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PROSPECTUS DATED NOVEMBER 1, 1995
PIPER INSTITUTIONAL FUNDS INC.
PIPER JAFFRAY TOWER
222 SOUTH NINTH STREET, MINNEAPOLIS, MINNESOTA 55402-3804
(612) 342-6387 (LOCAL CALLS), (800) 866-7778 (TOLL FREE)
---------------------
Piper Institutional Funds Inc. (the "Company") is an open-end mutual fund
whose shares are currently offered in two series: Institutional Money Market
Fund and Institutional Government Adjustable Portfolio (the "Funds"). Each Fund
has its own investment objective and policies designed to meet different
investment goals.
INSTITUTIONAL MONEY MARKET FUND has an investment objective of maximum
current income consistent with preservation of capital and maintenance of
liquidity. Institutional Money Market Fund will invest only in securities issued
or guaranteed by the U.S. Government or its agencies or instrumentalities and
repurchase agreements and reverse repurchase agreements with respect to such
securities.
INSTITUTIONAL GOVERNMENT ADJUSTABLE PORTFOLIO has an investment objective of
high current income consistent with low principal volatility. The Fund will seek
to achieve that objective by investing primarily (at least 65% of its total
assets under normal market conditions) in adjustable rate mortgage securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. The Fund's investments in mortgage-related securities include
derivative mortgage securities.
INVESTMENTS IN THE FUNDS ARE NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE IS NO ASSURANCE THAT INSTITUTIONAL MONEY MARKET FUND WILL BE
ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE. INSTITUTIONAL
GOVERNMENT ADJUSTABLE PORTFOLIO MAY INVEST IN "RESTRICTED SECURITIES." SEE
"SPECIAL INVESTMENT METHODS -- ILLIQUID SECURITIES".
This Prospectus concisely describes the information about the Funds that you
should know before investing. Please read the Prospectus carefully before
investing and retain it for future reference.
A Statement of Additional Information about the Funds dated November 1, 1995
is available free of charge. Write to the Funds at Piper Jaffray Tower, 222
South Ninth Street, Minneapolis, Minnesota 55402-3804 or telephone (612)
342-6387 (local calls) or (800) 866-7778 (toll free). The Statement of
Additional Information has been filed with the Securities and Exchange
Commission and is incorporated in its entirety by reference in this Prospectus.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
INTRODUCTION
Institutional Money Market Fund ("Money Market Fund") and Institutional
Government Adjustable Portfolio ("Adjustable Portfolio") (sometimes individually
referred to herein as a "Fund" or, collectively, as the "Funds") are series of
Piper Institutional Funds Inc. (the "Company"), an open-end management
investment company organized under the laws of the State of Minnesota in 1992.
Each Fund has a different investment objective, as described on the cover page
of this Prospectus, and is designed to meet different investment needs. The
Funds are classified as diversified mutual funds.
THE INVESTMENT ADVISER
The Funds are managed by Piper Capital Management Incorporated (the
"Adviser"), a wholly owned subsidiary of Piper Jaffray Companies Inc. Each Fund
pays the Adviser a fee for managing its investment portfolio. The fees for Money
Market Fund and Adjustable Portfolio are paid at annual rates of .15% and .30%,
respectively, of each Fund's average daily net assets. See "Management --
Investment Adviser."
THE DISTRIBUTOR
Piper Jaffray Inc. ("Piper Jaffray" or the "Distributor"), a wholly owned
subsidiary of Piper Jaffray Companies Inc. and an affiliate of the Adviser,
serves as Distributor of the Funds' shares.
OFFERING PRICES
Shares of Money Market Fund are offered to the public at their net asset
value of $1.00 per share with no sales charge. There can be no assurance,
however, that the net asset value per share of Money Market Fund will be
maintained at $1.00.
Shares of Adjustable Portfolio are offered to the public at the next
determined net asset value after receipt of an order by a shareholder's Piper
Jaffray Investment Executive or other broker-dealer, plus a maximum sales charge
of 1.00% of the offering price (1.01% of the net amount invested) on purchases
of less than $250,000. The sales charge is reduced to .50% of the offering price
on purchases of $250,000 or more, with no sales charge incurred on purchases of
$500,000 or more.
MINIMUM INITIAL AND SUBSEQUENT INVESTMENTS
The minimum initial investment for each Fund is $100,000. There is no
minimum for subsequent investments. The minimum initial investment for
Adjustable Portfolio may be waived by the Distributor for 401(k) employee
benefit plans administered by Piper Trust Company. See "How to Purchase Shares
- -- Minimum Investments."
EXCHANGES
You may exchange your shares for shares of any other mutual fund managed by
the Adviser which is open to new investors and eligible for sale in your state
of residence. All exchanges are subject to the minimum investment requirements
and other applicable terms set forth in the prospectus of the fund whose shares
you acquire. Exchanges are made on the basis of the net asset values of the
funds involved, except that investors exchanging into a fund which has a higher
sales charge must pay the difference. You may make four exchanges per year
without payment of a service charge. Thereafter, there is a $5 service charge
for each exchange. See "Shareholder Services -- Exchange Privilege."
REDEMPTION PRICE
Shares of the Funds may be redeemed at any time at their net asset value
next determined after a redemption request is received by your Piper Jaffray
Investment Executive or other broker-dealer.
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The Funds reserve the right, upon 30 days' written notice, to redeem an account
if the net asset value of the shares in that account falls below $50,000. See
"How to Redeem Shares -- Involuntary Redemption."
CERTAIN RISK FACTORS TO CONSIDER
An investment in either of the Funds is subject to certain risks, as set
forth in detail under "Investment Objectives and Policies" and "Special
Investment Methods." As with other mutual funds, there can be no assurance that
either Fund will achieve its objective. There is no assurance Money Market Fund
will be able to maintain a stable net asset value of $1.00 per share. Adjustable
Portfolio is subject to interest rate risk (the risk that rising interest rates
will make bonds issued at lower interest rates worth less). As a result, the
value of Adjustable Portfolio's shares will vary. Adjustable Portfolio is also
subject to credit risk (the risk that a bond issuer will fail to make timely
payments of interest or principal) to the extent it invests in non-U.S.
Government securities. Adjustable Portfolio may engage in the following
investment practices: the use of repurchase agreements, the lending of portfolio
securities, borrowing from banks, the use of reverse repurchase agreements
(reverse repurchase agreements involve the speculative technique known as
leverage), the use of hedging techniques, including interest rate transactions,
options, futures contracts and options on futures contracts, and the purchase or
sale of securities on a "when-issued" or "forward commitment" basis, including
the use of mortgage dollar rolls. These techniques may increase the volatility
of the Fund's net asset value. Adjustable Portfolio purchases mortgage-related
securities which, in addition to interest rate risk, are subject to prepayment
risk. Adjustable Portfolio's investments in mortgage-related securities include
securities commonly referred to as derivative mortgage securities. Recent market
experience has shown that certain derivative mortgage securities may be
extremely sensitive to changes in interest rates and in prepayment rates on the
underlying mortgage assets and, as a result, the prices of such securities may
be highly volatile. Adjustable Portfolio may also invest up to 10% of its total
assets in securities denominated in Canadian dollars. Money Market Fund may
engage in the use of repurchase agreements and, with respect to 5% of its net
assets, reverse repurchase agreements fully collateralized by securities issued
or guaranteed by the U.S. Government or its agencies or instrumentalities. All
of these transactions involve certain special risks, as set forth under
"Investment Objectives and Policies" and "Special Investment Methods."
SHAREHOLDER INQUIRIES
Any questions or communications regarding a shareholder account should be
directed to your Piper Jaffray investment executive or, in the case of shares
held through another broker-dealer, to IFTC at (800) 874-6205. General inquiries
regarding the Funds should be directed to the Funds at the telephone number set
forth on the cover of this Prospectus.
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FUND EXPENSES
<TABLE>
<CAPTION>
MONEY MARKET ADJUSTABLE
FUND PORTFOLIO
------------ ----------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a
percentage of offering price).................. None 1.00%(1)
Exchange Fee (2)................................ $0 $0
ANNUAL FUND OPERATING EXPENSES (as a percentage of
average net assets)
Management Fees................................. .15% .30%
Rule 12b-1 Fees................................. None None
Other Expenses (after voluntary expense
reimbursements)................................ .20% .30%
--
---
Total Fund Operating Expenses (after voluntary
expense reimbursements)........................ .35% .60%
<FN>
- ------------------------
(1) The sales charge is reduced to .50% of the offering price on purchases of
$250,000 or more. In connection with purchases of $500,000 or more, there
is no initial sales charge. See "How to Purchase Shares -- Public Offering
Price."
(2) There is a $5.00 fee for each exchange in excess of four exchanges per
year. See "How to Purchase Shares -- Exchange Privilege."
</TABLE>
EXAMPLE
You would pay the following expenses on a $1,000 investment assuming a 5%
annual return and redemption at the end of each time period:
<TABLE>
<CAPTION>
MONEY MARKET ADJUSTABLE
FUND PORTFOLIO
------------ ----------
<S> <C> <C>
1 Year......................................... $ 4 $16
3 Years........................................ $11 $29
5 Years........................................ $20 $43
10 Years........................................ $44 $84
</TABLE>
The purpose of the above Fund Expenses table is to assist you in
understanding the various costs and expenses that investors in the Funds will
bear directly or indirectly. THE EXAMPLE CONTAINED IN THE TABLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN.
Under an Investment Advisory and Management Agreement between the Funds and
the Adviser, the Adviser is entitled to receive fees from Money Market Fund and
Adjustable Portfolio equal on an annual basis to .15% and .30%, respectively, of
each Fund's average daily net assets. The Adviser has voluntarily agreed, for
the fiscal year ending June 30, 1996, to reimburse Money Market Fund and
Adjustable Portfolio to the extent that total operating expenses exceed .35% and
.60% per annum, respectively, of average daily net assets. The Total Fund
Operating Expenses set forth in the above table are based on this agreement.
Voluntary reimbursements by the Adviser may be discontinued at any time
following the Funds' fiscal year end, at the Adviser's discretion. For the
fiscal year ended June 30, 1995, the Adviser voluntarily agreed to pay all
operating expenses of Money Market Fund and Adjustable Portfolio which exceeded
.35% and .55%, respectively, of average daily net assets. Absent such voluntary
expense reimbursements, Total Fund Operating Expenses would have been .49% and
.75% of average daily net assets, respectively. For additional information,
including a more complete explanation of management fees, see "Management --
Investment Adviser" and "Management -- Expenses."
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FINANCIAL HIGHLIGHTS
The following financial highlights have been audited by KPMG Peat Marwick
LLP, independent auditors, and should be read in conjunction with the financial
statements and the related notes thereto appearing in the Fund's annual report
to shareholders. An annual report of the Funds can be obtained without charge by
contacting the Funds at (612) 342-6387 (local calls) or (800) 866-7778 (toll
free). In addition to financial statements, the annual report contains further
information about the performance of the Funds.
MONEY MARKET FUND
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED JUNE 30
--------------- PERIOD FROM
1995 1994 2/2/93* TO 6/30/93
------ ------ ------------------
<S> <C> <C> <C>
Net asset value, beginning of period.... $1.00 $1.00 $1.00
Operations:
Net investment income................. 0.05 0.03 0.01
------ ------ -----
Total from operations............... 0.05 0.03 0.01
------ ------ -----
Distributions from net investment
income................................. (0.05) (0.03) (0.01)
------ ------ -----
Net asset value, end of period.......... $1.00 $1.00 $1.00
------ ------ -----
------ ------ -----
Total return+........................... 5.26% 3.23% 1.24%
Net assets, end of period (in
millions).............................. $ 52 $ 35 $ 40
Ratio of expenses to average daily net
assets++............................... 0.35% 0.35% 0.35%**
Ratio of net investment income to
average daily net assets++............. 5.17% 3.26% 3.02%**
<FN>
- ------------------------
* Commencement of operations.
** Adjusted to an annual basis.
+ Total return is based on the change in net asset value during the period,
assumes reinvestment of all distributions at net asset value and does not
reflect a sales charge.
++ Various fees and expenses were voluntarily waived or absorbed by the
Adviser during the years ended June 30, 1995 and 1994. Had the Fund paid
all expenses, the ratios of expenses and net investment income to average
daily net assets would have been 0.49%/5.03% in fiscal 1995 and 0.61%/3.00%
in fiscal 1994.
</TABLE>
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ADJUSTABLE PORTFOLIO
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JUNE 30
----------------- PERIOD FROM
1995 1994 2/2/93* TO 6/30/93
------- ------- ------------------
<S> <C> <C> <C>
Net asset value, beginning of period.... $ 9.46 $10.04 $10.00
Operations:
Net investment income................. 0.52 0.49 0.18
Net realized and unrealized gains
(losses) on investments.............. (0.04) (0.57) 0.04
------- ------- -------
Total from operations............... 0.48 (0.08) 0.22
------- ------- -------
Distributions to shareholders:
From net investment income............ (0.41) (0.50) (0.18)
Tax return of capital................. (0.09) -- --
------- ------- -------
Total distributions................. (0.50) (0.50) (0.18)
------- ------- -------
Net asset value, end of period.......... $ 9.44 $ 9.46 $10.04
------- ------- -------
------- ------- -------
Total return+........................... 5.26% (0.91%) 2.18%
Net assets, end of period (in
millions).............................. $ 15 $ 35 $ 41
Ratio of expenses to average daily net
assets++............................... 0.55% 0.55% 0.74%**
Ratio of net investment income to
average daily net assets++............. 5.54% 5.13% 4.73%**
Portfolio turnover rate (excluding
short-term securities)................. 43% 110% 26%
<FN>
- ------------------------
* Commencement of operations.
** Adjusted to an annual basis.
+ Total return is based on the change in net asset value during the period,
assumes reinvestment of all distributions at net asset value and does not
reflect a sales charge.
++ Various fees and expenses were voluntarily waived or absorbed by the
Adviser during the years ended June 30, 1995 and 1994. Had the Fund paid
all expenses, the ratios of expenses and net investment income to average
daily net assets would have been 0.75%/5.34% in fiscal 1995 and 0.60%/5.08%
in fiscal 1994.
</TABLE>
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INVESTMENT OBJECTIVES AND POLICIES
The investment objectives listed below cannot be changed without shareholder
approval. In view of the risks inherent in all investments in securities, there
is no assurance that these objectives will be achieved. The investment policies
and techniques employed in pursuit of the Funds' objectives may be changed
without shareholder approval, unless otherwise noted.
INSTITUTIONAL MONEY MARKET FUND
RULE 2A-7. Money Market Fund will be subject to the investment restrictions
of Rule 2a-7 under the Investment Company Act of 1940 in addition to its other
policies and restrictions discussed below. Rule 2a-7 requires that the Fund
invest exclusively in securities that mature within 397 days and that the Fund
maintain an average weighted maturity of not more than 90 days. Rule 2a-7 also
requires that all investments by the Fund be limited to United States
dollar-denominated investments that: (1) present "minimal credit risks," and (2)
are at the time of acquisition "Eligible Securities." Eligible Securities
include, among others, securities that are rated by two Nationally Recognized
Statistical Rating Organizations ("NRSROs") in one of the two highest categories
for short-term debt obligations, such as A-1 or A-2 by Standard & Poor's
Corporation ("Standard & Poor's") or P-1 or P-2 by Moody's Investors Service,
Inc. ("Moody's"). It is the responsibility of the Adviser to determine that the
Fund's investments present only "minimal credit risks" and are Eligible
Securities. The Funds' Board of Directors has established written guidelines and
procedures for the Adviser and oversees the Adviser's determination that Money
Market Fund's portfolio securities present only "minimal credit risks" and are
Eligible Securities.
Under Rule 2a-7, 95% of the assets of non-tax-exempt money funds (such as
Money Market Fund) must be invested in Eligible Securities that are deemed First
Tier Securities, which include, among others, securities rated by two NRSROs in
the highest category (such as A-1 and P-1). Rule 2a-7 requires that (1) a fund
may not invest more than 5% of its total assets in securities of a single
issuer, other than U.S. Government securities, (2) a fund may not invest more
than 5% of its total assets in Second Tier Securities (I.E., Eligible Securities
that are not First Tier Securities) and (3) a fund's investment in Second Tier
Securities of a single issuer may not exceed the greater of 1% of the fund's
total assets or $1,000,000.
INVESTMENT OBJECTIVE. Money Market Fund has an investment objective of
maximum current income consistent with preservation of capital and maintenance
of liquidity.
INVESTMENT POLICIES AND TECHNIQUES. Money Market Fund will invest only in
U.S. Government Securities (as defined below) and in repurchase agreements and
reverse repurchase agreements with respect to such securities. See "Special
Investment Methods -- Repurchase Agreements" and "-- Reverse Repurchase
Agreements." The Fund will purchase only those securities with a remaining
effective maturity of 397 calendar days or less on the date of purchase and will
maintain a dollar-weighted average maturity of its portfolio of 90 days or less.
U.S. Government Securities are obligations issued or guaranteed as to
payment of principal and interest by the U.S. Government or its agencies or
instrumentalities. These securities include direct obligations of the U.S.
Treasury, such as U.S. Treasury bills, notes and bonds, and obligations of U.S.
Government agencies or instrumentalities, including, but not limited to, Federal
Home Loan Banks, the Farmers Home Administration, Federal Farm Credit Banks, the
Federal National Mortgage Association, the Government National Mortgage
Association, the Federal Home Loan Mortgage Corporation, the Financing
Corporation and the Student Loan Marketing Association. Obligations of
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U.S. Government agencies or instrumentalities are backed in a variety of ways by
the U.S. Government or its agencies or instrumentalities. Some of these
obligations, such as Government National Mortgage Association mortgage-backed
securities, are backed by the full faith and credit of the U.S. Treasury.
Others, such as those of the Federal Home Loan Banks, are backed by the right of
the issuer to borrow from the Treasury. Still others, such as those issued by
the Federal National Mortgage Association, are backed by the discretionary
authority of the U.S. Government to purchase certain obligations of the agency
or instrumentality. Other obligations may be backed by an irrevocable letter of
credit of an agency or instrumentality of the U.S. Government. Finally,
obligations of other agencies or instrumentalities are only backed by the credit
of the agency or instrumentality issuing the obligations.
INSTITUTIONAL GOVERNMENT ADJUSTABLE PORTFOLIO
INVESTMENT OBJECTIVE. Adjustable Portfolio has an investment objective of
high current income consistent with low principal volatility. Despite the Fund's
investment objective of low principal volatility, investors should expect some
fluctuation in the net asset value of their shares. See "Investment Risks"
below.
INVESTMENT POLICIES AND TECHNIQUES. Adjustable Portfolio, under normal
conditions, will seek to achieve its investment objective by investing primarily
(at least 65% of its total assets) in a portfolio of Mortgage-Backed Securities
(as defined herein) having adjustable interest rates which reset at periodic
intervals ("adjustable rate mortgage securities" or "ARMS") and which are U.S.
Government Securities, as defined above under "Investment Objectives and
Policies -- Institutional Money Market Fund." ARMS include both pass-through
securities representing interests in adjustable rate mortgage loans and floating
rate collateralized mortgage obligations. The balance of the Fund's assets (up
to 35% of total assets) may be invested in ARMS issued by private organizations,
Mortgage-Backed Securities other than ARMS, other types of U.S. Government
Securities, Canadian Government Securities, Foreign Index Linked Instruments and
Corporate Debt Securities. Investments in each of Canadian Government
Securities, Foreign Index Linked Instruments and Corporate Debt Securities are
limited to 10% of total assets. Securities in which Adjustable Portfolio invests
(other than U.S. Government Securities) must be rated, as of the date of
purchase, AAA or better by Standard & Poor's or, if unrated, be of a comparable
quality as determined by the Adviser. In the event that a security held by
Adjustable Portfolio is downgraded to a rating below AAA or, if unrated, is no
longer of a quality comparable to a security rated AAA, as determined by the
Adviser, the Fund will sell such a security as promptly as possible. For a
discussion of Standard & Poor's ratings, see Appendix A to the Statement of
Additional Information.
The Fund may engage in options and financial futures transactions which
relate to the securities in which it invests, may engage in foreign currency
exchange transactions with respect to its investments in Canadian Government
Securities, may enter into interest rate swaps and purchase and sell interest
rate caps and floors, may purchase or sell securities on a when-issued or
forward commitment basis, including the use of mortgage dollar rolls, and may
lend its portfolio securities. The Fund's investments in options and futures
contracts will not be included in the 65% of total assets that must be invested
in ARMS which are U.S. Government Securities, even if they relate to such
securities. For temporary defensive purposes, the Fund may invest without
limitation in cash or in high-quality debt securities with remaining maturities
of one year or less. Such securities may include (a) commercial paper rated A-1+
by Standard & Poor's, (b) certificates of deposit, time deposits and bankers'
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acceptances with any bank the unsecured commercial paper of which is rated A-1+
by Standard & Poor's (or, in the case of the principal bank in a bank holding
company, the unsecured commercial paper of the bank holding company), and (c)
U.S. Government Securities.
INVESTMENT RISKS. Adjustable Portfolio is subject to certain risks which
could result in fluctuation of the net asset value of the Fund's shares. The
Fund is subject to interest rate risk, which is the potential for a decline in
bond prices due to rising interest rates. In general, bond prices vary inversely
with interest rates. When interest rates rise, bond prices generally fall.
Conversely, when interest rates fall, bond prices generally rise. Although the
ARMS in the Fund's portfolio should generally be more resistant to price swings
than other debt securities because the interest rates of ARMS move with market
interest rates, the adjustable rate feature of ARMS will not eliminate price
fluctuations. See "Adjustable Rate Mortgage Securities -- Interest Rate Risk"
below. The Fund's investments in ARMS and other Mortgage-Backed Securities are
also subject to prepayment risk. See "Adjustable Rate Mortgage Securities --
Prepayment Risk" below. In addition, the Fund is subject to credit risk to the
extent it invests in non-U.S. Government securities. Credit risk, also known as
default risk, is the possibility that a bond issuer will fail to make timely
payments of interest or principal. These and other risks of Adjustable
Portfolio's investments are described in detail below.
Adjustable Portfolio's investments in mortgage-related securities include
derivative mortgage securities such as collateralized mortgage obligations and
stripped mortgage-backed securities which may involve risks in addition to those
found in other mortgage-related securities. Recent market experience has shown
that certain derivative mortgage securities may be highly sensitive to changes
in interest and prepayment rates and, as a result, the prices of such securities
may be highly volatile. In addition, recent market experience has shown that
during periods of rising interest rates, the market for certain derivative
mortgage securities may become more unstable and such securities may become more
difficult to sell as market makers choose not to repurchase such securities or
offer prices, based on current market conditions, which are unacceptable to
Adjustable Portfolio.
Adjustable Portfolio also may engage in investment practices which involve
certain special risks. See "Special Investment Methods" below. The use of these
investment practices may increase the volatility of Adjustable Portfolio's net
asset value.
ADJUSTABLE RATE MORTGAGE SECURITIES
U.S. GOVERNMENT MORTGAGE PASS-THROUGH SECURITIES. Adjustable Portfolio may
invest in ARMS which are "pass-through" securities issued or guaranteed by the
U.S. Government or one of its agencies or instrumentalities ("U.S. Government
Pass-Throughs"). Pass-through securities constituting ARMS represent ownership
interests in underlying pools of adjustable rate mortgage loans originated by
private lenders. Such securities differ from conventional debt securities, which
provide for periodic payment of interest in fixed amounts (usually
semi-annually) and principal payments at maturity or on specified call dates, in
that pass-through securities provide for monthly payments that are a
pass-through of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans, net
of any fees paid to the guarantor of such securities and the servicers of the
underlying mortgage loans.
The U.S. Government Pass-Throughs in which Adjustable Portfolio may invest
are issued or guaranteed by the Government National Mortgage Association
("GNMA"), the Federal National Mortgage Association ("FNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC"). Each of GNMA, FNMA and FHLMC guarantee
timely distributions of interest to securities holders. GNMA and FNMA also
guarantee timely distribution of scheduled principal. FHLMC generally
9
<PAGE>
guarantees only ultimate collection of principal on the underlying loans, which
collection may take up to one year. GNMA is a wholly owned corporate
instrumentality of the U.S. Government within the Department of Housing and
Urban Development and its guarantee is backed by the full faith and credit of
the U.S. Government. FNMA and FHLMC are federally chartered corporations and
their respective guarantees are not backed by the full faith and credit of the
U.S. Government.
The mortgages underlying ARMS issued by GNMA are fully guaranteed by the
Federal Housing Administration ("FHA") or Veterans Administration ("VA"). The
mortgages underlying ARMS issued by FNMA or FHLMC may be backed by conventional
adjustable rate mortgages not guaranteed by FHA or VA.
PRIVATE MORTGAGE PASS-THROUGH SECURITIES. Private Mortgage Pass-Through
Securities ("Private Pass-Throughs") are structured similarly to the GNMA, FNMA
and FHLMC mortgage pass-through securities described above and are issued by
originators of and investors in mortgage loans, including savings and loan
associations, mortgage bankers, commercial banks, investment banks and special
purpose subsidiaries of the foregoing. Private Pass-Throughs constituting ARMS
are backed by a pool of conventional adjustable rate mortgage loans. Since
Private Pass-Throughs are not guaranteed by an entity having the credit status
of GNMA, FNMA or FHLMC, such securities generally are structured with one or
more types of credit enhancement. See "Investment Objectives, Policies and
Restrictions -- Mortgage-Backed Securities -- Credit Support" in the Statement
of Additional Information.
