<PAGE>
ADJUSTABLE RATE
MORTGAGE
SECURITIES
FUND
1995
ANNUAL REPORT
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PRESIDENT'S LETTER.............................1
LETTER TO SHAREHOLDERS.........................2
ADJUSTABLE RATE MORTGAGE SECURITIES
FUND (HISTORICAL INFORMATION OF AMERICAN
ADJUSTABLE RATE TERM TRUST -- 1998)
FINANCIAL STATEMENTS AND NOTES...............5
INVESTMENTS IN SECURITIES...................16
INDEPENDENT AUDITORS' REPORT................17
AMERICAN ADJUSTABLE RATE
TERM TRUSTS -- 1996, 1997 AND 1999
FINANCIAL STATEMENTS AND NOTES..............18
INVESTMENTS IN SECURITIES...................34
INDEPENDENT AUDITORS' REPORT................37
FEDERAL TAX INFORMATION.......................38
SHAREHOLDER UPDATE............................39
</TABLE>
On September 1, the American Adjustable Rate Term Trusts 1996, 1997, 1998 and
1999 merged into the Adjustable Rate Mortgage Securities Fund. In this annual
report for the fiscal year ended August 31, 1995, you will find information
in the financial statements and the investments in securities on all four
term trusts. However, only the American Adjustable Rate Term Trust -- 1998 is
featured in the shareholder letter section because it is considered the
predecessor of the new Adjustable Rate Mortgage Securities Fund for
performance and financial reporting purposes.
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
The Adjustable Rate Mortgage Securities Fund is a diversified, open-end
mutual fund with an investment objective of providing the maximum current
income that is consistent with a low volatility of principal. The fund
invests primarily in adjustable rate mortgage (ARM) securities. It may also
invest in mortgage-backed securities other than ARM securities, U.S.
government securities, asset-backed securities and corporate debt securities.
The fund's Nasdaq symbol is PJARX. As with other mutual funds, there can be
no assurance the fund will achieve its objective.
THIS REPORT IS INTENDED FOR SHAREHOLDERS OF ADJUSTABLE RATE MORTGAGE
SECURITIES FUND, BUT IT MAY ALSO BE USED AS SALES LITERATURE IF PRECEDED OR
ACCOMPANIED BY A PROSPECTUS. THE PROSPECTUS GIVES DETAILS ABOUT THE CHARGES,
INVESTMENT RESULTS AND OPERATING POLICIES OF THE FUND.
<PAGE>
PRESIDENT'S LETTER
[PHOTO]
William H. Ellis
PRESIDENT, PIPER CAPITAL MANAGEMENT
Dear Shareholders:
In our last report to you, we announced that the American Adjustable
Rate Term Trusts 1996, 1997, 1998 and 1999 would not be able to reach
their $10 per share objective at their respective termination dates
without taking unacceptable risks. At that time, we proposed the
merger of the term trusts into an open-end mutual fund in order to
eliminate the market discount at which the shares were trading, allowing
shareholders to access their assets at net asset value. On August 10,
shareholders of the term trusts approved the merger of the four
closed-end funds into a single open-end fund called Adjustable Rate
Mortgage Securities Fund.
At the close of business on September 1, the term trusts merged
into the new fund. You received shares of the fund with a total value
that was equal to the total value of your term trust shares. The
Adjustable Rate Mortgage Securities Fund does not have a set termination
date or termination amount. It's an open-end fund with an objective of
providing the maximum current income that is consistent with a low
volatility of principal.
As discussed in the proxy statement, the fund intends to treat the
merger as a tax-free reorganization for federal tax purposes. No facts
have come to our attention at this time that would change this opinion.
Therefore, you will not be required to report any income, gain or loss as
a result of receiving your Adjustable Rate Mortgage Securities
Fund shares in the merger. Of course, if you redeem your shares, you will
generally recognize a gain or loss at that time.
This annual report covers the fiscal year ended August 31, 1995. You
will find information in the financial statements and the investments in
securities on all four term trusts. However, only the American Adjustable
Rate Term Trust -- 1998 (DDJ) is featured in the shareholder letter
section because it is considered the predecessor of the Adjustable Rate
Mortgage Securities Fund for performance and financial reporting
purposes. In the shareholder letter, portfolio managers Mike
Jansen and Tom McGlinch will give an outlook for the new fund and recap
DDJ's performance.
We believe this merger is in the best interests of shareholders and
want to thank you for approving the proposal. We look forward to serving
your investment needs with the new fund.
Sincerely,
/s/ William H. Ellis
William H. Ellis
President, Piper Capital Management
1
<PAGE>
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
WHAT ARE ADJUSTABLE RATE
MORTGAGE (ARM) SECURITIES?*
An ARM security represents ownership in a pool of adjustable rate mortgage
loans. Payments on the ARM securities come from payments on the adjustable
rate mortgages. When a borrower's mortgage rate resets to a higher (lower)
rate due to changes in a market index, the coupon on the ARM security also
resets to a higher (lower) level. This results in a larger (smaller) interest
payment that is then passed through to investors. The borrower's loan
document specifically states the dates on which the rate will change, the
market index on which the new rate is based, and the margin by which the rate
is set over the index rate. For example, many borrowers have loans indexed to
the one-year Treasury rate plus a margin of 2.75%, which reset once a year.
If, on the reset date, the one-year Treasury rate is 5.50%, the borrower's
new rate for the following 12 months will increase to 8.25%. Likewise, the
rate passed through to the investor will increase to 8.25% minus a mortgage
servicer and guarantee fee. Almost all ARM loans have periodic reset caps and
lifetime caps, which limit how often and how high rates can reset. Smaller
periodic caps and lower lifetime caps work to the advantage of the borrower
and to the disadvantage of the investor when rates are rising. Although ARM
pools are made up of thousands of similarly indexed loans, in any particular
month only a portion of the loans reset to a current market rate, creating
lags in the adjustment process.
* ARM SECURITIES ARE DEFINED MORE BROADLY IN THE FUND'S PROSPECTUS. PLEASE
SEE THE PROSPECTUS FOR A COMPLETE DEFINITION.
** FIGURES SHOWN REFLECT PAST PERFORMANCE AND DO NOT GUARANTEE FUTURE
RESULTS. THE RETURN AND MARKET VALUE OF INVESTMENTS IN THE FUND WILL
FLUCTUATE AND SHARES, WHEN SOLD, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST.
October 16, 1995
Dear Shareholders:
WE WOULD LIKE TO THANK YOU FOR RESPONDING TO THE RECENT PROXY CONCERNING THE
MERGER OF THE AMERICAN ADJUSTABLE RATE TERM TRUSTS. Approving the proposal to
merge the term trusts into the new open-end Adjustable Rate Mortgage
Securities Fund benefited shareholders in a couple of ways. First, investors
who want to liquidate all or part of their investment are now able to do so
at net asset value instead of the discounted market price at which the term
trusts were trading. Also, the new fund is not constrained by the term trust
structure and therefore has greater investment flexibility to buy
longer-maturity securities in an effort to obtain a higher return. The fund
will attempt to maintain an average effective duration of one to four years.
In addition, we feel that the new fund's expense cap of 0.60% of the fund's
average daily net assets through at least August 31, 1996, makes it
attractive.
THE FUND INVESTS PRIMARILY IN ARM SECURITIES IN AN EFFORT TO ACHIEVE ITS
OBJECTIVE OF PROVIDING THE MAXIMUM CURRENT INCOME THAT IS CONSISTENT WITH A
LOW VOLATILITY OF PRINCIPAL. Over an interest rate cycle of higher and lower
rates, ARM securities typically produce returns that are between the yields
on money market securities and the total returns generated by one- to
three-year government securities. (See the sidebar for more detailed
information about ARM securities.)
THE NEW FUND IS CURRENTLY POSITIONED WITH APPROXIMATELY 73% OF ITS ASSETS IN
ARM SECURITIES, 18% IN FIXED RATE SECURITIES AND 7% IN SHORT-TERM CASH
EQUIVALENTS (SEE PIE CHARTS ON PAGE 4). Within the ARM securities portion,
51% are issued by a U.S. government agency and 22% are privately issued. Most
of the ARM securities have coupons which are indexed to the one-year Treasury
yield and which reset on an annual basis. The privately issued ARM securities
are rated AAA or AA by Standard and Poor's. The fund cannot own foreign
securities, structured securities, inverse floaters, interest-only
securities, principal-only securities or Z tranches. Also, the fund cannot
employ the sale-forward (dollar-roll) program and may borrow only for
temporary or emergency purposes.
FOR THE YEAR ENDED AUGUST 31, 1995, AMERICAN ADJUSTABLE RATE TERM TRUST --
1998 HAD A NET ASSET VALUE RETURN OF 5.43%.** During this same time frame,
the fund's market price return was 11.38%,** which is due in part to the
elimination of the discount between market price and net asset value at
conversion. The fund's performance is now being compared to both the Lipper
Adjustable Rate Mortgage Funds Average and the Lehman Brothers Adjustable
Rate Mortgage Index.
THE FUND OUTPERFORMED THE LIPPER AVERAGE RETURN OF 1.25% FOR THE ONE-YEAR
PERIOD ENDED AUGUST 31, 1995. This average consists of 70 funds which invest
at least 65% of their assets in ARM securities as
2
<PAGE>
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
categorized by Lipper Analytical Services. The fund's emphasis on
high-quality securities helped it outperform the average of other funds in
its Lipper category. Some funds in the category have experienced poor returns
due to losses suffered in unrated, credit-sensitive securities over the past
year.
THE FUND UNDERPERFORMED THE LEHMAN BROTHERS INDEX, AN UNMANAGED INDEX MADE UP
SOLELY OF U.S. GOVERNMENT AGENCY ARM SECURITIES, WHICH RETURNED 8.24% FOR THE
SAME ONE-YEAR PERIOD. The Lehman Brothers index included a large portion of
Government National Mortgage Association (GNMA) and Cost of Funds Index
(COFI) ARM securities which performed strongly because their prices are more
sensitive to falling interest rates. The fund was positioned in
higher-coupon, Treasury indexed securities that have returns which are more
sensitive to income rather than price appreciation.
SINCE THE MERGER, APPROXIMATELY 50% OF SHAREHOLDERS HAVE TAKEN THE
OPPORTUNITY TO REDEEM THEIR SHARES AT NET ASSET VALUE. We anticipated this
level of redemptions, in part because of the indications we received from
shareholders on their proxy ballots. To prepare for these redemptions, we
accumulated a 20% position in short-term securities. We also sold a number of
privately issued and U.S. government agency ARM securities to meet cashflow
needs. Redemption requests were fulfilled without disruption to the fund's
net asset value or to the marketplace in general.
THE LARGE SHORT-TERM POSITION, IN COMBINATION WITH HIGH PREPAYMENT LEVELS IN
ADJUSTABLE RATE MORTGAGES, CONTRIBUTED TO A SEPTEMBER DIVIDEND OF $0.034.
Borrowers are prepaying adjustable rate mortgages at a faster speed recently
due to the lower rates available on fixed rate mortgages. While short-term
interest rates have dropped only slightly this year, long-term rates have
fallen sharply. Mortgage rates started the year near 9.50% and are now near
7.50%. At the same time, many adjustable rate mortgage borrowers are seeing
their rates rise from 6.00% to 8.00% because of last year's rising rate
environment and are choosing to fix their payments at lower rates. Since many
of the ARM securities held in the fund were purchased at premium prices, the
faster prepayments are causing the fund to amortize these premiums more
quickly which reduces the fund's current income level. Our recent sales of
ARM securities have been made with the objective of minimizing the impact of
prepayments on the fund's income. In addition, we have swapped higher coupon,
higher cost ARM securities for lower coupon, lower cost ARM securities which
are less likely to be prepaid.
OVER TIME, WE BELIEVE THESE ACTIONS, IN ADDITION TO A MUCH SMALLER SHORT-TERM
POSITION IN THE FUND, WILL PROVIDE A HIGHER AND MORE PREDICTABLE STREAM OF
DIVIDEND INCOME TO SHAREHOLDERS. The dividend policy for the fund is to
distribute to shareholders substantially all of the
[PHOTO]
flipped FPO 75%
[PHOTO]
FPO 62%
Thomas S. McGlinch, CFA (above)
SHARES PRIMARY RESPONSIBILITY FOR THE MANAGEMENT OF THE
ADJUSTABLE RATE MORTGAGE SECURITIES FUND. HE HAS 14 YEARS OF
INVESTMENT EXPERIENCE.
Mike Jansen, (below)
SHARES PRIMARY RESPONSIBILITY FOR THE MANAGEMENT OF THE ADJUSTABLE RATE
MORTGAGE SECURITIES FUND. HE HAS 14 YEARS OF INVESTMENT EXPERIENCE.
3
<PAGE>
VALUE OF $10,000 INVESTED
[GRAPHIC]
If you had invested $10,000 in January 1992 and held your investment through
August 31, 1995, reinvesting all distributions, your investment would have
grown to $11,281 (based on historical net asset value performance of American
Adjustable Rate Term Trust--1998, the fund's predecessor for performance and
financial reporting purposes). Fund results reflect the Adjustable Rate
Mortgage Securities Fund's maximum 1.5% sales charge, as if it was applied
since the fund's inception. In comparing the fund to the Lehman Brothers
index and the Lipper average, keep in mind that the fund's performance
reflects the sales charge, while no such charges are reflected in the index
or the average. Past performance does not guarantee future results.
AVERAGE ANNUAL TOTAL RETURNS
(THROUGH 8/31/95; INCLUDES 1.5% SALES CHARGE)
<TABLE>
<S> <C>
One-Year.........................3.85%
Since Inception (1/30/92)........3.42%
</TABLE>
investment income earned during any period. Therefore, we will not
attempt to stabilize monthly distributions by retaining income in a
dividend reserve.
CURRENTLY, THE NARROW SPREAD BETWEEN SHORT- AND LONG-TERM RATES IMPLIES THAT
THE MARKET IS ANTICIPATING THE FEDERAL RESERVE WILL EASE MONETARY POLICY.
Although employment is growing at a lower rate than in 1994, we see the
rebound in important economic sectors such as housing as a reason the Federal
Reserve will move slowly if they choose to ease further. It is likely the
Federal Reserve is comfortable with the rate of economic growth and inflation
anticipated for the remainder of 1995 and will remain fairly neutral with its
monetary policy. If the Federal Reserve fails to ease, the market is
susceptible to higher rates. Nonetheless, we would expect any changes to be
moderate and have positioned the fund to perform best in a market environment
of low interest rate volatility.
Thank you for your investment in the Adjustable Rate Mortgage Securities
Fund. We consider it a privilege to manage your money and look forward to
serving your investment needs with the new fund.
Sincerely,
/s/ Mike Jansen /s/ Tom McGlinch
Mike Jansen Tom McGlinch
PORTFOLIO MANAGER PORTFOLIO MANAGER
PORTFOLIO COMPOSITION BEFORE MERGER
AUGUST 31, 1995
American Adjustable Rate Term Trust--1998
[PIE CHART]
PORTFOLIO COMPOSITION AFTER MERGER
SEPTEMBER 30, 1995
Adjustable Rate Mortgage Securities Fund
[PIE CHART]
INVESTMENT CATEGORIES REFLECT PERCENTAGE OF TOTAL ASSETS.
