP-1 indicates a very strong
or strong capacity to pay principal and interest. The designation SP-2
indicates a satisfactory capacity to pay principal and interest.
Commercial paper ratings are graded by Standard & Poor's into four
categories, ranging from "A" for the highest quality obligations to "D" for the
lowest. Issues assigned the A rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
designation 1, 2, and 3 to indicate the relative degree of safety. The "A-1"
designation indicates that the degree of safety regarding timely payment is very
strong. Those issues determined to possess overwhelming safety characteristics
will be denoted with a plus sign designation. The "A-2" designation indicates
that the degree of safety regarding timely payment is strong.
Moody's commercial paper ratings are opinions of the ability of the issuers
to repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations
are exempt from registration under the Securities Act of 1933, nor does it
represent that any specific note is a valid obligation of a rated issuer or
issued in conformity with any applicable law. Moody's employs the following
three designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Prime-1 Superior capacity for repayment of
short-term promissory obligations.
Prime-2 Strong capacity for repayment of
short-term promissory obligations.
Prime-3 Acceptable capacity for repayment
of short-term promissory
obligations.
A-2
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APPENDIX B
FUTURES CONTRACTS AND OPTIONS
FUTURES CONTRACTS
Each Fund may purchase and sell interest rate futures contracts and options
thereon. An interest rate futures contract creates an obligation on the part of
the seller (the "short") to deliver, and an offsetting obligation on the part of
the purchaser (the "long") to accept delivery of, the type of financial
instrument called for in the contract in a specified delivery month for a stated
price. A majority of transactions in interest rate futures contracts, however,
do not result in the actual delivery of the underlying instrument, but are
settled through liquidation, i.e., by entering into an offsetting transaction.
The futures contracts to be traded by the Fund are traded only on commodity
exchanges--known as "contract markets"--approved for such trading by the
Commodity Futures Trading Commission ("CFTC"), and must be executed through a
futures commission merchant, or brokerage firm, which is a member of the
relevant contract market. These contract markets, through their clearing
corporations, guarantee that the contracts will be performed. Presently,
interest rate futures contracts are based on such debt securities as long-term
U.S. Treasury Bonds, Treasury Notes, Government National Mortgage Association
modified pass-through mortgage-backed securities, three-month U.S. Treasury
Bills and bank certificates of deposit.
Although most interest rate futures contracts by their terms call for
actual delivery or acceptance of commodities or securities, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out a short position is effected by purchasing a futures
contract for the same aggregate amount of the specific type of financial
instrument or commodity and the same delivery month. If the price of the
initial sale of the futures contract exceeds the price of the offsetting
purchase, the seller is paid the difference and realizes a gain. Conversely, if
the price of the offsetting purchase exceeds the price of the initial sale, the
trader realizes a loss. Similarly, the closing out of a long position is
effected by the purchaser entering into a futures contract sale. If the
offsetting sale price exceeds the purchase price, the purchaser realizes a gain,
and if the purchase price exceeds the offsetting sale price, he realizes a loss.
The purchase or sale of a futures contract differs from the purchase or
sale of a security, in that no price or premium is paid or received. Instead,
an amount of cash or securities acceptable to the Adviser and the relevant
contract market, which varies, but is generally about 5% of the contract amount,
must be deposited with the custodian in the name of the broker. This amount is
known as "initial margin," and represents a "good faith" deposit assuring the
performance of both the purchaser and the seller under the futures contract.
Subsequent payments to and from the broker, known as "variation margin," are
required to be made on a daily basis as the price of the futures contract
fluctuates, making the long or short positions in the futures contract more or
less valuable, a process known as "marking
B-1
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to the market." Prior to the settlement date of the futures contract, the
position may be closed out by taking an opposite position which will operate to
terminate the position in the futures contract. A final determination of
variation margin is then made, additional cash is required to be paid to or
released by the broker, and the purchaser realizes a loss or gain. In addition,
a commission is paid on each completed purchase and sale transaction.
Each Fund also may purchase and sell futures contracts on an index of
municipal securities. These instruments provide for the purchase or sale of a
hypothetical portfolio of municipal bonds at a fixed price in a stated delivery
month. Unlike most other futures contracts, however, a municipal bond index
futures contract does not require actual delivery of securities, but results in
a cash settlement based upon the difference in value of the index between the
time the contract was entered into and the time it is liquidated.
The municipal bond index underlying these futures contracts is The Bond
Buyer Municipal Bond Index, developed by THE BOND BUYER and the Chicago Board of
Trade ("CBT"), the contract market on which the futures contracts are traded.
The index is comprised of 40 tax-exempt term municipal revenue and general
obligation bonds. Each bond included in the index must be rated A- or higher by
Standard and Poor's or A or higher by Moody's and must have a remaining maturity
of 19 years or more. Twice a month new issues satisfying the eligibility
requirements are added to, and an equal number of old issues are deleted from,
the index. The value of the index is computed daily according to a formula
based upon the price of each bond in the index, as evaluated by four
dealer-to-dealer brokers.
The municipal bond index futures contract is traded only on the CBT. Like
other contract markets, the CBT assures performance under futures contracts
through a clearing corporation, a nonprofit organization managed by the exchange
membership which is also responsible for handling daily accounting of deposits
or withdrawals of margin.
The purpose of the acquisition or sale of futures contracts by the Funds,
as holders of long-term municipal securities, is to hedge against fluctuations
in rates on such securities without actually buying or selling long-term
municipal securities. For example, if a Fund owns long-term bonds and interest
rates are expected to increase, the Fund might sell futures contracts. Such a
sale would have much the same effect as selling some of the long-term bonds in
the Fund's portfolio. If interest rates increase as anticipated by the Adviser,
the value of certain long-term securities in the portfolio would decline, but
the value of the Fund's futures contracts would increase at approximately the
same rate, thereby keeping the net asset value of the Fund from declining as
much as it otherwise would have. Of course, since the value of the securities
in each Fund's portfolio will far exceed the value of the futures contracts sold
by such Fund, an increase in the value of the futures contracts could only
mitigate--but not totally offset--the decline in the value of the portfolio.
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Similarly, when it is expected that interest rates may decline, futures
contracts could be purchased to hedge against a Fund's anticipated purchases of
long-term bonds at higher prices. Since the rate of fluctuation in the value of
futures contracts should be similar to that of long-term bonds, the Fund could
take advantage of the anticipated rise in the value of long-term bonds without
actually buying them until the market had stabilized. At that time, the futures
contracts could be liquidated and the Fund's cash could then be used to buy
long-term bonds on the cash market. The Fund could accomplish similar results
by selling bonds with long maturities and investing in bonds with short
maturities when interest rates are expected to increase or by buying bonds with
long maturities and selling bonds with short maturities when interest rates are
expected to decline. However, in circumstances when the market for bonds may
not be as liquid as that for futures contracts, the ability to invest in such
contracts could enable a Fund to react more quickly to anticipated changes in
market conditions or interest rates.
OPTIONS ON FUTURES CONTRACTS
The Funds may purchase and sell put and call options on interest rate and
municipal bond index futures contracts which are traded on a United States
exchange or board of trade as a hedge against changes in interest rates, and
will enter into closing transactions with respect to such options to terminate
existing positions. Options on interest rate futures contracts are currently
available with respect to Treasury bonds (direct obligations of the U.S.