CMOS AND MULTI-CLASS PASS-THROUGH SECURITIES. ARMS in which Adjustable
Portfolio may invest also include adjustable rate tranches of collateralized
mortgage obligations and multi-class pass-through securities, which are
derivative mortgage securities. Collateralized mortgage obligations are debt
instruments issued by special purpose entities which are secured by pools of
mortgage loans or other Mortgage-Backed Securities. Multi-class pass-through
securities are equity interests in a trust composed of mortgage loans or other
Mortgage-Backed Securities. Payments of principal and interest on underlying
collateral provide the funds to pay debt service on the collateralized mortgage
obligation or make scheduled distributions on the multi-class pass-through
security. Collateralized mortgage obligations and multi-class pass-through
securities (collectively "CMOs" unless the context indicates otherwise) may be
issued by agencies or instrumentalities of the U.S. Government or by private
organizations.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMO, often referred to as a "tranche," is issued at a specified
coupon rate and has a stated maturity or final distribution date. Principal
prepayments on collateral underlying a CMO may cause it to be retired
substantially earlier than the stated maturities or final distribution dates.
The principal and interest on the mortgages underlying a CMO may be
allocated among the CMO's tranches in many ways. See "Mortgage-Backed Securities
- -- CMOs," below. One or more tranches of a CMO may have coupon rates which reset
periodically at a specified increment over an index such as the London Interbank
Offered Rate ("LIBOR"). These adjustable rate tranches, known as "floating rate
CMOs," will be considered as ARMS by Adjustable Portfolio. Floating rate CMOs
may be backed by fixed rate or adjustable rate mortgages; to date, fixed rate
mortgages have been more commonly utilized for this purpose. Floating rate CMOs
are typically issued with lifetime caps on the coupon rate thereon. These caps,
similar to the caps on adjustable rate mortgages, represent a
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ceiling beyond which the coupon rate on a floating rate CMO may not be increased
regardless of increases in the interest rate index to which the floating rate
CMO is geared, which may cause the security to be valued at a greater discount
than if the security was not subject to a ceiling.
HOW INTEREST RATES ARE SET. The interest rates on ARMS are reset at
periodic intervals (generally one year or less) to an increment over some
predetermined interest rate index. There are two main categories of indices:
those based on U.S. Treasury securities and those derived from a calculated
measure such as a cost of funds index or a moving average of mortgage rates.
Commonly utilized indices include the one-year and five-year constant maturity
Treasury note rates, the three-month Treasury bill rate, the 180-day Treasury
bill rate, rates on longer-term Treasury securities, the 11th District Federal
Home Loan Bank Cost of Funds Index, the National Median Cost of Funds, the one-
month or three-month LIBOR, the prime rate of a specific bank, or commercial
paper rates. Some indices, such as the one-year constant maturity Treasury note
rate, closely mirror changes in market interest rate levels. Others, such as the
11th District Home Loan Bank Cost of Funds Index (often related to ARMS issued
by FNMA), tend to lag changes in market rate levels and tend to be somewhat less
volatile. The Adviser will seek to diversify Adjustable Portfolio's investments
in ARMS among a variety of indices and reset periods to reduce the Fund's
exposure to the risk of interest rate fluctuations. In selecting a type of ARMS
for investment, the Adviser will also consider the liquidity of the market for
such ARMS.
The underlying adjustable rate mortgages which back ARMS in which Adjustable
Portfolio invests will frequently have caps and floors which limit the maximum
amount by which the loan rate to the residential borrower may change up or down
(1) per reset or adjustment interval and (2) over the life of the loan. Some
residential adjustable rate mortgage loans restrict periodic adjustments by
limiting changes in the borrower's monthly principal and interest payments
rather than limiting interest rate changes. These payment caps may result in
negative amortization; i.e., increase in the balance of the mortgage loan.
Floating rate CMOs are generally backed by fixed rate mortgages and generally
have lifetime caps on the coupon rate thereon.
INTEREST RATE RISK. The values of ARMS, like other debt securities,
generally vary inversely with changes in market interest rates (increasing in
value during periods of declining interest rates and decreasing in value during
periods of increasing interest rates); however, the values of ARMS should
generally be more resistant to price swings than other debt securities because
the interest rates of ARMS move with market interest rates. The adjustable rate
feature of ARMS will not, however, eliminate fluctuations in the prices of ARMS,
particularly during periods of extreme fluctuations in interest rates. Also,
since many adjustable rate mortgages only reset on an annual basis, it can be
expected that the prices of ARMS will fluctuate to the extent that changes in
prevailing interest rates are not immediately reflected in the interest rates
payable on the underlying adjustable rate mortgages.
PREPAYMENT RISK. ARMS, like other Mortgage-Backed Securities, differ from
conventional bonds in that principal is paid back over the life of the ARMS
rather than at maturity. As a result, the holder of the ARMS (I.E., Adjustable
Portfolio) receives monthly scheduled payments of principal and interest, and
may receive unscheduled principal payments representing prepayments on the
underlying mortgages. When the holder reinvests the payments and any unscheduled
prepayments of principal it receives, it may receive a rate of interest which is
lower than the rate on the existing ARMS. For this reason, ARMS are less
effective than longer-term debt securities as a means of "locking-in" long-term
interest rates.
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ARMS, while having less risk of price decline during periods of rapidly
rising rates than other investments of comparable maturities, will have less
potential for capital appreciation due to the likelihood of increased
prepayments of mortgages as interest rates decline. In addition, to the extent
ARMS are purchased at a premium, mortgage foreclosures and unscheduled principal
prepayments will result in a loss of some or all of the premium paid. On the
other hand, if ARMS are purchased at a discount, both a scheduled payment of
principal and an unscheduled prepayment of principal will increase current and
total returns and will accelerate the recognition of income which, when
distributed to shareholders, will be taxable as ordinary income.
MORTGAGE-BACKED SECURITIES
In addition to ARMS, Adjustable Portfolio may invest in other types of
Mortgage-Backed Securities. Mortgage-Backed Securities are securities which
represent interests in or are collateralized by mortgages. Such securities are
issued by GNMA, FNMA, FHLMC and by private organizations and take the same
structure as ARMS, i.e., pass-through securities and CMOs. Adjustable Portfolio
may invest in any type of Mortgage-Backed Security, including traditional fixed
rate Mortgage-Backed Securities and more recently developed instruments such as
Stripped Mortgage-Backed Securities and CMOs. Adjustable Portfolio may also
invest in Mortgage-Backed Securities backed by fixed rate mortgages and, in
conjunction therewith, pursuant to an interest rate swap, exchange its right to
receive payments at fixed rates of interest for floating rate payments. The
intended net effect of the transaction would be the creation of a security with
the economic characteristics of an adjustable rate mortgage security. Such
"synthetic ARMS" will not be considered as ARMS for purposes of the requirement
that the Fund invest at least 65% of its total assets in ARMS.
Adjustable Portfolio's investments in Mortgage-Backed Securities other than
ARMS, together with its investments in ARMS issued by private organizations,
U.S. Government Securities other than ARMS and Mortgage-Backed Securities, and
Canadian Government Securities, are limited to 35% of its total assets.
CMOS. As discussed above, Adjustable Portfolio's investments in ARMS
include floating rate CMOs. Adjustable Portfolio's investments in
Mortgage-Backed Securities other than ARMS may include any other tranche of a
CMO, provided that Adjustable Portfolio may not invest in the residual interests
of CMOs.
The principal and interest on the mortgages underlying a CMO may be
allocated among the CMO's several tranches in many ways. For example, certain
tranches may have variable or floating interest rates and others may be stripped
securities which provide only the principal or interest feature of the
underlying security. See "Stripped Mortgage-Backed Securities," below.
Generally, the purpose of the allocation of the cash flow of a CMO to the
various tranches is to obtain a more predictable cash flow to certain of the
individual tranches than exists with the underlying collateral of the CMO. As a
general rule, the more predictable the cash flow is on a CMO tranche, the lower
the anticipated yield will be on that tranche at the time of issuance relative
to prevailing market yields on mortgage-related securities. As part of the
process of creating more predictable cash flows on most of the tranches of a
CMO, one or more tranches generally must be created that absorb most of the
volatility in the cash flows on the underlying mortgage loans. The yields on
these tranches are generally higher than prevailing market yields on
mortgage-related securities with similar maturities. However, as a result of the
uncertainty of the cash flows of these tranches, market prices and yields may be
more volatile than for other CMO tranches. The more volatile CMO tranches
include inverse floaters, IOs, POs and Z tranches, discussed below.
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Adjustable Portfolio's investments in CMO tranches may include "inverse
floaters" and "Z tranches." An inverse floater is a CMO tranche with a coupon
rate that moves inversely to a designated index, such as LIBOR or COFI (Cost of
Funds Index). Like most other fixed-income securities, the value of inverse
floaters will decrease as interest rates increase and increase as interest rates
decrease. Inverse floaters, however, may exhibit greater price volatility with
changes in interest rates than the majority of mortgage pass-through securities
or CMOs. Coupon rates on inverse floaters typically change at a multiple of the
changes in the relevant index rate. Thus, any rise in the index rate (as a
consequence of an increase in interest rates) causes a correspondingly greater
drop in the coupon rate of an inverse floater while any drop in the index rate
causes a correspondingly greater increase in the coupon of an inverse floater.
Some inverse floaters also exhibit extreme sensitivity to changes in
prepayments.
Z tranches of CMOs defer interest and principal payments until one or more
other classes of the CMO have been paid in full. Interest accretes on the Z
tranche, being added to principal, and is compounded through the accretion
period. After the other classes have been paid in full, interest payments begin
and continue through maturity. Z tranches have characteristics similar to zero
coupon bonds. See "Zero Coupon Treasury Securities," below. Like a zero coupon
bond, during its accretion period a Z tranche has the advantage of eliminating
the risk of reinvesting interest payments at lower rates during a period of
declining market interest rates. At the same time, however, and also like a zero
coupon bond, the market value of a Z tranche can be expected to fluctuate more
widely with changes in market interest rates than would the market value of a
tranche which pays interest currently. In addition, changes in prepayment rates
on the underlying mortgage loans will affect the accretion period of a Z
tranche, and therefore also are likely to influence its market value.
STRIPPED MORTGAGE-BACKED SECURITIES. Adjustable Portfolio's investments in
Mortgage-Backed Securities other than ARMS may include Stripped Mortgage-Backed
Securities ("SMBS"), which are derivative multi-class mortgage securities. SMBS
may be issued by agencies or instrumentalities of the U.S. Government or by
private originators of, or investors in, mortgage loans, including savings and
loan associations, mortgage bankers, commercial banks, investment banks and
special purpose subsidiaries of the foregoing.
There are generally two types of classes of SMBS, one of which (the interest
only or "IO" class) entitles the holders thereof to receive distributions
consisting solely or primarily of all or a portion of the interest on the
underling pool of mortgage loans or Mortgage-Backed Securities ("Mortgage
Assets") and the other of which (the principal only or "PO" class) entitles the
holders thereof to receive distributions consisting solely or primarily of all
or a portion of the principal of the underlying pool of Mortgage Assets. IOs and
POs issued by the U.S. Government or its agencies and instrumentalities may be
determined to be liquid pursuant to procedures adopted by the Board of
Directors. Otherwise, Adjustable Portfolio will treat IOs and POs as illiquid
and subject to Adjustable Portfolio's restriction of investing no more than 15%
of its net assets in illiquid securities. See "Special Investment Methods --
Illiquid Securities."
The cash flows and yields on IO and PO classes are extremely sensitive to
the rate of principal payments (including prepayments) on the related underlying
Mortgage Assets. For example, a rapid or slow rate of principal payments will
have a material adverse effect on the yield to maturity of IOs or POs,
respectively. If the underlying Mortgage Assets experience greater than
anticipated prepayments of principal, an investor in an IO class may incur
substantial losses, even if the IO class is rated AAA.
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Conversely, if the underlying Mortgage Assets experience slower than anticipated
prepayments of principal, the yield on a PO class will be affected more severely
than would be the case with a traditional Mortgage-Backed Security.
Under the Internal Revenue Code, Adjustable Portfolio will be required to
accrue a portion of the original issue discount on a PO as income each year even
though Adjustable Portfolio receives no cash distribution on the security during
the year.
RISKS OF MORTGAGE-BACKED SECURITIES. Mortgage-Backed Securities (other than
ARMS) are subject generally to the same risks as ARMS; however, such other
Mortgage-Backed Securities can be expected to be affected to a greater extent
than ARMS by fluctuating interest rates and prepayments and to have different
yield characteristics, due to the fact that fixed rate rather than adjustable
rate mortgages underlie such securities. Generally, prepayments on fixed rate
mortgages will increase during a period of falling interest rates and decrease
during a period of rising interest rates. Accordingly, amounts available for
reinvestment are likely to be greater during a period of declining interest
rates than during a period of rising interest rates and the yield on the
securities in which such amounts are reinvested is likely to be lower than the
yield on the securities that were prepaid or the yield that could be achieved if
such amounts were reinvested during a period of rising interest rates. If
Adjustable Portfolio purchases Mortgage-Backed Securities at a premium, a
prepayment rate that is faster than expected will reduce both the market value
and the yield to maturity from that which was anticipated, while a prepayment
rate that is slower than expected will have the opposite effect of increasing
yield to maturity and market value. Conversely, if Adjustable Portfolio
purchases Mortgage-Backed Securities at a discount, faster than expected
prepayments will increase, while slower than expected prepayments will reduce,
yield to maturity and market value. Mortgage-Backed Securities may decrease in
value as a result of increases in interest rates and may benefit less than other
fixed income securities from declining interest rates because of the risk of
prepayment.
Mortgage-Backed Securities derive their value from underlying pools of
mortgages and, as such, could be considered "derivative" securities. Certain
derivative mortgage securities, such as the more volatile CMO tranches and
Stripped Mortgage-Backed Securities, discussed above, may involve risks in
addition to those found in other Mortgage-Backed Securities. Recent market
experience has shown that certain derivative mortgage securities may be highly
sensitive to changes in interest and prepayment rates and, as a result, the
prices of such securities may be highly volatile. In addition, recent market
experience has shown that during periods of rising interest rates, the market
for certain derivative mortgage securities may become more unstable and such
securities may become more difficult to sell as market makers either choose not
to repurchase such securities or offer prices, based on current market
conditions, which are unacceptable to Adjustable Portfolio.
ZERO COUPON TREASURY SECURITIES
Adjustable Portfolio may invest in "zero coupon" Treasury securities which
are U.S. Treasury bills, notes and bonds which have been stripped of their
unmatured interest coupons and receipts or certificates representing interests
in such stripped debt obligations and coupons. A zero coupon security pays no
interest to its holder during its life. Its value to an investor consists of the
difference between its face value at the time of maturity and the price for
which it was acquired, which is generally an amount significantly less than its
face value (sometimes referred to as a "deep discount" price).
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Currently U.S. Treasury securities issued without coupons include Treasury
bills and Treasury STRIPS. In addition, a number of banks and brokerage firms
separate the principal portions from the coupon portions of U.S. Treasury bonds
and notes and sell them separately in the form of receipts or certificates
representing undivided interests in these instruments (which instruments are
generally held by a bank in a custodial or trust account). Such securities are
currently not deemed by the Fund to be U.S. Government Securities but rather
securities issued by the bank or brokerage firm involved.
Zero coupon Treasury securities do not entitle the holder to any periodic
payments of interest prior to maturity. Accordingly, those securities usually
trade at a deep discount from their face or par value and will be subject to
greater fluctuations of market value in response to changing interest rates than
debt obligations of comparable maturities which make current distributions of
interest. In certain circumstances, Adjustable Portfolio could fail to recoup
its initial investment in those securities. Current federal tax law requires
that a holder (such as Adjustable Portfolio) of a zero coupon security accrue a
portion of the discount at which the security was purchased as income each year
even though Adjustable Portfolio receives no interest payment in cash on the
security during the year. In addition, as a registered investment company,
Adjustable Portfolio will be required to distribute this income to shareholders.
See "Dividends, Distributions and Tax Status." These distributions will be made
from the Fund's cash assets or, if necessary, from the proceeds of sales of
portfolio securities. Adjustable Portfolio will not be able to purchase
additional income producing securities with cash used to make such
distributions, and the Fund's current income ultimately may be reduced as a
result.
CANADIAN GOVERNMENT SECURITIES
Adjustable Portfolio may invest up to 10% of its total assets in Canadian
Government Securities. Canadian Government Securities are debt securities issued
or guaranteed by the Canadian federal government, Canadian provincial
governments and political subdivisions, agencies or instrumentalities thereof.
The Adviser anticipates that the Fund's portfolio of Canadian Government
Securities will consist primarily of Mortgage-Backed Securities issued or
guaranteed by the Canadian government or an agency or instrumentality thereof.
Investing in Canadian Government Securities involves considerations and possible
risks not typically associated with investing in U.S. securities, including
possible application of Canadian tax laws (including possible future withholding
taxes), potential difficulties in enforcing contractual obligations, changes in
governmental administrations or economic or monetary policy (in this country or
Canada) or changed circumstances in dealing between the United States and
Canada. Canadian brokerage commissions may be higher than those in the United
States and Canadian securities markets may be less liquid, more volatile and
less subject to governmental supervision than those in the United States.
The value of Adjustable Portfolio's investments denominated in Canadian
dollars could be adversely affected by a decline in the value of the Canadian
dollar relative to the U.S. dollar. In connection with such investments, the
Fund may from time to time enter into foreign exchange transactions, currency
forward and futures contracts and foreign currency options. These investment
techniques, and the risks incident thereto, are explained in Appendix A to this
Prospectus.
FOREIGN INDEX LINKED INSTRUMENTS
Adjustable Portfolio may invest up to 10% of its total assets in Foreign
Index Linked Instruments. Foreign Index Linked Instruments are fixed income
securities which are issued by U.S. issuers (including U.S. subsidiaries of
foreign issuers) and are denominated in U.S. dollars but return principal and/or
pay interest to investors in amounts which are linked to the level of a
particular foreign index. Foreign Index Linked Instruments may offer higher
yields than comparable securities linked to
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purely domestic indices but also may be more volatile. Foreign Index Linked
Instruments are relatively recent innovations for which the market has not yet
been fully developed and, accordingly, they typically are less liquid than
comparable securities linked to purely domestic indices. In addition, the value
of Foreign Index Linked Instruments will be affected by fluctuations in foreign
exchange rates or in foreign interest rates, factors which do not typically bear
on the values of ARMS or most other securities in which the Fund invests. If the
Adviser is incorrect in its prediction as to the movements in the direction of
particular foreign currencies or foreign interest rates, the return realized by
the Fund on a Foreign Index Linked Instrument may be lower than if the Fund had
invested in a similarly rated domestic security. The skills needed to predict
foreign currency and foreign interest rates are different from those needed to
select domestic portfolio securities. Foreign currency gains and losses with
respect to Foreign Index Linked Instruments may affect the amount and timing of
income recognized by the Fund.
CORPORATE DEBT SECURITIES
Adjustable Portfolio may invest up to 10% of its total assets in Corporate
Debt Securities. Corporate Debt Securities are debt obligations of U.S.
corporations (other than ARMS or Mortgage-Backed Securities). The values of
Corporate Debt Securities typically will fluctuate in response to general
economic conditions, to changes in interest rates and, to a greater extent than
the values of ARMS or Mortgage-Backed Securities, to business conditions
affecting the specific industries in which the issuers are engaged. Corporate
Debt Securities will typically decrease in value of a result of increases in
interest rates.
Adjustable Portfolio may invest in certain types of Corporate Debt
Securities that have been issued with original issue discount or market
discount. An investment in such securities poses certain economic risks and may
have certain adverse cash flow consequences to the Fund.
NEW INSTRUMENTS
Investors should note that new types of ARMS, other Mortgage-Backed
Securities, hedging instruments and other securities in which Adjustable
Portfolio may invest are developed and marketed from time to time and that,
consistent with its investment limitations, Adjustable Portfolio expects to
invest in those securities and instruments that the Adviser believes may assist
the Fund in achieving its investment objective. Adjustable Portfolio will
provide written notice to shareholders in advance of investments to a
significant degree (I.E., in excess of 5% of the Fund's net assets) in any type
of security other than the types disclosed in this Prospectus.
SPECIAL INVESTMENT METHODS
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with respect to U.S.
Government Securities. A repurchase agreement involves the purchase by a Fund of
securities with the condition that after a stated period of time the original
seller (a member bank of the Federal Reserve System or a recognized securities
dealer) will buy back the same securities ("collateral") at a predetermined
price or yield. Repurchase agreements involve certain risks not associated with
direct investments in securities. In the event the original seller defaults on
its obligation to repurchase, as a result of its bankruptcy or otherwise, the
Fund will seek to sell the collateral, which action could involve costs or
delays. In such case, the Fund's ability to dispose of the collateral to recover
such investment may be restricted or delayed. While collateral will at all times
be maintained in an amount equal to the repurchase price under the agreement
(including accrued interest due thereunder), to the extent proceeds from the
sale
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of collateral were less than the repurchase price, a Fund would suffer a loss.
In the event of a seller's bankruptcy, a Fund might be delayed in, or prevented
from, selling the collateral to the Fund's benefit. Repurchase agreements
maturing in more than seven days are considered illiquid and subject to each
Fund's restriction on investing in illiquid securities. See "Illiquid
Securities," below.
REVERSE REPURCHASE AGREEMENTS
Each Fund may engage in "reverse repurchase agreements" with banks and
securities dealers. Reverse repurchase agreements are ordinary repurchase
agreements in which the Fund is the seller of, rather than the investor in,
securities and agrees to repurchase them at an agreed upon time and price. Use
of a reverse repurchase agreement may be preferable to a regular sale and later
repurchase of the securities because it avoids certain market risks and
transactions costs. Because certain of the incidents of ownership of the
security are retained by the Fund, reverse repurchase agreements are considered
a form of borrowing by the Fund from the buyer, collateralized by the security.
At the time the Fund enters into a reverse repurchase agreement, cash, U.S.
Government Securities or other liquid high-grade debt obligations having a value
sufficient to make payments for the securities to be repurchased will be
segregated, and will be maintained throughout the period of the obligation.
Reverse repurchase agreements will be used as a means of borrowing for
investment purposes. This speculative technique is referred to as leveraging.
Leveraging may exaggerate the effect on net asset value of any increase or
decrease in the market value of the Fund's portfolio. Money borrowed for
leveraging will be subject to interest costs which could possibly exceed
interest income earned by the Fund on the investment of such borrowed money, and
therefore could adversely affect yield. No more than 25% of the total assets of
Adjustable Portfolio and 5% of the net assets of Money Market Fund will be
subject to reverse repurchase agreements.
BORROWING
Each Fund may borrow money from banks for temporary or emergency purposes in
an amount up to one-third of the value of its total assets in order to meet
redemption requests without immediately selling any of its portfolio securities.
Reverse repurchase agreements are not included in this limitation. If, for any
reason, the current value of either Fund's total assets falls below an amount
equal to three times the amount of its indebtedness from money borrowed, such
Fund will, within three days, reduce its indebtedness to the extent necessary.
To do this, the Fund may have to sell a portion of its investments at a time
when it may be disadvantageous to do so. Interest paid by a Fund on borrowed
funds would decrease the net earnings of that Fund. Neither Fund will purchase
portfolio securities while outstanding borrowings (other than reverse repurchase
agreements) exceed 5% of the value of the Fund's total assets. Each Fund may
mortgage, pledge or hypothecate its assets to secure permitted temporary or
emergency borrowing. The policies set forth in this paragraph are fundamental
and may not be changed with respect to a Fund without the approval of a majority
of that Fund's shares.
WHEN-ISSUED SECURITIES
Adjustable Portfolio may purchase securities on a "when-issued" basis and
may purchase or sell securities on a "forward commitment" basis. When such
transactions are negotiated, the price is fixed at the time the commitment is
made, but delivery and payment for the securities take place at a later date.
Adjustable Portfolio will not accrue income with respect to when-issued or
forward commitment securities prior to their stated delivery date. Pending
delivery of the securities, the Fund maintains in a segregated account cash or
liquid high-grade debt obligations in an amount sufficient to meet its purchase
commitments. The Fund will likewise segregate securities it sells on a forward
commitment basis.
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The purchase of securities on a when-issued or forward commitment basis
exposes Adjustable Portfolio to risk because the securities may decrease in
value prior to their delivery. Purchasing securities on a when-issued or forward
commitment basis involves the additional risk that the return available in the
market when the delivery takes place will be higher than that obtained in the
transaction itself. The Fund's purchase of securities on a when-issued or
forward commitment basis while remaining substantially fully invested increases
the amount of the Fund's assets that are subject to market risk to an amount
that is greater than the Fund's net asset value, which could result in increased
volatility of the price of the Fund's shares.