4
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1995
<TABLE>
<CAPTION>
Adjustable Rate
Mortgage
Securities
Fund**
----------------
<S> <C>
ASSETS:
Investments in securities at market value*
(including a repurchase agreement of $70,714,000) (note
2) ................................................... $ 422,173,937
Cash in bank on demand deposit ........................... 101,944
Receivable for investment securities sold ................ 9,015,608
Accrued interest receivable .............................. 2,048,827
Mortgage security principal paydowns receivable .......... 1,249,401
----------------
Total assets ......................................... 434,589,717
----------------
LIABILITIES:
Payable for investment securities purchased on a
when-issued basis (note 2) ............................. 25,109,375
Accrued investment management fee ........................ 121,952
Accrued administrative fee ............................... 52,265
----------------
Total liabilities .................................... 25,283,592
----------------
Net assets applicable to outstanding capital stock ....... $ 409,306,125
----------------
----------------
REPRESENTED BY:
Capital stock - authorized 1 billion shares of $0.01 par
value; outstanding, 47,066,117 shares ................ $ 470,661
Additional paid-in capital ............................... 460,104,831
Accumulated net realized loss on investments ............. (47,094,867)
Unrealized depreciation of investments ................... (4,174,500)
----------------
Total - representing net assets applicable to
outstanding capital stock ........................ $ 409,306,125
----------------
----------------
Net asset value per share of outstanding capital stock ... $ 8.70
----------------
----------------
* Investments in securities at identified cost ........... $ 426,348,437
----------------
----------------
** FORMERLY AMERICAN ADJUSTABLE RATE TERM TRUST 1998
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 1995
<TABLE>
<CAPTION>
Adjustable Rate
Mortgage
Securities Fund*
----------------
<S> <C>
INCOME:
Interest (net of interest expense of $3,384,232) ....... $ 25,824,364
Fee income (note 2) ...................................... 300,962
----------------
Total investment income .............................. 26,125,326
----------------
EXPENSES (NOTE 3):
Investment management fee ................................ 1,462,719
Administrative fee ....................................... 626,880
Custodian, accounting and transfer agent fees ............ 195,314
Reports to shareholders .................................. 181,868
Directors' fees .......................................... 24,161
Audit and legal fees ..................................... 68,994
Other expenses ........................................... 65,964
----------------
Total expenses ....................................... 2,625,900
----------------
Net investment income ................................ 23,499,426
----------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized loss on investments (note 4) ................ (10,259,308)
Net realized loss on closed put option contracts (note
4) ..................................................... (2,113,000)
Net realized loss on closed interest rate swap
transactions ........................................... (8,598,317)
Net realized gain on closed futures contracts ............ 209,151
----------------
Net realized loss on investments ....................... (20,761,474)
Net change in unrealized appreciation or depreciation of
investments ............................................ 17,558,315
----------------
Net loss on investments ................................ (3,203,159)
----------------
Net increase in net assets resulting from
operations ....................................... $ 20,296,267
----------------
----------------
* FORMERLY AMERICAN ADJUSTABLE RATE TERM TRUST 1998
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED AUGUST 31, 1995
<TABLE>
<CAPTION>
Adjustable Rate
Mortgage
Securities Fund*
----------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and fee income ................................ $ 26,125,326
Expenses ................................................. (2,625,900)
----------------
Net investment income ................................ 23,499,426
----------------
Adjustments to reconcile net investment income to cash
provided by operating activities:
Change in accrued interest and mortgage security
principal paydowns receivable ........................ 929,586
Net amortization of bond discount and premium .......... (3,285,176)
Change in accrued fees and expenses .................... (350,656)
----------------
Total adjustments .................................... (2,706,246)
----------------
Net cash provided by operating activities ............ 20,793,180
----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments ....................... 391,566,255
Purchases of investments ................................. (178,008,758)
Net sales of short-term securities ....................... 31,512,303
Cash paid for interest rate swap transactions ............ (10,301,092)
Net variation margin receipts for futures contracts ...... 209,151
Receipts from closed put option contracts ................ 500,500
----------------
Net cash provided by investing activities ............ 235,478,359
----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Tender of fund shares (note 7) ........................... (79,726,515)
Net payments for reverse repurchase agreements ........... (145,000,000)
Retirement of fund shares (note 6) ....................... (3,756,297)
Distributions paid to shareholders ....................... (27,746,007)
----------------
Net cash used by financing activities ................ (256,228,819)
----------------
Net increase in cash ..................................... 42,720
Cash at beginning of year ................................ 59,224
----------------
Cash at end of year ................................ $ 101,944
----------------
----------------
Supplemental disclosure of cash flow information:
Cash paid for interest on reverse repurchase
agreements ........................................... $ 3,695,590
----------------
----------------
* FORMERLY AMERICAN ADJUSTABLE RATE TERM TRUST 1998
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
ADJUSTABLE RATE MORTGAGE SECURITIES FUND*
<TABLE>
<CAPTION>
Year Ended Year Ended
8/31/95 8/31/94
---------------- ----------------
<S> <C> <C>
OPERATIONS:
Net investment income .................................. $ 23,499,426 33,892,114
Net realized loss on investments ......................... (20,761,474) (25,012,875)
Net change in unrealized appreciation or depreciation of
investments ............................................ 17,558,315 (25,676,685)
---------------- ----------------
Net increase (decrease) in net assets resulting from
operations ........................................... 20,296,267 (16,797,446)
---------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ............................... (27,746,007) (31,740,989)
---------------- ----------------
CAPITAL SHARE TRANSACTIONS:
Payments for tender of 9,135,819 shares (note 7) ......... (79,726,515) --
Payments for retirement of 488,000 and 335,000 shares,
respectively (note 6) .................................. (3,579,372) (2,768,772)
---------------- ----------------
Decrease in net assets from capital share
transactions ......................................... (83,305,887) (2,768,772)
---------------- ----------------
Total decrease in net assets ......................... (90,755,627) (51,307,207)
Net assets at beginning of year ............................ 500,061,752 551,368,959
---------------- ----------------
Net assets at end of year ................................ $ 409,306,125 500,061,752
---------------- ----------------
---------------- ----------------
Undistributed net investment income ...................... $ -- 7,060,244
---------------- ----------------
---------------- ----------------
* FORMERLY AMERICAN ADJUSTABLE RATE TERM TRUST 1998
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION
These financial statements present financial
information of American Adjustable Rate Term
Trust 1998 (DDJ). For financial reporting
purposes, DDJ is considered the surviving
entity of the merger of American Adjustable
Rate Term Trust 1996 (BDJ), American
Adjustable Rate Term Trust 1997 (CDJ),
American Adjustable Rate Term Trust 1998 (DDJ)
and American Adjustable Rate Term Trust 1999
(EDJ) into Piper Funds Inc. - II Adjustable
Rate Mortgage Securities Fund, which was
effective September 1, 1995. As such, only
historical financial information of DDJ is
relevant with respect to the future financial
reporting of Piper Funds Inc. - II Adjustable
Rate Mortgage Securities Fund.
Piper Funds Inc. - II was incorporated on
April 10, 1995 and is registered under the
Investment Company Act of 1940 (as amended) as
a single, open-end management investment
company. The company currently includes only
the Adjustable Rate Mortgage Securities Fund,
which is classified as a diversified fund. The
company's articles of incorporation permit the
board of directors to create additional funds
in the future.
(2) SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES
INVESTMENTS IN SECURITIES
The values of fixed income securities are
determined using pricing services or prices
quoted by independent brokers. Exchange-listed
options are valued at the last sale price and
open financial futures contracts are valued at
the last settlement price. When market
quotations are not readily available,
securities are valued at fair value according
to methods selected in good faith by the board
of directors. Short-term securities with
maturities of 60 days or less are valued at
amortized cost which approximates market
value.
Securities transactions are accounted for on
the date the securities are purchased or sold.
Realized gains and losses are calculated on
the identified-cost basis. Interest income,
including amortization of bond discount and
premium computed on a level-yield basis, is
accrued daily.
OPTION TRANSACTIONS
For hedging purposes, DDJ could buy put and
call options, write covered call options on
portfolio securities, write cash-secured puts,
and write call options that are not covered
for cross-hedging purposes. DDJ also could
write over-the-counter options where the
completion of the obligation is dependent upon
the credit standing of another party.
Effective September 1, 1995, Adjustable Rate
Mortgage Securities Fund may only purchase and
write put and call options which are
exchange-traded and cannot write call options
that are not covered. The risk in writing a
call option is that the fund gives up the
opportunity for profit if the market price of
the security increases. The risk in writing a
put option is that the fund may incur a loss
if the market price of the security decreases
and the option is exercised. The risk in
buying an option is that the fund pays a
premium whether or not the option is
exercised. The fund also has the additional
risk of not being able to enter into a closing
transaction if a liquid secondary market does
not exist.
Option contracts are valued daily, and
unrealized appreciation or depreciation is
recorded. The fund will realize a gain or loss
upon expiration or closing of the option
transaction. When an option is exercised, the
proceeds on sales for a written call option,
the purchase cost for a written put option, or
the cost of a security for a purchased put or
call option is adjusted by the amount of
premium received or paid.
9
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
FUTURES TRANSACTIONS
In order to gain exposure to or protect
against changes in the market, the fund may
buy and sell interest rate futures contracts
and related options. Risks of entering into
futures contracts and related options include
the possibility of an illiquid market and that
a change in the value of the contract or
option may not correlate with changes in the
value of the underlying securities.
Upon entering into a futures contract, the
fund is required to deposit either cash or
securities in an amount (initial margin) equal
to a certain percentage of the contract value.
Subsequent payments (variation margin) are
made or received by the fund each day. The
variation margin payments are equal to the
daily changes in the contract value and are
recorded as unrealized gains and losses. The
fund recognizes the realized gain or loss when
the contract is closed or expires.
INTEREST RATE TRANSACTIONS
To preserve a return or spread on a particular
investment or portion of its portfolio or for
other non-speculative purposes, DDJ could
enter into interest rate swaps and could
purchase or sell interest rate caps and
floors. Effective, September 1, 1995,
Adjustable Rate Mortgage Securities Fund may
purchase and sell interest rate caps and
floors but cannot enter into interest rate
swaps. Interest rate swaps involve the
exchange of commitments to pay or receive
interest, e.g., an exchange of floating rate
payments for fixed rate payments. The purchase
of an interest rate cap entitles the
purchaser, to the extent that a specified
index exceeds a predetermined interest rate,
to receive payments of interest on a
contractually based notional principal amount
from the party selling the interest rate cap.
The purchase of an interest rate floor
entitles the purchaser, to the extent that a
specified index falls below a predetermined
interest rate, to receive payments of interest
on a contractually based notional principal
amount from the party selling the interest
rate floor.
If forecasts of interest rates and other
market factors are incorrect, investment
performance will diminish compared to what
performance would have been if these
investment techniques were not used. Even if
the forecasts are correct, there is risk that
the positions may correlate imperfectly with
the asset or liability being hedged. Other
risks of entering into these transactions are
that a liquid secondary market may not always
exist, or that another party to a transaction
may not perform.
For interest rate swaps, DDJ accrued weekly,
as an increase or decrease to interest income,
the net amount due or owed by the fund.
Interest rate swap, cap and floor valuations
are based on prices quoted by independent
brokers. These valuations represent the net
present value of all future cash settlement
amounts based on implied forward interest
rates.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS
Delivery and payment for securities that have
been purchased by the fund on a
forward-commitment or when-issued basis can
take place one month or more after the
transaction date. During this period, such
securities do not earn interest, are subject
to market fluctuations and may increase or
decrease in value prior to their delivery. The
fund maintains, in a segregated account with
its custodian, cash or securities with a
market value equal to the amount of its
purchase commitments. The purchase of
securities on a when-issued or
forward-commitment basis may increase the
volatility of the fund's NAV to the extent the
fund makes such purchases while remaining
substantially fully invested. As of August 31,
1995, the fund had outstanding when-issued or
forward commitments of $25,109,375.
10
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Consistent with its ability to purchase
securities on a when-issued or forward-
commitment basis, DDJ entered into mortgage
"dollar rolls" in which the fund sold
securities for delivery in the current month
and simultaneously contracted with the same
counterparty to repurchase similar (same type,
coupon and maturity) but not identical
securities. As an inducement to "roll over"
its purchase commitments, the fund received
negotiated fees. For the year ended August 31,
1995, such fees amounted to $300,962.
Effective September 1, 1995, Adjustable Rate
Mortgage Securities Fund will not enter into
mortgage "dollar rolls" but may purchase
securities on a when-issued basis with the
intention of acquiring such securities for its
portfolio.
FEDERAL TAXES
The fund's policy is to comply with the
requirements of the Internal Revenue Code
applicable to regulated investment companies
and not be subject to federal income tax.
Therefore, no income tax provision is
required.
Net investment income and net realized gains
(losses) may differ for financial statement
and tax purposes primarily because of the
recognition of certain foreign currency gains
(losses) as ordinary income for tax purposes,
and losses deferred due to "wash sale" and
"straddle" transactions. The character of
distributions made during the year from net
investment income or net realized gains may
differ from their ultimate characterization
for federal income tax purposes. Also, due to
the timing of dividend distributions, the
fiscal year in which amounts are distributed
may differ from the year that the income or
realized gains (losses) were recorded by the
fund. The fund will elect to utilize
equalization debits, by which a portion of the
fund's payments for tendered shares which
occurred during the year ended August 31,
1995, will reduce undistributed net investment
income for tax purposes.
On the statements of assets and liabilities,
as a result of permanent book-to-tax
differences, a reclassification adjustment has
been made to decrease undistributed net
investment income by $2,813,663, decrease
accumulated net realized losses by $2,690,897
and increase additional paid-in capital by
$122,766.
DISTRIBUTIONS
DDJ paid monthly distributions from net
investment income. Realized capital gains, if
any, were distributed on an annual basis.
These distributions were recorded as of the
close of business on the ex-dividend date.
Such distributions were payable in cash or,
pursuant to the fund's dividend reinvestment
plan, reinvested in additional shares of the
fund's capital stock.
Effective September 1, 1995, Adjustable Rate
Mortgage Securities Fund's distributions to
shareholders from net investment income will
be declared daily and paid monthly in cash or
reinvested in additional shares. Distributions
from net realized gains, if any, will be made
on at least an annual basis.
REPURCHASE AGREEMENTS
For repurchase agreements entered into with
certain broker-dealers, the fund, along with
other affiliated registered investment
companies may transfer uninvested cash
balances into a joint trading account, the
daily aggregate of which is invested in
repurchase agreements secured by U.S.
government and agency obligations. Securities
pledged as collateral for all individual and
joint repurchase agreements are held by the
fund's custodian bank until maturity of the
repurchase agreements. Provisions for all
agreements ensure the daily market value of
the collateral is in excess of the repurchase
amount in the event of default.
11
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(3) EXPENSES
DDJ had entered into the following agreements
with Piper Capital Management Incorporated
(the adviser and administrator):
The investment advisory agreement provided the
adviser with a monthly investment management
fee based on fund's average weekly net assets
computed at the per-annum rate of 0.35%. For
its fee, the adviser provided investment
advice and, in general, conducted the
management and investment activity of the
fund.
The administration agreement provided the
administrator with a monthly fee in an amount
equal to an annualized rate of 0.15% of the
fund's average weekly net assets. For its fee,
the administrator provided certain reporting,
regulatory and record-keeping services for the
fund.