Treasury which generally have maturities of greater than ten years). An options
contract based on the municipal bond index futures contract discussed above was
introduced on the CBT in June 1987. An option on a futures contract, as
contrasted with the direct investment in such a contract, gives the purchaser
the right, in return for the premium paid, to assume a position in a futures
contract at a specified exercise price at any time prior to the expiration date
of the option. Options on futures contracts are similar to options on
securities, which give the purchaser the right, in return for the premium paid,
to purchase or sell securities. A call option gives the purchaser of such
option the right to buy, and obliges its writer to sell, a specified underlying
futures contract at a stated exercise price at any time prior to the expiration
date of the option. A purchaser of a put option has the right to sell, and the
writer has the obligation to buy, such contract at the exercise price during the
option period. Upon exercise of an option, the delivery of the futures position
by the writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures margin account,
which represents the amount by which the market price of the futures contract
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option on the futures contract. If an option is exercised
on the last trading day prior to the expiration date of the option, the
settlement will be made entirely in cash equal to the difference between the
exercise price of the option and the closing price of the interest rate futures
contract on the expiration date. The potential loss related to the purchase of
an option on a futures contract is limited to the premium paid for the option
(plus transaction costs). Because the value of the option is fixed at the point
of sale, there are no daily cash
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payments to reflect changes in the value of the underlying contract; however,
the value of the option does change daily and that change would be reflected in
the net asset values of the Funds. In connection with the writing of options on
futures contracts, a Fund will make initial margin deposits and make or receive
maintenance margin payments that reflect changes in the market value of such
options. Premiums received from the writing of an option are included in
initial margin deposits.
PURCHASE OF PUT OPTIONS ON FUTURES CONTRACTS. A Fund will purchase put
options on futures contracts if the Adviser anticipates a rise in interest
rates. Because the value of an interest rate or municipal bond index futures
contract moves inversely in relation to changes in interest rates, a put option
on such a contract becomes more valuable as interest rates rise. By purchasing
put options on futures contracts at a time when the Adviser expects interest
rates to rise, a Fund will seek to realize a profit to offset the loss in value
of its portfolio securities.
PURCHASE OF CALL OPTIONS ON FUTURES CONTRACTS. A Fund will purchase call
options on futures contracts if the Adviser anticipates a decline in interest
rates. The purchase of a call option on an interest rate or municipal bond
index futures contract represents a means of obtaining temporary exposure to
market appreciation at limited risk. Because the value of an interest rate or
municipal bond index futures contract moves inversely in relation to changes to
interest rates, a call option on such a contract becomes more valuable as
interest rates decline. A Fund will purchase a call option on a futures
contract to hedge against a decline in interest rates in a market advance when
the Fund is holding cash. The Fund can take advantage of the anticipated rise
in the value of long-term securities without actually buying them until the
market is stabilized. At that time, the options can be liquidated and the
Fund's cash can be used to buy long-term securities.
WRITING CALL OPTIONS ON FUTURES CONTRACTS. A Fund will write call options
on futures contracts if the Adviser anticipates a rise in interest rates. As
interest rates rise, a call option on such a contract becomes less valuable. If
the futures contract price at expiration of the option is below the exercise
price, the option will not be exercised and the Fund will retain the full amount
of the option premium. Such amount provides a partial hedge against any decline
that may have occurred in the Fund's portfolio securities.
WRITING PUT OPTIONS ON FUTURES CONTRACTS. A Fund will write put options on
futures contracts if the Adviser anticipates a decline in interest rates. As
interest rates decline, a put option on an interest rate or municipal bond index
futures contract becomes less valuable. If the futures contract price at
expiration of the option has risen due to declining interest rates and is above
the exercise price, the option will not be exercised and the Fund will retain
the full amount of the option premium. Such amount can then be used by the Fund
to buy long-term securities when the market has stabilized.
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RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
HEDGING RISKS IN FUTURES CONTRACTS TRANSACTIONS. There are several risks
in using municipal bond index or interest rate futures contracts as hedging
devices. One risk arises because the prices of futures contracts may not
correlate perfectly with movements in the underlying municipal bond index or
fixed-income security due to certain market distortions. First, all
participants in the futures market are subject to initial margin and variation
margin requirements. Rather than making additional variation margin payments,
investors may close the contracts through offsetting transactions which could
distort the normal relationship between the index or security and the futures
market. Second, the margin requirements in the futures market are lower than
margin requirements in the securities market, and as a result the futures market
may attract more speculators than does the securities market. Increased
participation by speculators in the futures market may also cause temporary
price distortions. Because of possible price distortion in the futures market
and because of imperfect correlation between movements in the municipal bond
index or securities and movements in the prices of futures contracts, even a
correct forecast of general market trends may not result in a successful hedging
transaction over a very short period.
Another risk arises because of imperfect correlation between movements in
the value of the futures contracts and movements in the value of securities
subject to the hedge. For example, there can be no assurance that there will be
a correlation between movements in the price of the municipal bond index and
movements in the price of the municipal bonds which are the subject of the
hedge. The degree of imperfection or correlation depends upon, among other
things, the differences between the municipal securities being hedged and the
municipal securities underlying the municipal bond index futures contracts. For
example, each bond included in the municipal bond index must have a remaining
maturity of 19 years or more, whereas each Fund's portfolio probably will be
comprised of securities with an average aggregate maturity of less than 19
years. This risk of an imperfect correlation increases to the extent that
either Fund enters into futures contracts for other than municipal bonds since
the value of municipal bonds and other debt securities may not react exactly the
same to general changes in interest rates and may react differently to factors
other than changes in the general level of interest rates.
Successful use of futures contracts by a Fund is subject to the ability of
the Adviser to predict correctly movements in the direction of interest rates.
If a Fund has hedged against the possibility of an increase in interest rates
adversely affecting the value of fixed-income securities held in its portfolio
and interest rates decrease instead, the Fund will lose part or all of the
benefit of the increased value of its security which it has hedged because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell securities to
meet daily variation margin requirements. Such sales of securities may, but
will not necessarily, be at increased prices which reflect the
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decline in interest rates. The Fund may have to sell securities at a time when
it may be disadvantageous to do so.
LIQUIDITY OF FUTURES CONTRACTS. A Fund may elect to close some or all of
its contracts prior to expiration. The purpose of making such a move would be
to reduce or eliminate the hedge position held by the Fund. A Fund may close
its positions by taking opposite positions. Final determinations of variation
margin are then made, additional cash as required is paid by or to the Fund, and
the Fund realizes a loss or a gain.
Positions in futures contracts may be closed only on an exchange or board
of trade providing a secondary market for such futures contracts. Although the
Funds intend to enter into futures contracts only on exchanges or boards of
trade where there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular contract
at any particular time. The purchase of municipal bond index futures contracts
involves an additional risk since these are instruments with a relatively short
trading history. As a result, it is possible that trading in such futures
contracts will be less liquid than that in other futures contracts.