MORTGAGE DOLLAR ROLLS
In connection with its ability to purchase securities on a when-issued or
forward commitment basis, Adjustable Portfolio may enter into mortgage "dollar
rolls" in which the Fund sells securities for delivery in the current month and
simultaneously contracts with the same counterparty to repurchase similar (same
type, coupon and maturity) but not identical securities on a specified future
date. The Fund gives up the right to receive principal and interest paid on the
securities sold. However, the Fund would benefit to the extent of any difference
between the price received for the securities sold and the lower forward price
for the future purchase plus any fee income received. Unless such benefits
exceed the income, capital appreciation and gain or loss due to mortgage
prepayments that would have been realized on the securities sold as part of the
mortgage dollar roll, the use of this technique will diminish the investment
performance of the Fund compared with what such performance would have been
without the use of mortgage dollar rolls. Adjustable Portfolio will hold and
maintain in a segregated account until the settlement date cash or liquid
high-grade debt securities in an amount equal to the forward purchase price. The
benefits derived from the use of mortgage dollar rolls may depend upon the
Adviser's ability to predict correctly mortgage prepayments and interest rates.
There is no assurance that mortgage dollar rolls can be successfully employed.
In addition, the use of mortgage dollar rolls by the Fund while remaining
substantially fully invested increases the amount of the Fund's assets that are
subject to market risk to an amount that is greater than the Fund's net asset
value, which could result in increased volatility of the price of the Fund's
shares.
For financial reporting and tax purposes, Adjustable Portfolio treats
mortgage dollar rolls as two separate transactions: one involving the purchase
of a security and a separate transaction involving a sale. The Fund does not
currently intend to enter into mortgage dollar rolls that are accounted for as a
financing.
No more than one-third of Adjustable Portfolio's total assets may be
committed to the purchase of securities on a when-issued or forward commitment
basis, including mortgage dollar roll purchases.
LENDING OF PORTFOLIO SECURITIES
In order to generate income, Adjustable Portfolio may lend portfolio
securities up to one-third of the value of its total assets to broker-dealers,
banks or other financial borrowers of securities. As with other extensions of
credit, there are risks of delay in recovery or even loss of rights in the
collateral should the borrower of the securities fail financially. However, the
Fund will only enter into loan arrangements with broker-dealers, banks or other
institutions which the Adviser has determined are creditworthy under guidelines
established by the Fund's Board of Directors and will receive collateral in the
form of cash, U.S. Government Securities or other high-grade debt obligations
equal to at least 100% of the value of the securities loaned. The value of the
collateral and of the securities loaned will be marked to market on a daily
basis. During the time portfolio securities are on loan, the borrower pays the
Fund an amount equivalent to any interest paid on the securities and the Fund
may invest
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the cash collateral and earn income or may receive an agreed upon amount of
interest income from the borrower. However, the amounts received by the Fund may
be reduced by finders' fees paid to broker-dealers. Collateral (including any
securities purchased with cash collateral) will be maintained by the Fund's
custodian in a segregated account.
INTEREST RATE TRANSACTIONS
To preserve a return or spread on a particular investment or portion of its
portfolio, to create synthetic adjustable rate mortgage securities (see
"Investment Objective and Policies -- Institutional Government Adjustable
Portfolio -- Mortgage-Backed Securities") or for other non-speculative purposes,
Adjustable Portfolio may enter into interest rate swaps and may purchase or sell
interest rate caps and floors. The Fund does not intend to use these
transactions for speculative purposes. Interest rate swaps involve the exchange
by the Fund with another party of their respective 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 a
specified index exceeds a predetermined interest rate, to receive payments of
interest on a contractually-based principal amount from the party selling such
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent a specified index falls below a predetermined interest
rate, to receive payments of interest on a contractually-based principal amount
from the party selling such interest rate floor.
Adjustable Portfolio may enter into interest rate swaps, caps and floors on
either an asset-based or liability-based basis, depending upon whether it is
hedging its assets or its liabilities, and will usually enter into interest rate
swaps on a net basis, i.e., the two payment streams are netted out, with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments. The net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each interest rate swap will be accrued on a
daily basis and an amount of cash or high quality liquid securities having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the Fund's custodian. If the Fund enters
into an interest rate swap on other than a net basis, the Fund would maintain a
segregated account in the full amount accrued on a daily basis of the Fund's
obligations with respect to the swap. To the extent Adjustable Portfolio sells
(I.E., writes) caps and floors, it will maintain in a segregated account cash or
high quality liquid debt securities having an aggregate net asset value at least
equal to the full amount, accrued on a daily basis, of the Fund's obligations
with respect to any caps or floors. The Fund will not enter into any interest
rate swap, cap or floor transaction unless the unsecured senior debt or the
claims-paying ability of the other party thereto is rated at least AA by
Standard & Poor's. The Adviser will monitor the creditworthiness of
contra-parties on an ongoing basis. If there is a default by the other party to
such a transaction, the Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. The
Adviser has determined that, as a result, the swap market has become relatively
liquid. Caps and floors are more recent innovations for which standardized
documentation has not yet been developed and, accordingly, they are less liquid
than swaps.
There is no limit on the amount of interest rate swap transactions that may
be entered into by Adjustable Portfolio. These transactions do not involve the
delivery of securities or other underlying assets or principal. Accordingly, the
risk of loss with respect to interest rate swaps is limited to the net amount of
interest payments that the Fund is contractually obligated to make. If the other
party to an interest rate swap defaults, the Fund's risk of loss consists of the
net amount of interest payments
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that the Fund contractually is entitled to receive. The aggregate purchase price
of caps and floors held by the Fund may not exceed 5% of the Fund's total
assets. The Fund may sell (I.E., write) caps and floors without limitation,
subject to the segregated account requirement described above.
OPTIONS TRANSACTIONS
WRITING COVERED OPTIONS. Adjustable Portfolio may write (I.E., sell)
covered put and call options with respect to the securities in which it may
invest. By writing a call option, the Fund becomes obligated during the term of
the option to deliver the securities underlying the option upon payment of the
exercise price if the option is exercised. By writing a put option, the Fund
becomes obligated during the term of the option to purchase the securities
underlying the option at the exercise price if the option is exercised. With
respect to put options written by Adjustable Portfolio, there will have been a
predetermination that acquisition of the underlying security is in accordance
with the investment objective of the Fund.
The principal reason for writing call or put options is to obtain, through
the receipt of premiums, a greater current return than would be realized on the
underlying securities alone. The Fund receives premiums from writing call or put
options, which it retains whether or not the options are exercised. By writing a
call option, the Fund might lose the potential for gain on the underlying
security while the option is open, and by writing a put option the Fund might
become obligated to purchase the underlying security for more than its current
market price upon exercise.
PURCHASING OPTIONS. Adjustable Portfolio may purchase put options, solely
for hedging purposes, in order to protect portfolio holdings in an underlying
security against a substantial decline in the market value of such holdings
("protective puts"). Such protection is provided during the life of the put
because the Fund may sell the underlying security at the put exercise price,
regardless of a decline in the underlying security's market price. Any loss to
the Fund is limited to the premium paid for, and transaction costs paid in
connection with, the put plus the initial excess, if any, of the market price of
the underlying security over the exercise price. However, if the market price of
such security increases, the profit the Fund realizes on the sale of the
security will be reduced by the premium paid for the put option less any amount
for which the put is sold.
Adjustable Portfolio may also purchase call options solely for the purpose
of hedging against an increase in prices of securities that the Fund ultimately
wants to buy. Such protection is provided during the life of the call option
because the Fund may buy the underlying security at the call exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. By using call options in this manner, Adjustable Portfolio
will reduce any profit it might have realized had it bought the underlying
security at the time it purchased the call option by the premium paid for the
call option and by transaction costs.
Adjustable Portfolio may purchase and write exchange-traded put and call
options, and over-the-counter ("OTC") put and call options in negotiated
transactions with the writers of the options since options on many of the
portfolio securities held by the Fund are not traded on an exchange. The Fund
will purchase OTC options only from investment dealers and other financial
institutions (such as commercial banks or savings and loan associations) deemed
creditworthy by the Adviser.
OTC options are two-party contracts with price and terms negotiated between
buyer and seller. In contrast, exchange-traded options are third-party contracts
with standardized strike prices and expiration dates, and are purchased from a
clearing corporation. Exchange-traded options have a continuous liquid market
while OTC options may not. The staff of the SEC has taken the position that
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purchased OTC options and the assets used to "cover" written OTC options are
illiquid securities, provided that the entire amount of assets used to cover OTC
options written by Adjustable Portfolio will not be treated as illiquid in
certain circumstances, as set forth in the Statement of Additional Information.
Adjustable Portfolio will treat OTC options, to the extent set forth in the
Statement of Additional Information, as subject to the Fund's limitation on
investments in illiquid securities. See "Investment Restrictions," below.
For further information concerning the characteristics and risks of options
transactions, see "Investment Objectives, Policies and Restrictions -- Options"
in the Statement of Additional Information.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Adjustable Portfolio may enter into contracts for the purchase or sale for
future delivery of fixed-income securities or contracts based on financial
indices including any index of securities in which the Fund may invest ("futures
contracts"). A "sale" of a futures contract means the acquisition of a
contractual obligation to deliver the securities called for by the contract at a
specified price on a specified date. The purchaser of a futures contract on an
index agrees to take or make delivery of an amount of cash equal to the
difference between a specified dollar multiple of the value of the index on the
expiration date of the contract ("current contract value") and the price at
which the contract was originally struck. No physical delivery of the
fixed-income securities underlying the index is made. The futures contracts in
which the Fund may invest have been developed by and are traded on national
commodity exchanges.
The purpose of the acquisition or sale of a futures contract by Adjustable
Portfolio is to hedge against fluctuations in the value of its portfolio without
actually buying or selling securities. For example, if the Fund owns long-term
debt securities and interest rates are expected to increase, the Fund might sell
futures contracts. If interest rates did increase, the value of the debt
securities in the Fund's portfolio would decline, but the value of the Fund's
futures contracts would increase at approximately the same rate, thereby keeping
the net asset value of the Fund from declining as much as it otherwise would
have. If, on the other hand, the Fund held cash reserves and short-term
investments pending anticipated investment in long-term obligations and interest
rates were expected to decline, the Fund might purchase futures contracts for
U.S. Government Securities. Since the behavior of such contracts would generally
be similar to that of long-term securities, the Fund could take advantage of the
anticipated rise in the value of long-term securities without actually buying
them until the market had stabilized. At that time, the Fund could accept
delivery under the futures contracts or the futures contracts could be
liquidated and the Fund's reserves could then be used to buy long-term
securities in the cash market. The Fund will engage in such transactions only
for hedging purposes, on either an asset-based or a liability-based basis, in
each case in accordance with the rules and regulations of the Commodity Futures
Trading Commission. See Appendix B to the Statement of Additional Information.
Adjustable Portfolio may purchase and sell put and call options on futures
contracts and enter into closing transactions with respect to such options to
terminate existing positions. The Fund may use such options on futures contracts
in connection with its hedging strategies in lieu of purchasing and writing
options directly on the underlying securities or purchasing and selling the
underlying futures contracts.
There are risks in using futures contracts and options on futures contracts
as hedging devices. The primary risks associated with the use of futures
contracts and options thereon are (a) the prices of
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futures contracts and options may not correlate perfectly with the market value
of the underlying security held by the Fund and (b) the possible lack of a
liquid secondary market for a futures contract and the resulting inability to
close a futures position prior to its maturity date. The risk that the Fund will
be unable to close out a futures position will be minimized by entering into
such transactions on a national exchange with an active and liquid secondary
market.
Additional information with respect to futures contracts and options on
futures contracts is set forth in Appendix B to the Statement of Additional
Information.
The effective use of futures contracts, options on futures contracts and the
other hedging techniques discussed above is dependent upon the Adviser's
judgment regarding interest rate movements and other economic factors. To the
extent that this judgment is incorrect, the Fund will be in a worse position
than if such hedging techniques had not been used.
ILLIQUID SECURITIES
Adjustable Portfolio may invest up to 15% of its net assets in illiquid
securities and Money Market Fund may invest up to 10% of its net assets in
illiquid securities. Illiquid securities may offer a higher yield than
securities which are more readily marketable, but they may not always be
marketable on advantageous terms.
The sale of illiquid securities often requires more time and results in
higher brokerage charges or dealer discounts than does the sale of securities
eligible for trading on national securities exchanges or in the over-the-counter
markets. A Fund may be restricted in its ability to sell such securities at a
time when the Adviser deems it advisable to do so. In addition, in order to meet
redemption requests, a Fund may have to sell other assets, rather than such
illiquid securities, at a time which is not advantageous.
"Restricted securities" are securities which were originally sold in private
placements and which have not been registered under the Securities Act of 1933
(the "1933 Act"). Such securities generally have been considered illiquid, since
they may be resold only subject to statutory restrictions and delays or if
registered under the 1933 Act. In 1990, however, the SEC adopted Rule 144A under
the 1933 Act, which provides a safe harbor exemption from the registration
requirements of the 1933 Act for resales of restricted securities to "qualified
institutional buyers," as defined in the rule. The result of this rule has been
the development of a more liquid and efficient institutional resale market for
restricted securities. Thus, restricted securities are no longer necessarily
illiquid. Neither Fund is subject to any limitation on its ability to invest in
securities simply because such securities are restricted. (Money Market Fund,
however, will invest only in U.S. Government Securities, which are not
considered restricted securities.) These securities will be treated as liquid
when they have been determined to be liquid by the Board of Directors of the
Funds or by the Adviser subject to the oversight of and pursuant to procedures
adopted by the Board of Directors. See "Investment Objectives, Policies and
Restrictions -- Illiquid Securities" in the Statement of Additional Information.
Similar determinations may be made with respect to commercial paper issued in
reliance upon the so-called "private placement" exemption from registration
under Section 4(2) of the 1933 Act and with respect to IO and PO classes of
Mortgage-Backed Securities issued by the U.S. Government or its agencies and
instrumentalities.
INVESTMENT RESTRICTIONS
Each Fund has adopted certain investment restrictions, which are set forth
in detail in the Statement of Additional Information under "Investment
Objectives, Policies and Restrictions." Certain of these restrictions are
fundamental and may not be changed without shareholder approval,
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including the following: (1) Neither Fund will invest 25% or more of its total
assets in any one industry. (This restriction does not apply to securities of
the U.S. Government or its agencies and instrumentalities and repurchase
agreements relating thereto or to obligations of United States banks, domestic
branches thereof and United States branches of foreign banks subject to United
States regulation. The various types of utility companies, such as gas,
electric, telephone, telegraph, satellite and microwave communications
companies, are considered as separate industries.) (2) Neither Fund will, with
respect to 75% of its total assets, invest more than 5% of the value of its
total assets in the securities of any one issuer or acquire more than 10% of the
outstanding voting securities of an issuer, in each case other than securities
issued or guaranteed by the U.S. Government or any agency or instrumentality
thereof and securities of other investment companies.
Except with respect to each Fund's policy concerning borrowing, if a
percentage restriction set forth in this Prospectus is adhered to at the time of
an investment, a later increase or decrease in percentage resulting from changes
in values or assets will not constitute a violation of such restriction.
PORTFOLIO TURNOVER
While it is not the policy of Adjustable Portfolio to trade actively for
short-term profits, the Fund will dispose of securities without regard to the
time they have been held when such action appears advisable to the Adviser.
Frequent changes may result in higher transaction and other costs for the Fund.
The method of calculating portfolio turnover rate is set forth in the Statement
of Additional Information under "Investment Objectives, Policies and
Restrictions -- Portfolio Turnover." Portfolio turnover rates for Adjustable
Portfolio are set forth in "Financial Highlights."
MANAGEMENT
BOARD OF DIRECTORS
The Company's Board of Directors has the primary responsibility for
overseeing the overall management of the Company and electing its officers.
INVESTMENT ADVISER
Piper Capital Management Incorporated (the "Adviser") has been retained
under an Investment Advisory and Management Agreement with the Company to act as
the Funds' investment adviser subject to the authority of the Board of
Directors.
In addition to acting as the investment adviser for the Funds, the Adviser
also serves as investment adviser to a number of other open-end and closed-end
investment companies and to various other concerns, including pension and profit
sharing funds, corporate funds and individuals. As of September 30, 1995, the
Adviser rendered investment advice regarding approximately $9.4 billion of
assets. The Adviser is a wholly owned subsidiary of Piper Jaffray Companies
Inc., a publicly held corporation which is engaged through its subsidiaries in
various aspects of the financial services industry. The address of the Adviser
is Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota
55402-3804.
The Adviser furnishes each Fund with investment advice and, in general,
supervises the management and investment programs of the Funds. The Adviser
furnishes at its own expense all necessary administrative services, office
space, equipment and clerical personnel for servicing the investments of the
Funds. The Adviser also provides investment advisory facilities and executive
and supervisory personnel for managing the investments and effecting the
portfolio transactions of the Funds. In addition, the Adviser pays the salaries
and fees of all officers and directors of the Company who are affiliated with
the Adviser.
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Under the Investment Advisory and Management Agreement, the Adviser receives
a monthly fee computed separately for each Fund. Such fees are paid at an annual
rate of .15% and .30%, respectively, of the average daily net assets of Money
Market Fund and Adjustable Portfolio.
PORTFOLIO MANAGEMENT
Nancy S. Olsen has been primarily responsible for the day-to-day management
of Money Market Fund's portfolio since the Fund's inception in 1993. Ms. Olsen,
who joined the Adviser in 1987, is a Senior Vice President and fixed income
portfolio manager for the Adviser and directs the Adviser's cash reserve
management department. Ms. Olsen has an M.B.A. from the University of Minnesota.
Thomas S. McGlinch has been primarily responsible for the day-to-day
management of Adjustable Portfolio's investment portfolio since October 1994.
Mr. McGlinch is a vice president and fixed-income portfolio manager for the
Adviser. Prior to joining the Adviser in 1992, Mr. McGlinch was an institutional
mortgage-backed securities trader for Piper Jaffray Inc. during 1992. From 1988
to January 1992, Mr. McGlinch was a specialty products trader at FBS Investment
Services. He is a Chartered Financial Analyst ("C.F.A.") with an M.B.A. from the
University of St. Thomas.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN
Investors Fiduciary Trust Company ("IFTC"), 127 West Tenth Street, Kansas
City, Missouri 64105, (800) 874-6205, serves as Custodian for the Funds'
portfolio securities and cash and as Transfer Agent and Dividend Disbursing
Agent for the Funds.
The Company has entered into a Shareholder Account Servicing Agreement with
the Distributor pursuant to which the Distributor provides certain transfer
agent and dividend disbursing agent services for the underlying individual
shareholder accounts. For more information, see "Investment Advisory and Other
Services -- Transfer Agent and Dividend Disbursing Agent" in the Statement of
Additional Information.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
The Adviser selects brokers and futures commission merchants to use for the
Fund's portfolio transactions. In making its selection, the Adviser may consider
a number of factors, which are more fully discussed in the Statement of
Additional Information, including, but not limited to, research services, the
reasonableness of commissions and quality of services and execution. A broker's
sales of either of the Funds' shares may also be considered a factor if the
Adviser is satisfied that a Fund would receive from that broker the most
favorable price and execution then available for a transaction. Portfolio
transactions for the Funds may be effected through the Distributor on a
securities exchange in compliance with Section 17(e) of the 1940 Act. For more
information, see "Portfolio Transactions and Allocation of Brokerage" in the
Statement of Additional Information.
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SHAREHOLDER GUIDE TO INVESTING
HOW TO PURCHASE SHARES
GENERAL
The Funds' shares may be purchased at the public offering price from the
Distributor and from other broker-dealers who have sales agreements with the
Distributor. The address of the Distributor is that of the Funds. The
Distributor reserves the right to reject any purchase order. You should be aware
that, because the Funds do not issue stock certificates, Fund shares must be
kept in an account with the Distributor or with IFTC. All investments must be
arranged through your Piper Jaffray Investment Executive or other broker-dealer.
PURCHASE PRICE
Shares of Money Market Fund are offered without a sales charge at the net
asset value per share next calculated after receipt of your order by your Piper
Jaffray Investment Executive or other broker-dealer. The net asset value per
share of such Fund is normally expected to be $1.00. See "Valuation of Shares".
Shares of Adjustable Portfolio are offered at the net asset value per share
next calculated after receipt of your order by your Piper Jaffray Investment
Executive or other broker-dealer, plus a front-end sales charge as follows:
<TABLE>
<CAPTION>
DEALER
SALES CHARGE AS SALES CHARGE AS CONCESSION AS
PERCENTAGE OF PERCENTAGE OF NET PERCENTAGE OF
AMOUNT OF TRANSACTION AT OFFERING PRICE OFFERING PRICE ASSET VALUE OFFERING PRICE
- ----------------------------------------------------- ----------------- ------------------- ---------------
<S> <C> <C> <C>
Less than $250,000................................... 1.00% 1.01% .75%
$250,000 but less than $500,000...................... .50% .50% .375%
$500,000 and over.................................... 0% 0% 0%
</TABLE>
The Adviser and/or the Distributor, out of their own assets, may pay for
certain expenses incurred in connection with the distribution of shares of the
Funds. In particular, in connection with sales of Adjustable Portfolio of
$500,000 or more, Piper Jaffray Investment Executives and other broker-dealers
are paid an amount equal to .15% of the offering price of Fund shares purchased
by their clients. In addition, Piper Jaffray Investment Executives and other
broker-dealers receive ongoing payments for their servicing and/or maintenance
of shareholder accounts in an amount equal to .06% of the average daily net
assets of Money Market Fund attributable to shares sold by them and .15% of the
average daily net assets of Adjustable Portfolio attributable to shares sold by
them.
The Distributor or the Adviser, at their own expense, provide promotional
incentives to Investment Executives of the Distributor and to broker-dealers who
have sales agreements with the Distributor in connection with sales of shares of
the Funds, and other mutual funds for which the Adviser acts as investment
adviser. In some instances, these incentives may be made available only to
certain Investment Executives or broker-dealers who have sold or may sell
significant amounts of such shares. The incentives may include payment for
travel expenses, including lodging at luxury resorts, incurred in connection
with sales seminars.
MINIMUM INVESTMENTS
A minimum initial investment of $100,000 is required for each Fund. There is
no minimum for subsequent investments. The Distributor may waive the minimum
initial investment for clients of Piper Trust Company.
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SHAREHOLDER GUIDE TO INVESTING
REDUCING YOUR SALES CHARGE
Purchasers of Adjustable Portfolio may qualify for a reduced sales charge
through one or more of several plans. You must notify your Piper Jaffray
Investment Executive or broker-dealer at the time of purchase to take advantage
of these plans.
AGGREGATION
Front-end or initial sales charges of Adjustable Portfolio may be reduced or
eliminated by aggregating your purchase with purchases of certain related
personal accounts. In addition, purchases made by members of certain organized
groups will be aggregated for purposes of determining sales charges. Sales
charges are calculated by adding the dollar amount of your current purchase to
the higher of the cost or current value of shares of any Piper fund sold with a
sales charge that are currently held by you and your related accounts or by
other members of your group.
QUALIFIED GROUPS. You may group purchases in the following personal
accounts together:
- Your individual account.
- Your spouse's account.
- Your children's accounts (if they are under the age of 21).
- Your employee benefit plan accounts if they are exclusively for your
benefit. This includes accounts such as IRAs, individual 403(b) plans or
single-participant Keogh-type plans.
- A single trust estate or single fiduciary account if you are the trustee
or fiduciary.
Additionally, purchases made by members of any organized group meeting the
requirements listed below may be aggregated for purposes of determining sales
charges:
- The group has been in existence for more than six months.
- It is not organized for the purpose of buying redeemable securities of a
registered investment company.
- Purchases must be made through a central administration, or through a
single dealer, or by other means that result in economy of sales effort or
expense.
An organized group does not include a group of individuals whose sole
organizational connection is participation as credit card holders of a company,
policyholders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser.
RIGHT OF ACCUMULATION
Sales charges for purchases of Adjustable Portfolio shares into Piper
Jaffray accounts will be automatically calculated taking into account the dollar
amount of any new purchases along with the higher of current value or cost of
shares previously purchased in the Piper funds that were sold with a sales
charge. For other broker-dealer accounts, you should notify your Investment
Executive at the time of purchase of additional Piper fund shares you may own.
LETTER OF INTENT
Your sales charge for Adjustable Portfolio may be reduced by signing a
non-binding Letter of Intent. This Letter of Intent will state your intention to
invest $100,000 or more in any of the Piper
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SHAREHOLDER GUIDE TO INVESTING
funds sold with a sales charge over a 13-month period, beginning not earlier
than 90 days prior to the date you sign the Letter. You will pay the lower sales
charge applicable to the total amount you plan to invest over the 13-month
period. Part of your shares will be held in escrow to cover additional sales
charges that may be due if you do not invest the planned amount. Please see
"Purchase of Shares" in the Statement of Additional Information for more
details. You can contact your Piper Jaffray Investment Executive or other
broker-dealer for an application.
SPECIAL PURCHASE PLANS
For more information on any of the following special purchase plans, contact
your Piper Jaffray Investment Executive or other broker-dealer.
PURCHASES BY PIPER JAFFRAY COMPANIES INC., ITS SUBSIDIARIES AND ASSOCIATED
PERSONS
Piper Jaffray Companies Inc. and its subsidiaries may buy shares of
Adjustable Portfolio without incurring a sales charge. The following persons
associated with such entities also may buy such shares without paying a sales
charge:
- Officers, directors and partners.
- Employees and retirees.
- Sales representatives.
- Spouses or children under the age of 21 of any of the above.
- Any trust, pension, profit-sharing or other benefit plan for any of the
above.
PURCHASES BY BROKER-DEALERS
Employees of broker-dealers who have entered into sales agreements with the
Distributor, and spouses and children under the age of 21 of such employees, may
buy shares of Adjustable Portfolio without incurring a sales charge.