Effective September 1, 1995, Adjustable Rate
Mortgage Securities Fund is subject to an
investment management agreement with Piper
Capital Management Incorporated (Piper
Capital) under which Piper Capital manages the
fund's assets and furnishes related office
facilities, equipment, research and personnel.
The agreement requires the fund to pay Piper
Capital a monthly fee based on its average
daily net assets. The fee is equal to an
annual rate of 0.35% of the first $500 million
in net assets and 0.30% of net assets in
excess of $500 million.
Effective September 1, 1995, Adjustable Rate
Mortgage Securities Fund will pay Piper
Jaffray Inc. (Piper Jaffray) a monthly fee for
expenses incurred in the distribution and
promotion of fund shares. The monthly fee is
limited to a maximum of 1/12th of 0.15% of the
fund's average daily net assets and is payable
as a servicing fee.
In addition to these fees the fund is
responsible for paying most other operating
expenses including outside directors' fees and
expenses, custodian fees, registration fees,
printing and shareholder reports, transfer
agent fees and expenses, legal, auditing and
accounting services, insurance, interest,
taxes and other miscellaneous expenses.
(4) SECURITIES
TRANSACTIONS
Cost of purchases and proceeds from sales of
securities (other than temporary investments
in short-term securities) for the year ended
August 31, 1995, were $162,675,184 and
$400,581,863, respectively.
In order to hedge the value of adjustable rate
mortgage securities under certain interest
rate scenarios, the fund had purchased
four-year U.S. Treasury put option contracts.
As a result of the fund's changing investment
strategies due to the impending merger, these
options were closed in fiscal 1995. The
resulting realized losses are disclosed in the
Statement of Operations.
During the year ended August 31, 1995, the
fund paid Piper Jaffray Inc., an affiliated
broker, brokerage commissions of $1,700.
(5) CAPITAL LOSS
CARRYOVER
For federal income tax purposes, the fund had
capital loss carryovers of $47,094,867 at
August 31, 1995. If these loss carryovers are
not offset by subsequent capital gains, they
will expire at various times during 1999
through 2002. It is unlikely the board of
directors will authorize a distribution of any
net realized capital gains until the available
capital loss carryovers have been offset or
expire.
12
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(6) RETIREMENT OF FUND
SHARES
The board of directors of DDJ approved a plan
to repurchase shares of the fund in the open
market and retire those shares. Repurchases
were only made when the previous day's closing
market price was at a discount from net asset
value. Daily repurchases were limited to 25%
of the previous four weeks average daily
trading volume on the New York Stock Exchange.
Under the plan, cumulative repurchases were
limited to 3% of the total shares originally
issued. The plan was last reviewed and
reapproved by the board of directors on August
18, 1995. Pursuant to the plan, the fund
repurchased and retired 823,000 shares (1.44%
of originally issued shares) as of August 31,
1995.
(7) TENDER OFFER OF
FUND SHARES
On August 22, 1994, shareholders of DDJ
approved a fundamental policy that allowed
shareholders to periodically tender their
shares back to the fund at net asset value.
A tender offer to repurchase up to 25% of the
fund's outstanding shares was mailed to
shareholders on September 6, 1994. The
deadline for participating in the offer was
October 3, 1994. The repurchase price was
determined on October 10, 1994, at the close
of the New York Stock Exchange (4 p.m. Eastern
Time). Proceeds of the tender offer were paid
to shareholders on October 17, 1994. The total
proceeds (including tender fees) paid by the
fund as well as the number and percentage of
shares tendered are as follows:
<TABLE>
<CAPTION>
Percentage Shares Proceeds
Tendered Tendered Paid
--------------- --------- ------------
<S> <C> <C> <C>
16% 9,135,819 $ 79,726,515
</TABLE>
(8) PENDING LITIGATION
On October 20, 1994, a complaint was filed by
Herman D. Gordon in the U.S. District Court
for the District of Minnesota against DDJ,
EDJ, Piper Jaffray Companies Inc. (Piper
Companies), Piper Capital Management
Incorporated (Piper Capital), Piper Jaffray
Inc. (Piper Jaffray) and certain associated
individuals. A second complaint was filed on
April 14, 1995, in the same court by Frank
Donio, I.R.A., and other plaintiffs against
BDJ, CDJ, DDJ and EDJ, Piper Companies, Piper
Capital, Piper Jaffray and certain associated
individuals. Plaintiffs in both actions filed
a Consolidated Amended Class Action Complaint
on May 23, 1995, alleging violations of
certain federal and state securities laws.
Piper Companies and Piper Capital have agreed
to indemnify Piper Funds II Adjustable Rate
Mortgage Securities Fund (as the successor by
merger to BDJ, CDJ, DDJ and EDJ) against any
expenses or losses incurred in connection with
such complaint.
13
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(9) SUBSEQUENT EVENT--
MERGER
At the close of business on September 1, 1995,
BDJ, CDJ, DDJ and EDJ merged into Piper Funds
Inc. - II Adjustable Rate Mortgage Securities
Fund, a diversified, open end management
investment company. DDJ is considered the
surviving entity for financial reporting
purposes.
The following table presents the results of
operations of DDJ for the period from August
31, 1995 to September 1, 1995 and the
subsequent merger of net assets of BDJ, CDJ,
DDJ and EDJ into Adjustable Rate Mortgage
Securities Fund.
<TABLE>
<S> <C>
Net assets of DDJ (surviving entity for financial
reporting purposes) on 8/31/95 ................ $ 409,306,125
Results of operations on 9/1/95:
Net investment income........................... 57,012
Net realized gain (loss) on investments......... (119,150)
Net change in appreciation or depreciation of
investments.................................... 771,219
--------------
Net increase in net assets resulting from
operations..................................... 709,081
--------------
Capital share transactions:
Redemption of 1,000 shares of DDJ for
dissenters' rights............................. (8,710)
--------------
Net assets of DDJ to be merged into Adjustable
Rate Mortgage
Securities Fund................................ 410,006,496
Merger of BDJ, CDJ and EDJ into Adjustable Rate
Mortgage
Securities Fund.................................. 801,742,686
--------------
Net assets of Adjustable Rate Mortgage Securities
Fund on 9/1/95 ................................ $ 1,211,749,182
--------------
--------------
</TABLE>
14
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(10) FINANCIAL
HIGHLIGHTS
Per-share data for a share of capital stock
outstanding throughout each period and
selected information for each period are as
follows:
<TABLE>
<CAPTION>
Period from
Year Year Ended Year Ended 1/30/92* to
Ended 8/31/95 8/31/94 8/31/93 8/31/92
------------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period ........... $ 8.82 9.67 9.74 9.58
------ ---------- ---------- -----------
Operations:
Net investment income .......................... 0.51 0.60 0.69 0.43
Net realized and unrealized gains (losses) on
investments .................................. (0.05) (0.89) (0.10) 0.08
------ ---------- ---------- -----------
Total from operations ........................ 0.46 (0.29) 0.59 0.51
------ ---------- ---------- -----------
Distributions to shareholders:
From net investment income ..................... (0.58) (0.56) (0.66) (0.35)
------ ---------- ---------- -----------
Net asset value, end of period ................. $ 8.70 8.82 9.67 9.74
------ ---------- ---------- -----------
------ ---------- ---------- -----------
SELECTED INFORMATION
Total investment return+ ......................... 5.43% (3.18%) 6.24% 5.49%
Net assets at end of period (in millions) ...... $ 409 500 551 555
Ratio of expenses to average weekly net assets ... 0.63% 0.60% 0.58% 0.58%++
Ratio of net investment income to average weekly
net assets ..................................... 5.62% 6.39% 7.25% 7.70%++
Portfolio turnover rate (excluding short-term
securities) .................................... 36% 39% 39% 41%
Amount of borrowings outstanding at end of period
(in millions)** .............................. $ -- 145 145 145
Average amount of borrowings outstanding during
the period (in millions) ..................... $ 57 145 149 90
Average number of shares outstanding during the
period (in millions) ........................... 49 57 57 48
Average per-share amount of borrowings outstanding
during the period ............................ $ 1.19 2.55 2.62 1.82
</TABLE>
* COMMENCEMENT OF OPERATIONS OF AMERICAN ADJUSTABLE RATE TERM TRUST 1998.
** AMERICAN ADJUSTABLE RATE TERM TRUST 1998 WAS A CLOSED-END INVESTMENT
MANAGEMENT COMPANY AND WAS PERMITTED TO ENTER INTO BORROWINGS FOR OTHER
THAN TEMPORARY OR EMERGENCY PURPOSES. ADJUSTABLE RATE MORTGAGE SECURITIES
FUND MAY BORROW ONLY FOR TEMPORARY OR EMERGENCY PURPOSES.
+ TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE, ASSUMES
REINVESTMENT OF DISTRIBUTIONS AT NET ASSET VALUE AND DOES NOT REFLECT A
SALES CHARGE.
++ ADJUSTED TO AN ANNUAL BASIS.
(11) QUARTERLY DATA
(UNAUDITED)
<TABLE>
<CAPTION>
Net Realized Net Increase
Total and Unrealized (Decrease) in Net Distributions Quarter End
Investment Net Investment Gains (Losses) Assets Resulting From Net Investment Net Asset
Quarter Ended Income Income on Investments from Operations Income Value
- ------------------ ---------- ----------------- ------------------- ------------------ ------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Per Per Per
Amount Share Amount Share Amount Share Amount Share
---------- ----- ----------- ----- ---------- ----- ----------- -----
11/30/94 $ 7,489,262 6,794,744 0.14 (13,697,529) (0.27) (6,902,785) (0.13) (6,183,665) (0.13) 8.56
2/28/95 5,803,517 5,246,655 0.11 5,743,189 0.13 10,989,844 0.24 (6,027,339) (0.13) 8.67
5/31/95 6,436,106 5,797,320 0.13 4,308,420 0.09 10,105,740 0.22 (6,004,113) (0.13) 8.76
8/31/95 6,396,441 5,660,707 0.13 442,761 -- 6,103,468 0.13 (9,530,890) (0.19) 8.70
---------- ---------- ----- ----------- ----- ---------- ----- ----------- -----
$ 26,125,326 23,499,426 0.51 (3,203,159) (0.05) 20,296,267 0.46 (27,746,007) (0.58)
---------- ---------- ----- ----------- ----- ---------- ----- ----------- -----
---------- ---------- ----- ----------- ----- ---------- ----- ----------- -----
</TABLE>
15
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
ADJUSTABLE RATE MORTGAGE SECURITIES FUND*
AUGUST 31, 1995
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ---------- -----------
<S> <C> <C>
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS)
U.S. GOVERNMENT SECURITIES (10.2%):
U.S. Treasury Note, 4.75%, 2/15/97 ................. $ 27,000,000 26,613,359
U.S. Treasury Note, 6.38%, 6/30/97 ................... 15,000,000 15,150,000
-----------
Total U.S. Government Securities
(cost: $41,878,373) ................................ 41,763,359
-----------
MORTGAGE-BACKED SECURITIES (75.7%):
U.S. AGENCY ADJUSTABLE RATE MORTGAGES (42.6%):
7.45%, FHLMC, 2/1/22 ................................. 10,785,510 10,932,733
7.81%, FHLMC, 2/1/22 ................................. 15,722,930 16,198,549
7.52%, FHLMC, 8/1/23 ................................. 6,351,483 6,530,849
7.13%, FHLMC, 11/1/16 ................................ 3,475,532 3,526,414
8.00%, FHLMC, 5/1/17 ................................. 3,581,365 3,639,956
7.74%, FHLMC, 1/1/21 ................................. 5,837,805 5,945,688
6.13%, FHLMC, 10/1/23 ................................ 2,929,008 2,974,319
7.54%, FNMA, 9/1/17 .................................. 3,837,284 3,908,043
7.29%, FNMA, 5/1/18 .................................. 5,921,419 6,029,485
7.23%, FNMA, 7/1/17 .................................. 6,204,118 6,320,011
7.80%, FNMA, 7/1/19 .................................. 2,756,865 2,832,320
7.53%, FNMA, 11/1/20 ................................. 5,057,917 5,073,698
7.23%, FNMA, 11/1/17 ................................. 9,818,814 9,931,141
7.89%, FNMA, 7/1/19 .................................. 3,970,383 4,083,658
7.41%, FNMA, 11/1/21 ................................. 7,031,651 7,165,674
7.31%, FNMA, 10/1/20 ................................. 3,445,723 3,355,272
7.01%, FNMA, 12/1/23 ................................. 1,528,113 1,567,935
6.09%, FNMA, 2/1/24 .................................. 3,863,831 3,945,512
6.00%, GNMA II, 7/20/22 .............................. 8,224,187 8,303,139
6.50%, GNMA II, 7/20/22 .............................. 7,882,746 7,985,142
7.00%, GNMA II, 5/20/22 .............................. 3,033,839 3,071,246
7.00%, GNMA II, 6/20/22 .............................. 8,463,131 8,582,969
7.38%, GNMA II, 6/20/23 .............................. 8,072,570 8,205,121
7.00%, GNMA II, 8/20/23 .............................. 8,920,228 9,050,464
6.00%, GNMA II, 9/1/25 ............................... 25,000,000(b) 25,015,750
-----------
174,175,088
-----------
COLLATERALIZED MORTGAGE OBLIGATIONS AND
OTHER MORTGAGE-BACKED SECURITIES (C) (33.1%):
U.S. AGENCY FIXED RATE (0.5%):
8.13%, FNMA, Series 1991-66, Class E, 4/25/18 ........ 2,125,025 2,119,266
-----------
U.S. AGENCY FLOATING RATE (11.1%):
6.44%, FHLMC, Series 1377, Class F, LIBOR, 9/15/07 ... 5,855,599 5,835,222
6.44%, FHLMC, Series 1401, Class K, LIBOR, 9/15/20 ... 2,520,900 2,530,706
6.34%, FHLMC, Series 1508, Class J, LIBOR, 9/15/19 ... 3,025,788 3,025,577
6.44%, FHLMC, Series 1603, Class G, LIBOR, 4/15/21 ... 1,670,525 1,677,424
6.29%, FHLMC, Series 1724, Class F, LIBOR, 5/15/01 ... 12,499,787 12,498,662
6.50%, FHLMC, Series 29, Class FA, LIBOR, 3/25/23 .... 7,000,000 7,025,760
6.57%, FNMA, Series 1992-144, Class FA, LIBOR,
9/25/07 ............................................. 2,153,548 2,162,937
6.42%, FNMA, Series 1994-87, Class F, LIBOR,
3/25/09 ............................................. 10,478,681 10,477,529
-----------
45,233,817
-----------
</TABLE>
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ---------- -----------
<S> <C> <C>
PRIVATE FLOATING RATE (21.5%):
7.79%, Donaldson, Lufkin and Jenrette, Series
1992-MF3, Class A3, 5/25/22 ....................... $ 5,000,000 5,078,125
7.94%, Merrill Lynch Mortgage Investor, Series 1988-V,
1/25/19 ............................................. 986,446 971,649
6.73%, Merrill Lynch Mortgage Investors, Series
1992-C, Class A-2, 6/15/17 .......................... 25,000,000 25,136,700
7.69%, Residential Funding Corporation, Series
1992-S25, Class A, 3/25/22 .......................... 11,294,780 11,402,708
7.81%, Residential Funding Corporation, Series
1993-S8, Class A, 2/25/23 ........................... 7,469,956 7,620,888
7.55%, Resolution Trust Corporation, Series 1992-4,
Class B2, 7/25/28 ................................... 10,000,426 9,553,532
7.73%, Resolution Trust Corporation, Series 1992-6,
Class B3, 1/25/26 ................................... 13,342,997 13,342,997
7.15%, Sears Mortgage Securities, Series 1991-K, Class
A1, 9/25/21 ......................................... 15,175,623 15,061,808
-----------
88,168,407
-----------
Total Mortgage-Backed Securities
(cost: $313,756,064) .............................. 309,696,578
-----------
SHORT-TERM SECURITIES (17.3%):
Repurchase agreement with Goldman Sachs in a joint
trading account collateralized by U.S. government
agency securities, acquired on 8/31/95, accrued
interest at repurchase date of $11,275, 5.82%, 9/1/95
(cost: $70,714,000) ................................. 70,714,000 70,714,000
-----------
Total Investments in Securities
(cost: $426,348,437) (d) ......................... $ 422,173,937
-----------
-----------
</TABLE>
NOTES TO INVESTMENTS IN SECURITIES:
(A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO
THE FINANCIAL STATEMENTS.