In addition, most domestic futures exchanges and boards of trade limit the
amount of fluctuation permitted in futures contract prices during a single
trading day. The daily limit establishes the maximum amount that the price of a
futures contract may vary either up or down from the previous day's settlement
price at the end of a trading session. Once the daily limit has been reached in
a particular contract, no trades may be made that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses because the limit may prevent
the liquidation of unfavorable positions. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses. In such event, it
will not be possible to close a futures position and, in the event of adverse
price movements, the Fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the
portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. However, as described above, there is no
guarantee that the price of the securities being hedged will, in fact, correlate
with the price movements in the futures contract and thus provide an offset to
losses on a futures contract.
RISKS OF OPTIONS ON FUTURES CONTRACTS. The use of options on futures
contracts also involves certain risks. Compared to the purchase or sale of
futures contracts, the purchase of call or put options on futures contracts
involves less potential risk to a Fund because the maximum amount at risk is the
premium paid for the options (plus transactions costs). The writing of a call
option on a futures contract generates a premium which may partially offset a
decline in the value of a
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Fund's portfolio assets. By writing a call option, the Fund becomes obligated
to sell a futures contract, which may have a value higher than the exercise
price. Conversely, the writing of a put option on a futures contract generates
a premium, but the Fund becomes obligated to purchase a futures contract, which
may have a value lower than the exercise price. Thus, the loss incurred by a
Fund in writing options on futures contracts may exceed the amount of the
premium received.
The effective use of options strategies is dependent, among other things,
on a Fund's ability to terminate options positions at a time when the Adviser
deems it desirable to do so. Although a Fund will enter into an option position
only if the Adviser believes that a liquid secondary market exists for such
option, there is no assurance that the Fund will be able to effect closing
transactions at any particular time or at an acceptable price. The Funds'
transactions involving options on futures contracts will be conducted only on
recognized exchanges.
A Fund's purchase or sale of put or call options on futures contracts will
be based upon predictions as to anticipated interest rates by the Adviser, which
could prove to be inaccurate. Even if the expectations of the Adviser are
correct, there may be an imperfect correlation between the change in the value
of the options and of the Fund's portfolio securities.
REGULATORY MATTERS
To the extent required to comply with applicable Securities and Exchange
Commission releases and staff positions, when entering into futures contracts,
the Fund will maintain, in a segregated account, cash or liquid high-grade debt
securities equal to the value of such contracts.
The Commodity Futures Trading Commission (the "CFTC"), a Federal agency,
regulates trading activity on the exchanges pursuant to the Commodity Exchange
Act, as amended. The CFTC requires the registration of "commodity pool
operators," defined as any person engaged in a business which is of the nature
of an Company, syndicate, or a similar form of enterprise, and who, in
connection therewith, solicits, accepts, or receives from others, funds,
securities, or property for the purpose of trading in any commodity for future
delivery on or subject to the rules of any contract market. The CFTC has
adopted Rule 4.5, which provides an exclusion from the definition of commodity
pool operator for any registered investment company which meets the requirements
of the Rule. Rule 4.5 requires, among other things, that an investment company
wishing to avoid commodity pool operator status use futures and options
positions only (a) for "bona fide hedging purposes" (as defined in CFTC
regulations) or (b) for other purposes so long as aggregate initial margins and
premiums required in connection with non-hedging positions do not exceed 5% of
the liquidation value of the investment company's portfolio.
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Any investment company wishing to claim the exclusion provided in Rule 4.5 must
file a notice of eligibility with both the CFTC and the National Futures
Association. Both Funds intend to file such a notice and to meet the
requirements of Rule 4.5, or such other requirements as the CFTC or its staff
may from time to time issue, in order to render registration as a commodity pool
operator unnecessary.
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PART C
OTHER INFORMATION
National Tax-Exempt Fund
Minnesota Tax-Exempt Fund
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements are incorporated by reference to the Registrant's
Annual Reports previously filed with the Commission.
(b) Exhibits:
1.1 Restated Articles of Incorporation dated November 23, 1993 *
1.2 Certificate of Designation of Series M Common Shares *
1.3 Certificate of Designation of Series J, Class Y Common Shares (2)
2.1 Bylaws *
2.2 Amendment to Bylaws dated July 6, 1995 *
2.3 Amendment to Bylaws dated September 13, 1996 (1)
5.1 Investment Advisory and Management Agreement dated February 19,
1987 *
5.2 Supplement to Investment Advisory and Management Agreement dated
April 4, 1988 *
5.3 Supplement to Investment Advisory and Management Agreement dated
March 16, 1990 *
5.4 Supplement to Investment Advisory and Management Agreement dated
July 21, 1992 *
5.5 Supplement to Investment Advisory and Management Agreement dated
April 10, 1995 *
6 Distribution Agreement (dated 2/18/97) (4)
9.1 Shareholder Account Servicing Agreement with Piper Trust Company
(dated 11/18/96) (4)
9.2 Shareholder Account Servicing Agreement with Piper Jaffray Inc.
(dated 11/30/95) (4)
10 Opinion and Consent of Dorsey & Whitney P.L.L.P. with respect to
Class Y shares of Series J dated July 31, 1997 (2)
11 Consent of KPMG Peat Marwick LLP (2)
13 Letter of Investment Intent dated April 6, 1995 *
15 Amended Plan of Distribution (effective 2/18/97) (4)
17 Power of Attorney dated November 15, 1996 (4)
18 Plan pursuant to Rule 18f-3 under the Investment Company Act of
1940 as amended May 23, 1997 (2)
----------------------------------------
* Incorporated by reference to Post-Effective Amendment No. 27 to the
Registrant's Registration Statement on Form N-1A filed with the
Commission on November 27, 1995.
(1) Incorporated by reference to Post-Effective Amendment No. 29 to the
Registrant's Registration Statement on Form N-1A filed with the
Commission on September 13, 1996.
(2) Filed herewith.
<PAGE>
(3) Incorporated by reference to Post-Effective Amendment No. 32 to the
Registrant's Registration Statement on Form N-1A filed with the
Commission on September 25, 1996.
(4) Incorporated by reference to Post-Effective Amendment No. 36 to the
Registrant's Registration Statement on Form N-1A filed with the
Commission on February 18, 1997.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
No person is directly or indirectly controlled by or under common control
with the Registrant.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of July 17, 1997, the following Class A Common Shares were outstanding.
There were no Class Y shares of Minnesota Tax Exempt Fund outstanding.
Number of
Title of Class Record Holders
-------------- --------------
National Tax-Exempt Fund Common Shares 2,857
Minnesota Tax-Exempt Fund Common Shares 1,434
ITEM 27. INDEMNIFICATION
The Articles of Incorporation and Bylaws of the Registrant provide that the
Registrant shall indemnify such persons for such expenses and liabilities, in
such manner and under such circumstances, to the full extent permitted by
Section 302A.521, Minnesota Statutes, as now enacted or hereafter amended,
provided that no such indemnification may be made if it would be in violation of
Section 17(h) of the Investment Company Act of 1940, as now enacted or hereafter
amended. Section 302A.521 of the Minnesota Statutes, as now enacted, provides
that a corporation shall indemnify a person made or threatened to be made a
party to a proceeding of the person against judgments, penalties, fines,
settlements, and reasonable expenses, including attorneys' fees and
disbursements, incurred by the person in connection with the proceeding if, with
respect to the acts or omissions of the person complained of in the proceeding,
the person has not been indemnified by another organization for the same
judgments, penalties, fines, settlements, and reasonable expenses incurred by
the person in connection with the proceeding with respect to the same acts or
omissions; acted in good faith, received no improper personal benefit and the
Minnesota Statutes dealing with directors' conflicts of interest, if applicable,
have been satisfied; in the case of a criminal proceeding, had no reasonable
cause to believe that the conduct was unlawful; and reasonably believed that the
conduct was in the best interests of the corporation or, in certain
circumstances, reasonably believed that the conduct was not opposed to the best
interests of the corporation.