PURCHASES BY OTHER INDIVIDUALS WITHOUT A SALES CHARGE
The following other individuals and entities also may buy shares of
Adjustable Portfolio without paying a sales charge:
- Clients of the Adviser buying shares in their advisory accounts.
- Discretionary accounts at Piper Trust Company and participants in
investment companies exempt from registration under the 1940 Act that are
managed by the Adviser.
- Trust companies and bank trust departments using funds over which they
exercise exclusive discretionary investment authority and which are held
in a fiduciary, agency, advisory, custodial or similar capacity.
- Investors purchasing shares through a Piper Jaffray Investment Executive
if the purchase of such shares is funded by the proceeds from the sale of
shares of any non-money market open-end mutual fund. This privilege is
available for 30 days after the sale.
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SHAREHOLDER GUIDE TO INVESTING
PURCHASES BY EMPLOYEE BENEFIT PLANS AND TAX-SHELTERED ANNUITIES
- Shares of Adjustable Portfolio will be sold at net asset value, without a
sales charge, to employee benefit plans containing an actively maintained
qualified cash or deferred arrangement under Section 401(k) of the
Internal Revenue Code of 1986, as amended (the "Code") (a "401(k) Plan").
In the event a 401(k) Plan of an employer has purchased shares in the Fund
during any calendar quarter, any other employee benefit plan of such
employer that is a qualified plan under Section 401(a) of the Code also
may purchase shares of the Fund during such quarter without incurring a
sales charge.
- Custodial accounts under Section 403(b) of the Code (known as
tax-sheltered annuities) also may buy shares of Adjustable Portfolio
without incurring a sales charge.
HOW TO REDEEM SHARES
NORMAL REDEMPTION
You may redeem all or a portion of your shares on any day that a Fund values
its shares. (Please refer to "Valuation of Shares" below for more information.)
Your shares will be redeemed at the net asset value next calculated after the
receipt of your instructions in good form by your Piper Jaffray Investment
Executive or other broker-dealer as explained below.
PIPER JAFFRAY INC. ACCOUNTS. To redeem your shares, please contact your
Piper Jaffray Investment Executive with an oral request to redeem your shares.
OTHER BROKER-DEALER ACCOUNTS. To redeem your shares, you may either contact
your broker-dealer with an oral request or send a written request directly to
the Funds' transfer agent, IFTC. This request should contain: the dollar amount
or number of shares to be redeemed, your Fund account number and either a social
security or tax identification number (as applicable). You should sign your
request in exactly the same way the account is registered. If there is more than
one owner of the shares, all owners must sign. A signature guarantee is required
for redemptions over $25,000. Please contact IFTC or refer to "Redemption of
Shares" in the Statement of Additional Information for more details.
PAYMENT OF REDEMPTION PROCEEDS
After your shares have been redeemed, the cash proceeds will normally be
sent to you or your broker-dealer within three business days. In no event will
payment be made more than seven days after receipt of your order in good form.
However, payment may be postponed or the right of redemption suspended for more
than seven days under unusual circumstances, such as when trading is not taking
place on the New York Stock Exchange. Payment of redemption proceeds may also be
delayed if the shares to be redeemed were purchased by a check drawn on a bank
which is not a member of the Federal Reserve System, until such checks have
cleared the banking system (normally up to 15 days from the purchase date).
REDEMPTION IN KIND
Although it is the current policy of Adjustable Portfolio to pay redemption
proceeds in cash, redemption proceeds for redemption requests of $100,000 or
more may be paid, at the sole option of Adjustable Portfolio, in whole or in
part by a distribution in kind of securities or other assets held by Adjustable
Portfolio. The determination of which of Adjustable Portfolio's assets will be
distributed to
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SHAREHOLDER GUIDE TO INVESTING
meet such redemption requests will be made by the Adviser, in consultation with
the redeeming shareholder. Securities or other assets so distributed will be
valued in the same manner as Adjustable Portfolio's securities. In order to
dispose of such securities or other assets, the redeeming shareholder would most
likely be required to bear transaction costs.
INVOLUNTARY REDEMPTION
Each Fund reserves the right to redeem your account at any time the net
asset value of the account falls below $50,000 as the result of a redemption or
exchange request. You will be notified in writing prior to any such redemption
and will be allowed 30 days to make additional investments before the redemption
is processed.
SHAREHOLDER SERVICES
REINSTATEMENT PRIVILEGE
If you have redeemed shares of Adjustable Portfolio, you may reinvest in
shares of Adjustable Portfolio without payment of an additional sales charge.
The reinvestment request must be made within 120 days of the redemption. You may
also reinvest within this time period in shares of any other mutual fund managed
by the Adviser except that, if that fund has a higher sales charge than
Adjustable Portfolio, you must pay the difference. This privilege is subject to
the eligibility of share purchases in your state as well as the minimum
investment requirements and any other applicable terms in the prospectus of the
fund being acquired.
EXCHANGE PRIVILEGE
If your investment goals change, you may prefer a fund with a different
objective. If you are considering an exchange into another mutual fund managed
by the Adviser, you should carefully read the appropriate prospectus for
additional information about that fund. A prospectus may be obtained through
your Piper Jaffray Investment Executive, your broker-dealer or the Distributor.
To exchange your shares, please contact your Piper Jaffray Investment Executive,
your broker-dealer or IFTC.
You may exchange your shares for shares of any other mutual fund managed by
the Adviser that is open to new investors. All exchanges are subject to the
eligibility of share purchases in your state as well as the minimum investment
requirements and any other applicable terms in the prospectus of the fund being
acquired. Exchanges are made on the basis of the net asset values of the funds
involved, except that investors exchanging into a fund which has a higher sales
charge must pay the difference.
You may make four exchanges per year without payment of a service charge.
Thereafter, you will pay a $5 service charge for each exchange. The Company
reserves the right to change or discontinue the exchange privilege, or any
aspect of the privilege, upon 60 days' written notice.
TELEPHONE TRANSACTION PRIVILEGES
PIPER JAFFRAY INC. ACCOUNTS. If you hold your shares in a Piper Jaffray
account, you may telephone your Investment Executive to execute any transaction
or to apply for many shareholder services. In some cases, you may be required to
complete a written application.
OTHER BROKER-DEALER ACCOUNTS. If you hold your shares in an account with
your broker-dealer or at IFTC, you may authorize telephone privileges by
completing the Account Application and Services Form. Please contact your
broker-dealer or IFTC (800-874-6205) for an application or for more details.
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SHAREHOLDER GUIDE TO INVESTING
The Funds will employ reasonable procedures to confirm that a telephonic request
is genuine, including requiring that payment be made only to the address of
record or the bank account designated on the Account Application and Services
Form and requiring certain means of telephonic identification. A Fund employing
such procedures will not be liable for following instructions communicated by
telephone that it reasonably believes to be genuine. If a Fund does not employ
such procedures, it may be liable for any losses due to unauthorized or
fraudulent telephone transactions. It may be difficult to reach the Funds by
telephone during periods when market or economic conditions lead to an unusually
large volume of telephone requests. If you cannot reach the Funds by telephone,
you should contact your broker-dealer or issue written instructions to IFTC at
the address set forth herein. See "Management -- Transfer Agent, Dividend
Disbursing Agent and Custodian." The Funds reserve the right to suspend or
terminate their telephone services at any time without notice.
DIRECTED DIVIDENDS
You may direct income dividends and capital gains distributions to be
invested in any other mutual fund managed by the Adviser (other than a money
market fund) that is offered in your state. This investment will be made at net
asset value. It will not be subject to a minimum investment amount except that
you must hold shares in such fund (including the shares being acquired with the
dividend or distribution) with a value at least equal to such fund's minimum
initial investment amount.
SYSTEMATIC WITHDRAWAL PLAN
If your account has a value of $5,000 or more, you may establish a
Systematic Withdrawal Plan for either of the Funds. This plan will allow you to
receive regular periodic payments by redeeming as many shares from your account
as necessary. As with other redemptions, a redemption to make a withdrawal is a
sale for federal income tax purposes. Payments made under a Systematic
Withdrawal Plan cannot be considered as actual yield or income since part of the
payments may be a return of capital.
A request to establish a Systematic Withdrawal Plan must be submitted in
writing to your Piper Jaffray Investment Executive or other broker-dealer. There
are no service charges for maintenance; the minimum amount that you may withdraw
each period is $100. You will be required to have any income dividends and any
capital gains distributions reinvested. You may choose to have withdrawals made
monthly, quarterly or semiannually. Please contact your Piper Jaffray Investment
Executive, other broker-dealer or IFTC for more information.
With respect to Adjustable Portfolio, you should be aware that additional
investments in an account that has an active Systematic Withdrawal Plan may be
inadvisable due to sales charges and tax liabilities. Please refer to
"Redemption of Shares" in the Statement of Additional Information for additional
details.
ACCOUNT PROTECTION
If you purchased your shares of either Fund through a Piper Jaffray
Investment Executive, you may choose from several account options. Your
investments in a Fund held in a Piper Jaffray account (except for non-"PAT"
accounts) would be protected up to $25 million. Investments held in non-"PAT"
Piper Jaffray accounts are protected up to $2.5 million. In each case, the
Securities Investor
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SHAREHOLDER GUIDE TO INVESTING
Protection Corporation ("SIPC") provides $500,000 of protection; the additional
coverage is provided by The Aetna Casualty & Surety Company. This protection
does not cover any declines in the net asset value of Fund shares.
CONFIRMATION OF TRANSACTIONS AND REPORTING OF OTHER INFORMATION
Each time there is a transaction involving your Fund shares, such as a
purchase, redemption or dividend reinvestment, you will receive a confirmation
statement describing that activity. This information will be provided to you
from either Piper Jaffray, your broker-dealer or IFTC. In addition, you will
receive various IRS forms after the first of each year detailing important tax
information. Each Fund is required to supply annual and semiannual reports that
list securities held by the Fund and include the current financial statements of
the Fund.
HOUSEHOLDING. If you have multiple accounts with Piper Jaffray, you may
receive some of the above information in combined mailings. This will not only
help to reduce Fund expenses, it will help the environment by saving paper.
Please contact your Piper Jaffray Investment Executive for more information.
DIVIDENDS AND DISTRIBUTIONS
The net investment income of each Fund will be declared as dividends daily
and will be paid monthly. Net realized capital gains, if any, will be
distributed on an annual basis. For Adjustable Portfolio, shares begin accruing
dividends on the date on which payment for such shares has been received by the
Distributor or IFTC, as appropriate, and shares redeemed will earn dividends
through the day prior to settlement of the redemption. For Money Market Fund,
shares will begin accruing dividends on the date on which payment is received,
provided such payment is received by 12:00 noon, New York time. If a redemption
request for shares of Money Market Fund is received by 12:00 noon, New York
time, shares will be redeemed that day and a dividend will not be earned.
Adjustable Portfolio may at times pay out less than the entire amount of net
investment income earned in any particular period in order to permit the Fund to
maintain a more stable level of distributions. Any such amount retained by the
Fund would be available to stabilize future distributions. As a result, the
distributions paid by the Fund for any particular period may be more or less
than the amount of net investment income earned by the Fund during such period.
DISTRIBUTION OPTIONS. All net investment income dividends and net realized
capital gains distributions for a Fund generally will be payable in additional
shares of that Fund at net asset value ("Reinvestment Option"). If you wish to
receive your distributions in cash, you must notify your Piper Jaffray
Investment Executive or other broker-dealer. You may elect either to receive
income dividends in cash and capital gains distributions in additional shares of
the Fund at net asset value ("Split Option"), or to receive both income
dividends and capital gains distributions in cash ("Cash Option"). You may also
direct income dividends and capital gains distributions to be invested in
another mutual fund managed by the Adviser. See "Shareholder Services --
Directed Dividends," above. The taxable status of income dividends and/or net
capital gains distributions is not affected by whether they are reinvested or
paid in cash.
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VALUATION OF SHARES
The Funds determine their net asset value on each day the New York Stock
Exchange (the "Exchange") is open for business. The calculation is made as of
the regular close of the Exchange (currently 4:00 p.m. New York time) after the
Funds have declared any applicable dividends. The net asset value of Money
Market Fund is also determined each business day at 12:00 noon (New York time).
The net asset value per share for Adjustable Portfolio is determined by
dividing the value of the securities owned by the Fund plus any cash and other
assets (including interest accrued and dividends declared but not collected)
less all liabilities by the number of Fund shares outstanding. For the purpose
of determining the aggregate net assets of Adjustable Portfolio, cash and
receivables will be valued at their face amounts. Interest will be recorded as
accrued and dividends will be recorded on the ex-dividend date.
The value of certain fixed-income securities held by Adjustable Portfolio
will be provided by an independent pricing service, which determines these
valuations at a time earlier than the close of the Exchange. Pricing services
consider such factors as security prices, yields, maturities, call features,
rating and developments relating to specific securities in arriving at
securities valuations. Fixed-income securities for which prices are not
available from an independent pricing service but where an active market exists
will be valued using market quotations obtained from one or more dealers that
make markets in the securities. Occasionally events affecting the value of such
securities may occur between the time valuations are determined and the close of
the Exchange. If events materially affecting the value of such securities occur
during such period, or if management determines for any other reason that
valuations provided by the pricing service are inaccurate, such securities will
be valued at their fair value according to procedures decided upon in good faith
by the Company's Board of Directors. In addition, any securities or other assets
of Adjustable Portfolio for which market prices are not readily available will
be valued at their fair value in accordance with such procedures.
It is the policy of Money Fund to attempt to maintain a net asset value per
share of $1.00. The securities held are valued on the basis of amortized cost,
in accordance with the Fund's election to operate under the provisions of Rule
2a-7 under the 1940 Act. The amortized cost method of valuation involves valuing
an instrument at its cost and thereafter assuming a constant amortization to
maturity of a discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. While this method provides
certainty in valuation, it may result in periods during which value as
determined by amortized cost is higher or lower than the price the Fund would
receive if it sold the instrument. Under the direction of the Board of
Directors, procedures have been adopted to monitor and stabilize the price per
share. Calculations are made to compare the value of the Fund's portfolio valued
at amortized cost with market values. In the event that a deviation of one-half
of 1% or more exists between the $1.00 per share net asset value for the Fund
and the net asset value calculated by reference to market quotations, or if
there is any other deviation which the Board of Directors believes would result
in a material dilution to shareholders or purchasers, the Board of Directors
will promptly consider what action, if any, should be initiated. See "Net Asset
Value and Public Offering Price" in the Statement of Additional Information.
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TAX STATUS
Each Fund is treated as a separate corporation for federal tax purposes.
Therefore, each Fund is treated separately in determining whether it qualifies
as a regulated investment company and for purposes of determining the net
ordinary income (or loss), net realized capital gains (or losses) and
distributions necessary to relieve such Fund of any federal income tax
liability. Each Fund qualified as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"),
during its last taxable year and intends to qualify as a regulated investment
company during the current taxable year. If so qualified, a Fund will not be
liable for federal income taxes to the extent it distributes its taxable income
to shareholders.
Distributions by a Fund are generally taxable to shareholders, whether
received in cash or additional shares of the Fund (or shares of another mutual
fund managed by the Adviser). Distributions of net capital gains (designated as
"capital gain dividends") by Adjustable Portfolio, if any, are taxable to
shareholders as long-term capital gains, regardless of the length of time the
shareholder has held the shares of the Fund.
A shareholder will recognize a capital gain or loss upon the sale or
exchange of Fund shares if, as is normally the case, the shares are capital
assets in the shareholder's hands. This capital gain or loss will be long-term
if the shares have been held for more than one year.
The foregoing relates to federal income taxation as in effect as of the date
of this Prospectus. For a more detailed discussion of the federal income tax
consequences of investing in shares of the Funds, see "Taxation" in the
Statement of Additional Information. Before investing in either of the Funds,
you should check the consequences of your local and state tax laws.
PERFORMANCE COMPARISONS
Advertisements and other sales literature for Adjustable Portfolio may refer
to the Fund's "average annual total return" and "cumulative total return." In
addition, both Funds may provide yield calculations in advertisements and other
sales literature. All such yield and total return quotations are based upon
historical earnings and are not intended to indicate future performance.
Yield calculations for Adjustable Portfolio will be based upon a 30-day
period stated in the advertisement and will be calculated by dividing the net
investment income per share (as defined under SEC rules and regulations) earned
during the advertised period by the offering price per share (including the
maximum sales charge) on the last day of the period. The result will then be
"annualized" using a formula that provides for semi-annual compounding of
income. Money Market Fund may advertise its "yield" and "effective yield." The
"yield" of Money Market Fund refers to the income generated by an investment in
the Fund over a seven-day period stated in the advertisement. This income is
then "annualized." That is, the amount of income generated by the investment
during that week is assumed to be generated each week over a 52-week period and
is shown as a percentage of the investment. The "effective yield" is calculated
similarly but, when annualized, the income earned by an investment in the Fund
is assumed to be reinvested. The "effective yield" will be slightly higher than
the "yield" because of the compounding effect of this assumed reinvestment.
Average annual total return is the average annual compounded rate of return
on a hypothetical $1,000 investment made at the beginning of the advertised
period. Cumulative total return is calculated by subtracting a hypothetical
$1,000 payment to the Fund from the redeemable value of such
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payment at the end of the advertised period, dividing such difference by $1,000
and multiplying the quotient by 100. In calculating average annual and
cumulative total return, the maximum sales charge is deducted from the
hypothetical investment and all dividends and distributions are assumed to be
reinvested.
In addition to advertising total return and yield, comparative performance
information may be used from time to time in advertising the Funds' shares. For
example, advertisements may compare a Fund's performance to that of various
unmanaged market indices, or may include performance data from Lipper Analytical
Services, Inc., Morningstar, Inc. or other entities or organizations which track
the performance of investment companies.
For additional information regarding comparative performance information and
the calculation of yield, average annual total return and cumulative total
return, see "Performance Comparisons" in the Statement of Additional
Information.
Advertisements and other sales literature may also refer to Adjustable
Portfolio's effective duration. Effective duration estimates the interest rate
risk (price volatility) of a security, I.E., how much the value of the security
is expected to change with a given change in interest rates. The longer a
security's effective duration, the more sensitive its price is to changes in
interest rates. For example, if interest rates were to increase by 1%, the
market value of a bond with an effective duration of five years would decrease
by about 5%, with all other factors being constant. It is important to
understand that, while a valuable measure, effective duration is based on
certain assumptions and has several limitations. It is most useful as a measure
of interest rate risk when interest rate changes are small, rapid and occur
equally across all the different points of the yield curve. In addition,
effective duration is difficult to calculate precisely for bonds with prepayment
options, such as mortgage-backed securities, because the calculation requires
assumptions about prepayment rates. For example, when interest rates go down,
homeowners may prepay their mortgages at a higher rate than assumed in the
initial effective duration calculation, thereby shortening the effective
duration of Adjustable Portfolio's mortgage-backed securities. Conversely, if
rates increase, prepayments may decrease to a greater extent than assumed,
extending the effective duration of such securities. For these reasons, the
effective durations of funds which invest a significant portion of their assets
in mortgage-backed securities, particularly mortgage derivative securities, can
be greatly affected by changes in interest rates.
GENERAL INFORMATION
The Company is authorized to issue a total of 10 trillion shares of common
stock with a par value of $.01 per share. One hundred and ten billion of these
shares have been authorized by the Board of Directors to be issued in two
separate series: ten billion shares designated as Series A Common Shares, which
are the shares of common stock of Adjustable Portfolio, and one hundred billion
shares designated as Series B Common Shares, which are the shares of common
stock of Money Market Fund.
The Board of Directors is empowered under the Company's Articles of
Incorporation to issue other series of the Company's common stock without
shareholder approval. In addition, the Board of Directors may, without
shareholder approval, create and issue one or more additional classes of shares
within each Fund, as well as within any series of the Company created in the
future. See "Capital Stock and Ownership of Shares" in the Statement of
Additional Information.
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All shares, when issued, will be fully paid and nonassessable and will be
redeemable. All shares have equal voting rights. They can be issued as full or
fractional shares. A fractional share has pro-rata the same kind of rights and
privileges as a full share. The shares possess no preemptive or conversion
rights.
Each share of a series has one vote (with proportionate voting for
fractional shares) irrespective of the relative net asset value of the series'
shares. On some issues, such as the election of directors, all shares of the
Company vote together as one series. On an issue affecting only a particular
series, the shares of the affected series vote separately. Cumulative voting is
not authorized. This means that the holders of more than 50% of the shares
voting for the election of directors can elect 100% of the directors if they
choose to do so, and, in such event, the holders of the remaining shares will be
unable to elect any directors.
The Bylaws of the Company provide that shareholder meetings be held only
with such frequency as required under Minnesota law. Minnesota corporation law
requires only that the Board of Directors convene shareholder meetings when it
deems appropriate. In addition, Minnesota law provides that if a regular meeting
of shareholders has not been held during the immediately preceding 15 months, a
shareholder or shareholders holding 3% or more of the voting shares of the
Company may demand a regular meeting of shareholders by written notice given to
the chief executive officer or chief financial officer of the Company. Within 30
days after receipt of the demand, the Board of Directors shall cause a regular
meeting of shareholders to be called, which meeting shall be held no later than
90 days after receipt of the demand, all at the expense of the Company. In
addition, the 1940 Act requires a shareholder vote for all amendments to
fundamental investment policies and restrictions and for all amendments to
investment advisory contract. The 1940 Act also provides that Directors of the
Company may be removed by action of the record holders of two-thirds or more of
the outstanding shares of the Company. The Directors are required to call a
meeting of shareholders for the purpose of voting upon the question of removal
of any Director when so requested in writing by the record holders of at least
10% of the Company's outstanding shares.
PENDING LEGAL PROCEEDINGS
Complaints have been brought against the Adviser and the Distributor
relating to certain investment companies for which the Adviser acts or has acted
as investment adviser or subadviser. These lawsuits do not involve the Funds. A
number of complaints have been brought in federal and state court against the
Institutional Government Income Portfolio ("PJIGX") series of Piper Funds Inc.,
the Adviser, the Distributor, and certain individuals affiliated or formerly
affiliated with the Adviser and the Distributor. In addition, complaints have
been filed in federal court relating to a number of closed-end investment
companies managed by the Adviser and two open-end investment companies for which
the Adviser has acted as sub-adviser. The complaints, which ask for rescission
of plaintiff shareholders' purchases or compensatory damages, plus interest,
costs and expenses, generally allege, among other things, certain violations of
federal and/or state securities laws, including the making of materially
misleading statements in prospectuses concerning investment policies and risks.
See "Pending Litigation" in the Statement of Additional Information.
A settlement agreement has been reached with respect to one of the
complaints involving PJIGX. An Amended Consolidated Class Action Complaint,
which represents a consolidation of claims previously brought by 11 persons or
entities, was filed on October 5, 1994 in the United States District Court,
District of Minnesota. The named plaintiffs in this putative class action (the
"PJIGX action")
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purport to represent a class of individuals and groups who purchased shares of
PJIGX during the period from July 1, 1991 through May 9, 1994. The named
plaintiffs and defendants have entered into a settlement agreement which has
received preliminary approval from the Court. The terms of the settlement are
set forth in a Settlement Agreement dated July 20, 1995 (as modified by an
Addendum filed on July 28, 1995). The Settlement Agreement contained a provision
which would have permitted the defendants to cancel the Agreement if
shareholders who had incurred a cumulative "loss" (as defined under the
Agreement) of more than 10% of the loss sustained by the entire class had opted
out. The October 2, 1995 deadline for requesting exclusion from the class has
passed, and the loss sustained by persons requesting exclusion is less than 10%.
If granted final approval by the Court, the settlement agreement would provide
up to $70 million to class members in payments scheduled over approximately
three years. Such payments would be made by Piper Jaffray Companies and the
Adviser and would not be an obligation of Piper Funds Inc. Six additional
complaints have been brought and a number of actions have been commenced in
arbitration relating to PJIGX. The complaints generally have been consolidated
with the PJIGX action for pretrial purposes and the arbitrations and litigations
have been stayed pending entry of an order by the Court permitting those class
members who have requested exclusion to proceed with their actions.
The Adviser and the Distributor to not believe that the PJIGX settlement or
any outstanding complaint or action in arbitration will have a material adverse
effect on their ability to perform under their agreements with the Company or a
material adverse effect on the Funds, and they intend to defend such lawsuits
and actions vigorously.
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS (AND/OR IN THE STATEMENT OF ADDITIONAL INFORMATION REFERRED TO
ON THE COVER PAGE OF THIS PROSPECTUS), AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
FUNDS OR PIPER JAFFRAY INC. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION.
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APPENDIX A
FOREIGN CURRENCY TRANSACTIONS
As noted in the Prospectus, Adjustable Portfolio may invest up to 10% of its
assets in securities denominated in Canadian dollars. Adjustable Portfolio may
engage in foreign currency exchange transactions to protect against uncertainty
in the level of the rate of exchange between Canadian and U.S. dollars. The Fund
may engage in such transactions in connection with the purchase and sale of
portfolio securities ("transaction hedging") and to protect the value of
specific portfolio positions ("position hedging").