(B) ON AUGUST 31, 1995, THE TOTAL COST OF INVESTMENTS PURCHASED ON A
WHEN-ISSUED BASIS WAS $25,109,375.
(C) DESCRIPTIONS OF CERTAIN COLLATERALIZED MORTGAGE OBLIGATIONS ARE AS FOLLOWS:
LIBOR - LONDON INTERBANK OFFERED RATE.
FLOATING RATE - REPRESENT SECURITIES THAT PAY INTEREST AT RATES THAT
INCREASE (DECREASE) WITH AN INCREASE (DECREASE) IN A SPECIFIED INDEX.
(D) ALSO REPRESENTS COST FOR FEDERAL INCOME TAX PURPOSES. THE AGGREGATE GROSS
UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED
ON THIS COST WERE AS FOLLOWS:
<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION .... $ 148,172
GROSS UNREALIZED DEPRECIATION ...... (4,322,672)
----------
NET UNREALIZED APPRECIATION: ... $ (4,174,500)
----------
----------
</TABLE>
* FORMERLY AMERICAN ADJUSTABLE RATE TERM TRUST 1998
16
<PAGE>
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
PIPER FUNDS INC. - II ADJUSTABLE RATE MORTGAGE SECURITIES FUND:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments in securities, of Piper Funds Inc. - II Adjustable
Rate Mortgage Securities Fund (formerly American Adjustable Rate Term Trust Inc.
- - 1998) as of August 31, 1995, and the related statements of operations and cash
flows for the year then ended, the statements of changes in net assets for each
of the years in the two-year period ended August 31, 1995 and the financial
highlights presented in footnote 10 to the financial statements. These financial
statements and the financial highlights are the responsibility of the fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased and sold but not received or delivered, we
request confirmations from brokers and, where replies are not received, we carry
out other appropriate auditing procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Piper Funds Inc. - II
Adjustable Rate Mortgage Securities Fund (formerly American Adjustable Rate Term
Trust Inc. - 1998) as of August 31, 1995, the results of its operations and cash
flows for the year then ended, the changes in its net assets for each of the
years in the two-year period ended August 31, 1995 and the financial highlights
presented in footnote 10 to the financial statements, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
October 13, 1995
17
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
AUGUST 31, 1995
<TABLE>
<CAPTION>
American American American
Adjustable Adjustable Adjustable
Rate Term Rate Term Rate Term
Trust 1996 Trust 1997 Trust 1999
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS:
Investments in securities at market value*
(including repurchase agreements of
$14,394,000; $54,501,000 and $49,871,000,
respectively) (note 2) .................. $ 186,645,080 373,531,591 256,753,174
Cash in bank on demand deposit .............. 100,302 750,846 102,236
Receivable for investment securities sold ... -- 2,760,877 1,583,544
Receivable for put options closed ........... 100 35,200 --
Accrued interest receivable ................. 1,068,066 2,230,059 1,371,910
Mortgage security principal paydowns
receivable ................................ 1,046,771 736,142 1,723,902
------------ ------------ ------------
Total assets ............................ 188,860,319 380,044,715 261,534,766
------------ ------------ ------------
LIABILITIES:
Payable for investment securities purchased
on a when-issued basis (note 2) ........... -- 10,043,750 20,087,500
Accrued investment management fee ........... 57,256 111,084 71,756
Accrued administrative fee .................. 24,538 47,608 30,753
------------ ------------ ------------
Total liabilities ....................... 81,794 10,202,442 20,190,009
------------ ------------ ------------
Net assets applicable to outstanding capital
stock ..................................... $ 188,778,525 369,842,273 241,344,757
------------ ------------ ------------
------------ ------------ ------------
REPRESENTED BY:
Capital stock - authorized 1 billion shares
of $0.01 par value; outstanding,
21,846,582; 42,433,699 and 28,114,172
shares, respectively ...................... 218,466 424,337 281,142
Additional paid-in capital .................. 211,965,074 413,266,384 274,572,715
Accumulated net realized loss on
investments ............................... (21,547,695) (41,083,019) (31,946,977)
Unrealized depreciation of investments ...... (1,857,320) (2,765,429) (1,562,123)
------------ ------------ ------------
Total - representing net assets
applicable to outstanding capital
stock ................................ $ 188,778,525 369,842,273 241,344,757
------------ ------------ ------------
------------ ------------ ------------
Net asset value per share of outstanding
capital stock ............................. $ 8.64 8.72 8.58
------------ ------------ ------------
------------ ------------ ------------
* Investments in securities at identified
cost ...................................... $ 188,502,400 376,297,020 258,315,297
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 1995
<TABLE>
<CAPTION>
American American American
Adjustable Adjustable Adjustable
Rate Term Rate Term Rate Term
Trust 1996 Trust 1997 Trust 1999
------------ ------------ ------------
<S> <C> <C> <C>
INCOME:
Interest (net of interest expense of $1,525,774;
$3,877,530 and $2,047,360, respectively) ... $ 12,520,399 23,582,776 15,318,759
Fee income (note 2) ............................ 130,648 356,398 197,723
------------ ------------ ------------
Total investment income .................... 12,651,047 23,939,174 15,516,482
------------ ------------ ------------
EXPENSES (NOTE 3):
Investment management fee ...................... 707,664 1,335,931 856,890
Administrative fee ............................. 303,285 572,542 367,239
Custodian, accounting and transfer agent
fees ......................................... 141,073 196,056 136,121
Reports to shareholders ........................ 113,392 187,950 104,909
Directors' fees ................................ 15,711 22,661 22,661
Audit and legal fees ........................... 69,473 74,040 67,639
Federal excise tax expense (note 2) ............ 87,791 -- --
Other expenses ................................. 59,534 63,377 83,071
------------ ------------ ------------
Total expenses ............................. 1,497,923 2,452,557 1,638,530
------------ ------------ ------------
Net investment income ...................... 11,153,124 21,486,617 13,877,952
------------ ------------ ------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON
INVESTMENTS:
Net realized loss on investments (note 4) ...... (3,157,265) (6,307,138) (7,106,564)
Net realized loss on closed put option contracts
(note 4) ..................................... (1,528,700) (2,494,400) (870,500)
Net realized gain (loss) on closed interest rate
swap transactions ............................ 527,325 1,284,681 (7,968,122)
Net realized gain on closed futures
contracts .................................... 75,712 148,300 116,228
------------ ------------ ------------
Net realized loss on investments ............. (4,082,928) (7,368,557) (15,828,958)
Net change in unrealized appreciation or
depreciation of investments .................. 4,093,903 7,457,863 12,552,689
------------ ------------ ------------
Net gain (loss) on investments ............... 10,975 89,306 (3,276,269)
------------ ------------ ------------
Net increase in net assets resulting from
operations .............................. $ 11,164,099 21,575,923 10,601,683
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED AUGUST 31, 1995
<TABLE>
<CAPTION>
American American American
Adjustable Adjustable Adjustable
Rate Term Rate Term Rate Term
Trust 1996 Trust 1997 Trust 1999
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and fee income ................ $ 12,651,047 23,939,174 15,516,482
Expenses ................................. (1,497,923) (2,452,557) (1,638,530)
------------- ------------- -------------
Net investment income ................ 11,153,124 21,486,617 13,877,952
------------- ------------- -------------
Adjustments to reconcile net investment
income to cash provided by operating
activities:
Change in accrued interest and mortgage
security principal paydowns
receivable ............................ 707,294 370,513 (428,229)
Net amortization of bond discount and
premium ............................... (1,330,614) (3,619,847) (1,804,080)
Change in accrued fees and expenses .... (284,376) (373,189) (167,712)
------------- ------------- -------------
Total adjustments .................... (907,696) (3,622,523) (2,400,021)
------------- ------------- -------------
Net cash provided by operating
activities .......................... 10,245,428 17,864,094 11,477,931
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments ....... 160,411,931 370,520,124 264,553,164
Purchases of investments ................. (56,156,777) (168,270,994) (131,072,083)
Net sales of short-term securities ....... 19,391,621 3,383,866 12,489,307
Cash received (paid) for interest rate
swap transactions ...................... 527,325 1,284,681 (9,245,203)
Net variation margin receipts for futures
contracts .............................. 75,712 148,300 116,228
Receipts from closed put option
contracts .............................. -- 46,000 1,139,500
------------- ------------- -------------
Net cash provided by investing
activities .......................... 124,249,812 207,111,977 137,980,913
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Tender of fund shares (note 7) ........... (42,903,162) (65,042,645) (47,240,592)
Net payments for reverse repurchase
agreements ............................. (70,000,000) (125,000,000) (85,000,000)
Retirement of fund shares (note 6) ....... (1,454,560) (3,544,849) (2,045,751)
Distributions paid to shareholders ....... (20,175,730) (30,683,252) (15,320,596)
------------- ------------- -------------
Net cash used by financing
activities .......................... (134,533,452) (224,270,746) (149,606,939)
------------- ------------- -------------
Net increase (decrease) in cash .......... (38,212) 705,325 (148,095)
Cash at beginning of year ................ 138,514 45,521 250,331
------------- ------------- -------------
Cash at end of year ................ $ 100,302 750,846 102,236
------------- ------------- -------------
------------- ------------- -------------
Supplemental disclosure of cash flow
information:
Cash paid for interest on reverse
repurchase agreements ................ $ 1,789,441 4,219,747 2,191,535
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
AMERICAN ADJUSTABLE RATE TERM TRUST 1996
<TABLE>
<CAPTION>
Year Ended Year Ended
8/31/95 8/31/94
------------ ------------
<S> <C> <C>
OPERATIONS:
Net investment income .................................. $ 11,153,124 17,520,126
Net realized loss on investments ......................... (4,082,928) (10,318,058)
Net change in unrealized appreciation or depreciation of
investments ............................................ 4,093,903 (9,945,239)
------------ ------------
Net increase (decrease) in net assets resulting from
operations ............................................ 11,164,099 (2,743,171)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ............................... (20,175,730) (12,495,376)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Payments for tender of 4,767,018 shares (note 7) ......... (42,903,162) --
Payments for retirement of 173,700 and 142,700 shares,
respectively (note 6) .................................. (1,394,350) (1,215,470)
------------ ------------
Decrease in net assets from capital share
transactions .......................................... (44,297,512) (1,215,470)
------------ ------------
Total decrease in net assets ......................... (53,309,143) (16,454,017)
Net assets at beginning of year ............................ 242,087,668 258,541,685
------------ ------------
Net assets at end of year ................................ $ 188,778,525 242,087,668
------------ ------------
------------ ------------
Undistributed net investment income ...................... $ -- 10,238,410
------------ ------------
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
AMERICAN ADJUSTABLE RATE TERM TRUST 1997
<TABLE>
<CAPTION>
Year Ended Year Ended
8/31/95 8/31/94
------------ ------------
<S> <C> <C>
OPERATIONS:
Net investment income .................................. $ 21,486,617 31,764,264
Net realized loss on investments ......................... (7,368,557) (23,803,088)
Net change in unrealized appreciation or depreciation of
investments ............................................ 7,457,863 (19,413,596)
------------ ------------
Net increase (decrease) in net assets resulting from
operations ............................................ 21,575,923 (11,452,420)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ............................... (30,683,252) (26,867,223)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Payments for tender of 7,396,113 shares (note 7) ......... (65,042,645) --
Payments for retirement of 420,100 and 290,700 shares,
respectively (note 6) .................................. (3,396,318) (2,437,499)
------------ ------------
Decrease in net assets from capital share
transactions .......................................... (68,438,963) (2,437,499)
------------ ------------
Total decrease in net assets ......................... (77,546,292) (40,757,142)
Net assets at beginning of year ............................ 447,388,565 488,145,707
------------ ------------
Net assets at end of year ................................ $ 369,842,273 447,388,565
------------ ------------
------------ ------------
Undistributed net investment income ...................... $ -- 11,548,663
------------ ------------
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
AMERICAN ADJUSTABLE RATE TERM TRUST 1999
<TABLE>
<CAPTION>
Year Ended Year Ended
8/31/95 8/31/94
------------ ------------
<S> <C> <C>
OPERATIONS:
Net investment income .................................. $ 13,877,952 20,160,682
Net realized loss on investments ......................... (15,828,958) (17,443,179)
Net change in unrealized appreciation or depreciation of
investments ............................................ 12,552,689 (14,015,353)
------------ ------------
Net increase (decrease) in net assets resulting from
operations ............................................ 10,601,683 (11,297,850)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ............................... (15,320,596) (19,270,500)
In excess of net realized gains (note 2) ................. -- (183,586)
------------ ------------
Total distributions .................................... (15,320,596) (19,454,086)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Payments for tender of 5,535,062 shares (note 7) ......... (47,240,592) --
Payments for retirement of 237,000 and 205,100 shares,
respectively (note 6) .................................. (1,854,628) (1,674,424)
------------ ------------
Decrease in net assets from capital share
transactions .......................................... (49,095,220) (1,674,424)
------------ ------------
Total decrease in net assets ......................... (53,814,133) (32,426,360)
Net assets at beginning of year ............................ 295,158,890 327,585,250
------------ ------------
Net assets at end of year ................................ $ 241,344,757 295,158,890
------------ ------------
------------ ------------
Undistributed net investment income ...................... $ -- 2,115,191
------------ ------------
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION
American Adjustable Rate Term Trusts 1996
(BDJ), 1997 (CDJ) and 1999 (EDJ) are
registered under the Investment Company Act of
1940 (as amended) as diversified, closed-end
management investment companies. BDJ, CDJ and
EDJ commenced operations on September 27,
1990; July 24, 1991; and September 24, 1992;
respectively, upon completion of initial
public offerings of common stock. Shares of
the funds stopped trading on the New York
Stock Exchange and the Chicago Stock Exchange
on August 24, 1995. As discussed in footnote
9, the funds' shareholders approved a plan to
merge all of the funds' net assets, along with
the net assets of American Adjustable Rate
Term Trust 1998 (DDJ) into Piper Funds Inc. -
II Adjustable Rate Mortgage Securities Fund, a
diversified, open-end investment company,
effective September 1, 1995.