Insofar as the indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised
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that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Information on the business of the Adviser is described in the section of
the Prospectus, incorporated by reference in this Registration Statement,
entitled "Management -- Investment Adviser."
The officers and directors of the Adviser and their titles are as follow:
Name Title
---- -----
William H. Ellis President, Director and Chairman of
the Board
Deborah K. Roesler Director
Bruce C. Huber Director
David E. Rosedahl Director
Momchilo Vucenich Director
Paul A. Dow Senior Vice President and
Chief Investment Officer
Susan S. Miley Senior Vice President, General
Counsel and Secretary
Worth Bruntjen Senior Vice President
Richard Daly Senior Vice President
Michael C. Derck Senior Vice President
Richard W. Filippone Senior Vice President
John J. Gibas Senior Vice President
Marijo A. Goldstein Senior Vice President
Mark R. Grotte Senior Vice President
Jerry F. Gudmundson Senior Vice President
Robert C. Hannah Senior Vice President
Lynne Harrington Senior Vice President
Kim Jenson Senior Vice President
Russell J. Kappenman Senior Vice President
Kimberly F. Kaul Senior Vice President
Lisa A. Kenyon Senior Vice President
Thomas S. McGlinch Senior Vice President
Curt D. McLeod Senior Vice President
Steven V. Markusen Senior Vice President
Paula Meyer Senior Vice President
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Robert H. Nelson Senior Vice President
Gary Norstrem Senior Vice President
Nancy S. Olsen Senior Vice President
Ronald R. Reuss Senior Vice President
Bruce D. Salvog Senior Vice President
John K. Schonberg Senior Vice President
Sandra K. Shrewsbury Senior Vice President
Eric L. Siedband Senior Vice President
David M. Steele Senior Vice President
Jill A. Thompson Senior Vice President
Robert H. Weidenhammer Senior Vice President
John G. Wenker Senior Vice President
Douglas J. White Senior Vice President
Cynthia K. Castle Vice President
Molly Destro Vice President
Julie Deutz Vice President
Rochelle B. Gonzo Vice President
Joyce A. K. Halbe Vice President
Joan L. Harrod Vice President
Mary M. Hoyme Vice President
Amy K. Johnson Vice President
John D. Kightlinger Vice President
Wan-Chong Kung Vice President
Jane C. Longueville Vice President
Robert D. Mellum Vice President
Steven Meyer Vice President
Thomas Moore Vice President
Chris Neuharth Vice President
Paul D. Pearson Vice President
Catherine M. Stienstra Vice President
Shaista Tajamal Vice President
Jane K. Welter Vice President
Marcy K. Winson Vice President
Fong P. Woo Vice President
Principal occupations of Messrs. Ellis, Dow, Nelson and Ms. Miley are set
forth in the Statement of Additional Information under the heading "Directors
and Officers." MR. HAYSSEN is a Director of the Adviser and has been Chief
Information Officer of Piper Jaffray Companies Inc. since January 1996 and a
Managing Director of Piper Jaffray Inc. ("Piper Jaffray") since 1986, prior to
which he was a Managing Director of Piper Jaffray Companies Inc. from 1987 to
1995, Chief Financial Officer of Piper Jaffray from 1988 to 1995, Chief
Financial Officer of the Adviser from 1989 to 1995 and Chief Operating Officer
of the Adviser from 1994 to 1995. MR. HUBER has been a Director of the Adviser
since 1985 and a Managing Director of Piper Jaffray since 1986. MR. ROSEDAHL is
a Director of the Adviser and Managing Director and Secretary for Piper Jaffray
and Managing Director, Secretary and General Counsel for Piper Jaffray Companies
Inc. MR. VUCENICH has been a Director of the Adviser since 1994 and a Managing
Director of Piper Jaffray Inc. since 1993.
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MR. BRUNTJEN has been a Senior Vice President of the Adviser since 1988.
MR. DALY has been a Senior Vice President of the Adviser since November 1996,
prior to which he had been a Vice President of the Adviser from 1992 to 1996 and
an Assistant Vice President of Piper Jaffray since 1990. MR. DERCK has been a
Vice President of the Adviser since November 1992, prior to which he had been a
manager of Advisory Accounts Services with the Adviser since April 1992 and,
before that, an Assistant Vice President at First Trust since 1976.
MR. FILIPPONE has been a Senior Vice President of the Adviser since 1991.
MR. GIBAS has been a Senior Vice President of the Adviser since 1992, prior to
which he had been a Vice President of the Adviser from 1987 to 1992.
MS. GOLDSTEIN has been a Senior Vice President of the Adviser since 1993, prior
to which she was a Vice President of the Adviser from 1991 to 1993. MR. GROTTE
has been a Senior Vice President of the Adviser since 1992, prior to which he
had been a Vice President of the Adviser from 1988 to 1992. MR. GUDMUNDSON has
been a Senior Vice President of the Adviser since 1995, prior to which he was an
Executive Vice President at Resource Capital Advisers from 1991 to 1995.
MR. HANNAH has been a Senior Vice President of the Adviser since 1995, prior to
which he was manager of Craig and Associates in Seattle, Washington from 1993 to
1994, and prior thereto, he was manager of Exvere in Seattle from January 1993
to August 1993 and a registered representative at Geneva in Irvine, California
from 1991 to 1992. MS. HARRINGTON has been a Senior Vice President of the
Adviser since 1995, prior to which she was a Managing Director at Piper Jaffray
Inc. in the Public Finance Department. MS. KENYON has been a Senior Vice
President of the Adviser since 1992, prior to which she had been a financial
adviser for a private family in Los Angeles. MS. JENSON has been a Senior Vice
President of the Adviser since 1996, prior to which she was a Managing Director
at Piper Trust since 1991. MR. KAPPENMAN has been a Senior Vice President of
the Adviser since November 1996, prior to which he was a Vice President of the
Adviser from 1991 to 1996. MS. KAUL has been a Senior Vice President of the
Adviser since November 1996 and Director of Corporate Communications of the
Adviser since 1991, prior to which she was a Vice President of the Adviser from
1991 to 1996. MR. MCGLINCH has been a Senior Vice President of the Adviser
since 1995, prior to which he had been a Vice President of the Adviser since
1992 and, prior thereto, he had been a specialty products trader at FBS
Investment Services from 1990 to 1992. MR. MCLEOD has been a Senior Vice
President of the Adviser since 1995, prior to which he had a Vice President of
the Adviser since 1994, and prior thereto, a Vice President of Piper Jaffray
since 1991. MR. MARKUSEN has been a Senior Vice President of the Adviser since
1993, prior to which had been a senior vice president of Investment Advisers,
Inc., in Minneapolis, Minnesota from 1989 to 1993. MS. MEYER has been a Senior
Vice President of the Adviser since 1994, prior to which she had been a Vice
President of Secura Insurance, Appleton, Wisconsin from 1988 to 1994. MR.