Adjustable Portfolio may engage in transaction hedging to protect against a
change in the exchange rate between the date on which the Fund contracts to
purchase or sell the security and the settlement date, or to "lock in" the U.S.
dollar equivalent of a dividend or interest payment in Canadian dollars. For
that purpose, Adjustable Portfolio may purchase or sell Canadian dollars on a
spot (or cash) basis at the prevailing spot rate in connection with the
settlement of transactions in portfolio securities denominated in Canadian
dollars. If conditions warrant, Adjustable Portfolio may also enter into
contracts to purchase or sell Canadian dollars at a future date ("forward
contracts") and purchase and sell Canadian dollars or futures contracts as a
hedge against changes in Canadian dollars or exchange rates between the trade
and settlement dates on particular transactions and not for speculation. A
foreign currency forward contract is a negotiated agreement to exchange currency
at a future time at a rate or rates that may be higher or lower than the spot
rate. Foreign currency futures contracts are standardized exchange-traded
contracts and have margin requirements. For transaction hedging purposes,
Adjustable Portfolio may also purchase exchange-listed and over-the-counter call
and put options on Canadian dollars or futures contracts thereon. A put option
on a futures contract gives the Fund the right to assume a short position in the
futures contract until expiration of the option. A put option on currency gives
the Fund the right to sell a currency at an exercise price until the expiration
of the option. A call option on a futures contract gives the Fund the right to
assume a long position in the futures contract until the expiration of the
option. A call option on currency gives the Fund the right to purchase a
currency at the exercise price until the expiration of the option.
Adjustable Portfolio may engage in position hedging to protect against a
decline in the value relative to the U.S. dollar in its securities, denominated
in Canadian dollars (or an increase in the value of the Canadian dollar for
securities which the Fund intends to buy, when it holds cash reserves and
short-term investments). For position hedging purposes, Adjustable Portfolio may
purchase or sell Canadian dollar futures contracts and forward contracts, and
may purchase put or call options on Canadian dollars or on futures contracts
thereon on exchanges or over-the-counter markets. In connection with position
hedging, Adjustable Portfolio may also purchase or sell Canadian dollars on a
spot basis.
The precise matching of the amounts of foreign currency exchange
transactions and the value of the portfolio securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
these securities between the dates the currency exchange transactions are
entered into and the dates they mature.
It is impossible to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, it may be necessary for Adjustable Portfolio
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to purchase additional Canadian dollars on the spot market (and bear the
expenses of such purchase) if the market value of the security or securities
being hedged is less than the amount of Canadian dollars the Fund is obligated
to deliver and if a decision is made to sell the security or securities and make
delivery of the Canadian dollars. Conversely, it may be necessary to sell on the
spot market some of the Canadian dollars received upon the sale of the portfolio
security or securities if the market value of such security or securities
exceeds the amount of Canadian dollars the Fund is obligated to deliver.
Hedging transactions involve costs and may result in losses. Adjustable
Portfolio may write covered call options on Canadian dollars to offset some of
such costs. The Fund may engage in over-the-counter transactions only when
appropriate exchange-traded transactions are unavailable and when, in the
opinion of the Adviser, the pricing mechanism and liquidity are satisfactory and
the participants are responsible parties likely to meet their contractual
obligations. Adjustable Portfolio's ability to engage in hedging and related
option transactions may be limited by tax considerations. See "Taxation" in the
Statement of Additional Information.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which Adjustable Portfolio owns or intends
to purchase or sell. They simply establish a rate of exchange which one can
achieve at some future point in time. Additionally, although these techniques
tend to minimize the risk of loss due to a decline in the value of the hedged
currency, they tend to limit any potential gain which might result from the
increase in the value of such currency.
A forward foreign currency exchange contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract as agreed by the parties, at a
price set at the time of the contract. In the case of a cancellable forward
contract, the holder has the unilateral right to cancel the contract at maturity
by paying a specified fee. The contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades. A foreign currency futures
contract is a standardized contract for the future delivery of a specified
amount of a foreign currency at a future date at a price set at the time of the
contract. Foreign currency futures contracts traded in the United States are
designated by and traded on exchanges regulated by the Commodity Futures Trading
Commission (the "CFTC"), such as the New York Mercantile Exchange. Adjustable
Portfolio would enter into foreign currency futures contracts solely for hedging
or other appropriate risk management purposes as defined in CFTC regulations.
Forward foreign currency exchange contracts differ from foreign currency
futures contracts in certain respects. For example, the maturity date of a
forward contract may be any fixed number of days from the date of the contract
agreed upon by the parties, rather than a predetermined date in any given month.
Also, forward foreign exchange contracts are traded directly between currency
traders so that no intermediary is required. A forward contract generally
requires no margin or other deposit.
At the maturity of a forward or futures contract, Adjustable Portfolio may
either accept or make delivery of the currency specified in the contract, or at
or prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are effected with the currency trader who is a party to the original
forward contract. Closing transactions with respect to futures contracts are
effected on a commodities exchange; a clearing corporation associated with the
exchange assumes responsibility for closing out such contracts.
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Positions in foreign currency futures contracts may be closed out only on an
exchange or board of trade which provides a secondary market for such contracts.
Although Adjustable Portfolio intends to purchase or sell foreign currency
futures contracts only on exchanges or boards of trade where there appears to be
an active secondary market, there is no assurance that a secondary market on an
exchange or board of trade will exist for any particular contract or at any
particular time. In such event, it may not be possible to close a futures
position and, in the event of adverse price movements, Adjustable Portfolio
would continue to be required to make daily cash payments of variation margin.
Options on foreign currencies operate similarly to options on securities,
and are traded primarily in the over-the-counter market, although options on
foreign currencies have recently been listed on several exchanges. Options
traded in the over-the-counter market are illiquid and it may not be possible
for Adjustable Portfolio to dispose of an option it has purchased or terminate
its obligations under an option it has written at a time when the Adviser
believes it would be advantageous to do so. Options on futures contracts are
affected by all of those factors which influence foreign exchange rates and
investments generally.
The value of a foreign currency option is dependent upon the value of the
foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign debt security. Because foreign currency
transactions occurring in the interbank market involve substantially larger
amounts than those that may be involved in the use of foreign currency options,
investors may be disadvantaged by having to deal in an odd lot market (generally
consisting of transactions of less than $1 million) for the underlying foreign
currencies at prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (less than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global, around-the-clock market. To
the extent the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the options markets.
In addition, significant price and rate movements that take place while U.S.
markets are closed will not be reflected in the price of Fund shares until net
asset value is next determined (as of the primary closing time of the New York
Stock Exchange).
Although foreign exchange dealers do not charge a fee for currency
conversion, they do realize a profit based upon the difference (the "spread")
between prices at which they are buying and selling various currencies. Thus, a
dealer may offer to sell a foreign currency to Adjustable Portfolio at one rate,
while offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer.
A-3
<PAGE>
PIPER INSTITUTIONAL FUNDS INC.
INVESTMENT ADVISER
PIPER CAPITAL MANAGEMENT INCORPORATED
DISTRIBUTOR
PIPER JAFFRAY INC.
CUSTODIAN AND TRANSFER AGENT
INVESTORS FIDUCIARY TRUST COMPANY
INDEPENDENT AUDITORS
KPMG PEAT MARWICK LLP
LEGAL COUNSEL
DORSEY & WHITNEY P.L.L.P.
Table of Contents
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Introduction................................... 2
Fund Expenses.................................. 4
Financial Highlights........................... 5
Investment Objectives and Policies............. 7
Special Investment Methods..................... 16
Management..................................... 23
SHAREHOLDER GUIDE TO INVESTING
How to Purchase Shares....................... 25
Reducing Your Sales Charge................... 26
Special Purchase Plans....................... 27
How to Redeem Shares......................... 28
Shareholder Services......................... 29
Dividends and Distributions.................. 31
Valuation of Shares............................ 32
Tax Status..................................... 33
Performance Comparisons........................ 33
General Information............................ 34
Appendix A -- Foreign Currency Transactions.... A-1
</TABLE>
INSTITUTIONAL MONEY MARKET FUND
INSTITUTIONAL GOVERNMENT ADJUSTABLE PORTFOLIO
NOVEMBER 1, 1995
PIF-05
<PAGE>
PART B
INSTITUTIONAL MONEY MARKET FUND
INSTITUTIONAL GOVERNMENT ADJUSTABLE PORTFOLIO
Series of Piper Institutional Funds Inc.
STATEMENT OF ADDITIONAL INFORMATION
November 1, 1995
Table of Contents
Page
----
Investment Objectives, Policies and Restrictions . . . . . . . . 2
Directors and Executive Officers . . . . . . . . . . . . . . . . 9
Investment Advisory and Other Services . . . . . . . . . . . . . 14
Portfolio Transactions and Allocation of Brokerage . . . . . . . 18
Capital Stock and Ownership of Shares. . . . . . . . . . . . . . 19
Net Asset Value and Public Offering Price. . . . . . . . . . . . 20
Performance Comparisons. . . . . . . . . . . . . . . . . . . . . 21
Purchase of Shares . . . . . . . . . . . . . . . . . . . . . . . 24
Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
General Information. . . . . . . . . . . . . . . . . . . . . . . 28
Financial Statements . . . . . . . . . . . . . . . . . . . . . . 29
Pending Litigation . . . . . . . . . . . . . . . . . . . . . . . 29
Appendix A - Commercial Paper and Corporate Bond Ratings . . . . A-1
Appendix B - Interest Rate Futures Contracts
and Related Options. . . . . . . . . . . . . . . . . . . . . . B-1
This Statement of Additional Information is not a prospectus.
This Statement of Additional Information relates to the Prospectus dated
November 1, 1995, and should be read in conjunction therewith. A copy of the
Prospectus may be obtained from the Funds at Piper Jaffray Tower, 222 South
Ninth Street, Minneapolis, Minnesota 55402-3804.
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The shares of Piper Institutional Funds Inc. (the "Company") are
currently offered in two series: Institutional Money Market Fund ("Money
Market Fund") and Institutional Government Adjustable Portfolio ("Adjustable
Portfolio") (sometimes referred to herein individually as a "Fund" or,
collectively, as the "Funds"). The investment objectives and policies of the
Funds are set forth in the Prospectus. Certain additional investment
information is set forth below.
REPURCHASE AGREEMENTS
Each Fund may invest in repurchase agreements. The Funds' custodian
will hold the securities underlying any repurchase agreement or such
securities will be part of the Federal Reserve Book Entry System. The market
value of the collateral underlying the repurchase agreement will be
determined on each business day. If at any time the market value of the
collateral falls below the repurchase price of the repurchase agreement
(including any accrued interest), the respective Fund will promptly receive
additional collateral (so the total collateral is an amount at least equal to
the repurchase price plus accrued interest).
The Funds have received from the Securities and Exchange Commission
an exemptive order permitting the Funds, along with other investment
companies currently managed by Piper Capital Management Incorporated (the
"Adviser"), and all future investment companies or series thereof advised by
the Adviser or its affiliates, to deposit uninvested cash balances into a
large single joint account to be used to enter into one or more large
repurchase agreements.
MORTGAGE-BACKED SECURITIES
Many Mortgage-Backed Securities (principally CMOs secured by GNMA,
FNMA and/or FHLMC Certificates) are issued by entities that operate under
orders from the Securities and Exchange Commission (the "SEC") exempting such
issuers from the provisions of the Investment Company Act of 1940, as amended
(the "1940 Act"). Until recently, the staff of the Division of Investment
Management of the SEC had taken the position that such issuers were
investment companies pursuant to Section 3 of the 1940 Act and that,
accordingly, an investment by an investment company (such as Adjustable
Portfolio) in the securities of such issuers was subject to limitations
imposed by Section 12 of the 1940 Act. However, in reliance on a recent SEC
staff interpretation, Adjustable Portfolio may investment in securities
issued by certain "exempted issuers" without regard to the limitations of
Section 12 of the 1940 Act. In its interpretation, the SEC staff defined
"exempted issuers" as unmanaged, fixed asset issuers that (a) invest
primarily in Mortgage-Backed Securities, (b) do not issue redeemable
securities as defined in Section 2(a)(32) of the Act, (c) operate under
general exemptive orders exempting them from "all provisions of the [1940]
Act" and (d) are not registered or regulated under the 1940 Act as investment
companies.
-2-
<PAGE>
TYPES OF CREDIT SUPPORT
To lessen the effect of failures by mortgagors to make payments on
underlying mortgages, ARMS and other Mortgage-Backed Securities may contain
elements of credit support. Such credit support falls into two categories:
(a) liquidity protection and (b) protection against losses resulting from
ultimate default by an obligor on the underlying assets. Liquidity
protection refers to the provision of advances, generally by the entity
administering the pool of assets, to ensure that the pass-through of payments
due on the underlying pool occurs in a timely fashion. Protection against
losses resulting from ultimate default enhances the likelihood of ultimate
payment of the obligations on at least a portion of the assets in the pool.
Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties,
through various means of structuring the transaction or through a combination
of such approaches. Adjustable Portfolio will not pay any additional fees for
such credit support, although the existence of credit support may increase
the price of a security.
The ratings of securities for which third-party credit enhancement
provides liquidity protection or protection against losses from default are
generally dependent upon the continued creditworthiness of the enhancement
provider. The ratings of such securities could be downgraded in the event of
deterioration in the creditworthiness of the credit enhancement provider even
in cases where the delinquency and loss experience on the underlying pool of
assets is better than expected.
Examples of credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class
securities with one or more classes subordinate to other classes as to the
payment of principal thereof and interest thereon, with the result that
defaults on the underlying assets are borne first by the holders of the
subordinated class), creation of "reserve funds" (where cash or investments,
sometimes funded from a portion of the payments on the underlying assets, are
held in reserve against future losses) and "over-collateralization" (where
the scheduled payments on, or the principal amount of, the underlying assets
exceed those required to make payment on the securities and pay any servicing
or other fees). The degree of credit support provided for each issue is
generally based on historical information with respect to the level of credit
risk associated with the underlying assets. Other information which may be
considered includes demographic factors, loan underwriting practices and
general market and economic conditions. Delinquency or loss in excess of
that which is anticipated (and in excess of the degree of credit support
provided) will adversely affect the return on an investment in such a
security by decreasing the yield and value of such security.
OPTIONS
As set forth in the Prospectus, Adjustable Portfolio may write
covered options and purchase options on securities. The principal reason for
writing call or put options is to obtain, through the receipt of premiums, a
greater current return than would be realized on the underlying securities
alone. Adjustable Portfolio receives premiums from writing call or put
options, which it retains whether or not the
-3-
<PAGE>
options are exercised. Adjustable Portfolio will write only covered options.
This means that so long as the Fund is obligated as the writer of a call
option, it will own the underlying securities subject to the option (or
comparable securities satisfying the cover requirements of securities
exchanges). The Fund will be considered covered with respect to a put option
it writes if, so long as it is obligated as the writer of a put option, it
deposits and maintains with its custodian cash, U.S. Government securities or
other liquid high-grade debt obligations having a value equal to or greater
than the exercise price of the option.
Adjustable Portfolio may wish to protect certain portfolio securities
against a decline in market value at a time when no put options on those
particular securities are available for purchase. The Fund may therefore
purchase a put option on securities other than those it wishes to protect
even though it does not hold such other securities in its portfolio. While
the Fund will only purchase put options on securities where, in the opinion
of the Adviser, changes in the value of the put option should generally
offset changes in the value of the securities to be hedged, the correlation
will be less than in transactions in which the Fund purchases put options on
underlying securities it owns.
The writing by Adjustable Portfolio of options on securities will be
subject to limitations established by each of the registered securities
exchanges on which such options are traded. Such limitations govern the
maximum number of options in each class which may be written by a single
investor or group of investors acting in concert, regardless of whether the
options are written on the same or different securities exchanges or are held
or written in one or more accounts or through one or more brokers. Thus, the
number of options which the Fund may write may be affected by options written
by other investment companies managed by and other investment advisory
clients of the Adviser. An exchange may order the liquidation of positions
found to be in excess of these limits, and it may impose certain other
sanctions.
OVER-THE-COUNTER OPTIONS
Adjustable Portfolio may purchase and write over-the-counter ("OTC")
put and call options in negotiated transactions. OTC options are two-party
contracts with price and terms negotiated between buyer and seller. In
contrast, exchange-traded options are third-party contracts with standardized
strike prices and expiration dates, and are purchased from a clearing
corporation. Exchange-traded options have a continuous liquid market while
OTC options may not. The staff of the Securities and Exchange Commission has
previously taken the position that the value of purchased OTC options and the
assets used as "cover" for written OTC options are illiquid securities and,
as such, are to be included in the calculation of a fund's 15% limitation on
illiquid securities. However, the staff has eased its position somewhat in
certain limited circumstances. Although the Adviser disagrees with the
position of the staff, pending resolution of this issue Adjustable Portfolio
will treat OTC options, to the extent set forth below, as subject to the
Fund's limitation on illiquid securities. Adjustable Portfolio will attempt
to enter into contracts with certain dealers with which it writes OTC
options. Each such contract will provide that the Fund has the absolute
right to repurchase the options
-4-
<PAGE>
it writes at any time at a repurchase price which represents the fair market
value, as determined in good faith through negotiation between the parties,
but which in no event will exceed a price determined pursuant to a formula
contained in the contract. Although the specific details of such formula may
vary among contracts, the formula will generally be based upon a multiple of
the premium received by the Fund for writing the option, plus the amount, if
any, of the option's intrinsic value. The formula will also include a factor
to account for the difference between the price of the security and the
strike price of the option if the option is written out-of-the-money. With
respect to each OTC option for which such a contract is entered into, the
Fund will count as illiquid only the initial formula price minus the option's
intrinsic value.
Adjustable Portfolio will enter into such contracts only with primary
U.S. Government securities dealers recognized by the Federal Reserve Bank of
New York. Moreover, such primary dealers will be subject to the same
standards as are imposed upon dealers with which the Fund enters into
repurchase agreements.
ILLIQUID SECURITIES
As set forth in the Prospectus, the Funds may invest in Rule 144A
securities, commercial paper issued pursuant to Rule 4(2) under the
Securities Act of 1933, and, with respect to Adjustable Portfolio,
interest-only and principal-only classes of Mortgage-Backed Securities issued
by the U.S. Government or its agencies or instrumentalities and treat such
securities as liquid when they have been determined to be liquid by the Board
of Directors of the Fund or by the Adviser subject to the oversight of and
pursuant to procedures adopted by the Board of Directors. Under these
procedures, factors taken into account in determining the liquidity of a
security include (a) the frequency of trades and quotes for the security; (b)
the number of dealers willing to purchase or sell the security and the number
of other potential purchasers; (c) dealer undertakings to make a market in
the security; and (d) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer). With respect to
Rule 144A securities, investing in such securities could have the effect of
increasing the level of Fund illiquidity to the extent that qualified
institutional buyers become, for a time, uninterested in purchasing these
securities.
FOREIGN INDEX LINKED INSTRUMENTS
As set forth in the Prospectus, Adjustable Portfolio may invest up to
10% of its total assets in Foreign Index Linked Instruments. Foreign Index
Linked Instruments are fixed income securities which are issued by U.S.
issuers (including U.S. subsidiaries of foreign issuers) and are denominated
in U.S. dollars but return principal and/or pay interest to investors in
amounts which are linked to the level of a particular foreign index. A
foreign index may be based upon the exchange rate of a particular currency or
currencies or the differential between two currencies, or the level of
interest rates in a particular country or countries or the differential in
interest rates between particular countries. In the case of Foreign Index
Linked Instruments linking the principal amount to a foreign index, the
amount of
-5-
<PAGE>
principal payable by the issuer at maturity will increase or decrease in
response to changes in the level of the foreign index during the term of the
Foreign Index Linked Instrument. In the case of Foreign Index Linked
Instruments linking the interest component to a foreign index, the amount of
interest payable will adjust periodically in response to changes in the level
of the foreign index during the term of the Foreign Index Linked Instrument.
Foreign Index Linked Instruments may be issued by a U.S. governmental agency
or instrumentality or by a private issuer. The Foreign Index Linked
Instruments in which the Fund has invested to date have been debt instruments
closely resembling corporate bonds. However, Foreign Index Linked
Instruments present certain risks in addition to those presented by corporate
bonds. See "Special Investment Methods--Foreign Index Linked Instruments" in
the Prospectus.
PORTFOLIO TURNOVER
Portfolio turnover is the ratio of the lesser of annual purchases or
sales of portfolio securities to the average monthly value of portfolio
securities, not including securities maturing in less than 12 months. A 100%
portfolio turnover rate would occur, for example, if the lesser of the value
of purchases or sales of portfolio securities for a particular year were
equal to the average monthly value of the portfolio securities owned during
such year.
Money Market Fund, consistent with its objective, may attempt to
maximize yield through portfolio trading. This may involve selling portfolio
instruments and purchasing different instruments to take advantage of
disparities of yield in different segments of the high-grade money market or
among particular instruments within the same segment of the market. Since
the Fund's assets will be invested in securities with short maturities and
the Fund will manage its portfolio as described above, the portfolio will
turn over several times a year. However, this will not generally increase
Money Market Fund's brokerage costs, since brokerage commissions as such are
not usually paid in connection with the purchase or sale of the instruments
in which the Fund invests. Because securities with maturities of less than
one year are excluded from required portfolio turnover rate calculations, the
portfolio turnover rate for Money Market Fund will be zero.
While it is not the policy of Adjustable Portfolio to trade actively
for short-term (less than six months) profits, the Fund will dispose of
securities without regard to the time they have been held when such action
appears advisable to the Adviser. In the case of Adjustable Portfolio,
frequent changes may result in higher transaction and other costs for the
Fund. For purposes of calculating portfolio turnover, the maturity of
investment purchases and sales related to "rollover" transactions of
Adjustable Portfolio is considered to be less than 12 months. See "Special
Investment Methods--When-Issued Securities" in the Prospectus. The portfolio
turnover rate is not expected to exceed 100% for Adjustable Portfolio,
although the turnover rate will not be a limiting factor when management
deems portfolio changes appropriate.
-6-
<PAGE>
INVESTMENT RESTRICTIONS
In addition to the investment objectives and policies set forth in
the Prospectus, each Fund is subject to certain investment restrictions, as
set forth below, which may not be changed without the vote of a majority of a
Fund's outstanding shares. "Majority," as used in the Prospectus and in this
Statement of Additional Information, means the lesser of (a) 67% of a Fund's
outstanding shares present at a meeting of the holders if more than 50% of
the outstanding shares are present in person or by proxy or (b) more than 50%
of a Fund's outstanding shares.
Unless otherwise specified below, neither Fund will:
1. With respect to 75% of its total assets, invest more than 5% of
the value of its total assets in the securities of any one issuer or own more
than 10% of the outstanding voting securities of any one issuer, in each case
other than securities issued or guaranteed by the U.S. Government or any
agency or instrumentality thereof and securities of other investment
companies.
2. Invest 25% or more of the value of its total assets in the
securities of issuers conducting their principal business activities in any
one industry. This restriction does not apply to securities of the U.S.
Government or its agencies and instrumentalities and repurchase agreements
relating thereto or to obligations of U.S. banks, domestic branches thereof
and U.S. branches of foreign banks subject to United States regulation. The
various types of utilities companies, such as gas, electric, telephone,
telegraph, satellite and microwave communications companies, are considered
as separate industries.
3. Issue any senior securities (as defined in the 1940 Act), other
than as set forth in restriction number 4 below and except to the extent that
using options, forward foreign currency exchange contracts, futures contracts
and options on futures contracts, purchasing or selling securities on a
when-issued or forward commitment basis or using similar investment
strategies may be deemed to constitute issuing a senior security.
4. Borrow money (provided that either of the Funds may enter into
reverse repurchase agreements) except from banks for temporary or emergency
purposes. Each Fund may borrow money in an amount up to one-third of the
value of its total assets in order to meet redemption requests without
immediately selling any of its portfolio securities. If, for any reason, the
current value of the Fund's total assets falls below an amount equal to three
times the amount of its indebtedness from money borrowed, the Fund will,
within three business days, reduce its indebtedness to the extent necessary.
Neither Fund will purchase portfolio securities while outstanding borrowings
(other than reverse repurchase agreements) exceed 5% of the value of the
Fund's total assets. Neither Fund will borrow money for leverage purposes
(provided that each Fund may enter into reverse repurchase agreements for
such purposes).
5. Mortgage, pledge or hypothecate its assets except to secure
permitted indebtedness. For purposes of this policy, collateral arrangements
for margin
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<PAGE>
deposits on forward foreign currency exchange contracts, futures contracts
and options on futures contracts, with respect to the writing of options,
with respect to reverse repurchase agreements or with respect to similar
investment techniques are not deemed to be a pledge or hypothecation of
assets.
6. Purchase any securities on margin except to obtain such
short-term credits as may be necessary for the clearance of transactions and
except that Adjustable Portfolio may make margin deposits in connection with
permitted transactions in options, forward foreign currency exchange
contracts, futures contracts, options on futures contracts and similar
investment techniques.
7. Write, purchase or sell puts, calls or combinations thereof,
provided that Money Market Fund may purchase securities with demand or put
features and, except that Adjustable Portfolio may write put and call options
with respect to the securities in which it may invest; may purchase put and
call options; and may engage in financial futures contracts and related
options transactions.
8. Purchase or sell commodities or commodity futures contracts
except that Adjustable Portfolio may do so for hedging purposes.
9. Purchase or sell real estate or real estate mortgage loans,
except that the Funds may invest in securities secured by real estate or
interests therein (including ARMS, other Mortgage-Backed Securities and
similar securities) or issued by companies that invest in real estate or
interests therein.