(2) SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES
INVESTMENTS IN SECURITIES
The values of fixed income securities are
determined using pricing services or prices
quoted by independent brokers. Exchange-listed
options are valued at the last sale price and
open financial futures contracts are valued at
the last settlement price. When market
quotations are not readily available,
securities are valued at fair value according
to methods selected in good faith by the board
of directors. Short-term securities with
maturities of 60 days or less are valued at
amortized cost which approximates market
value.
Securities transactions are accounted for on
the date the securities are purchased or sold.
Realized gains and losses are calculated on
the identified-cost basis. Interest income,
including amortization of bond discount and
premium computed on a level-yield basis, is
accrued daily.
OPTION TRANSACTIONS
For hedging purposes, the funds may buy and
sell put and call options, write covered call
options on portfolio securities, write
cash-secured puts, and write call options that
are not covered for cross-hedging purposes.
The risk in writing a call option is that a
fund gives up the opportunity for profit if
the market price of the security increases.
The risk in writing a put option is that a
fund may incur a loss if the market price of
the security decreases and the option is
exercised. The risk in buying an option is
that a fund pays a premium whether or not the
option is exercised. A fund also has the
additional risk of not being able to enter
into a closing transaction if a liquid
secondary market does not exist. The funds
also may write over-the-counter options where
the completion of the obligation is dependent
upon the credit standing of another party.
Option contracts are valued daily, and
unrealized appreciation or depreciation is
recorded. A fund will realize a gain or loss
upon expiration or closing of the option
transaction. When an option is exercised, the
proceeds on sales for a written call option,
the purchase cost for a written put option, or
the cost of a security for a purchased put or
call option is adjusted by the amount of
premium received or paid.
FUTURES TRANSACTIONS
In order to gain exposure to or protect
against changes in the market, the funds may
buy and sell interest rate futures contracts
and related options. Risks of entering into
futures contracts and related options include
the possibility of an illiquid market and that
a change in the value of the contract or
option may not correlate with changes in the
value of the underlying securities.
Upon entering into a futures contract, the
fund is required to deposit either cash or
securities in an amount (initial margin) equal
to a certain percentage of the contract
24
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
value. Subsequent payments (variation margin)
are made or received by a fund each day. The
variation margin payments are equal to the
daily changes in the contract value and are
recorded as unrealized gains and losses. A
fund recognizes a realized gain or loss when
the contract is closed or expires.
INTEREST RATE TRANSACTIONS
To preserve a return or spread on a particular
investment or portion of its portfolio or for
other non-speculative purposes, the funds may
enter into interest rate swaps and the
purchase or sale of interest rate caps and
floors. Interest rate swaps involve the
exchange of commitments to pay or receive
interest, e.g., an exchange of floating rate
payments for fixed rate payments. The purchase
of an interest rate cap entitles the
purchaser, to the extent that a specified
index exceeds a predetermined interest rate,
to receive payments of interest on a
contractually based notional principal amount
from the party selling the interest rate cap.
The purchase of an interest rate floor
entitles the purchaser, to the extent that a
specified index falls below a predetermined
interest rate, to receive payments of interest
on a contractually based notional principal
amount from the party selling the interest
rate floor.
If forecasts of interest rates and other
market factors are incorrect, investment
performance will diminish compared to what
performance would have been if these
investment techniques were not used. Even if
the forecasts are correct, there is risk that
the positions may correlate imperfectly with
the asset or liability being hedged. Other
risks of entering into these transactions are
that a liquid secondary market may not always
exist, or that another party to a transaction
may not perform.
For interest rate swaps, the funds accrue
weekly, as an increase or decrease to interest
income, the current net amount due or owed by
the funds. Interest rate swap, cap and floor
valuations are based on prices quoted by
independent brokers. These valuations
represent the net present value of all future
cash settlement amounts based on implied
forward interest rates. As of August 31, 1995,
the funds had no open interest rate swap
agreements.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS
Delivery and payment for securities that have
been purchased by the funds on a
forward-commitment or when-issued basis can
take place one month or more after the
transaction date. During this period, such
securities do not earn interest, are subject
to market fluctuations and may increase or
decrease in value prior to their delivery. The
funds maintain, in segregated accounts with
their custodian, securities with a market
value equal to the amount of their purchase
commitments. The purchase of securities on a
when-issued or forward-commitment basis may
increase the volatility of the funds' NAVs to
the extent the funds make such purchases while
remaining substantially fully invested. As of
August 31, 1995, CDJ and EDJ had $10,043,750
and $20,087,500 of outstanding when-issued or
forward commitments, respectively.
Consistent with their ability to purchase
securities on a when-issued or forward-
commitment basis, the funds may enter into
mortgage "dollar rolls" in which the funds
sell securities for delivery in the current
month and simultaneously contract with the
same counterparty to repurchase similar (same
type, coupon and maturity) but not identical
securities. As an inducement to "roll over"
their purchase commitments, the funds receive
negotiated fees. For the year ended August 31,
1995, such fees earned by the funds amounted
to $130,648; $356,398 and $197,723 for BDJ,
CDJ and EDJ, respectively.
25
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
FEDERAL TAXES
Each fund's policy is to comply with the
requirements of the Internal Revenue Code
applicable to regulated investment companies
and not be subject to federal income tax.
Therefore, no income tax provision is
required. However, BDJ incurred federal excise
taxes of $87,791 ($0.004 per share) on income
retained by the fund during the 1994 excise
tax year.
Net investment income and net realized gains
(losses) may differ for financial statement
and tax purposes primarily because of the
recognition of certain foreign currency gains
(losses) as ordinary income for tax purposes,
and losses deferred due to "wash sale" and
"straddle" transactions. The character of
distributions made during the year from net
investment income or net realized gains may
differ from their ultimate characterization
for federal income tax purposes. The effect on
dividend distributions of certain book-to-tax
differences is presented an as "excess
distribution" in the statement of changes in
net assets and the financial highlights. Also,
due to the timing of dividend distributions,
the fiscal year in which amounts are
distributed may differ from the year that the
income or realized gains (losses) were
recorded by the fund. The funds will elect to
utilize equalization debits, by which a
portion of the funds' payments for tendered
shares which occurred during the year ended
August 31, 1995, will reduce undistributed net
investment income for tax purposes.
On the statements of assets and liabilities,
as a result of permanent book-to-tax
differences, reclassification adjustments have
been made as follows:
<TABLE>
<CAPTION>
BDJ CDJ EDJ
--------- --------- ----------
<S> <C> <C> <C>
Decrease accumulated net realized loss
on investments ..................... $ 1,242,744 2,160,720 1,694,852
Decrease undistributed net investment
income ............................. $ 1,215,804 2,352,028 672,547
Increase (decrease) additional paid-in
capital ............................ $ (26,940) 191,308 (1,022,305)
</TABLE>
DISTRIBUTIONS
The funds pay monthly distributions from net
investment income. Realized capital gains, if
any, will be distributed on an annual basis.
These distributions are recorded as of the
close of business on the ex-dividend date.
Such distributions are payable in cash or,
pursuant to the funds' dividend reinvestment
plan, reinvested in additional shares of the
funds' common stock. Under the plan, fund
shares are purchased in the open market.
REPURCHASE AGREEMENTS
For repurchase agreements entered into with
certain broker-dealers, the funds along with
other affiliated registered investment
companies may transfer uninvested cash
balances into a joint trading account, the
daily aggregate of which is invested in
repurchase agreements secured by U.S.
government and agency obligations. Securities
pledged as collateral for all individual and
joint repurchase agreements are held by the
funds' custodian bank until maturity of the
repurchase agreements. Provisions for all
agreements ensure the daily market value of
the collateral is in excess of the repurchase
amount in the event of default.
26
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(3) EXPENSES
The funds have entered into the following
agreements with Piper Capital Management
Incorporated (the adviser and administrator):
The investment advisory agreement provides the
adviser with a monthly investment management
fee based on each fund's average weekly net
assets computed at the per-annum rate of
0.35%. For its fee, the adviser provides
investment advice and, in general, conducts
the management and investment activity of the
fund.
The administration agreement provides the
administrator with a monthly fee in an amount
equal to an annualized rate of 0.15% of the
each fund's average weekly net assets. For its
fee, the administrator provides certain
reporting, regulatory and record-keeping
services for the funds.
In addition to the investment management fee
and the administrative fee, the funds are
responsible for paying most other operating
expenses including outside directors' fees and
expenses, custodian fees, registration fees,
printing and shareholder reports, transfer
agent fees and expenses, legal, auditing and
accounting services, insurance, interest,
taxes and other miscellaneous expenses.
(4) SECURITIES
TRANSACTIONS
Cost of purchases and proceeds from sales of
securities (other than temporary investments
in short-term securities) for the year ended
August 31, 1995, were as follows:
<TABLE>
<CAPTION>
Sales
Purchases Proceeds
------------ ------------
<S> <C> <C>
BDJ ......................................... $ 33,098,233 160,411,931
CDJ ......................................... $ 117,981,466 373,281,001
EDJ ......................................... $ 113,965,226 266,136,708
</TABLE>
During the year ended August 31, 1995, the
funds paid Piper Jaffray Inc., an affiliated
broker, brokerage commissions of $850; $1,700
and $850 for BDJ, CDJ and EDJ, respectively.
In order to hedge the value of adjustable rate
mortgage securities under certain interest
rate scenarios, each fund had purchased
four-year U.S. Treasury note put option
contracts. As a result of the funds' changing
investment strategies due to the impending
merger, these options were closed in fiscal
1995. The resulting realized losses are
disclosed in the Statement of Operations.
(5) CAPITAL LOSS
CARRYOVER
For federal income tax purposes, the funds had
capital loss carryovers of $21,547,695;
$41,083,019 and $31,946,977 for BDJ, CDJ and
EDJ, respectively, at August 31, 1995. If
these loss carryovers are not offset by
subsequent capital gains, they will expire at
various times during 1998 through 2002.
(6) RETIREMENT OF FUND
SHARES
The funds' board of directors approved a plan
to repurchase shares of the funds in the open
market and retire those shares. Repurchases
are only made when the previous day's closing
market price was at a discount from net asset
value. Daily repurchases are limited to 25% of
the previous four weeks average daily trading
volume on the New York Stock Exchange. Under
the current plan, cumulative repurchases in
each fund cannot exceed 3% of the total shares
originally issued. The plan was last reviewed
and reapproved by the board of directors on
August 18, 1995. Pursuant to the plan, the
funds have repurchased and retired the
following cumulative number of shares as of
August 31, 1995:
<TABLE>
<CAPTION>
Shares Percent of Shares
Repurchased Originally Issued
------------ -------------------
<S> <C> <C>
BDJ ....................................... 316,400 1.17%
CDJ ....................................... 710,800 1.41%
EDJ ....................................... 442,100 1.30%
</TABLE>
27
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(7) TENDER OFFER OF
FUND SHARES
On August 22, 1994, shareholders of the funds
approved a fundamental policy that allows
shareholders of BDJ, CDJ and EDJ to
periodically tender their shares back to the
respective fund at net asset value.
A tender offer to repurchase up to 25% of each
fund's outstanding shares was mailed to
shareholders on September 6, 1994. The
deadline for participating in the offer was
October 3, 1994. The repurchase prices were
determined on October 10, 1994, at the close
of the New York Stock Exchange (4 p.m. Eastern
Time). Proceeds of the tender offer were paid
to shareholders on October 17, 1994. The total
proceeds (including tender fees) paid by the
funds as well as the number and percentage of
shares tendered are as follows:
<TABLE>
<CAPTION>
Percentage Shares Proceeds
Tendered Tendered Paid
--------------- --------- ------------
<S> <C> <C> <C>
BDJ ................................. 18% 4,767,018 $ 42,903,162
CDJ ................................. 15% 7,396,113 $ 65,042,645
EDJ ................................. 16% 5,535,062 $ 47,240,592
</TABLE>
(8) PENDING LITIGATION
On October 20, 1994, a complaint was filed by
Herman D. Gordon in the U.S. District Court
for the District of Minnesota against DDJ and
EDJ, Piper Jaffray Companies Inc. (Piper
Companies), Piper Capital Management
Incorporated (Piper Capital), Piper Jaffray
Inc. (Piper Jaffray) and certain associated
individuals. A second complaint was filed on
April 14, 1995, in the same court by Frank
Donio, I.R.A., and other plaintiffs against
BDJ, CDJ, DDJ and EDJ, Piper Companies, Piper
Capital, Piper Jaffray and certain associated
individuals. Plaintiffs in both actions filed
a Consolidated Amended Class Action Complaint
on May 23, 1995, alleging violations of
certain federal and state securities laws.
Piper Companies and Piper Capital have agreed
to indemnify Piper Funds II Adjustable Rate
Mortgage Securities Fund (as the successor by
merger to BDJ, CDJ, DDJ and EDJ) against any
expenses or losses incurred in connection with
such complaint.
28
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(9) SUBSEQUENT EVENT--
MERGER
At the close of business on September 1, 1995,
BDJ, CDJ, DDJ and EDJ merged into Piper Funds
Inc. - II Adjustable Rate Mortgage Securities
Fund, a diversified, open-end management
investment company. DDJ is considered the
surviving entity for financial reporting
purposes.
The following table presents the results of
operations of BDJ, CDJ and EDJ for the period
from August 31, 1995 to September 1, 1995, and
the subsequent merger of the net assets of
those funds into Piper Funds Inc. - II
Adjustable Rate Mortgage Securities Fund.
<TABLE>
<CAPTION>
BDJ CDJ EDJ
------------ ------------ ------------
<S> <C> <C> <C>
Net assets on 8/31/95 ................ $ 188,778,525 369,842,273 241,344,757
Results of operations on 9/1/95:
Net investment income ................ 27,390 50,782 33,372
Net realized gain (loss) on
investments ......................... (265,318) (110,668) 4,106
Net change in appreciation or
depreciation of investments ......... 426,963 1,018,376 600,778
------------ ------------ ------------
Net increase in net assets resulting
from operations ..................... 189,035 958,490 638,256
------------ ------------ ------------
Capital share transactions:
Redemption of 1,000 shares for
dissenters' rights .................. (8,650) -- --
------------ ------------ ------------
Net assets prior to merger on 9/1/95 ... 188,958,910 370,800,763 241,983,013
Merger into Piper Funds Inc. - II
Adjustable Rate Mortgage Securities
Fund on 9/1/95 representing 21,845,582;
42,433,699 and 28,114,172 shares,
respectively* ......................... (188,958,910) (370,800,763) (241,983,013)
------------ ------------ ------------
Net assets at close of business on
9/1/95 .............................. $ -- -- --
------------ ------------ ------------
------------ ------------ ------------
* SHAREHOLDERS OF BDJ, CDJ AND EDJ RECEIVED 23,619,989; 46,350,330 AND 30,248,037
SHARES, RESPECTIVELY OF PIPER FUNDS INC. - II ADJUSTABLE RATE MORTGAGE
SECURITIES FUND AT AN INITIAL NET ASSET VALUE OF $8.00 PER SHARE.