NORSTREM has been a Senior Vice President of the Adviser since 1993, prior to
which he was Treasurer of the City of Saint Paul, Minnesota for twenty-eight
years. MS. OLSEN has been a Senior Vice President of the Adviser since 1991.
MR. REUSS has been a Senior Vice President of the Adviser since 1989. MR.
SALVOG has been a Senior Vice President of the Adviser since 1992, prior to
which he had been a portfolio manager at Kennedy & Associates in Seattle,
Washington from 1984 to 1992. MR. SCHONBERG has been a Senior Vice President of
the Adviser since 1995, prior to which he was a Vice President of the Adviser
from 1992 to 1995 and a portfolio manager for the Adviser since 1989. MS.
SHREWSBURY has been a Senior
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Vice President of the Adviser since 1993, prior to which she had been a Managing
Director of Piper Jaffray since 1992, and a Vice President of Piper Jaffray
since 1990. MR. SIEDBAND has been a Senior Vice President of the Adviser since
November 1996, prior to which he was a Vice President of the Adviser from 1992
to 1996. MR. STEELE has been a Senior Vice President of the Adviser since 1992,
prior to which he had been a portfolio manager at Kennedy & Associates in
Seattle, Washington from 1987 to 1992. MS. THOMPSON has been a Senior Vice
President of the Adviser since November 1996, prior to which she was a Vice
President of the Adviser from 1994 to 1996, and prior thereto, a Vice President
of Piper Jaffray since 1991. MR. WEIDENHAMMER has been a Senior Vice President
of the Adviser since 1991. MR. WENKER has been a Senior Vice President of the
Adviser since 1993, prior to which he had been a Managing Director of Piper
Jaffray from 1992 to 1993, and prior thereto, the Director of Revitalization
Resources of the Minneapolis Community Development Agency from 1990 to 1992.
MR. WHITE has been a Senior Vice President of the Adviser since 1991.
MS. CASTLE has been a Vice President of the Adviser since 1994, prior to
which she was a client service associate of the Adviser since 1990. MS. DESTRO
has been a Vice President of the Adviser since 1994, prior to which she was an
Accounting Manager from 1993 to 1994 and mutual fund accountant from 1991 to
1993 with the Adviser. MS. DEUTZ has been a Vice President of the Adviser since
September 1995, prior to which she was an Assistant Vice President at Daiwa
Bank, Ltd. from 1992 to September 1995 and a manager of financial reporting at
The Churchill Companies from 1991 to 1992. MS. GONZO has been a Vice President
of the Adviser since November 1996, prior to which she was a communications
manager of the Adviser since 1993, and prior thereto, a senior financial
communications specialist at Minnesota Mutual in St. Paul, Minnesota from 1986
to 1993. MS. HALBE has been a Vice President of the Adviser since 1996, prior
to which she was a Vice President at First Asset Management since 1990. MS.
HARROD has been a Vice President of the Adviser since 1992 and has been a trader
for the Adviser since 1989. MS. HOYME has been a Vice President of the Adviser
since 1996, prior to which she had been a Vice President at First Asset
Management since 1989. MS. JOHNSON has been a Vice President of the Adviser
since 1994, prior to which she was an Accounting Manager from 1993 to 1994 and
mutual fund accountant from 1991 to 1993 with the Adviser. MR. KIGHTLINGER has
been a Vice President of the Adviser since 1991. MS. KUNG has been a Vice
President of the Adviser since 1993, prior to which she had been a Senior
Consultant at Cytrol Inc. from 1989 to 1992. MS. LONGUEVILLE has been a Vice
President of the Adviser since November 1996, prior to which she was an
Assistant Vice President since 1995, and prior thereto, a communications manager
at the Adviser. MR. MELLUM has been a Vice President of the Adviser since 1996,
prior to which he was an Assistant Vice President of the Adviser since 1995, and
prior thereto, a credit analyst at the Adviser since 1993, and prior to that he
was a student. MR. MEYER has been a Vice President of the Adviser since 1994
and manager of Systems Integration for the Adviser since 1991. MR. MOORE has
been a Vice President of the Adviser since 1992, prior to which he was a
Portfolio Manager at Alpine Capital Management from 1990 to 1992 and a broker at
Hanifen Capital Management from 1990 to 1992. MR. NEUHARTH has been a Vice
President of the Adviser since 1996, prior to which he had been a senior
mortgage trader at FBS Mortgage since 1995, and prior thereto, a fixed income
portfolio manager at Fortis Financial since
-6-
<PAGE>
1987. MR. PEARSON has been a Vice President of the Adviser since 1995, prior to
which he was Mutual Funds Accounting Manager of the Adviser from 1994 to 1995
and prior thereto, Director of Fund Operations at Norwest Bank, Minneapolis from
1992 to 1994. MS. STIENSTRA has been a Vice President of the Adviser since
November 1995 and a municipal bond trader of the Adviser since June 1995, prior
to which she was an assistant analyst of the Adviser from 1991 to 1994. MS.
TAJAMAL has been a Vice President of the Adviser since 1995 and a portfolio
manager of the Adviser since 1993, prior to which she was a money market analyst
of the Adviser from 1990 to 1993. MS. WELTER has been a Vice President of the
Adviser since 1994, prior to which she was a client service associate of the
Adviser since 1993 and a mutual fund accountant with the Adviser from 1990 to
1993. MS. WINSON has been a Vice President of the Adviser since November 1993,
prior to which she was an Assistant Vice President of the Adviser since March
1993 and an educator from 1990 to 1992. MR. WOO has been a Vice President of
the Adviser since 1994, prior to which he was a municipal credit analyst of the
Adviser since 1992 and a credit specialist at a commercial trading firm from
1991 to 1992.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Piper Jaffray Inc. acts as principal underwriter for the Registrant
and also for three other open-end investment companies, Piper Funds Inc. -- II,
the shares of which are currently offered in one series, Piper Institutional
Funds Inc., the shares of which are currently offered in one series and Piper
Global Funds Inc., the shares of which are currently offered in two series.
Piper Jaffray has acted as principal underwriter in connection with the initial
public offering of shares of 23 closed-end investment companies.