10. Act as an underwriter of securities of other issuers, except
insofar as a Fund may be technically deemed an underwriter under the federal
securities laws in connection with the disposition of portfolio securities.
11. Make loans of money or property to any person, except for loans
of portfolio securities and except through the use of repurchase agreements
or the purchase of debt obligations in which such Fund may invest
consistently with the Fund's investment objective and policies.
In addition, as non-fundamental investment restrictions that may be
changed at any time without shareholder approval, neither Fund will:
(a) Invest more than 5% of the value of its total assets in the
securities of any issuers which, with their predecessors, have a record of
less than three years' continuous operation. (Securities of such issuers
will not be deemed to fall within this limitation if they are guaranteed by
an entity in continuous operation for more than three years. The value of
all securities issued or guaranteed by such guarantor and owned by a Fund
shall not exceed 10% of the value of the total assets of such Fund.)
(b) Make short sales of securities.
(c) Purchase or retain the securities of any issuer if, to the
Fund's knowledge, those officers or directors of the Company or its
affiliates or of its investment
-8-
<PAGE>
adviser who individually own beneficially more than 0.5% of the outstanding
securities of such issuer, together own more than 5% of such outstanding
securities.
(d) Invest for the purpose of exercising control or management.
(e) Purchase or sell oil, gas or mineral leases or interests in oil,
gas or other mineral exploration or development programs.
(f) Invest in the securities of other investment companies except as
part of a merger, consolidation or acquisition of assets, except that
Adjustable Portfolio may invest in money market funds to the extent permitted
by the 1940 Act.
(g) Invest more than 15% of its net assets, with respect to
Adjustable Portfolio, or 10% of its net assets, with respect to Money Market
Fund, in illiquid securities.
(h) Invest in real estate limited partnerships.
(i) Invest more than 5% of its net assets in warrants, valued at the
lower of cost or market. Included within this amount, but not to exceed 2%
of the value of a Fund's net assets, may be warrants which are not listed on
the New York or American Stock Exchange. For purposes of this investment
restriction, warrants acquired by a Fund in units or attached to securities
may be deemed to be without value.
Any investment restriction or limitation referred to above or in the
Prospectus, except the borrowing policy, which involves a maximum percentage
of securities or assets, shall not be considered to be violated unless an
excess over the percentage occurs immediately after an acquisition of
securities or utilization of assets and such excess results therefrom.
DIRECTORS AND EXECUTIVE OFFICERS
The names, addresses and principal occupations during the past five
years of the directors and executive officers of the Company are given below.
The officers and directors of the Company also serve as officers and
directors of various closed- and open-end investment companies managed by the
Adviser.
Name and Address Position with the Company
---------------- -------------------------
William H. Ellis* Chairman of the Board of Directors
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
David T. Bennett Director
3400 City Center
33 South Sixth Street
Minneapolis, Minnesota 55402
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<PAGE>
Name and Address Position with the Company
---------------- -------------------------
Jaye F. Dyer Director
4670 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402
Karol D. Emmerich Director
7302 Claredon Drive
Edina, Minnesota 55439
Luella G. Goldberg Director
7019 Tupa Drive
Edina, Minnesota 55435
George Latimer Director
754 Linwood Avenue
St. Paul, MN 55105
Paul A. Dow President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
David E. Rosedahl Secretary
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Charles N. Hayssen Treasurer
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Robert H. Nelson Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Nancy S. Olsen Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Thomas S. McGlinch Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
-10-
<PAGE>
John Schonberg Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
- ------------------
* Directors of the Company who are interested persons (as that term
is defined by the 1940 Act) of Piper Capital Management
Incorporated and the Funds.
William H. Ellis has been President of Piper Jaffray Companies Inc.
and Piper Jaffray Inc. (the "Distributor") since September 1982, Chief
Operating Officer of the same two companies since August 1983, Director and
Chairman of the Board of Piper Capital Management Incorporated ("the
Adviser") since October 1985 and President of the Adviser since December
1994.
David T. Bennett is of counsel to the law firm of Gray, Plant,
Mooty, Mooty & Bennett, P.A., located in Minneapolis, Minnesota. Mr. Bennett
is chairman of a group of privately held companies and serves on the board of
directors of a number of nonprofit organizations.
Jaye F. Dyer has been President of Dyer Management Company, a
private management company, since January 1991. Prior to that he was
President and Chief Executive Officer of Dyco Petroleum Corporation, a
Minneapolis based oil and natural gas development company he founded, from
1971 to March 1, 1989, and Chairman of the Board until December 31, 1990.
Mr. Dyer serves on the board of directors of Northwestern National Life
Insurance Company, The ReliaStar Financial Corp. (the holding company of
Northwestern National Life Insurance Company) and various privately held and
nonprofit corporations.
Karol D. Emmerich has been President of The Paraclete Group, a
consultant to nonprofit organizations, since 1993. Prior to that she had
been Vice President, Chief Accounting Officer and Treasurer of Dayton Hudson
Corporation from 1980 to May 1993. Ms. Emmerich is an Executive Fellow at
the University of St. Thomas Graduate School of Business and serves on the
board of directors of a number of privately held and nonprofit organizations.
Luella G. Goldberg has served on the board of directors of
Northwestern National Life Insurance Company (since 1976), The ReliaStar
Financial Corp. (since 1989), TCF Financial Corporation (since 1988), the
holding company of TCF Bank Savings fsb, and Hormel Foods Corp. (since 1993).
Ms. Goldberg also serves as a Trustee of Wellesley College, and as a director
of a number of other organizations, including the University of Minnesota
Foundation and the Minnesota Orchestral Association. Ms. Goldberg was
Chairman of the Board of Trustees of Wellesley College from 1985 to 1993 and
acting President from July 1, 1993 to October 1, 1993.
George Latimer is Director, Special Actions Office, Office of the
Secretary, Department of Housing and Urban Development since 1993, prior to
which he had been Dean of Hamline Law School, Saint Paul, Minnesota from 1990
to 1993. Mr. Latimer also serves on the board of directors of Digital
Biometrics, Inc. and Payless Cashways, Inc.
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<PAGE>
Paul A. Dow has been a Senior Vice President of the Adviser since
1989 and Chief Investment Officer of the Adviser since 1989.
David E. Rosedahl has been Secretary and a Director of the Adviser
since 1985, a Managing Director of the Distributor since 1986, a Managing
Director of Piper Jaffray Companies Inc. since 1987, Secretary of the
Distributor since 1993 and General Counsel for the Distributor and Piper
Jaffray Companies Inc. since 1979.
Charles N. Hayssen has been a Managing Director of the Distributor
since 1986 and of Piper Jaffray Companies Inc. since 1987, Chief Financial
Officer of the Distributor since 1988, Director and Chief Financial Officer
of the Adviser since 1989 and Chief Operating Officer of the Adviser since
1994.
Robert H. Nelson has been a Senior Vice President of the Adviser
since November 1993, prior to which he had been a Vice President of the
Adviser from 1991 to 1993 and Assistant Vice President from 1989 to 1991.
Nancy S. Olsen has been a Senior Vice President of the Adviser since
November 1991, prior to which she had been a Vice President of the Adviser
from 1987 to 1991.
Mr. McGlinch has been a Vice President of the Adviser since November
1992, prior to which he had been a specialty products trader at FBS
Investment Services from January 1990 to January 1992.
Mr. Schonberg has been a Vice President of the Adviser since
November 1992 and a portfolio manager for the Adviser since July 1989.
Ms. Goldberg, Ms. Emmerich and Mr. Dyer are members of the Company's
Audit Committee. Ms. Goldberg acts as the chairperson of such committee.
The Audit Committee oversees the Funds' financial reporting process, reviews
audit results and recommends annually to the Company a firm of independent
certified public accountants.
The functions to be performed by the Audit Committee are to
recommend annually to the Board a firm of independent certified public
accountants to audit the books and records of the Funds for the ensuing year;
to monitor that firm's performance; to review with the firm the scope and
results of each audit and determine the need, if any, to extend audit
procedures; to confer with the firm and representatives of the Funds on
matters concerning the Funds' financial statements and reports including the
appropriateness of its accounting practices and of its financial controls and
procedures; to evaluate the independence of the firm; to review procedures to
safeguard portfolio securities; to review the purchase by the Funds from the
firm of non-audit services; to review all fees paid to the firm; and to
facilitate communications between the firm and the Funds' officers and
Directors.
The Board of Directors also has a Committee of the Independent
Directors, consisting of Mr. Bennett, who serves as chairperson, Messrs.
Dyer, and Latimer, Ms.
-12-
<PAGE>
Emmerich and Ms. Goldberg, and a Derivatives Committee consisting of Ms.
Emmerich, who serves as chairperson, Ms. Goldberg and Mr. Dyer.
The functions of the Committee of the Independent Directors are: (a)
recommendation to the full Board of approval of any management, advisory,
sub-advisory and/or administration agreements; (b) recommendation to the full
Board of approval of any underwriting and/or distribution agreements; (c)
review of the fidelity bond and premium allocation; (d) review of errors and
omissions and any other joint insurance policies and premium allocation; (e)
review of, and monitoring of compliance with, procedures adopted pursuant to
certain rules promulgated under the 1940 Act; and (f) such other duties as
the independent directors shall, from time to time, conclude are necessary or
appropriate to carry out their duties under the 1940 Act. The functions of
the Derivatives Committee are: (a) to oversee practices, policies and
procedures of the Adviser in connection with the use of derivatives; (b) to
receive periodic reports from management and independent accountants; and (c)
to report periodically to the Committee of the Independent Directors and the
Board of Directors.
The directors of the Company who are officers or employees of the
Adviser or any of its affiliates receive no remuneration from the Company.
Each of the other directors receives fees that are allocated among the series
of the Company on the basis of the total assets of each series. Each
director receives from the Company and Piper Funds Inc., collectively, an
annual retainer of $1,000, plus a fee of $250 for each regular quarterly
Board of Directors meeting attended. (The per-meeting fee is based on the
total assets of the Company and Piper Funds Inc. and will increase to $500
per meeting in the event total assets exceed $200 million, with continuing
increases to as high as $1,500 per meeting in the event total assets reach $5
billion or more. In addition, members of the Audit Committee not affiliated
with the Adviser receive $1,000 for each Audit Committee meeting attended
($2,000 with respect to the chairperson of the Committee), with such fee
being allocated among all open-end and closed-end investment companies
managed by the Adviser. Members of the Committee of the Independent
Directors and the Derivatives Committee currently receive no additional
compensation. Directors are also reimbursed for expenses incurred in
connection with attending meetings.
The following table sets forth the aggregate compensation received
by each director from the Company during the fiscal year ended June 30, 1995,
as well as the total compensation received by each director from the Company
and all other registered investment companies managed by the Adviser or
affiliates of the Adviser during the calendar year ended December 31, 1994.
Directors who are officers or employees of the Adviser or any of its
affiliates did not receive any such compensation and are not included in the
table.
-13-
<PAGE>
<TABLE>
<CAPTION>
Pension or
Retirement Estimated Total
Aggregate Benefits Annual Benefits Compensation
Compensation Accrued as Part Upon from Fund
Director from the Company of Fund Expenses Retirement Complex*
- -------- ---------------- ---------------- ---------------- -------------
<S> <C> <C> <C> <C>
David T. Bennett $1,200 None None $57,500
Jaye F. Dyer $1,358 None None $68,250
Karol D. Emmerich $1,358 None None $68,250
Luella G. Goldberg $1,516 None None $71,250
George Latimer $1,200 None None $65,250
</TABLE>
- -----------------
* Consists of 21 registered investment companies managed by the Adviser or an
affiliate of the Adviser, including Piper Institutional. Each director
included in the table, other than Mr. Bennet, serves on the board of each
such registered investment company. Mr. Bennett serves on the board of 20
such companies.
INVESTMENT ADVISORY AND OTHER SERVICES
GENERAL
The investment adviser for the Funds is Piper Capital Management
Incorporated (the "Adviser"). Its affiliate, Piper Jaffray Inc. (the
"Distributor"), acts as the Funds' distributor. Each acts as such pursuant
to a written agreement which is periodically approved by the directors or the
shareholders of the Funds. The address of both the Adviser and the
Distributor is Piper Jaffray Tower, 222 South Ninth Street, Minneapolis,
Minnesota 55402-3804.
CONTROL OF THE ADVISER AND THE DISTRIBUTOR
The Adviser and the Distributor are both wholly owned subsidiaries
of Piper Jaffray Companies Inc., a publicly held corporation which is engaged
through its subsidiaries in various aspects of the financial services
industry.
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
The Adviser acts as the investment adviser of the Funds under an
Investment Advisory and Management Agreement which has been approved by the
Board of Directors (including a majority of the directors who are not parties
to the agreement, or interested persons of any such party, other than as
directors of the Company) and the initial shareholder of the Company.
The Investment Advisory and Management Agreement will terminate
automatically in the event of its assignment. In addition, the agreement is
terminable at any time, without penalty, by the Board of Directors or by vote
of a majority of the Company's outstanding voting securities on not more than
60 days' written notice to the Adviser, and by the Adviser on 60 days'
written notice to the Company. The agreement may be terminated with respect
to a particular Fund at any time by a vote of the holders of a majority of
the outstanding voting securities of such Fund, upon 60 days' written notice
to the Adviser. Unless sooner terminated, the agreement shall continue in
effect for more than two years after its
-14-
<PAGE>
execution only so long as such continuance is specifically approved at least
annually by either the Board of Directors or by a vote of a majority of the
outstanding voting securities of the Company, provided that in either event
such continuance is also approved by a vote of a majority of the directors
who are not parties to such agreement, or interested persons of such parties,
cast in person at a meeting called for the purpose of voting on such
approval. If a majority of the outstanding voting securities of any series
of the Company approves the agreement, the agreement shall continue in effect
with respect to such approving series whether or not the shareholders of the
other series approve the agreement.
Pursuant to the Investment Advisory and Management Agreement, Money
Market Fund and Adjustable Portfolio pay the Adviser monthly advisory fees
equal on an annual basis to .15% and .30%, respectively, of the Fund's
average daily net assets. The advisory fees paid by Money Market Fund for
the fiscal period from February 2, 1993 (commencement of operations) through
June 30, 1993 and for the fiscal years ended June 30, 1994 and 1995 and were
$18,155, $44,077 and $51,262, respectively. The fees paid by Adjustable
Portfolio for the fiscal period from February 2, 1993 (commencement of
operations) through June 30, 1993 and for the fiscal years ended June 30,
1994 and 1995 were $37,934, $165,558 and $70,330, respectively.
Although not required under the Investment Advisory and Management
Agreement, the Adviser voluntarily agreed, for the fiscal year ended June 30,
1995, to reimburse Money Market Fund and Adjustable Portfolio to the extent
that total operating expenses (including the Adviser's compensation but
excluding interest, taxes, brokerage fees and commissions and extraordinary
expenses) exceeded .35% and .55% per annum, respectively, of average daily
net assets. Voluntary fee waivers and reimbursements by the Adviser may be
discontinued at any time following the Funds' fiscal year end, at the
Adviser's discretion. For the fiscal year ending June 30, 1996, the Adviser
intends to reimburse Money Market Fund and Adjustable Portfolio for all
expenses in excess of .35% and .60%, respectively. Even in the event of
discontinuance of this arrangement, the Funds will still be subject to the
laws of certain states, which require that if a mutual fund's expenses
(including advisory fees but excluding interest, taxes, brokerage commissions
and extraordinary expenses) exceed certain percentages of average net assets,
the fund must be reimbursed for such excess expenses. The Investment
Advisory and Management Agreement provides that the Adviser must make any
expense reimbursements to the Funds required under state law. The laws of
California provide that aggregate annual expenses of a mutual fund shall not
normally exceed 2-1/2% of the first $30 million of the average net assets, 2%
of the next $70 million of the average net assets and 1-1/2% of the remaining
average net assets. Such expenses include the Adviser's compensation, but
exclude interest, taxes, brokerage fees and commissions and extraordinary
expenses. The Adviser does not believe that the laws of any other state in
which the Funds' shares may be offered for sale contain expense reimbursement
requirements.
Under the Investment Advisory and Management Agreement, the Adviser
provides each Fund with advice and assistance in the selection and
disposition of that Fund's investments. All investment decisions are subject
to review by the
-15-
<PAGE>
Company's Board of Directors. The Adviser is obligated to pay the salaries
and fees of any affiliates of the Adviser serving as officers or directors of
the Company.
The same security may be suitable for both of the Funds and/or for
other funds or private accounts managed by the Adviser or its affiliates. If
and when two or more funds or accounts simultaneously purchase or sell the
same security, the transactions will be allocated as to price and amount in
accordance with arrangements equitable to each fund or account. The
simultaneous purchase or sale of the same securities by both Funds or by
either of the Funds and other funds or accounts managed by the Adviser or its
affiliates may have a detrimental effect on a Fund, as this may affect the
price paid or received by that Fund or the size of the position obtainable or
able to be sold by that Fund.
EXPENSES
The expenses of each Fund are deducted from their total income
before dividends are paid. These expenses include, but are not limited to,
organizational costs, fees paid to the Adviser, fees and expenses of officers
and directors who are not affiliated with the Adviser, taxes, interest, legal
fees, transfer agent, dividend disbursing agent and custodian fees, audit
fees, brokerage fees and commissions, fees and expenses of registering and
qualifying the Funds and their shares for distribution under federal and
state securities laws, expenses of preparing prospectuses and statements of
additional information and of printing and distributing prospectuses and
statements of additional information annually to existing shareholders, the
expenses of reports to shareholders, shareholders' meetings and proxy
solicitations and other expenses which are not expressly assumed by the
Adviser under the Investment Advisory and Management Agreement. Any general
expenses of the Company that are not readily identifiable as belonging to a
particular Fund will be allocated between the Funds based upon the relative
net assets of the Funds at the time such expenses were accrued.
DISTRIBUTION PLAN
Rule 12b-1(b) under the 1940 Act provides that any payments made by
a fund in connection with financing the distribution of its shares may only
be made pursuant to a written plan describing all aspects of the proposed
financing of distribution. The Company had adopted a Distribution Plan for
Adjustable Portfolio in accordance with such Rule; however, the plan was
terminated by the Board of Directors on June 2, 1993 (effective June 24,
1993). The amount paid by the Fund pursuant to this plan from February 2,
1993 (commencement of operations) to June 24, 1993 was $23,771.
UNDERWRITING AND DISTRIBUTION AGREEMENT
Pursuant to an Underwriting and Distribution Agreement, the
Distributor has agreed to act as the principal underwriter for the Funds in
the sale and distribution to the public of shares of the Funds, either
through dealers or otherwise. The Distributor has agreed to offer such
shares for sale at all times when such shares are available for sale and may
lawfully be offered for sale and sold. As
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<PAGE>
compensation for its services, the Distributor receives the sales load on
sales of Adjustable Portfolio shares set forth in the Prospectus. For the
period from February 2, 1993 (commencement of operations) through June 30,
1993 and for the fiscal years ended June 30, 1994 and 1995, Adjustable
Portfolio paid $4,383, $54,430 and $0, respectively in sales charges to the
Distributor. The Distributor receives no compensation from the Fund for its
sales of Money Market Fund shares.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Investors Fiduciary Trust Company ("IFTC"), the transfer agent for
the Company, maintains certain omnibus shareholder accounts for each Fund.
Each such omnibus account represents the accounts of a number of individual
shareholders of the Fund. The Company has entered into a Shareholder Account
Servicing Agreement with the Distributor, pursuant to which the Distributor
provides certain transfer agent and dividend disbursing agent services for
the underlying individual shareholder accounts. Pursuant to such Agreement,
the Distributor has agreed to perform the usual and ordinary services of
transfer agent and dividend disbursing agent not performed by IFTC with
respect to the underlying individual shareholder accounts, including, without
limitation, the following: maintaining all shareholder accounts, preparing
shareholder meeting lists, mailing shareholder reports and prospectuses,
tracking shareholder accounts for blue sky and Rule l2b-1 purposes,
withholding taxes on nonresident alien and foreign corporation accounts,
preparing and mailing checks for disbursement of income dividends and capital
gains distributions, preparing and filing U.S. Treasury Department Form 1099
for all shareholders, preparing and mailing confirmation forms to
shareholders and dealers with respect to all purchases, exchanges and
liquidations of series shares and other transactions in shareholder accounts
for which confirmations are required, recording reinvestments of dividends
and distributions in series shares, recording redemptions of series shares,
and preparing and mailing checks for payments upon redemption and for
disbursements to withdrawal plan holders. As compensation for such services,
the Distributor is paid an annual fee of $9.00 per active shareholder account
for the Money Market Fund and $7.50 per active account for the Adjustable
Portfolio. The Distributor is paid an annual fee of $6.00 per inactive
account (defined as an account that has a balance of shares in a Fund but
that does not require a client statement for the current month) for the Money
Market Fund and $7.50 per inactive account for the Adjustable Portolio. There
is no charge for a closed shareholder account (defined as an account that has
been inactive for at least three consecutive months). Such fee is payable on
a monthly basis at a rate of 1/12 of the annual per-account charge. Such fee
covers all services listed above, with the exception of preparing shareholder
meeting lists and mailing shareholder reports and prospectuses. These
services, along with proxy processing (if applicable) and other special
service requests, are billable as performed at a mutually agreed upon fee in
addition to the annual fee noted above, provided that such mutually agreed
upon fee shall be fair and reasonable in light of the usual and customary
charges made by others for services of the same nature and quality. The
Agreement was in effect for a portion of the fiscal year ended June 30, 1995.
Fees paid during the fiscal year ended June 30, 1995 were $211 for
Adjustable Portfolio and $256 for Money Market Fund.
-17-
<PAGE>
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
The Adviser is responsible for decisions to buy and sell securities
for the Funds, the selection of broker-dealers to effect the transactions and
the negotiation of brokerage commissions, if any. In placing orders for
securities transactions, the primary criterion for the selection of a
broker-dealer is the ability of the broker-dealer, in the opinion of the
Adviser, to secure prompt execution of the transactions on favorable terms,
including the reasonableness of the commission and considering the state of
the market at the time.
When consistent with these objectives, business may be placed with
broker-dealers who furnish investment research or services to the Adviser.
Such research or services include advice, both directly and in writing, as to
the value of securities; the advisability of investing in, purchasing or
selling securities; and the availability of securities, or purchasers or
sellers of securities; as well as analyses and reports concerning issues,
industries, securities, economic factors and trends, portfolio strategy and
the performance of accounts. This allows the Adviser to supplement its own
investment research activities and enables the Adviser to obtain the views
and information of individuals and research staffs of many different
securities firms prior to making investment decisions for the Funds. To the
extent portfolio transactions are effected with broker-dealers who furnish
research services to the Adviser, the Adviser receives a benefit, not capable
of evaluation in dollar amounts, without providing any direct monetary
benefit to the Funds from these transactions. The Adviser believes that most
research services obtained by it generally benefit several or all of the
investment companies and private accounts which it manages, as opposed to
solely benefiting one specific managed fund or account. Normally, research
services obtained through managed funds or accounts investing in common
stocks would primarily benefit the managed funds or accounts which invest in
common stock; similarly, services obtained from transactions in fixed-income
securities would normally be of greater benefit to the managed funds or
accounts which invest in debt securities. The Funds will not purchase at a
higher price or sell at a lower price in connection with transactions
effected with a dealer, acting as principal, who furnishes research services
to the Adviser than would be the case if no weight were given by the Adviser
to the dealer's furnishing of such services.
The Adviser has not entered into any formal or informal agreements
with any broker-dealers, nor does it maintain any "formula" which must be
followed in connection with the placement of the Funds' portfolio
transactions in exchange for research services provided the Adviser, except
as noted below. However, the Adviser does maintain an informal list of
broker-dealers, which is used from time to time as a general guide in the
placement of the Funds' business, in order to encourage certain
broker-dealers to provide the Adviser with research services which the
Adviser anticipates will be useful to it. Because the list is merely a
general guide, which is to be used only after the primary criterion for the
selection of broker-dealers (discussed above) has been met, substantial
deviations from the list are permissible and may be expected to occur. The
Adviser will authorize the Funds to pay an amount of commission for effecting
a securities transaction in excess of the amount of commission another
broker-dealer would have charged only if the
-18-
<PAGE>
Adviser determines in good faith that such amount of commission is reasonable
in relation to the value of the brokerage and research services provided by
such broker-dealer, viewed in terms of either that particular transaction or
the Adviser's overall responsibilities with respect to the accounts as to
which it exercises investment discretion. Generally, the Funds pay higher
than the lowest commission rates available.
Portfolio transactions for the Funds, including transactions in
futures contracts and options thereon, may be effected through the
Distributor. In determining the commissions to be paid to the Distributor in
connection with transactions effected on a securities exchange, it is the
policy of the Funds that such commissions will, in the judgment of the
Adviser, subject to review by the Board of Directors, be both (a) at least as
favorable as those which would be charged by other qualified brokers or
futures commission merchants in connection with comparable transactions
involving similar securities or similar futures contracts or options on
futures contracts being purchased or sold on an exchange during a comparable
period of time, and (b) at least as favorable as commissions
contemporaneously charged by the Distributor on comparable transactions for
its most favored comparable unaffiliated customers. While the Funds do not
deem it practicable and in their best interest to solicit competitive bids
for commission rates on each transaction, consideration will regularly be
given to posted commission rates as well as to other information concerning
the level of commissions charged on comparable transactions by other
qualified brokers and futures commission merchants. Money Market Fund did
not pay any brokerage commissions and Adjustable Portfolio paid brokerage
commissions of $5,185 for the period from February 2, 1993 (commencement of
operations) through June 30, 1993. For the fiscal year ending June 30, 1994,
Money Market Fund did not pay any brokerage commissions and Adjustable
Portfolio paid brokerage commissions of $20,188. For the fiscal year ending
June 30, 1995, Money Market Fund did not pay any brokerage commissions and
Adjustable Portfolio paid total brokerage commissions of $2,975 from which
$2,550 was paid to Piper Jaffray Inc., an affiliate of the Fund and the
Adviser.