</TABLE>
29
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(10) FINANCIAL
HIGHLIGHTS
Per-share data for a share of capital stock
outstanding throughout each period and
selected information for each period are as
follows:
AMERICAN ADJUSTABLE RATE TERM TRUST 1996
<TABLE>
<CAPTION>
Period from
Year Year Ended Year Ended Year Ended 9/27/90* to
Ended 8/31/95 8/31/94 8/31/93 8/31/92 8/31/91
------------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period ........... $ 9.04 9.60 9.74 9.64 9.53
------ ---------- ---------- ---------- -----------
Operations:
Net investment income .......................... 0.51/ / 0.65 0.75 0.82 0.83
Net realized and unrealized gains (losses) on
investments................................... 0.01 (0.75) (0.27) 0.07 0.05
------ ---------- ---------- ---------- -----------
Total from operations ........................ 0.52 (0.10) 0.48 0.89 0.88
------ ---------- ---------- ---------- -----------
Distributions to shareholders:
From net investment income ..................... (0.92) (0.46) (0.62) (0.79) (0.77)
------ ---------- ---------- ---------- -----------
Net asset value, end of period ................. $ 8.64 9.04 9.60 9.74 9.64
------ ---------- ---------- ---------- -----------
------ ---------- ---------- ---------- -----------
Per share market value, end of
period TRIANGLE ............................. $ -- 8.50 9.50 10.25 10.13
------ ---------- ---------- ---------- -----------
------ ---------- ---------- ---------- -----------
SELECTED INFORMATION
Total investment return, net asset value+ ........ 5.86% (1.06%) 5.18% 9.58% 9.55%
Total investment return, market value** .......... 12.79% (5.94%) (1.37%) 9.29% 9.15%
Net assets at end of period (in millions) ...... $ 189 242 259 262 260
Ratio of expenses to average weekly net
assets*** ...................................... 0.74% 0.65% 0.61% 0.62% 0.64%++
Ratio of net investment income to average weekly
net assets*** .................................. 5.52% 6.97% 7.91% 8.44% 9.09%++
Portfolio turnover rate (excluding short-term
securities) .................................... 17% 43% 58% 26% 60%
Amount of borrowings outstanding at end of period
(in millions)+++ ............................. $ -- 70 86 70 70
Per-share amount of borrowings outstanding at end
of period .................................... $ -- 2.61 3.18 2.60 2.60
Per-share amount of net assets, excluding
borrowings, at end of period ................. $ -- 11.65 12.78 12.34 12.24
Asset coverage ratio TRIANGLE TRIANGLE ....... $ -- 446% 402% 475% 470%
</TABLE>
* COMMENCEMENT OF OPERATIONS.
** TOTAL INVESTMENT RETURN, MARKET VALUE, IS BASED ON THE CHANGE IN MARKET
PRICE OF A SHARE DURING THE
PERIOD AND ASSUMES REINVESTMENT OF DISTRIBUTIONS AT ACTUAL PRICES PURSUANT
TO THE FUND'S DIVIDEND
REINVESTMENT PLAN. FOR PURPOSES OF THE FISCAL 1995 COMPUTATION, THE AUGUST
31, 1995 NET ASSET VALUE IS USED AS THE END OF PERIOD VALUE. SEE FOOTNOTE 9
TO THE FINANCIAL STATEMENTS REGARDING THE MERGER INTO AN OPEN-END
MANAGEMENT INVESTMENT COMPANY ON 9/1/95.
*** INCLUDES 0.04% AND 0.01% FROM FEDERAL EXCISE TAXES IN THE FISCAL YEARS 1995
AND 1994, RESPECTIVELY.
+ TOTAL INVESTMENT RETURN, NET ASSET VALUE, IS BASED ON THE CHANGE IN NET
ASSET VALUE OF A SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF
DISTRIBUTIONS AT NET ASSET VALUE.
++ ADJUSTED TO AN ANNUAL BASIS.
+++ SECURITIES PURCHASED ON A WHEN-ISSUED BASIS FOR WHICH LIQUID, HIGH-GRADE
DEBT OBLIGATIONS ARE MAINTAINED IN A SEGREGATED ACCOUNT ARE NOT CONSIDERED
BORROWINGS. SEE FOOTNOTE 2 IN THE NOTES TO FINANCIAL STATEMENTS.
TRIANGLE SHARES STOPPED TRADING ON THE NYSE AND CSE ON AUGUST 24, 1995.
TRIANGLE TRIANGLE REPRESENTS NET ASSETS, EXCLUDING BORROWINGS, AT END
OF PERIOD DIVIDED BY BORROWINGS OUTSTANDING AT END
OF PERIOD.
/ / BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD.
30
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(10) FINANCIAL
HIGHLIGHTS
(CONTINUED)
Per-share data for a share of capital stock
outstanding throughout each period and
selected information for each period are as
follows:
AMERICAN ADJUSTABLE RATE TERM TRUST 1997
<TABLE>
<CAPTION>
Period from
Year Year Ended Year Ended Year Ended 7/24/91* to
Ended 8/31/95 8/31/94 8/31/93 8/31/92 8/31/91
------------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period ........... $ 8.90 9.66 9.68 9.68 9.58
------ ---------- ---------- ---------- -----------
Operations:
Net investment income .......................... 0.53/ / 0.63 0.72 0.78 0.07
Net realized and unrealized gains (losses) on
investments................................... 0.01 (0.86) (0.10) 0.05 0.03
------ ---------- ---------- ---------- -----------
Total from operations ........................ 0.54 (0.23) 0.62 0.83 0.10
------ ---------- ---------- ---------- -----------
Distributions to shareholders:
From net investment income ..................... (0.72) (0.53) (0.63) (0.80) --
From net realized gains ........................ -- -- (0.01) (0.03) --
------ ---------- ---------- ---------- -----------
Total distributions to shareholders .......... (0.72) (0.53) (0.64) (0.83) --
------ ---------- ---------- ---------- -----------
Net asset value, end of period ................. $ 8.72 8.90 9.66 9.68 9.68
------ ---------- ---------- ---------- -----------
------ ---------- ---------- ---------- -----------
Per share market value, end of
period TRIANGLE ............................. $ -- 8.50 9.38 10.00 10.25
------ ---------- ---------- ---------- -----------
------ ---------- ---------- ---------- -----------
SELECTED INFORMATION
Total investment return, net asset value+ ........ 6.23% (2.46%) 6.73% 8.97% 1.04%
Total investment return, market value** .......... 11.54% (3.96%) 0.04% 5.87% 2.50%
Net assets at end of period (in millions) ...... $ 370 447 488 489 212
Ratio of expenses to average weekly net assets ... 0.64% 0.61% 0.58% 0.60% 0.60%++
Ratio of net investment income to average weekly
net assets 5.63% 6.76% 7.55% 7.99% 7.88%++
Portfolio turnover rate (excluding short-term
securities) .................................... 28% 43% 47% 38% 10%
Amount of borrowings outstanding at end of period
(in millions)+++ ............................. $ -- 125 162 143 50
Per-share amount of borrowings outstanding at end
of period .................................... $ -- 2.49 3.20 2.83 2.29
Per-share amount of net assets, excluding
borrowings, at end of period ................. $ -- 11.39 12.86 12.51 11.97
Asset coverage ratio TRIANGLE TRIANGLE ....... $ -- 458% 402% 442% 523%
</TABLE>
* COMMENCEMENT OF OPERATIONS.
** TOTAL INVESTMENT RETURN, MARKET VALUE, IS BASED ON THE CHANGE IN MARKET
PRICE OF A SHARE DURING THE
PERIOD AND ASSUMES REINVESTMENT OF DISTRIBUTIONS AT ACTUAL PRICES PURSUANT
TO THE FUND'S DIVIDEND
REINVESTMENT PLAN. FOR PURPOSES OF THE FISCAL 1995 COMPUTATION, THE AUGUST
31, 1995 NET ASSET VALUE IS USED AS THE END OF PERIOD VALUE. SEE FOOTNOTE 9
TO THE FINANCIAL STATEMENTS REGARDING THE MERGER INTO AN OPEN-END
MANAGEMENT INVESTMENT COMPANY ON 9/1/95.
+ TOTAL INVESTMENT RETURN, NET ASSET VALUE, IS BASED ON THE CHANGE IN NET
ASSET VALUE OF A SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF
DISTRIBUTIONS AT NET ASSET VALUE.
++ ADJUSTED TO AN ANNUAL BASIS.
+++ SECURITIES PURCHASED ON A WHEN-ISSUED BASIS FOR WHICH LIQUID, HIGH-GRADE
DEBT OBLIGATIONS ARE MAINTAINED IN A SEGREGATED ACCOUNT ARE NOT CONSIDERED
BORROWINGS. SEE FOOTNOTE 2 IN THE NOTES TO FINANCIAL STATEMENTS.
TRIANGLE SHARES STOPPED TRADING ON THE NYSE AND CSE ON AUGUST 24, 1995.
TRIANGLE TRIANGLE REPRESENTS NET ASSETS, EXCLUDING BORROWINGS, AT END
OF PERIOD DIVIDED BY BORROWINGS OUTSTANDING AT END OF PERIOD.
/ / BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD.
31
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(10) FINANCIAL
HIGHLIGHTS
(CONTINUED)
Per-share data for a share of capital stock
outstanding throughout each period and
selected information for each period are as
follows:
AMERICAN ADJUSTABLE RATE TERM TRUST 1999
<TABLE>
<CAPTION>
Period from
Year Year Ended 9/24/92* to
Ended 8/31/95 8/31/94 8/31/93
------------- ---------- -----------
<S> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period ........... $ 8.71 9.61 9.58
------ ---------- -----------
Operations:
Net investment income .......................... 0.49/ / 0.60 0.60
Net realized and unrealized losses on
investments .................................. (0.08) (0.93) (0.04)
------ ---------- -----------
Total from operations ........................ 0.41 (0.33) 0.56
------ ---------- -----------
Distributions to shareholders:
From net investment income ..................... (0.54) (0.56) (0.53)
In excess of net realized gains ................ -- (0.01) --
------ ---------- -----------
Total distributions to shareholders .......... (0.54) (0.57) (0.53)
------ ---------- -----------
Net asset value, end of period ................. $ 8.58 8.71 9.61
------ ---------- -----------
------ ---------- -----------
Per share market value, end of
period TRIANGLE ............................. $ -- 8.25 9.63
------ ---------- -----------
------ ---------- -----------
SELECTED INFORMATION
Total investment return, net asset value+ ........ 4.88% (3.61%) 6.05%
Total investment return, market value** .......... 11.07% (8.75%) 1.62%
Net assets at end of period (in millions) ...... $ 241 295 328
Ratio of expenses to average weekly net assets ... 0.67% 0.60% 0.57%++
Ratio of net investment income to average weekly
net assets ..................................... 5.67% 6.40% 6.76%++
Portfolio turnover rate (excluding short-term
securities) .................................... 43% 35% 40%
Amount of borrowings outstanding at end of period
(in millions)+++ ............................. $ -- 85 102
Per-share amount of borrowings outstanding at end
of period .................................... $ -- 2.51 3.00
Per-share amount of net assets, excluding
borrowings, at end of period ................. $ -- 11.22 12.61
Asset coverage ratio TRIANGLE TRIANGLE ....... $ -- 447% 421%
</TABLE>
* COMMENCEMENT OF OPERATIONS.
** TOTAL INVESTMENT RETURN, MARKET VALUE, IS BASED ON THE CHANGE IN MARKET
PRICE OF A SHARE DURING THE
PERIOD AND ASSUMES REINVESTMENT OF DISTRIBUTIONS AT ACTUAL PRICES PURSUANT
TO THE FUND'S DIVIDEND
REINVESTMENT PLAN. FOR PURPOSES OF THE FISCAL 1995 COMPUTATION, THE AUGUST
31, 1995 NET ASSET VALUE IS USED AS THE END OF PERIOD VALUE. SEE FOOTNOTE 9
TO THE FINANCIAL STATEMENTS REGARDING THE MERGER INTO AN OPEN-END
MANAGEMENT INVESTMENT COMPANY ON 9/1/95.
+ TOTAL INVESTMENT RETURN, NET ASSET VALUE, IS BASED ON THE CHANGE IN NET
ASSET VALUE OF A SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF
DISTRIBUTIONS AT NET ASSET VALUE.
++ ADJUSTED TO AN ANNUAL BASIS.
+++ SECURITIES PURCHASED ON A WHEN-ISSUED BASIS FOR WHICH LIQUID, HIGH-GRADE
DEBT OBLIGATIONS ARE MAINTAINED IN A SEGREGATED ACCOUNT ARE NOT CONSIDERED
BORROWINGS. SEE FOOTNOTE 2 IN THE NOTES TO FINANCIAL STATEMENTS.
TRIANGLE SHARES STOPPED TRADING ON THE NYSE AND CSE ON AUGUST 24, 1995.
TRIANGLE TRIANGLE REPRESENTS NET ASSETS, EXCLUDING BORROWINGS, AT END
OF PERIOD DIVIDED BY BORROWINGS OUTSTANDING AT END OF PERIOD.
/ / BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD.