(b) The name, positions and offices with Piper Jaffray Inc., and positions
and offices with the Registrant of each director and officer of Piper Jaffray
Inc. are as follow:
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
---- --------------------- ---------------------
Addison L. Piper Chairman of the Board of None
Directors and Chief
Executive Officer
Andrew S. Duffe President None
Ralph W. Burnet Member of the Board None
of Directors
William H. Ellis Member of the Board None
of Directors
John L. McElroy, Jr. Member of the Board None
of Directors
Kathy Halbreich Member of the Board None
of Directors
-7-
<PAGE>
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
---- --------------------- ---------------------
Robert S. Slifka Member of the Board None
of Directors
David Stanley Member of the Board None
of Directors
James J. Bellus Managing Director None
AnnDrea M. Benson Managing Director and None
General Counsel
Lloyd K. Benson Managing Director None
Gary J. Blauer Managing Director None
Karen M. Bohn Managing Director None
Sean K. Boyea Managing Director None
Ronald O. Braun Managing Director None
Jay A. Brunkhorst Managing Director None
Edward M. Caillier Managing Director None
Kenneth S. Cameranesi Managing Director None
Stephen M. Carnes Managing Director None
Joseph V. Caruso Managing Director None
Antonio J. Cecin Managing Director None
Joyce E. Chaney Managing Director None
Kenneth P. Clark Managing Director None
Linda A. Clark Managing Director None
Stephen B. Clark Managing Director None
John P. Clausen Managing Director None
Mark Copman Managing Director None
David P. Crosby Managing Director None
-8-
<PAGE>
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
---- --------------------- ---------------------
Mark A. Curran Managing Director None
George S. Dahlman Managing Director None
William E. Darling Managing Director None
Michael D. Deede Managing Director None
Jack C. Dillingham Managing Director None
Mark T. Donahoe Managing Director None
Darci L. Doneff Managing Director None
Michael D. Duffy Managing Director None
Andrew W. Dunleavy Managing Director None
Richard A. Edstrom Managing Director None
Fred R. Eoff, Jr. Managing Director None
Richard D. Estenson Managing Director None
Francis E. Fairman IV Managing Director None
John R. Farrish Managing Director None
G. Richard Ferguson Managing Director None
Paul Ferry Managing Director None
Mark E. Fisler Managing Director None
Michael W. Follett Managing Director None
Daniel P. Gallaher Managing Director None
Peter M. Gill Managing Director None
Kevin D. Grahek Managing Director None
Paul D. Grangaard Managing Director None
Thomas J. Gunderson Managing Director None
-9-
<PAGE>
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
---- --------------------- ---------------------
James S. Harrington Managing Director None
Charles N. Hayssen Managing Director None
William P. Henderson Managing Director None
Allan F. Hickok Managing Director None
Richard L. Hines Managing Director None
David B. Holden Managing Director None
Charles E. Howell Managing Director None
Bruce C. Huber Managing Director None
Elizabeth A. Huey Managing Director None
John R. Jacobs Managing Director None
Earl L. Johnson Managing Director None
Richard L. Johnson Managing Director None
Nicholas P. Karos Managing Director None
Paul P. Karos Managing Director None
Richard G. Kiss Managing Director None
Gordon E. Knudsvig Managing Director None
Jerome P. Kohl Managing Director None
Eric W. Larson Managing Director None
Michael L. Libera Managing Director None
Marina M. Lyon Managing Director None
Robert J. Magnuson Managing Director None
Robert E. Mapes Managing Director None
Peter T. Mavroulis Managing Director None
-10-
<PAGE>
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
---- --------------------- ---------------------
Timothy R. McClernon Managing Director None
Michael P. McMahon Managing Director None
G. Terry McNellis Managing Director None
Darryl L. Meyers Managing Director None
Joseph E. Meyers Managing Director None
John V. Miller Managing Director None
Davil L. Miogley Managing Director None
Dennis V. Mitchell Managing Director None
Edward P. Nicoski Managing Director None
Barry J. Nordstrand Managing Director None
Benjamin S. Oehler Managing Director None
Brooks G. O'Neil Managing Director None
John P. O'Neill Managing Director None
John Otterlei Managing Director None
Robin C. Pfister Managing Director None
Laurence S. Podobinski Managing Director None
Steven J. Proeschel Managing Director None
Rex W. Ramsay Managing Director None
Brian J. Ranallo Managing Director None
Jeffrey K. Ray Managing Director None
Roger W. Redmond Managing Director None
Robert P. Rinek Managing Director None
Wesley L. Ringo Managing Director None
-11-
<PAGE>
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
---- --------------------- ---------------------
Jim M. Roane Managing Director None
Deborah K. Roesler Managing Director None
Ross E. Rogers Managing Director None
David E. Rosedahl Managing Director None
and Secretary
Jeanne R. Rosengren Managing Director None
David D. Rothschild Managing Director None
Terry D. Sandven Managing Director None
Thomas P. Schnettler Managing Director None
Steven R. Schroll Managing Director None
Joyce Nelson Schuette Managing Director None\
Lawrence M. Schwartz, Jr. Managing Director None
Morton D. Silverman Managing Director None
Linda E. Singer Managing Director None
David P. Sirianni Managing Director None
Arch C. Smith Managing Director None
Robert L. Sonnek Managing Director None
Sandra G. Sponem Managing Director None
Thomas E. Stanberry Managing Director None
DeLos V. Steenson Managing Director None
D. Greg Sundberg Managing Director None
Robert D. Swerdling Managing Director None
William H. Teeter Managing Director None
Ann C. Tillotson Managing Director None
-12-
<PAGE>
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
---- --------------------- ---------------------
Marie Uhrich Managing Director None
Momchilo Vucenich Managing Director None
Charles M. Webster, Jr. Managing Director None
Darrell L. Westby Managing Director None
David R. Westcott Managing Director None
Douglas R. Whitaker Managing Director None
James H. Wilford Managing Director None
Stephen W. Woodard Managing Director None
Mark Wren Managing Director None
Saul Yaari Managing Director None
Bradley F. Zilka Managing Director None
Beverly J. Zimmer Managing Director None
The principal business address of each of the individuals listed above is Piper
Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402-3804.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The physical possession of the accounts, books, and other documents
required to be maintained by Section 31(a) of the Investment Company Act of 1940
and Rules 3la-1 to 3la-3 promulgated thereunder is maintained by the Registrant
at Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota
55402-3804, except that the physical possession of certain accounts, books and
other documents related to the custody of the Registrant's securities is
maintained by Investors Fiduciary Trust Company, 127 West Tenth Street, Kansas
City, Missouri 64105.
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
(a) Not applicable.
(b) Not applicable.
(c) Each recipient of a prospectus of any series of the Registrant may
request the latest Annual Report of such series, and such Annual Report will be
furnished by the Registrant without charge.
-13-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement on Form N-1A
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Minneapolis and State of Minnesota on
the 31st day of July 1997.
PIPER FUNDS INC.
(Registrant)
By /s/ Paul A. Dow
---------------------------------
Paul A. Dow
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
/s/ Paul A. Dow President (principal July 31, 1997
- ------------------------------------- executive officer)
Paul A. Dow
/s/ Robert H. Nelson Treasurer (principal July 31, 1997
- ------------------------------------- financial and
Robert H. Nelson accounting officer)
David T. Bennett* Director
Jaye F. Dyer* Director
William H. Ellis* Director
Karol D. Emmerich* Director
Luella G. Goldberg* Director
David A. Hughey* Director
George Latimer* Director
*By /s/ William H. Ellis
---------------------------------
Wiliam H. Ellis
Attorney-in-Fact July 31, 1997
<PAGE>
EXHIBIT INDEX
TO
REGISTRATION STATEMENT
OF
PIPER FUNDS INC.
Exhibit Page No.