From time to time the Funds may acquire the securities of their
regular brokers or dealers or affiliates of such brokers or dealers. As of
June 30, 1995, Money Market Fund held securities issued by Federal National
Mortgage Association in the amount of $7,369,104 and Adjustable Portfolio did
not hold any such securities. During the fiscal year ended June 30, 1995,
Money Market Fund purchased securities issued by Federal National Mortgage
Association, Goldman Sachs and Lehman Brothers and Adjustable Portfolio did
not purchase any such securities.
CAPITAL STOCK AND OWNERSHIP OF SHARES
Each Fund's shares of common stock have a par value of $.01 per
share, and have equal rights to share in dividends and assets. The shares
possess no preemptive or conversion rights. Cumulative voting is not
authorized. This means that the holders of more than 50% of the shares
voting for the election of directors can elect 100% of the directors if they
choose to do so, and in such event the holders of the remaining shares will
be unable to elect any directors.
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<PAGE>
As of October 16, 1995, no shareholders were beneficial owners of 5%
or more of the outstanding shares of Money Market Fund. As of October 16,
1995, the following shareholders were beneficial owners of 5% or more of the
outstanding shares of Adjustable Portfolio: St. Louis Park Methodist
Hospital, Attn: Janis Williams, 6th & Marquette, Minneapolis, MN (13.6%);
Fairview Hospital & Health Care Service General Fund, Attn: Katrina Jaworski,
2312 S. 6th Street, Minneapolis, MN (7.2%); Hitchcock Industries, 8701 Harriet
Ave, Bloomington, MN (20.3%) and Helath Care Group Self Insurance
Association, Berkley Administrators, Trust Account No. 7, P.O. Box 59143,
Minneapolis, MN (10.2%). The Funds' officers and directors as a group owned
less than 1% of the outstanding shares of each Fund as of such date.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the public offering price of Fund shares
is summarized in the Prospectus in "Purchase of Shares -- Public Offering
Price" and "Valuation of Shares." The net asset value of each Fund's shares
is determined on each day on which the New York Stock Exchange is open,
provided that the net asset value need not be determined on days when no Fund
shares are tendered for redemption and no order for Fund shares is received.
The New York Stock Exchange is not open for business on the following
holidays (or on the nearest Monday or Friday if the holiday falls on a
weekend): New Year's Day, Presidents' Day, Good Friday, Memorial Day, July
4th, Labor Day, Thanksgiving and Christmas.
Money Market Fund values its portfolio securities at amortized cost
in accordance with Rule 2a-7 under the 1940 Act. This method involves
valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact
of fluctuations in interest rates on the market value of the instrument and
regardless of any unrealized capital gains or losses. While this method
provides certainty in valuation, it may result in periods during which value,
as determined by amortized cost, is higher or lower than the price the Fund
would receive if it sold the instrument. During periods of declining
interest rates, the daily yield on shares of the Fund computed by dividing
the annualized daily income of the Fund by the net asset value computed as
described above may tend to be higher than a like computation made by the
Fund with identical investments utilizing a method of valuation based upon
market prices and estimates of market prices for all of its securities.
Pursuant to Rule 2a-7, the Board of Directors of the Company has
determined, in good faith based upon a full consideration of all material
factors, that it is in the best interests of Money Market Fund and its
shareholders to maintain a stable net asset value per share by virtue of the
amortized cost method of valuation. Money Market Fund will continue to use
this method only so long as the Board of Directors believes that it fairly
reflects the market-based net asset value per share. In accordance with Rule
2a-7, the Board of Directors has undertaken, as a particular responsibility
within the overall duty of care owed to Fund shareholders, to establish
procedures reasonably designed, taking into account current market conditions
and Money Market Funds' investment objectives, to stabilize such Fund's net
asset value per share at a single value. These procedures include the
periodic determination of any deviation of current net asset value per share,
calculated using available market quotations, from such Fund's amortized cost
price
-20-
<PAGE>
per share, the periodic review by the Board of the amount of any such
deviation and the method used to calculate any such deviation, the
maintenance of records of such determinations and the Board's review thereof,
the prompt consideration by the Board if any such deviation exceeds 1/2 of
1%, and the taking of such remedial action by the Board as it deems
appropriate where it believes the extent of any such deviation may result in
material dilution or other unfair results to investors or existing
shareholders. Such remedial action may include redemptions in kind, selling
portfolio instruments prior to realizing capital gains or losses, shortening
the average portfolio maturity, withholding dividends or utilizing a net
asset value per share as determined by using available market quotations.
Money Market Fund will, in further compliance with Rule 2a-7, maintain a
dollar-weighted average portfolio maturity appropriate to its objective of
maintaining a stable net asset value and not exceeding 90 days, will not
purchase any instrument with a remaining maturity of greater than 397
calendar days, will limit its portfolio investments to those U.S.
dollar-denominated instruments which the Board determines present minimal
credit risks and which are at the time of acquisition Eligible Securities (as
defined in Rule 2a-7), and will record, maintain and preserve a written copy
of the above-described procedures and a written record of the Board's
considerations and actions taken in connection with the discharge of its
above-described responsibilities.
On June 30, 1995, the net asset value per share of the Funds was
calculated as follows:
MONEY MARKET FUND
Net Assets ($52,488,862) = Net Asset Value per Share ($1.00)
---------------------------------
Shares Outstanding (52,488,862)
ADJUSTABLE PORTFOLIO
Net Assets ($14,969,773) = Net Asset Value per Share ($9.44)
--------------------------------
Shares Outstanding (1,585,696)
PERFORMANCE COMPARISONS
Advertisements and other sales literature for Adjustable Portfolio
may refer to "yield," "average annual total return" and "cumulative total
return." Average annual total return figures are computed by finding the
average annual compounded rates of return over the periods indicated in the
advertisement that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return;
n = number of years; and
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<PAGE>
ERV = ending redeemable value at the end of the
period of a hypothetical $1,000 payment made
at the beginning of such period.
This calculation deducts the maximum sales charge from the initial
hypothetical $1,000 investment, assumes all dividends and capital gains
distributions are reinvested at net asset value on the appropriate
reinvestment dates as described in the Prospectus, and includes all recurring
fees, such as investment advisory and management fees, charged to all
shareholder accounts.
The average annual total return for Adjustable Portfolio was 4.21%
for the one-year period ended June 30, 1995 and 2.26% for the period from
February 2, 1993 (commencement of operations) to June 30, 1995.
The Adviser has waived or paid certain expenses of the Fund, thereby
increasing total return and yield. These expenses may or may not be waived
or paid in the future in the Adviser's discretion. Absent any voluntary
expense payments or waivers, the average annual total returns would have been
4.17% and 2.22%, respectively.
Cumulative total return is computed by finding the cumulative
compounded rate of return over the period indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
CTR = (ERV-P) 100
-----
P
Where: CTR = Cumulative total return;
ERV = ending redeemable value at the end of the
period of a hypothetical $1,000 payment made
at the beginning of such period; and
P = initial payment of $1,000.
This calculation assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus and includes all recurring fees, such as investment advisory
and management fees, charged to all shareholder accounts.
The cumulative total return for Adjustable Portfolio from inception
(February 2, 1993) to June 30, 1995 was 5.52%. Absent any voluntary expense
payments or waivers, the cumulative total return would have been 5.48%.
Adjustable Portfolio may issue yield quotations. Yield is computed
by dividing the net investment income per share (as defined under Securities
and Exchange Commission rules and regulations) earned during the computation
period by the maximum offering price per share on the last day of the period
(based on a 30-day or one month period), according to the following formula:
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<PAGE>
YIELD = 2 [ (a-b + 1) 6 - 1]
---
c-d
Where: a = dividends and interest earned during the
period;
b = expenses accrued for the period ( net of
reimbursements);
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends; and
d = the maximum offering price per share on the
last day of the period.
The yield for Adjustable Portfolio for the 30-day period ended June
30, 1995 was 6.31%. Absent any voluntary expense payments or waivers, the
30-day yield would have been 6.11%.
Money Market Fund may issue current yield quotations. Simple yields
are computed by determining the net change, exclusive of capital changes, in
the value of a hypothetical pre-existing account having a balance of one
share at the beginning of a recent seven calendar day period, subtracting a
hypothetical charge reflecting deductions from shareholder accounts, and
dividing the difference by the value of the account at the beginning of the
base period to obtain the base period return, and then multiplying the base
period return by 365/7. The resulting yield figure will be carried to at
least the nearest hundredth of one percent. Effective yields are computed by
determining the net change, exclusive of capital changes, in the value of a
hypothetical pre-existing account having a balance of one share at the
beginning of a recent seven calendar day period, subtracting a hypothetical
charge reflecting deductions from shareholder accounts, and dividing the
difference by the value of the account at the beginning of the base period to
obtain the base period return, and then compounding the base period return by
adding 1, raising the sum to a power equal to 365 divided by 7, and
subtracting 1 from the result, according to the following formula:
EFFECTIVE YIELD = [(BASE PERIOD RETURN +1)365/7] -1
The seven-day yield and effective yield for Money Market Fund as of
June 30, 1995 were 5.67% and 5.83%, respectively. Absent any voluntary
expense payments or waivers, the seven-day yield and effective yield would
have been 5.53% and 5.69%, respectively.
When calculating the foregoing yield or effective yield quotations,
the calculation of net change in account value will include the value of
additional shares purchased with dividends from the original share and
dividends declared on both the original share and any such additional shares,
and all fees, other than nonrecurring accounts or sales charges, that are
charged to all shareholder accounts in proportion to the length of the base
period. Realized gains and losses from the sale of securities and unrealized
appreciation and depreciation are excluded from the calculation of yield and
effective yield.
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In addition to advertising total return and yield, comparative
performance information may be used from time to time in advertising the
Funds' shares. The performance of Money Market Fund may be compared to the
performance of the Donoghue Institutional Money Market Fund Index and the
performance of Adjustable Portfolio may be compared to the performance of the
Merrill Lynch 1-3 Year Governmental Index, the Lipper ARM Fund Average, the
Lipper Short-Intermediate Fund Average and the Lehman 1-3 Year Government
Index.
PURCHASE OF SHARES
An investor in Adjustable Portfolio may qualify for a reduced sales
charge immediately by signing a nonbinding Letter of Intent stating the
investor's intention to invest within a 13-month period, beginning not
earlier than 90 days prior to the date of execution of the Letter, a
specified amount which, if made at one time, would qualify for a reduced
sales charge. Reinvested dividends will be treated as purchases of additional
shares. Any redemptions made during the term of the Letter of Intent will be
subtracted from the amount of purchases in determining whether the Letter of
Intent has been completed. During the term of a Letter of Intent, IFTC will
hold shares representing 5% of the amount that the investor intends to invest
during the 13-month period in escrow for payment of a higher sales charge if
the full amount indicated in the Letter of Intent is not purchased.
Dividends on the escrowed shares will be paid to the shareholder. The
escrowed shares will be released when the full amount indicated has been
purchased. If the full indicated amount is not purchased within the 13-month
period, the investor will be required to pay, either in cash or by
liquidating escrowed shares, an amount equal to the difference in the dollar
amount of sales charge actually paid and the amount of sales charge the
investor would have paid on his or her aggregate purchases if the total of
such purchases had been made at a single time.
REDEMPTION
GENERAL
Redemption of shares, or payment, may be suspended at times (a) when
the New York Stock Exchange is closed for other than customary weekend or
holiday closings, (b) when trading on said Exchange is restricted, (c) when
an emergency exists, as a result of which disposal by the Funds of securities
owned by them is not reasonably practicable, or it is not reasonably
practicable for the Funds fairly to determine the value of their net assets,
or (d) during any other period when the Securities and Exchange Commission,
by order, so permits, provided that applicable rules and regulations of the
Securities and Exchange Commission shall govern as to whether the conditions
prescribed in (b) or (c) exist.
Shareholders who purchased shares through a broker-dealer other than
the Distributor may also redeem such shares by written request to IFTC at the
address set forth in the Prospectus. To be considered in proper form,
written requests for redemption should indicate the dollar amount or number
of shares to be redeemed, refer to the shareholder's Fund account number, and
give either a social security
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or tax identification number. The request should be signed in exactly the
same way the account is registered. If there is more than one owner of the
shares, all owners must sign. If shares to be redeemed have a value of
$10,000 or more or redemption proceeds are to be paid to someone other than
the shareholder at the shareholder's address of record, the signature(s) must
be guaranteed by an "eligible guarantor institution," which includes a
commercial bank that is a member of the Federal Deposit Insurance
Corporation, a trust company, a member firm of a domestic stock exchange, a
savings association or a credit union that is authorized by its charter to
provide a signature guarantee. IFTC may reject redemption instructions if
the guarantor is neither a member of nor a participant in a signature
guarantee program. Signature guarantees by notaries public are not
acceptable. The purpose of a signature guarantee is to protect shareholders
against the possibility of fraud. Further documentation will be requested
from corporations, administrators, executors, personal representatives,
trustees and custodians. Redemption requests given by facsimile will not be
accepted. Unless other instructions are given in proper form, a check for the
proceeds of the redemption will be sent to the shareholder's address of
record.
SYSTEMATIC WITHDRAWAL PLAN
To establish a Systematic Withdrawal Plan for either Fund and
receive regular periodic payments, an account must have a value of $5,000 or
more. A request to establish a Systematic Withdrawal Plan must be submitted
in writing to an investor's Piper Jaffray investment executive or other
broker-dealer. There are no service charges for maintenance; the minimum
amount that may be withdrawn each period is $100. (This is merely the
minimum amount allowed and should not be interpreted as a recommended
amount.) The holder of a Systematic Withdrawal Plan will have any income
dividends and any capital gains distributions reinvested in full and
fractional shares at net asset value. To provide funds for payment, the
appropriate Fund will redeem as many full and fractional shares as necessary
at the redemption price, which is net asset value. Redemption of shares may
reduce or possibly exhaust the shares in your account, particularly in the
event of a market decline. As with other redemptions, a redemption to make a
withdrawal payment is a sale for federal income tax purposes. Payments made
pursuant to a Systematic Withdrawal Plan cannot be considered as actual yield
or income since part of such payments may be a return of capital.
The maintenance of a Systematic Withdrawal Plan for Adjustable
Portfolio concurrent with purchases of additional shares of the Fund would be
disadvantageous because of the sales commission involved in the additional
purchases.
A confirmation of each transaction showing the sources of the
payment and the share and cash balance remaining in the account will be sent.
The plan may be terminated on written notice by the shareholder or the Fund,
and it will terminate automatically if all shares are liquidated or withdrawn
from the account or upon the death or incapacity of the shareholder. The
amount and schedule of withdrawal payments may be changed or suspended by
giving written notice to your Piper
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Jaffray investment executive or other broker-dealer at least seven business days
prior to the end of the month preceding a scheduled payment.
TAXATION
Each Fund qualified during its last taxable year and intends to
qualify each year as a "regulated investment company" under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"). To qualify as a
regulated investment company a Fund must, among other things, receive at
least 90% of its gross income each year from dividends, interest, gains from
the sale or other disposition of securities and certain other types of income,
including income from options and futures contracts.
The Code also forbids a regulated investment company from earning
30% or more of its gross income from the sale or other disposition of
securities held less than three months. This restriction may limit the
extent to which Adjustable Portfolio may purchase futures contracts and
options. To the extent such Fund engages in short-term trading and enter
into futures and options transactions, the likelihood of violating this 30%
requirement is increased.
The Code also requires a regulated investment company to diversify
its holdings. The Internal Revenue Service has not made its position clear
regarding the treatment of futures contracts and options for purposes of the
diversification test, and the extent to which Adjustable Portfolio can buy or
sell futures contracts and options may be limited by this requirement.
If for any taxable year one of the Funds does not qualify as a
regulated investment company, all of its taxable income will be subject to
tax at regular corporate rates without any deduction for distributions to
shareholders, and such distributions will be taxable to the Fund's
shareholders as ordinary dividends to the extent of the Fund's current or
accumulated earnings and profits. To qualify again as a regulated investment
company in a subsequent year the Fund would be required to distribute to
shareholders its undistributed earnings and profits and to pay an interest
charge on 50% of such earnings and profits. In addition, if immediately
after qualifying as a regulated investment company for any taxable year the
Fund failed to qualify for a period greater than one taxable year, the Fund
would be required to recognize any net built-in gains (the excess of
aggregate gains over aggregate losses that would have been realized if it had
been liquidated) in order to again qualify as a regulated investment company.
Each Fund will be subject to a non-deductible excise tax equal to 4%
of the excess, if any, of the amount required to be distributed pursuant to
the Code for each calendar year over the amount actually distributed. No
amount of such excess, however, will be subject to the excise tax to the
extent it is subject to the corporate-level income tax. In order to avoid
the imposition of this excise tax, each Fund generally must declare dividends
by the end of a calendar year representing 98% of the Fund's ordinary income
for the calendar year and 98% of its capital gain net income (both long-term
and short-term capital gains) for the 12-month period ending October 31 of
the calendar year.
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Gain or loss on futures contracts and options is taken into account
when realized by entering into a closing transaction or by exercise. In
addition, with respect to many types of futures contracts and options held at
the end of Adjustable Portfolio's taxable year, unrealized gain or loss on
such contracts is taken into account at the then current fair market value
thereof under a special "marked-to-market, 60/40 system," and such gain or
loss is recognized for tax purposes. The gain or loss from such futures
contracts and options (including premiums on certain options that expire
unexercised) is treated as 60% long-term and 40% short-term capital gain or
loss, regardless of their holding period. The amount of any capital gain or
loss actually realized by the Fund in a subsequent sale or other disposition
of such futures contracts will be adjusted to reflect any capital gain or loss
taken into account by the Fund in a prior year as a result of the constructive
sale under the "marked-to-market, 60/40 system." Notwithstanding the rules
described above, with respect to certain futures contracts, the Fund may make an
election that will have the effect of exempting all or a part of those
identified futures contracts from being treated for federal income tax purposes
as sold on the last business day of the Fund's taxable year. All or part of any
loss realized by the Fund on any closing of a futures contract may be deferred
until all of the Fund's offsetting positions with respect to the futures
contract are closed.
Ordinarily, distributions and redemption proceeds earned by a
shareholder of either of the Funds are not subject to withholding of federal
income tax. However, 31% of a Fund shareholder's distributions and
redemption proceeds must be withheld if a Fund shareholder fails to supply
the Fund or its agent with such shareholder's taxpayer identification number
or if a Fund shareholder who is otherwise exempt from withholding fails to
properly document such shareholder's status as an exempt recipient.
Corporations are generally exempt from these requirements.
Any loss on the sale or exchange of shares of either Fund generally
will be disallowed to the extent that a shareholder acquires or contracts to
acquire shares of the same Fund within 30 days before or after such sale or
exchange. In addition, if a shareholder disposes of shares within 90 days of
acquiring such shares and purchases other shares of the Company or of a
series of another investment company managed by the Adviser at a reduced
sales charge, the shareholder's tax basis for determining gain or loss on the
shares which are disposed of is reduced by the lesser of the amount of the
sales charge that was paid when the shares disposed of were acquired or the
amount by which the sales charge for the new shares is reduced. If a
shareholder's tax basis is so reduced, the amount of the reduction is treated
as part of the tax basis of the new shares.
For federal income tax purposes, Adjustable Portfolio had capital
loss carryovers in the amount of $3,291,023 at June 30, 1995, which, if not
offset by subsequent capital gains, will expire in 2002-2004. 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
expired.
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Interest income from direct investment by noncorporate taxpayers in
U.S. Government obligations (but not repurchase agreements) generally is not
subject to state taxation. However, certain states attempt to tax mutual
fund dividends attributable to such income. This treatment has been
challenged in a number of lawsuits. Shareholders are encouraged to consult
their tax advisors concerning this matter.
GENERAL INFORMATION
The Board of Directors may, without shareholder approval, create and
issue one or more additional classes of shares within each Fund, as well as
within any series of the Company created in the future. All classes of shares
in a Fund would be identical except that each class of shares would be available
through a different distribution channel and certain classes might incur
different expenses for the provision of distribution services or the
provision of shareholder services or administration assistance by
institutions. Shares of each class would share equally in the gross income
of a series, but any variation in expenses would be charged separately
against the income of the particular class incurring such expenses. This
would result in variations in net investment income accrued and dividends
paid by and in the net asset value of the different classes of a series.
This ability to create multiple classes of shares within each series of the
Company will allow the Company in the future the flexibility to better tailor
its methods of marketing, administering and distributing shares of the Funds
to the needs of particular investors and to allocate expenses related to such
marketing, administration and distribution methods to the particular classes
of shareholders of the Fund incurring such expenses.
On an issue affecting only a particular series, the shares of the
affected series vote separately. An example of such an issue would be a
fundamental investment restriction pertaining to only one series. In voting
on the Investment Advisory and Management Agreement (the "Agreement"),
approval of the Agreement by the shareholders of a particular series would
make the Agreement effective as to that series whether or not it had been
approved by the shareholders of the other series.
The assets received by the Company for the issue or sale of shares
of each series, and all income, earnings, profits and proceeds thereof,
subject only to the rights of creditors, are allocated to such series, and
constitute the underlying assets of such series. The underlying assets of
each series are required to be segregated on the books of account, and are to
be charged with the expenses in respect to such series and with a share of
the general expenses of the Company. Any general expenses of the Company not
readily identifiable as belonging to a particular series shall be allocated
among the series based upon the relative net assets of the series at the time
such expenses were accrued.
Minnesota has enacted legislation which authorizes corporations to
eliminate or limit the personal liability of a director to the corporation or
its shareholders for monetary damages for breach of the fiduciary duty of
"care" (the duty to act with the care an ordinarily prudent person in a like
position would exercise under similar circumstances). Minnesota law does
not, however, permit a corporation to
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eliminate or limit the liability of a director (a) for any breach of the
director's duty of "loyalty" to the corporation or its shareholders (the duty
to act in good faith and in a manner reasonably believed to be in the best
interest of the corporation), (b) for acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law, (c) for
authorizing a dividend, stock repurchase or redemption or other distribution
in violation of Minnesota law or for violation of certain provisions of
Minnesota securities laws, or (d) for any transaction from which the director
derived an improper personal benefit. Minnesota law does not permit
elimination or limitation of a director's liability under the 1933 Act or the
Securities Exchange Act of 1934, and the 1940 Act prohibits elimination or
limitation of a director's liability for acts involving willful malfeasance,
bad faith, gross negligence or reckless disregard of the duties of a
director. The Articles of Incorporation of Piper Global limit the liability
of directors to the fullest extent permitted by Minnesota law and the 1940
Act.
FINANCIAL STATEMENTS
The audited financial statements and supplementary schedules for
Money Market Fund and Adjustable Portfolio as of June 30, 1995, have been
incorporated by reference into this Statement of Additional Information from
the Funds' annual report to shareholders in reliance on the report of KPMG
Peat Marwick LLP, 4200 Norwest Center, Minneapolis, Minnesota 55402,
independent auditors of the Funds, given on the authority of such firm as
experts in accounting and auditing.
PENDING LITIGATION
Complaints have been brought in federal and state court relating to
one open-end and twelve closed-end investment companies managed by the
Adviser and to two open-end funds for which the Adviser has acted as
sub-adviser. An Amended Consolidated Class Action Complaint was filed on
October 5, 1994 in the United States District Court, District of Minnesota,
against the Institutional Government Income Portfolio (a series of Piper
Funds Inc.), the Adviser, the Distributor, William H. Ellis and Edward J.
Kohler alleging certain violations of federal and state securities laws,
including the making of materially misleading statements in the prospectus,
common law negligent misrepresentation and breach of fiduciary duty. This is
a consolidated putative class action in which claims brought by 11 persons or
entities have been consolidated under the title IN RE: PIPER FUNDS INC.
INSTITUTIONAL GOVERNMENT INCOME PORTFOLIO LITIGATION. The named plaintiffs
in the complaint purport to represent a class of individuals and groups who
purchased shares of Institutional Government Income Portfolio during the
putative class period of July 1, 1991 through May 9, 1994. The named
plaintiffs and defendants have entered into a settlement agreement which has
received preliminary approval from the Court. The terms of the settlement
are set forth in a Settlement Agreement dated July 20, 1995 (as modified by
an Addendum filed on July 28, 1995). The Settlement Agreement contained a
provision which would have permitted the defendants to cancel the Agreement
if shareholders who had incurred a cumulative "Loss" (as defined under the
Agreement) more than 10% of the Loss sustained by the entire class had opted
out. The deadline for requesting exclusion from the class has passed, and
the Loss sustained by persons requesting exclusion is less than 10%. If
granted
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final approval by the Court, the Settlement Agreement would provide
up to $70 million, together with interest earned, less certain disbursements
and attorneys fees as approved by the Court, to class members in payments
scheduled over approximately three years. Such payments would be made by
Piper Jaffray Companies Inc. and the Adviser and would not be an obligation
of the Institutional Government Income Portfolio or Piper Funds Inc.