32
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(11) QUARTERLY DATA
(UNAUDITED)
<TABLE>
<CAPTION>
Net Realized Net Increase
Total and Unrealized (Decrease) in Net Distributions Quarter End
Investment Net Investment Gains (Losses) Assets Resulting from Net Investment Net Asset
Quarter Ended Income Income on Investments from Operations Income Value
- ------------------ ---------- -------------------- --------------------- -------------------- --------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AMERICAN ADJUSTABLE RATE TERM TRUST 1996
<CAPTION>
Amount Per-Share Amount Per-Share Amount Per-Share Amount Per-Share
---------- --------- ----------- --------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
11/30/94 $ 3,467,478 2,960,212 0.13 (3,750,264) (0.16) (790,052) (0.03) (2,177,611) (0.10) 8.91
2/28/95 2,817,331 2,549,600 0.12 2,062,703 0.09 4,612,303 0.21 (2,136,600) (0.09) 9.03
5/31/95 3,162,431 2,844,355 0.13 1,939,196 0.09 4,783,551 0.22 (2,130,942) (0.10) 9.15
8/31/95 3,203,807 2,798,957 0.13 (240,660) (0.01) 2,558,297 0.12 (13,730,577) (0.63) 8.64
---------- ---------- --- ----------- --------- ---------- --------- ----------- ---------
$ 12,651,047 11,153,124 0.51 10,975 0.01 11,164,099 0.52 (20,175,730) (0.92)
---------- ---------- --- ----------- --------- ---------- --------- ----------- ---------
---------- ---------- --- ----------- --------- ---------- --------- ----------- ---------
AMERICAN ADJUSTABLE RATE TERM TRUST 1997
<CAPTION>
Amount Per-Share Amount Per-Share Amount Per-Share Amount Per-Share
---------- --------- ----------- --------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
11/30/94 $ 6,734,775 6,055,630 0.15 (10,412,854) (0.24) (4,357,224) (0.09) (5,200,212) (0.12) 8.69
2/28/95 5,482,168 4,909,476 0.12 5,227,426 0.12 10,136,902 0.24 (5,112,948) (0.12) 8.81
5/31/95 5,818,656 5,257,293 0.13 4,836,150 0.11 10,093,443 0.24 (5,093,960) (0.12) 8.93
8/31/95 5,903,575 5,264,218 0.13 438,584 0.02 5,702,802 0.15 (15,276,132) (0.36) 8.72
---------- ---------- --- ----------- --------- ---------- --------- ----------- ---------
$ 23,939,174 21,486,617 0.53 89,306 0.01 21,575,923 0.54 (30,683,252) (0.72)
---------- ---------- --- ----------- --------- ---------- --------- ----------- ---------
---------- ---------- --- ----------- --------- ---------- --------- ----------- ---------
AMERICAN ADJUSTABLE RATE TERM TRUST 1999
<CAPTION>
Amount Per-Share Amount Per-Share Amount Per-Share Amount Per-Share
---------- --------- ----------- --------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
11/30/94 $ 4,210,736 3,781,356 0.13 (9,724,958) (0.32) (5,943,602) (0.19) (3,917,275) (0.13) 8.39
2/28/95 3,675,324 3,347,658 0.12 3,676,280 0.14 7,023,938 0.26 (3,810,767) (0.13) 8.52
5/31/95 3,825,660 3,450,934 0.12 1,825,180 0.07 5,276,114 0.19 (3,797,141) (0.14) 8.57
8/31/95 3,804,762 3,298,004 0.12 947,229 0.03 4,245,233 0.15 (3,795,413) (0.14) 8.58
---------- ---------- --- ----------- --------- ---------- --------- ----------- ---------
$ 15,516,482 13,877,952 0.49 (3,276,269) (0.08) 10,601,683 0.41 (15,320,596) (0.54)
---------- ---------- --- ----------- --------- ---------- --------- ----------- ---------
---------- ---------- --- ----------- --------- ---------- --------- ----------- ---------
</TABLE>
33
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
AMERICAN ADJUSTABLE RATE TERM TRUST 1996
AUGUST 31, 1995
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ----------- ------------
<S> <C> <C>
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS)
MORTGAGE-BACKED SECURITIES (73.3%):
U.S. AGENCY ADJUSTABLE RATE MORTGAGES (41.2%):
7.66%, FHLMC, 10/1/22 .............................. $ 2,603,005 2,667,091
7.94%, FHLMC, 8/1/23 ................................. 6,697,098 6,848,653
8.38%, FHLMC, 6/1/21 ................................. 2,377,476 2,431,564
7.25%, FHLMC, 11/1/16 ................................ 9,646,301 9,791,478
7.54%, FHLMC, 6/1/18 ................................. 2,019,504 2,062,075
7.63%, FHLMC, 5/1/19 ................................. 2,213,468 2,263,758
7.62%, FHLMC, 10/1/18 ................................ 6,769,519 6,927,791
7.75%, FHLMC, 10/1/19 ................................ 2,583,243 2,657,847
7.63%, FHLMC, 8/1/20 ................................. 10,494,136 10,706,852
5.99%, FHLMC, 1/1/24 ................................. 1,412,966 1,420,497
6.23%, FHLMC, 1/1/24 ................................. 1,815,876 1,872,168
6.98%, FNMA, 7/1/17 .................................. 1,877,083 1,899,364
7.39%, FNMA, 4/1/18 .................................. 4,818,583 4,901,511
7.54%, FNMA, 1/1/28 .................................. 2,317,781 2,360,081
7.75%, FNMA, 5/1/27 .................................. 1,678,135 1,717,370
7.72%, FNMA, 1/1/20 .................................. 2,020,948 2,075,615
7.01%, FNMA, 12/1/23 ................................. 3,438,253 3,527,854
6.18%, FNMA, 8/1/23 .................................. 2,132,298 2,207,760
7.00%, GNMA II, 8/20/23 .............................. 4,765,163 4,834,735
7.00%, GNMA II, 5/20/21 .............................. 4,542,600 4,621,005
------------
77,795,069
------------
COLLATERALIZED MORTGAGE OBLIGATIONS AND OTHER MORTGAGE-BACKED
SECURITIES (C) (32.1%):
U.S. AGENCY FLOATING RATE (14.9%):
6.48%, FHLMC, Series 1249, Class A, LIBOR, 4/15/22 ... 14,242,781 14,310,291
6.34%, FHLMC, Series 1508, Class J, LIBOR, 9/15/19 ... 3,025,788 3,025,577
6.44%, FHLMC, Series 1603, Class G, LIBOR, 4/15/21 ... 3,132,235 3,145,171
6.29%, FHLMC, Series 1724, Class F, LIBOR, 5/15/01 ... 4,227,606 4,227,225
6.42%, FNMA, Series 1994-87, Class F, LIBOR,
3/25/09 ............................................. 3,492,894 3,492,510
------------
28,200,774
------------
PRIVATE FLOATING RATE (17.2%):
7.58%, Donaldson, Lufkin and Jenrette, Series
1992-MF3, Class A3, 5/25/22 ......................... 6,000,000 6,093,750
7.71%, Paine Webber Mortgage Acceptance Corporation,
Series 1993-10, Class M1, 11/25/23 .................. 13,135,441 13,201,119
</TABLE>
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ----------- ------------
<S> <C> <C>
8.00%, Paine Webber Mortgage Acceptance Corporation,
Series 1993-8, Class M2, 8/25/23 .................. $ 5,091,075 5,078,348
7.81%, Residential Funding Corporation, Series
1993-S8, Class A, 2/25/23 ........................... 4,979,971 5,080,592
7.10%, Salomon Brothers Mortgage, Series 1987-2, Class
A, 12/25/16 ......................................... 3,029,590 2,931,128
------------
32,384,937
------------
Total Mortgage-Backed Securities
(cost: $140,308,026) .............................. 138,380,780
------------
SHORT-TERM SECURITIES (25.6%):
FHLMC Discount Note, 5.91%, 3/29/96 15,000,000 14,514,300
FNMA Discount Note, 5.85%, 3/29/96 ................... 20,000,000 19,356,000
Repurchase agreement with Morgan Stanley in a joint
trading account collateralized by U.S. government
agency securities, acquired on 8/31/95, accrued
interest at repurchase date of $2,259, 5.65%,
9/1/95 .............................................. 14,394,000 14,394,000
------------
Total Short-Term Securities
(cost: $48,194,374) ............................... 48,264,300
------------
Total Investments in Securities
(cost: $188,502,400) (c) ......................... $ 186,645,080
------------
------------
</TABLE>
NOTES TO INVESTMENTS IN SECURITIES:
(A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO
THE FINANCIAL STATEMENTS.
(B) DESCRIPTIONS OF CERTAIN COLLATERALIZED MORTGAGE OBLIGATIONS ARE AS FOLLOWS:
LIBOR - LONDON INTERBANK OFFERED RATE.
FLOATING RATE - REPRESENTS SECURITIES THAT PAY INTEREST AT RATES
THAT INCREASE (DECREASE) WITH AN INCREASE (DECREASE) IN A SPECIFIED
INDEX.
(C) ALSO REPRESENTS COST FOR FEDERAL INCOME TAX PURPOSES. THE AGGREGATE GROSS
UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED
ON THIS COST WERE AS FOLLOWS:
<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION .... $ 123,601
GROSS UNREALIZED DEPRECIATION ...... (1,980,921)
----------
NET UNREALIZED DEPRECIATION .... $ (1,857,320)
----------
----------
</TABLE>
34
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
AMERICAN ADJUSTABLE RATE TERM TRUST 1997
AUGUST 31, 1995
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ----------- ------------
<S> <C> <C>
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS)
U.S. GOVERNMENT SECURITIES (14.0%):
U.S. Treasury Note, 6.50%, 11/30/96 ................ $ 12,000,000 12,107,280
U.S. Treasury Note, 4.75%, 2/15/97 ................... 25,000,000 24,642,000
U.S. Treasury Note, 6.63%, 3/31/97 ................... 15,000,000 15,188,850
------------
Total U.S. Government Securities
(cost: $51,954,196) ............................... 51,938,130
------------
MORTGAGE-BACKED SECURITIES (72.2%):
U.S. AGENCY ADJUSTABLE RATE MORTGAGES (40.6%):
7.71%, FHLMC, 5/1/20 ................................. 2,360,845 2,425,437
8.32%, FHLMC, 6/1/21 ................................. 4,282,155 4,414,773
7.66%, FHLMC, 10/1/22 ................................ 5,206,010 5,334,182
8.26%, FHLMC, 8/1/19 ................................. 1,879,325 1,938,768
7.77%, FHLMC, 1/1/19 ................................. 170,800 173,628
7.95%, FHLMC, 4/1/22 ................................. 930,969 958,144
6.13%, FHLMC, 10/1/23 ................................ 1,464,504 1,487,160
5.99%, FHLMC, 1/1/24 ................................. 2,122,197 2,133,508
6.23%, FHLMC, 1/1/24 ................................. 3,981,375 4,104,798
7.53%, FNMA, 1/1/18 .................................. 2,110,477 2,170,520
7.92%, FNMA, 1/1/29 .................................. 3,585,600 3,661,794
7.29%, FNMA, 5/1/18 .................................. 1,519,937 1,547,675
7.41%, FNMA, 8/1/27 .................................. 8,675,614 8,846,437
7.39%, FNMA, 4/1/18 .................................. 8,074,033 8,212,987
7.54%, FNMA, 1/1/28 .................................. 1,253,302 1,276,174
7.27%, FNMA, 3/1/28 .................................. 10,019,983 10,194,531
7.49%, FNMA, 1/1/20 .................................. 3,032,650 3,055,395
8.10%, FNMA, 11/1/20 ................................. 5,305,330 5,461,201
7.50%, FNMA, 12/1/20 ................................. 7,730,529 7,866,509
8.19%, FNMA, 5/1/21 .................................. 5,946,919 6,089,110
7.96%, FNMA, 8/1/21 .................................. 3,239,340 3,301,762
6.01%, FNMA, 12/1/23 ................................. 3,557,054 3,660,031
6.15%, FNMA, 12/1/23 ................................. 3,478,790 3,600,408
6.12%, FNMA, 1/1/24 .................................. 3,355,849 3,472,095
8.12%, FNMA, 7/1/23 .................................. 4,632,679 4,822,758
5.95%, FNMA, 2/1/24 .................................. 8,389,486 8,616,422
6.01%, FNMA, 3/1/24 .................................. 4,451,509 4,581,360
6.63%, GNMA II, 11/20/21 ............................. 3,725,381 3,842,619
7.50%, GNMA II, 6/20/22 .............................. 1,078,349 1,114,225
7.38%, GNMA II, 6/20/23 .............................. 1,614,514 1,641,024
6.50%, GNMA II, 11/20/23 ............................. 4,379,109 4,425,527
5.50%, GNMA II, 4/20/24 .............................. 723,714 714,465
6.00%, GNMA II, 8/20/21 .............................. 7,440,481 7,544,350
6.13%, GNMA II, 10/20/21 ............................. 7,256,504 7,335,383
6.00%, GNMA II, 9/1/25 ............................... 10,000,000(b) 10,006,300
------------
150,031,460
------------
COLLATERALIZED MORTGAGE OBLIGATIONS AND OTHER MORTGAGE-BACKED
SECURITIES (C) (31.6%):
U.S. AGENCY FIXED RATE (0.4%):
8.13%, FNMA, Series 1991-66, Class E, 4/25/18 ........ 1,700,020 1,695,413
------------
U.S. AGENCY FLOATING RATE (9.2%):
6.44%, FHLMC, Series 1401, Class K, LIBOR, 9/15/20 ... 1,890,675 1,898,029
6.34%, FHLMC, Series 1508, Class J, LIBOR, 9/15/19 ... 3,025,788 3,025,577
6.44%, FHLMC, Series 1710, Class AC, LIBOR,
2/15/24 ............................................. 3,000,000 3,004,080
</TABLE>
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ----------- ------------
<S> <C> <C>
6.29%, FHLMC, Series 1724, Class F, LIBOR,
5/15/01 ........................................... $ 10,714,103 10,713,139
6.42%, FNMA, Series 1993-103, Class FA, LIBOR,
6/25/19 ............................................. 5,000,000 5,007,000
6.42%, FNMA, Series 1994-87, Class F, LIBOR,
3/25/09 ............................................. 10,478,681 10,477,528
------------
34,125,353
------------
PRIVATE FLOATING RATE (22.0%):
7.58%, Donaldson, Lufkin and Jenrette, Series
1992-MF3, Class A3, 5/25/22 ......................... 17,000,000 17,265,625
7.72%, Glendale Federal Savings, Series 1989-5, Class
A, 4/1/29 ........................................... 17,914,726 18,069,563
6.88%, Merrill Lynch Mortgage Investors, Series
1993-C, Class A4, 3/15/18 ........................... 7,000,000 6,794,340
7.81%, Residential Funding Corporation, Series
1993-S8, Class A, 2/25/23 ........................... 7,469,956 7,620,889
6.68%, Resolution Trust Corporation, Series 1991-2,
Class B, 4/25/21 .................................... 5,000,000 4,981,250
8.12%, Resolution Trust Corporation, Series 1991-8,
Class A-1, 12/25/20 ................................. 11,854,133 12,178,270
7.55%, Resolution Trust Corporation, Series 1992-4,
Class B2, 7/25/28 ................................... 15,000,639 14,330,298
------------
81,240,235
------------
Total Mortgage-Backed Securities
(cost: $269,841,824) .............................. 267,092,461
------------
SHORT-TERM SECURITIES (14.7%):
Repurchase agreement with Goldman Sachs in a joint
trading account collateralized by U.S. government
agency securities, acquired on 8/31/95, accrued
interest at repurchase date of $8,690, 5.82%, 9/1/95
(cost: $54,501,000) ................................. 54,501,000 54,501,000
------------
Total Investments in Securities
(cost: $376,297,020) (d) ......................... $ 373,531,591
------------
------------
</TABLE>
NOTES TO INVESTMENTS IN SECURITIES:
(A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO
THE FINANCIAL STATEMENTS.
(B) ON AUGUST 31, 1995, THE TOTAL COST OF INVESTMENTS PURCHASED ON A
WHEN-ISSUED BASIS WAS $10,043,750.