- ------- --------
1.3 Certificate of Designation of Series J,
Class Y Common Shares
10 Opinion and Consent of Dorsey & Whitney LLP
11 Consent of KPMG Peat Marwick LLP
18 Plan pursuant to Rule 18f-3 under the Investment
Company Act of 1940 as amended May 23, 1997
<PAGE>
CERTIFICATE OF DESIGNATION
OF
CLASS Y COMMON SHARES
OF
SERIES J
OF
PIPER FUNDS, INC.
The undersigned duly elected Secretary of Piper Funds, Inc., a Minnesota
corporation (the "Corporation"), hereby certifies that the following is a true,
complete and correct copy of resolutions duly adopted by a majority of the
directors of the Board of Directors of the Corporation on May 23, 1997:
WHEREAS, the total authorized number of shares of the Corporation is
ten trillion, all of which shares are common shares, par value $.01 per
share, as set forth in the Corporation's Restated Articles of Incorporation
(the "Articles").
WHEREAS, ten billion of such shares have been designated in the
Articles as Series J Common Shares.
WHEREAS, pursuant to Section 5(b) of the Articles, the shares of each
Series may be classified by the Board of Directors in one or more classes
with such relative rights and preferences as shall be stated or expressed
in a resolution or resolutions providing for the issue of any such class or
classes as may be adopted from time to time by the Board of Directors of
the Corporation.
NOW, THEREFORE, BE IT RESOLVED, that of the ten billion shares
designated in the Articles as Series J Common Shares, four billion are
hereby designated as Series J, Class A Common Shares, one billion are
hereby designated as Series J, Class Y Common Shares, the remaining five
billion Series J Common Shares shall remain undesignated as to class, and
the Series J Common Shares which are outstanding on the date hereof are
hereby redesignated as Series J, Class A Common Shares.
FURTHER RESOLVED, that the classes of Common Shares designated by
these resolutions shall have the relative rights and preferences set forth
in the Articles. As provided in Section 5(b) of the Articles, each class
of Common Shares designated by these resolutions may be subject to such
charges and expenses (including, by way of example but not by way of
limitation, such front-end and deferred sales charges as may be permitted
under the Investment Company Act of 1940 (the "1940 Act") and the rules of
the National Association of Securities Dealers, Inc., and expenses under
Rule 12b-1 plans, administration plans, service plans or other plans or
arrangements, however designated) adopted from time to time by the Board of
Directors of the Corporation in accordance, to the extent applicable, with
the 1940 Act, which charges and expenses may differ from those applicable
to another class, and all of the charges and expenses to which a class is
subject shall be borne by such class and shall be appropriately reflected
in determining the net asset value and the amounts payable with respect to
dividends and distributions on, and redemptions or liquidation of, such
class.
IN WITNESS WHEREOF, the undersigned has signed this Certificate of
Designation on behalf of the Corporation this 11th day of July 1997.
/s/Susan S. Miley
-------------------------------
Susan S. Miley, Secretary
<PAGE>
[LETTERHEAD]
Piper Funds Inc.
222 South Ninth Street
Minneapolis, Minnesota 55402
Ladies and Gentlemen:
We have acted as counsel to Piper Funds Inc., a Minnesota corporation
(the "Fund"), in connection with Post-Effective Amendment No. 39 to the Fund's
Registration Statement on Form N-1A (File No. 33-10261) (the "Registration
Statement") relating to the sale by the Fund of an indefinite number of Class A
and Class Y shares of the Fund's Series J common stock, each with a par value of
$.01 per share (collectively, the "Shares").
We have examined such documents and have reviewed such questions of
law as we have considered necessary and appropriate for the purposes of our
opinions set forth below. In rendering our opinions set forth below, we have
assumed the authenticity of all documents submitted to us as originals, the
genuineness of all signatures and the conformity to authentic originals of all
documents submitted to us as copies. We have also assumed the legal capacity
for all purposes relevant hereto of all natural persons and, with respect to all
parties to agreements or instruments relevant hereto other than the Fund, that
such parties had the requisite power and authority (corporate or otherwise) to
execute, deliver and perform such agreements or instruments, that such
agreements or instruments have been duly authorized by all requisite action
(corporate or otherwise), executed and delivered by such parties and that such
agreements or instruments are the valid, binding and enforceable obligations of
such parties. As to questions of fact material to our opinions, we have relied
upon certificates of officers of the Fund and of public officials. We have also
assumed that the Shares will be issued and sold as described in the Registration
Statement.
Based on the foregoing, we are of the opinion that the Shares have
been duly authorized by all requisite corporate action and, upon issuance,
delivery and payment therefore as described in the Registration Statement, will
be validly issued, fully paid and nonassessable.
Our opinions expressed above are limited to the laws of the State of
Minnesota.
<PAGE>
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Counsel" on the back cover of the Prospectus constituting part of the
Registration Statement.
Dated: July 31, 1997
Very truly yours,
/s/ Dorsey & Whitney LLP
KLP
<PAGE>
[Letterhead]
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Piper Funds Inc.:
We consent to the use of our report dated November 14, 1996 incorporated by
reference herein and to the references to our Firm under the headings "FINANCIAL
HIGHLIGHTS" in Part A and "FINANCIAL STATEMENTS" in Part B of the Registration
Statement.
/s/KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Minneapolis, Minnesota
July 30,1997
<PAGE>
PIPER FUNDS, INC.
PIPER GLOBAL FUNDS INC.
MULTIPLE CLASS PLAN PURSUANT TO RULE 18f-3
AMENDED MAY 23, 1997
I. PREAMBLE
Each of the funds listed below (each a "Fund," and collectively the
"Funds"), series of either Piper Funds Inc. or Piper Global Funds Inc., as
indicated, has elected to rely on Rule 18f-3 under the Investment Company Act of
1940, as amended (the "1940 Act") in offering multiple classes of shares in each
Fund:
Series of Piper Funds Inc. Classes Offered
-------------------------- ---------------
Small Company Growth Fund Class A and Class B
Emerging Growth Fund Class A, Class B and Class Y
Growth Fund Class A and Class B
Growth and Income Fund Class A, Class B and Class Y
Balanced Fund Class A and Class B
Intermediate Bond Fund Class A and Class Y
Money Market Fund Class A and Class B
Minnesota Tax-Exempt Fund Class A and Class Y
Series of Piper Global Funds Inc. Classes Offered
--------------------------------- ---------------
Emerging Markets
Growth Fund Class A and Class B
Pacific-European
Growth Fund Class A, Class B and Class Y
This Plan sets forth the differences among classes of shares of the Funds,
including distribution and shareholder servicing arrangements, expense
allocations, conversion features, exchange privileges and voting rights. Each
class of a Fund represents a pro rata interest in the same portfolio of
investments and differs from the other classes of the Fund only to the extent
outlined below.
II. ATTRIBUTES OF NON-MONEY MARKET FUND SHARE CLASSES
The Funds may offer up to three classes of shares. The attributes of such
classes for each of the Funds other than Money Market Fund are as follows:
CLASS A
- Front-End Sales Charge: Maximum front-end sales charge of 4% of the
offering price (2% in the case of Intermediate Bond Fund). This sales charge
will be
<PAGE>
subject to reduction or waiver in various circumstances, as set forth in the
then current prospectus of the respective Fund.