(C) DESCRIPTIONS OF CERTAIN COLLATERALIZED MORTGAGE OBLIGATIONS ARE AS FOLLOWS:
LIBOR - LONDON INTERBANK OFFERED RATE
FLOATING RATE - REPRESENTS SECURITIES THAT PAY INTEREST AT RATES
THAT INCREASE (DECREASE) WITH AN INCREASE (DECREASE) IN A SPECIFIED
INDEX
(D) ALSO REPRESENTS COST FOR FEDERAL INCOME TAX PURPOSES. THE AGGREGATE GROSS
UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED
ON THIS COST WERE AS FOLLOWS:
<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION .... $ 173,162
GROSS UNREALIZED DEPRECIATION ...... (2,938,591)
----------
NET UNREALIZED DEPRECIATION .... $ (2,765,429)
----------
----------
</TABLE>
35
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
AMERICAN ADJUSTABLE RATE TERM TRUST 1999
AUGUST 31, 1995
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ----------- ------------
<S> <C> <C>
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS)
U.S. GOVERNMENT SECURITIES (10.7%):
U.S. Treasury Note, 4.75%, 2/15/97 ................. $ 13,000,000 12,813,840
U.S. Treasury Note, 6.38%, 6/30/97 ................... 13,000,000 13,130,000
------------
Total U.S. Government Securities
(cost: $26,019,990) ............................... 25,943,840
------------
MORTGAGE-BACKED SECURITIES (75.0%):
U.S. AGENCY ADJUSTABLE RATE MORTGAGES (36.5%):
8.25%, FHLMC, 6/1/22 ................................. 25,917,342 26,536,507
7.74%, FHLMC, 11/1/22 ................................ 9,601,686 9,805,242
7.74%, FHLMC, 9/1/22 ................................. 5,482,171 5,644,772
7.94%, FHLMC, 8/1/23 ................................. 5,238,324 5,356,867
7.63%, FHLMC, 4/1/23 ................................. 4,202,449 4,286,414
7.38%, FNMA, 11/1/22 ................................. 3,219,526 3,283,917
6.50%, GNMA II, 7/20/22 .............................. 3,941,373 3,992,572
6.50%, GNMA II, 9/20/22 .............................. 3,599,623 3,653,078
7.38%, GNMA II, 6/20/23 .............................. 5,251,359 5,337,586
6.00%, GNMA II, 9/1/25 ............................... 20,000,000(b) 20,012,600
------------
87,909,555
------------
COLLATERALIZED MORTGAGE OBLIGATIONS AND OTHER MORTGAGE-BACKED
SECURITIES (C) (38.5%):
U.S. AGENCY FLOATING RATE (14.9%):
6.44%, FHLMC, Series 1401, Class K, LIBOR, 9/15/20 ... 6,302,249 6,326,765
6.34%, FHLMC, Series 1508, Class J, LIBOR, 9/15/19 ... 2,269,341 2,269,182
6.29%, FHLMC, Series 1724, Class F, LIBOR, 5/15/01 ... 7,142,735 7,142,092
6.50%, FHLMC, Series 29, Class FA, LIBOR, 3/25/23 .... 8,000,000 8,029,440
6.47%, FNMA, Series 1992-141, Class FA, LIBOR,
8/25/07 ............................................. 7,005,378 7,031,298
6.42%, FNMA, Series 1994-87, Class F, LIBOR,
3/25/09 ............................................. 5,239,341 5,238,765
------------
36,037,542
------------
PRIVATE FLOATING RATE (23.6%):
8.22%, California Federal, Series 1987-F, Class A2,
7/1/17 .............................................. 5,235,031 5,077,980
7.58%, Donaldson, Lufkin and Jenrette, Series
1992-MF3, Class A3, 5/25/22 ......................... 10,000,000 10,156,250
7.69%, Merrill Lynch Mortgage Investors, Series
1992-H, Class A1-2, 2/25/23 ......................... 3,781,063 3,808,252
</TABLE>
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- ----------- ------------
<S> <C> <C>
6.78%, Merrill Lynch Mortgage Investors, Series
1993-B, Class A3, 11/15/17 .......................... 13,650,000 13,756,607
7.13%, Merrill Lynch Mortgage Investors, Series
1993-E, Class A4, 6/15/18 ......................... $ 6,500,000 6,243,250
7.81%, Residential Funding Corporation, Series
1993-S8, Class A, 2/25/23 ........................... 4,979,971 5,080,592
7.55%, Resolution Trust Corporation, Series 1992-4,
Class B2, 7/25/28 ................................... 3,000,128 2,866,060
7.73%, Resolution Trust Corporation, Series 1992-6,
Class B3, 1/25/26 ................................... 10,002,246 10,002,246
------------
56,991,237
------------
Total Mortgage-Backed Securities
(cost: $182,424,307) .............................. 180,938,334
------------
SHORT-TERM SECURITIES (20.7%):
Repurchase agreement with Goldman Sachs in a joint
trading account collateralized by U.S. government
agency securities, acquired on 8/31/95, accrued
interest at repurchase date of $7,925, 5.80%, 9/1/95
(cost: $49,871,000) ................................. 49,871,000 49,871,000
------------
Total Investments in Securities
(cost: $258,315,297) (d) ......................... $ 256,753,174
------------
------------
</TABLE>
NOTES TO INVESTMENTS IN SECURITIES:
(A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO
THE FINANCIAL STATEMENTS.
(B) ON AUGUST 31, 1995, THE TOTAL COST OF INVESTMENTS PURCHASED ON A
WHEN-ISSUED BASIS WAS $20,087,500.
(C) DESCRIPTIONS OF CERTAIN COLLATERALIZED MORTGAGE OBLIGATIONS ARE AS FOLLOWS:
LIBOR - LONDON INTERBANK OFFERED RATE.
FLOATING RATE - REPRESENTS SECURITIES THAT PAY INTEREST AT RATES THAT
INCREASE (DECREASE) WITH AN INCREASE (DECREASE) IN A SPECIFIED INDEX.
(D) ALSO REPRESENTS COST FOR FEDERAL INCOME TAX PURPOSES. THE AGGREGATE GROSS
UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED
ON THIS COST WERE AS FOLLOWS:
<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION .... $ 295,680
GROSS UNREALIZED DEPRECIATION ...... (1,857,803)
----------
NET UNREALIZED DEPRECIATION .... $ (1,562,123)
----------
----------
</TABLE>
36
<PAGE>
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
AMERICAN ADJUSTABLE RATE TERM TRUST INC. - 1996,
AMERICAN ADJUSTABLE RATE TERM TRUST INC. - 1997 AND
AMERICAN ADJUSTABLE RATE TERM TRUST INC. - 1999:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments in securities, of American Adjustable Rate Term
Trust Inc. - 1996, American Adjustable Rate Term Trust Inc. - 1997 and American
Adjustable Rate Term Trust Inc. - 1999 as of August 31, 1995, and the related
statements of operations and cash flows for the year then ended, the statements
of changes in net assets for each of the years in the two-year period ended
August 31, 1995 and the financial highlights presented in footnote 10 to the
financial statements. These financial statements and the financial highlights
are the responsibility of the funds' management. Our responsibility is to
express an opinion on these financial statements and the financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased and sold but not received or delivered, we
request confirmations from brokers and, where replies are not received, we carry
out other appropriate auditing procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Adjustable Rate Term
Trust Inc. - 1996, American Adjustable Rate Term Trust Inc. - 1997 and American
Adjustable Rate Term Trust Inc. - 1999 as of August 31, 1995, the results of
their operations and cash flows for the year then ended, the changes in their
net assets for each of the years in the two-year period ended August 31, 1995
and the financial highlights presented in footnote 10 to the financial
statements, in conformity with generally accepted accounting principles.
As discussed in footnote 9 to the financial statements, American Adjustable Rate
Term Trust Inc. - 1996, American Adjustable Rate Term Trust Inc. - 1997 and
American Adjustable Rate Term Trust Inc. - 1999 merged into Piper Funds Inc. -
II Adjustable Rate Mortgage Securities Fund on September 1, 1995.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
October 13, 1995
37
<PAGE>
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX INFORMATION
Fiscal Year Ended August 31, 1995
Distributions shown below are taxable as dividend income. None qualify for the
corporate dividends received deduction. In February 1996, each shareholder will
receive a breakdown of income earned by investment category for calendar year
1995.
Information for federal income tax purposes is presented as an aid to
shareholders in reporting the distributions shown below. Shareholders should
consult a tax adviser on how to report these distributions for state and local
income taxes.
<TABLE>
<CAPTION>
American American American American
Adjustable Adjustable Adjustable Adjustable
Rate Term Rate Term Rate Term Rate Term
Payable Date Trust 1996 Trust 1997 Trust 1998 Trust 1999
- ------------------------------------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
September 28, 1994 ..................... $ 0.0300 0.0375 0.0400 0.0425
October 26, 1994 ......................... 0.0300 0.0375 0.0400 0.0425
November 23, 1994 ........................ 0.0325 0.0400 0.0425 0.0450
December 28, 1994 ........................ 0.0325 0.0400 0.0425 0.0450
January 13, 1995 ......................... 0.0325 0.0400 0.0425 0.0450
February 22, 1995 ........................ 0.0325 0.0400 0.0425 0.0450
March 29, 1995 ........................... 0.0325 0.0400 0.0425 0.0450
April 26, 1995 ........................... 0.0325 0.0400 0.0425 0.0450
May 24, 1995 ............................. 0.0325 0.0400 0.0425 0.0450
June 28, 1995 ............................ 0.1085 0.0400 0.0425 0.0450
July 27, 1995 ............................ 0.0325 0.0400 0.0425 0.0450
August 23, 1995 .......................... 0.0325 0.0400 0.0425 0.0450
August 24, 1995 .......................... 0.4550 0.2400 0.0750 --
----------- ----------- ----------- -----------
Total distributions .................... $ 0.9160 0.7150 0.5800 0.5350
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
38
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER UPDATE
ANNUAL MEETING RESULTS
An annual meeting of the funds' shareholders was held on August 1, 1995 and
adjourned to August 10, 1995 with respect to the third matter set forth below.
Each matter voted upon at the meeting, as well as the number of votes cast for,
against or withheld, the number of abstentions, and the number of broker
non-votes with respect to such matters, are set forth below.
1. The funds' shareholders elected the following six directors:
AMERICAN ADJUSTABLE RATE TERM TRUST 1996 (BDJ)
<TABLE>
<CAPTION>
Shares Shares Withholding
Voted "For" Authority to Vote
----------- ------------------
<S> <C> <C>
David T. Bennett.......................................................... 18,221,539 1,292,019
Jaye F. Dyer.............................................................. 18,210,300 1,303,258
William H. Ellis.......................................................... 18,201,503 1,312,055
Karol D. Emmerich......................................................... 18,223,803 1,289,755
Luella G. Goldberg........................................................ 18,216,862 1,296,696
George Latimer............................................................ 18,207,787 1,305,771
</TABLE>
AMERICAN ADJUSTABLE RATE TERM TRUST 1997 (CDJ)
<TABLE>
<CAPTION>
Shares Shares Withholding
Voted "For" Authority to Vote
----------- ------------------
<S> <C> <C>
David T. Bennett.......................................................... 36,894,551 2,473,129
Jaye F. Dyer.............................................................. 36,868,590 2,499,090
William H. Ellis.......................................................... 36,785,796 2,581,884
Karol D. Emmerich......................................................... 36,816,793 2,550,887
Luella G. Goldberg........................................................ 36,796,122 2,571,558
George Latimer............................................................ 36,798,987 2,568,693
</TABLE>
AMERICAN ADJUSTABLE RATE TERM TRUST 1998 (DDJ)
<TABLE>
<CAPTION>
Shares Shares Withholding
Voted "For" Authority to Vote
----------- ------------------
<S> <C> <C>
David T. Bennett.......................................................... 40,977,588 2,602,924
Jaye F. Dyer.............................................................. 40,969,160 2,611,352
William H. Ellis.......................................................... 40,858,731 2,721,781
Karol D. Emmerich......................................................... 40,892,210 2,688,302
Luella G. Goldberg........................................................ 40,879,022 2,701,490
George Latimer............................................................ 40,850,509 2,730,003
</TABLE>
AMERICAN ADJUSTABLE RATE TERM TRUST 1999 (EDJ)
<TABLE>
<CAPTION>
Shares Shares Withholding
Voted "For" Authority to Vote
----------- ------------------
<S> <C> <C>
David T. Bennett.......................................................... 23,242,175 1,955,524
Jaye F. Dyer.............................................................. 23,219,659 1,978,040
William H. Ellis.......................................................... 23,157,205 2,040,494
Karol D. Emmerich......................................................... 23,187,739 2,009,960
Luella G. Goldberg........................................................ 23,168,192 2,029,507
George Latimer............................................................ 23,179,265 2,018,434
</TABLE>
2. The funds' shareholders ratified the selection by a majority of the
independent members of the funds' Boards of Directors of KPMG Peat
Marwick LLP as the independent public accountants for the funds for the
fiscal year ending August 31, 1995. The following votes were cast
regarding this matter:
<TABLE>
<CAPTION>
Shares Shares Voted Broker
Voted "For" "Against" Absentions Non-Votes
----------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
BDJ................................................. 18,185,913 349,256 979,384 --
CDJ................................................. 36,787,530 753,257 1,836,173 --
DDJ................................................. 39,550,474 783,561 1,973,849 1,272,628
EDJ................................................. 23,263,951 592,815 1,340,931 --
</TABLE>
39
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER UPDATE
3. The funds' shareholders approved the Agreement and Plan of Merger whereby
each approving fund merged with and into Piper Funds Inc. - II Adjustable
Rate Mortgage Securities Fund. The following votes were cast regarding
this matter:
<TABLE>
<CAPTION>
Shares Shares Voted Broker
Voted "For" "Against" Abstentions Non-Votes
----------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
BDJ................................................. 14,934,062 1,100,214 767,096 2,712,186
CDJ................................................. 29,393,183 1,634,820 1,618,708 6,720,969
DDJ................................................. 32,499,507 2,022,751 964,496 8,093,758
EDJ................................................. 18,831,029 1,383,124 1,122,038 3,861,508
</TABLE>
40
<PAGE>
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS OF PIPER FUNDS INC. - II
<TABLE>
<S> <C>
DIRECTORS David T. Bennett, CHAIRMAN, HIGHLAND HOMES, INC., USL PRODUCTS, INC., KIEFER BUILT, INC.,
OF COUNSEL, GRAY, PLANT, MOOTY, MOOTY & BENNETT, P.A.
Jaye F. Dyer, PRESIDENT, DYER MANAGEMENT COMPANY
William H. Ellis, CHAIRMAN OF THE BOARD, PRESIDENT, PIPER CAPITAL MANAGEMENT INCORPORATED,
PIPER JAFFRAY COMPANIES INC.
Karol D. Emmerich, PRESIDENT, THE PARACLETE GROUP
Luella G. Goldberg, DIRECTOR, TCF FINANCIAL, RELIASTAR CORP., HORMEL FOODS CORP.
George Latimer, DIRECTOR, SPECIAL ACTIONS OFFICE, OFFICE OF THE SECRETARY, DEPARTMENT OF
HOUSING AND URBAN DEVELOPMENT
OFFICERS Paul A. Dow, PRESIDENT
Michael P. Jansen, SENIOR VICE PRESIDENT
Robert H. Nelson, SENIOR VICE PRESIDENT
Amy K. Johnson, VICE PRESIDENT
Thomas S. McGlinch, VICE PRESIDENT
David E. Rosedahl, SECRETARY
Charles N. Hayssen, TREASURER
INVESTMENT ADVISER Piper Capital Management Incorporated
222 SOUTH NINTH STREET, MINNEAPOLIS, MN 55402-3804
CUSTODIAN AND TRANSFER Investors Fiduciary Trust Company
AGENT 127 WEST 10TH STREET, KANSAS CITY, MO 64105-1716
LEGAL COUNSEL Dorsey & Whitney P.L.L.P.
220 SOUTH SIXTH STREET, MINNEAPOLIS, MN 55402
INDEPENDENT AUDITORS KPMG Peat Marwick LLP
4200 NORWEST CENTER, MINNEAPOLIS, MN 55402
</TABLE>
41
<PAGE>
PIPER CAPITAL
MANAGEMENT
Bulk Rate
U.S. Postage
PAID
Permit No. 3008
Mpls, MN
PIPER CAPITAL MANAGEMENT INCORPORATED
222 SOUTH NINTH STREET
MINNEAPOLIS, MN 55402-3804
PIPER JAFFRAY INC., FUND DISTRIBUTOR AND NASD MEMBER.
[LOGO] THIS DOCUMENT IS PRINTED ON PAPER MADE FROM
100% TOTAL RECOVERED FIBER, INCLUDING 15% POST-CONSUMER WASTE.
310-95 PJARX-01 10/95