- Contingent Deferred Sales Charge ("CDSC"): None, except that, in
connection with purchases of $500,000 or more, on which there is no initial
sales charge, a CDSC may be imposed, as set forth in the then current prospectus
of the respective Fund. Subject to Board approval, a CDSC also may be assessed
from time to time in connection with other purchases on which there is no
initial sales charge, such as purchases made during a special "no-load
promotion."
- Rule 12b-1 Fees: Class A shares will be subject to Rule 12b-1
distribution and shareholder servicing fees equal, on an annual basis, to .50%
of a Fund's average daily net assets (.30% in the case of Intermediate Bond
Fund) attributable to Class A shares. (For Pacific-European Growth Fund, the
Distributor will be entitled to reimbursement for its actual expenses incurred
in connection with servicing of the Fund's shareholder accounts and in
connection with distribution related services provided with respect to the Fund
in an amount not to exceed, on an annualized basis, .50% of the average daily
net assets attributable to the Class A shares of the Fund.)
- Conversion Features: None.
- Exchange Privileges: Class A shareholders may exchange their shares for
shares of any Piper Fund that is not issuing multiple classes of shares, and for
Class A shares of any Piper Fund that is issuing multiple classes of shares.
Such exchanges will be made at net asset value, provided that investors
exchanging into a Fund that has a higher sales charge must pay the difference.
CLASS B
- Front-End Sales Charge: None.
- Contingent Deferred Sales Charge: A CDSC of up to 4% will be imposed if
shares are redeemed within six years of purchase. For this purpose, years are
calculated on a calendar-year basis. The CDSC will decrease according to the
following schedule:
CDSC as a %
If Redeemed During the of Amount Redeemed
- ---------------------- ------------------
Calendar year of the purchase 4%
First calendar year after purchase 4%
Second calendar year after purchase 3%
Third calendar year after purchase 2%
Fourth calendar year after purchase 2%
Fifth calendar year after purchase 1%
2
<PAGE>
Thus, if a shareholder bought shares on December 30, 1996 and redeemed them on
January 2, 1998, the 3% CDSC would apply.
The CDSC will be based upon the lesser of the net asset value of the shares at
the time of purchase or at the time of redemption. The charge does not apply to
amounts representing an increase in share value due to capital appreciation and
shares acquired through the reinvestment of dividends or capital gains
distributions. In determining whether a CDSC is payable, redemptions of Class B
shares are processed on a first in, first out basis, to result in the lowest
possible sales charge. The CDSC may be subject to reduction or waiver in various
circumstances, as set forth in the then current prospectus of the respective
Fund.
- Conversion Features: On January 1 of the sixth calendar year after a
purchase, Class B shares will automatically convert to Class A shares. This
conversion will be on the basis of the relative net asset values of the two
classes. Class B shares purchased through the reinvestment of distributions paid
on such shares are, for purposes of conversion, considered to be held in a
separate sub-account. Each time Class B shares convert to Class A shares, a
proportionate number of the shares of the same class in the sub-account converts
to Class A. Effecting of the conversion feature is subject to the continuing
availability of a ruling of the Internal Revenue Service or an opinion of
counsel to the effect that the conversion of shares does not constitute a
taxable event under the Internal Revenue Code.
- Rule 12b-1 Fees: Class B shares will be subject to Rule 12b-1
distribution and shareholder servicing fees equal, on an annual basis, to 1.00%
of a Fund's average daily net assets attributable to Class B shares.
- Exchange Privileges: Class B shareholders may exchange their shares
only for Class B shares of other Piper Funds. Thus, Class B shares may not be
exchanged for shares of Piper Funds that are not issuing multiple classes of
shares. Exchanges will be made at net asset value. No CDSC will be imposed
upon exchanges, but the new shares acquired in the exchange will be treated as
if purchased on the date of the original shares for purposes of calculating any
future CDSC payments and for purposes of determining the conversion date.
CLASS Y
- Front-End Sales Charge: None.
- Contingent Deferred Sales Charge: None.
- Rule 12b-1 Fees: None.
- Conversion Features: None.
3
<PAGE>
- Exchange Privileges: Class Y shares may be exchanged at net asset value
for Class Y shares of another Fund, provided the Class Y minimum investment
amount for such other Fund is met.
III. ATTRIBUTES OF MONEY MARKET FUND SHARE CLASSES
The Money Market Fund offers two classes of shares. The attributes of such
classes are as follows:
CLASS A
- Front-End Sales Charge: None
- Contingent Deferred Sales Charge: None.
- Rule 12b-1 Fees: Class A shares will be subject to Rule 12b-1
distribution and shareholder servicing fees equal, on an annual basis, to .30 of
a Fund's average daily net assets attributable to Class A shares.
- Conversion Features: None.
- Exchange Privileges: New purchases of Money Market Fund are only
allowed into Class A. Holders of these new Class A Money Market Fund shares are
allowed to exchange their shares for Class A shares of any of the other Funds
(in which case the applicable front-end sales charge will be imposed) or for
Class Y shares at net asset value (provided that the Class Y minimum investment
amount is met and the shareholder is otherwise eligible to purchase such
shares). Class A Money Market Fund shares cannot be exchanged into Class B
shares of another Fund. Instead, there must be a redemption of the Class A
Money Market Fund shares, followed by a purchase of the Class B shares of the
other Fund. Class B shares of another Fund cannot be exchanged into Class A
Money Market Fund shares, but must be exchanged for Class B Money Market Fund
shares.
CLASS B
The attributes of the Money Market Fund Class B shares are the same as
those of the non-Money Market Fund Class B shares.
IV. EXPENSE ALLOCATIONS
Expenses of the existing classes of the existing Funds shall be allocated
as follows:
A. Rule 12b-1 distribution and shareholder servicing fees relating to the
respective classes of shares, as set forth above, shall be borne
exclusively by the classes of shares to which they relate. In addition, to
the extent they can
4
<PAGE>
reasonably be identified as relating to a particular class, transfer
agent fees shall be allocated to such class.
B. Except as set forth in A above, expenses of the Funds shall be borne at
the Fund level and shall not be allocated on a class basis. Such expenses
shall be allocated to each class based on such class's pro rata share of a
Fund's net assets.
The foregoing allocations shall in all cases be made in a manner consistent
with the Funds' private letter ruling from the Internal Revenue Service with
respect to multiple classes of shares.
V. VOTING
Each class shall have exclusive voting rights on any matter submitted to
shareholders that relates solely to its arrangement for shareholder services and
the distribution of securities and shall have separate voting rights on any
matter submitted to shareholders in which the interests of one class differ from
the interests of any other class. Class B shareholders shall have voting rights
with respect to material increases in expenses that are submitted separately to
Class A shareholders for their approval.
VI. AMENDMENT AND REVIEW OF PLAN
A. NEW FUNDS AND NEW CLASSES. With respect to any new Fund created after
the date of this Plan and any new class of shares of the existing Funds created
after the date of this Plan, the Board of Directors of the Funds, including a
majority of the independent directors, shall approve amendments to this Plan
setting forth the attributes of the classes of shares of such new Fund or of
such new class of shares.
B. MATERIAL AMENDMENTS AND REVIEW OF PLAN. The Board of Directors of the
Funds, including a majority of the independent directors, shall review this Plan
for its continued appropriateness as necessary and shall approve any material
amendment of this Plan.