Six additional complaints, which are based on claims similar to
those asserted in the first complaint, have been brought relating to the
Institutional Government Income Portfolio. The first of such complaints was
filed in the same court against the same parties on October 21, 1994, by
Eltrax Systems, Inc. A second additional complaint was filed against the
Company, the Adviser, the Distributor and Piper Jaffray Companies Inc. on
September 30, 1994 in the United States District Court, District of Colorado.
Plaintiffs in the complaint are Gary Pashel and Gregg S. Hayutin, Trustees
of the Mae Pashel Trust; Mae Pashel, individually; Gary Pashel and Michael H.
Feinstein, Trustees of the Robert Hayutin Insurance Trust; and Dennis E.
Hayutin, Gregg S. Hayutin and Gary Pashel, Trustees of the Marie Ellen
Hayutin Trust. The third additional complaint, a putative class action, was
filed on November 1, 1994 in the United States District Court, District of
Idaho by the Idaho Association of Realtors, Inc., a non-profit Idaho
corporation. The complaint was filed against the Institutional Government
Income Portfolio, the Adviser, the Distributor, Piper Jaffray Companies Inc.,
William H. Ellis and Edward J. Kohler. The fourth complaint, also a putative
class action, was filed in the United States District Court for the District
of Minnesota, Third Division, on January 25, 1995. The Complaint was brought
by Louise S. Maher and John A. Raetz against Piper Funds Inc., Institutional
Government Income Portfolio, the Adviser, the Distributor, Piper Jaffray
Companies Inc., William H. Ellis and Edward J. Kohler. The fifth complaint
was brought on April 11, 1995, and in the future may be filed in the
Minnesota State District Court, Hennepin County. The plaintiff, Frank R.
Berman, Trustee of Frank R. Berman Professional CP Pension Plan Trust, sued
individually and not on behalf of any putative class. Defendants are the
Distributor, Piper Funds Inc., Morton Silverman and Worth Bruntjen. A sixth
complaint relating to Institutional Government Income Portfolio was filed on
June 22, 1995 in the Montana Thirteenth Judicial District Court, Yellowstone
County by Beverly Muth against the Distributor and Teresa L. Darnielle. In
addition to the above complaints, a number of actions have been commenced in
arbitration by individual investors in the Institutional Government Income
Portfolio. The complaints discussed in this paragraph generally have been
consolidated with the IN RE: PIPER FUNDS INC. action for pretrial purposes
and the arbitrations and litigation have been stayed pending entry of an
order by the Court permitting those class members who have requested
exclusion to proceed with their actions.
A complaint was filed by Herman D. Gordon on October 20, 1994, in
the United States District Court, District of Minnesota, against American
Adjustable Rate Term Trust Inc.--1998, American Adjustable Rate Term Trust
Inc.--1999, the Adviser, the Distributor, Piper Jaffray Companies Inc.,
Benjamin Rinkey, Jeffrey Griffin, Charles N. Hayssen and Edward J. Kohler. A
second complaint was filed by Frank Donio, I.R.A. and other plaintiffs on
April 14, 1995, in the United States District Court, District of Minnesota,
against American Adjustable Rate Term Trust
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Inc.--1996, American Adjustable Rate Term Trust Inc.--1997, American
Adjustable Rate Term Trust Inc.--1998, American Adjustable Rate Term Trust
Inc.--1999, the Adviser, the Distributor, Piper Jaffray Companies Inc. and
certain associated individuals. Plaintiffs in both actions filed a
Consolidated Amended Class Action Complaint on May 23, 1995 and by Order
dated June 8, 1995, the Court consolidated the two putative class actions.
The consolidated amended complaint, which purports to be a class action,
alleges certain violations of federal and state securities laws, breach of
fiduciary duty and negligent misrepresentation.
A complaint was filed by Carson H. Bradley on February 3, 1995 in
the Sixth Judicial District of the State of Idaho against American Government
Income Fund Inc., American Government Income Portfolio Inc., the Adviser, the
Distributor and Worth Bruntjen. The complaint alleges negligent
misrepresentation, breach of fiduciary duty and breach of contract. The
action has been removed to Federal District Court for the District of Idaho.
A complaint was filed by Gary E. Nelson on June 28, 1995 in the
United States District Court for the Western District of Washington at
Seattle against American Strategic Income Portfolio Inc. - II, the Adviser,
the Distributor, Piper Jaffray Companies Inc., Worth Bruntjen, Charles N.
Hayssen, Michael Jansen, William H. Ellis and Edward J. Kohler. A second
complaint was filed by the same individual in the same court on July 12, 1995
against American Opportunity Income Fund Inc., the Adviser, the Distributor,
Piper Jaffray Companies Inc., Worth Bruntjen, Charles N. Hayssen, Michael
Jansen, William H. Ellis and Edward J. Kohler. On September
7, 1995, Christian Fellowship Foundation Peace United Church of Christ, Gary
E. Nelson and Lloyd Schmidt filed an amended complaint purporting to be a
class action in the United States District Court for the District of
Washington. The complaint was filed against American Government Income
Portfolio, Inc., American Government Income Fund Inc., American Government
Term Trust, Inc., American Strategic Income Portfolio Inc., American
Strategic Income Portfolio Inc. -- II, American Strategic Income Portfolio
Inc. -- III, American Opportunity Income Fund Inc., American Select Portfolio
Inc., Piper Jaffray Companies Inc., Piper Jaffray Inc., the Adviser and
certain associated individuals. By Order filed October 5, 1995, the
complaints were consolidated. The amended complaint alleges generally that
the prospectus and financial statements of each investment company were false
and misleading. Specific violations of various federal securities laws are
alleged with respect to each investment company. The complaint also alleges
that the defendants violated the Racketeer Influenced and Corrupt
Organizations Act, the Washington State Securities Act and the Washington
Consumer Protection Act.
Complaints have also been filed relating to two open-end funds for
which the Adviser has acted as sub-adviser, Managers Intermediate Mortgage
Fund and Managers Short Government Fund. A complaint was filed on September
26, 1994 in the United States District Court, District of Connecticut, by
Florence R. Hosea, Bobby W. Hosea, Getrud B. Dale and Peter M. Dale, Andrew
Poffel and Diane Poffel as tenants by the Entireties, Myrone Sarone, Donna M.
DiPalo, Bernard B. Geltner and Gail Geltner and Paul Delman. The complaint
was filed against The Managers Funds, the Managers Funds, L.P., Robert P.
Watson, the Adviser, the Distributor, an individual associated with the
Adviser, Evaluation Associates, Inc. and Managers
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<PAGE>
Intermediate Mortgage Fund. The complaint, which is a putative class action,
alleges certain violations of federal securities laws, including the making
of false and misleading statements in the prospectus, and alleges negligent
misrepresentation, breach of fiduciary duty and common law fraud. A similar
complaint was filed as a putative class action in the same court on November
4, 1994. The complaint was filed by Karen E. Kopelman against The Managers
Fund, The Managers Funds, L.P., Robert P. Watson, the Adviser, the
Distributor, Worth Bruntjen, Evaluation Associates, Inc. and Managers
Intermediate Mortgage Fund. The two putative class actions were consolidated
by court order on December 13, 1994. Plaintiffs filed an Amended and Restated
Complaint on July 19, 1995. A complaint relating to the Managers Short
Government Fund was filed on November 18, 1994 in the United States District
Court, District of Minnesota. The complaint was filed by Robert Fleck as a
putative class action against The Managers Funds, The Managers Funds, L.P.,
the Adviser, the Distributor, Worth Bruntjen, Evaluation Associates, Inc.,
Robert P. Watson, John E. Rosati, William M. Graulty, Madeline H. McWhinney,
Steven J. Pasggioli, Thomas R. Schneeweis and Managers Short Government Fund,
F/K/A/ Managers Short Government Income Fund. The complaint alleges certain
violations of federal securities laws, including the making of false and
misleading statements in the prospectus, and negligent misrepresentation.
The Adviser and Distributor do not believe that the settlement
reached in connection with the first lawsuit described above, or any other of
the above lawsuits, will have a material adverse effect upon their ability to
perform under their agreements with the Fund, and they intend to defend the
remaining lawsuits vigorously.
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APPENDIX A
COMMERCIAL PAPER AND CORPORATE BOND RATINGS
COMMERCIAL PAPER RATINGS
Set forth below are descriptions of the two highest commercial paper
and other short-term rating categories assigned by Standard & Poor's Ratings
Services ("S&P"), Moody's Investors Service, Inc. ("Moody's"), Fitch
Investors Service, Inc. ("Fitch") and Duff & Phelps, Inc. ("Duff"):
The designation A-1 by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted with a
plus sign (+) designation. Capacity for timely payment on issues with an A-2
designation is strong. However, the relative degree of safety is not as high
as for issues designated A-1.
The rating Prime-1 (P-1) is the highest commercial paper rating
assigned by Moody's. Issuers of P-1 paper must have a superior capacity for
repayment of short-term promissory obligations, and ordinarily will be
evidenced by leading market positions in well established industries, high
rates of return on funds employed, conservative capitalization structures
with moderate reliance on debt and ample asset protection, broad margins in
earnings coverage of fixed financial charges and high internal cash
generation, and well established access to a range of financial markets and
assured sources of alternate liquidity. Issues rated Prime-2 (P-2) have a
strong capacity for repayment of short-term promissory obligations. This
ordinarily will be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
The rating Fitch-1 (Highest Grade) is the highest commercial paper
rating assigned by Fitch. Paper rated Fitch-1 is regarded as having the
strongest degree of assurance for timely payment. The rating Fitch-2 (Very
Good Grade) is the second highest commercial paper rating assigned by Fitch
which reflects an assurance of timely payment only slightly less in degree
than the strongest issues.
The rating Duff-1 is the highest commercial paper rating assigned by
Duff. Paper rated Duff-1 is regarded as having very high certainty of timely
payment with excellent liquidity factors which are supported by ample asset
protection. Risk factors are minor. Paper rated Duff-2 is regarded as
having good certainty of timely payment, good access to capital markets and
sound liquidity factors and company fundamentals. Risk factors are small.
A-1
<PAGE>
S&P CORPORATE BOND RATINGS
S&P's ratings for corporate bonds have the following definitions:
Debt rated "AAA" has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in a small degree.
Debt rated "A" has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
A-2
<PAGE>
APPENDIX B
INTEREST RATE FUTURES CONTRACTS AND RELATED OPTIONS
INTEREST RATE FUTURES CONTRACTS
Adjustable Portfolio may purchase and sell interest rate futures
contracts and options thereon. An interest rate futures contract creates an
obligation on the part of the seller (the "short") to deliver, and an
offsetting obligation on the part of the purchaser (the "long") to accept
delivery of, the type of financial instrument called for in the contract in a
specified delivery month for a stated price. A majority of transactions in
interest rate futures contracts, however, do not result in the actual
delivery of the underlying instrument, but are settled through liquidation
(I.E., by entering into an offsetting transaction). The interest rate
futures contracts to be traded by the Fund are traded only on commodity
exchanges--known as "contract markets"--approved for such trading by the
Commodity Futures Trading Commission and must be executed through a futures
commission merchant or brokerage firm which is a member of the relevant
contract market. These contract markets, through their clearing
corporations, guarantee that the contracts will be performed. Presently,
futures contracts are based upon such debt securities as long-term U.S.
Treasury bonds, Treasury notes, Government National Mortgage Association
modified pass-through mortgage-backed securities, three-month U.S. Treasury
bills and bank certificates of deposit. In addition, futures contracts are
traded in the Moody's Investment Grade Corporate Bond Index and the Long Term
Corporate Bond Index.
Although most futures contracts by their terms call for actual
delivery or acceptance of commodities or securities, in most cases the
contracts are closed out before the settlement date without the making or
taking of delivery. Closing out a short position is effected by purchasing a
futures contract for the same aggregate amount of the specific type of
financial instrument or commodity and the same delivery month. If the price
of the initial sale of the futures contract exceeds the price of the
offsetting purchase, the seller is paid the difference and realizes a gain.
Conversely, if the price of the offsetting purchase exceeds the price of the
initial sale, the trader realizes a loss. Similarly, the closing out of a
long position is effected by the purchaser entering into a futures contract
sale. If the offsetting sale price exceeds the purchase price, the purchaser
realizes a gain and, if the purchase price exceeds the offsetting sale price,
the purchaser realizes a loss.
The purchase or sale of a futures contract differs from the purchase
or sale of a security in that no price or premium is paid or received.
Instead, an amount of cash or securities acceptable to the Adviser and the
relevant contract market, which varies but is generally about 5% of the
contract amount, must be deposited with the custodian in the name of the
broker. This amount is known as "initial margin," and represents a "good
faith" deposit assuring the performance of both the purchaser and the seller
under the futures contract. Subsequent payments to and from the broker,
known as "variation margin," are required to be made on a daily basis as the
price of the futures contract fluctuates, making the long or short positions
in the futures contract more or less valuable, a process known as "marking
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to the market." Prior to the settlement date of the futures contract, the
position may be closed out by taking an opposite position which will operate
to terminate the position in the futures contract. A final determination of
variation margin is then made, additional cash is required to be paid to or
released by the broker, and the purchaser realizes a loss or gain. In
addition, a commission is paid on each completed purchase and sale
transaction.
The purpose of the acquisition or sale of a futures contract by the
Fund, as the holder of long-term fixed-income securities, is to hedge against
fluctuations in rates on such securities without actually buying or selling
long-term fixed-income securities. For example, if the Fund owns long-term
bonds and interest rates are expected to increase, the Fund might sell
futures contracts. Such a sale would have much the same effect as selling
some of the long-term bonds in the Fund's portfolio. If interest rates
increase as anticipated by the Adviser, the value of certain long-term
securities in the portfolio would decline, but the value of the Fund's
futures contracts would increase at approximately the same rate, thereby
keeping the net asset value of the Fund from declining as much as it
otherwise would have. Of course, since the value of the securities in the
Fund's portfolio will far exceed the value of the futures contracts sold by
the Fund, an increase in the value of the futures contracts could only
mitigate--but not totally offset--the decline in the value of the portfolio.
Similarly, when it is expected that interest rates may decline,
futures contracts could be purchased to hedge against the Fund's anticipated
purchases of long-term fixed-income securities, such as bonds, at higher
prices. Since the rate of fluctuation in the value of futures contracts
should be similar to that of long-term bonds, the Fund could take advantage
of the anticipated rise in the value of long-term bonds without actually
buying them until the market had stabilized. At that time, the futures
contracts could be liquidated and the Fund's cash could then be used to buy
long-term bonds on the cash market. The Fund could accomplish similar
results by selling bonds with long maturities and investing in bonds with
short maturities when interest rates are expected to increase or by buying
bonds with long maturities and selling bonds with short maturities when
interest rates are expected to decline. However, in circumstances when the
market for bonds may not be as liquid as that for futures contracts, the
ability to invest in such contracts could enable the Fund to react more
quickly to anticipated changes in market conditions or interest rates.
OPTIONS ON INTEREST RATE FUTURES CONTRACTS
Adjustable Portfolio may purchase and sell put and call options on
interest rate futures contracts which are traded on a United States exchange
or board of trade as a hedge against changes in interest rates, and will
enter into closing transactions with respect to such options to terminate
existing positions. An interest rate futures contract provides for the
future sale by one party and the purchase by the other party of a certain
amount of a specific financial instrument (debt security) at a specified
price, date, time and place. An option on an interest rate futures contract,
as contrasted with the direct investment in such a contract, gives the
purchaser the right, in return for the premium paid, to assume a position in
an interest rate futures contract at a specified exercise price at any time
prior to the expiration date of the option. Options on interest rate futures
contracts are similar to options on securities, which give the purchaser the
right, in return for the premium paid, to purchase or sell securities. A
call option gives the purchaser of such option the right to buy, and obliges
its writer to sell, a specified underlying futures contract at a specified
exercise price at any time prior to the expiration date of
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the option. A purchaser of a put option has the right to sell, and the
writer has the obligation to buy, such contract at the exercise price during
the option period. Upon exercise of an option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's future
margin account, which represents the amount by which the market price of the
futures contract exceeds, in the case of a call, or is less than, in the case
of a put, the exercise price of the option on the futures contract. If an
option is exercised on the last trading day prior to the expiration date of
the option, the settlement will be made entirely in cash equal to the
difference between the exercise price of the option and the closing price of
the interest rate futures contract on the expiration date. The Fund will pay
a premium for purchasing options on interest rate futures contracts. Because
the value of the option is fixed at the point of sale, there are no daily
cash payments to reflect changes in the value of the underlying contract;
however, the value of the option does change daily and that change would be
reflected in the net asset value of the Fund. In connection with the writing
of options on interest rate futures contracts, the Fund will make initial
margin deposits and make or receive maintenance margin payments that reflect
changes in the market value of such options. Premiums received from the
writing of an option are included in initial margin deposits.
PURCHASE OF PUT OPTIONS ON FUTURES CONTRACTS. Adjustable Portfolio
may purchase put options on interest rate futures contracts if the Adviser
anticipates a rise in interest rates. Because the value of an interest rate
futures contract moves inversely in relation to changes in interest rates, a
put option on such a contract becomes more valuable as interest rates rise.
By purchasing put options on interest rate futures contracts at a time when
the Adviser expects interest rates to rise, the Fund will seek to realize a
profit to offset the loss in value of its portfolio securities. If interest
rates remain steady or fall such that the futures contract price at
expiration of the option is above the option exercise price, the put option
will expire worthless.
PURCHASE OF CALL OPTIONS ON FUTURES CONTRACTS. Adjustable Portfolio
may purchase call options on interest rate futures contracts if the Adviser
anticipates a decline in interest rates. The purchase of a call option on an
interest rate futures contract represents a means of obtaining temporary
exposure to market appreciation at limited risk. Because the value of an
interest rate futures contract moves inversely in relation to changes to
interest rates, a call option on such a contract becomes more valuable as
interest rates decline. The Fund may purchase a call option on an interest
rate futures contract to hedge against a decline in interest rates in a
market advance when the Fund is holding cash. The Fund can take advantage of
the anticipated rise in the value of long-term securities without actually
buying them until the market is stabilized. At that time, the options can be
liquidated and the Fund's cash can be used to buy long-term securities. If
interest rates remain steady or rise such that the futures contract price at
expiration of the option is below the option exercise price, the call option
will expire worthless.
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WRITING CALL OPTIONS ON FUTURES CONTRACTS. Adjustable Portfolio may
write call options on interest rate futures contracts if the Adviser
anticipates a rise in interest rates. As interest rates rise, a call option
on such a contract becomes less valuable. If the futures contract price at
expiration of the option is below the exercise price, the option will not be
exercised and the Fund will retain the full amount of the option premium.
Such amount provides a partial hedge against any decline that may have
occurred in the Fund's portfolio securities. If interest rates decline such
that the futures contract price is above the option exercise price and the
option is exercised, the Fund will be liable for the amount by which the
market price of the futures contract exceeds the exercise price of the option.
WRITING PUT OPTIONS ON FUTURES CONTRACTS. Adjustable Portfolio may
write put options on interest rate futures contracts if the Adviser
anticipates a decline in interest rates. As interest rates decline, a put
option on an interest rate futures contract becomes less valuable. If the
futures contract price at expiration of the option has risen due to declining
interest rates and is above the exercise price, the option will not be
exercised and the Fund will retain the full amount of the option premium.
Such amount can then be used by the Fund to buy long-term securities when the
market has stabilized. If interest rates rise such that the futures contract
price is below the option exercise price and the option is exercised, the
Fund will be liable for the amount by which the exercise price of the option
exceeds the market price of the futures contract.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
HEDGING RISKS IN FUTURES CONTRACTS TRANSACTIONS. There are several
risks in using futures contracts as hedging devices. One risk arises because
the prices of futures contracts may not correlate perfectly with movements in
the underlying fixed-income security due to certain market distortions.
First, all participants in the futures market are subject to initial margin
and variation margin requirements. Rather than making additional variation
margin payments, investors may close the contracts through offsetting
transactions which could distort the normal relationship between the security
and the futures market. Second, the margin requirements in the futures
market are lower than margin requirements in the securities market, and as a
result the futures market may attract more speculators than does the
securities market. Increased participation by speculators in the futures
market may also cause temporary price distortions. Because of possible price
distortion in the futures market and because of imperfect correlation between
movements in securities and movements in the prices of futures contracts,
even a correct forecast of general market trends may not result in a
successful hedging transaction over a very short period. Another risk arises
because of imperfect correlation between movements in the value of the
futures contracts and movements in the value of securities subject to the
hedge.
Successful use of futures contracts by Adjustable Portfolio is
subject to the ability of the Adviser to predict correctly movements in the
direction of interest rates. If the Fund has hedged against the possibility
of an increase in interest rates adversely affecting the value of
fixed-income securities held in its portfolio and
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interest rates decrease instead, the Fund will lose part or all of the
benefit of the increased value of its security which it has hedged because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell securities
to meet daily variation margin requirements. Such sales of securities may,
but will not necessarily, be at increased prices which reflect the decline in
interest rates. The Fund may have to sell securities at a time when it may
be disadvantageous to do so.
LIQUIDITY OF FUTURES CONTRACTS. Adjustable Portfolio may elect to
close some or all of its contracts prior to expiration. The purpose of
making such a move would be to reduce or eliminate the hedge position held by
the Fund. The Fund may close its positions by taking opposite positions.
Final determinations of variation margin are then made, additional cash as
required is paid by or to the Fund, and the Fund realizes a loss or a gain.
Positions in futures contracts may be closed only on an exchange or
board of trade providing a secondary market for such futures contracts.
Although the Fund intends to enter into futures contracts only on exchanges
or boards of trade where there appears to be an active secondary market,
there is no assurance that a liquid secondary market will exist for any
particular contract at any particular time.
In addition, most domestic futures exchanges and boards of trade
limit the amount of fluctuation permitted in futures contract prices during a
single trading day. The daily limit establishes the maximum amount that the
price of a futures contract may vary either up or down from the previous
day's settlement price at the end of a trading session. Once the daily limit
has been reached in a particular contract, no trades may be made that day at
a price beyond that limit. The daily limit governs only price movement
during a particular trading day and therefore does not limit potential losses
because the limit may prevent the liquidation of unfavorable positions. It
is possible that futures contract prices could move to the daily limit for
several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses. In such event, it will not be
possible to close a futures position and, in the event of adverse price
movements, the Fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the
portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. However, as described above, there is
no guarantee that the price of the securities being hedged will, in fact,
correlate with the price movements in the futures contract and thus provide
an offset to losses on a futures contract.
RISKS OF OPTIONS ON FUTURES CONTRACTS. The use of options on
futures contracts also involves additional risk. Compared to the purchase or
sale of futures contracts, the purchase of call or put options on futures
contracts involves less potential risk to the Fund because the maximum amount
at risk is the premium paid for the options (plus transactions costs). The
writing of a call option on a futures contract generates a premium which may
partially offset a decline in the value of the Fund's portfolio assets. By
writing a call option, the Fund becomes obligated to sell a futures contract,
which may have a value higher than the exercise
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price. Conversely, the writing of a put option on a futures contract
generates a premium, but the Fund becomes obligated to purchase a futures
contract, which may have a value lower than the exercise price. Thus, the
loss incurred by the Fund in writing options on futures contracts may exceed
the amount of the premium received.
The effective use of options strategies is dependent, among other
things, on the Fund's ability to terminate options positions at a time when
the Adviser deems it desirable to do so. Although the Fund will enter into
an option position only if the Adviser believes that a liquid secondary
market exists for such option, there is no assurance that the Fund will be
able to effect closing transactions at any particular time or at an
acceptable price. The Funds' transactions involving options on futures
contracts will be conducted only on recognized exchanges.
Adjustable Portfolio's purchase or sale of put or call options on
futures contracts will be based upon predictions as to anticipated interest
rates by the Adviser, which could prove to be inaccurate. Even if the
expectations of the Adviser are correct, there may be an imperfect
correlation between the change in the value of the options and of the Fund's
portfolio securities.
REGULATORY MATTERS
To the extent required to comply with applicable Securities and
Exchange Commission releases and staff positions, when entering into futures
contracts, Adjustable Portfolio will maintain, in a segregated account, cash
or liquid high-grade debt securities equal to the value of such contracts.
The Commodity Futures Trading Commission (the "CFTC"), a federal
agency, regulates trading activity on the exchanges pursuant to the Commodity
Exchange Act, as amended. The CFTC requires the registration of "commodity
pool operators," defined as any person engaged in a business which is of the
nature of an investment trust, syndicate or a similar form of enterprise, and
who, in connection therewith, solicits, accepts or receives from others,
funds, securities or property for the purpose of trading in any commodity for
future delivery on or subject to the rules of any contract market. The CFTC
has adopted Rule 4.5, which provides an exclusion from the definition of
commodity pool operator for any registered investment company which meets the
requirements of the Rule. Rule 4.5 requires, among other things, that an
investment company wishing to avoid commodity pool operator status use
futures and options positions only (a) for "bona fide hedging purposes" (as
defined in CFTC regulations) or (b) for other purposes so long as aggregate
initial margins and premiums required in connection with non-hedging
positions do not exceed 5% of the liquidation value of the investment
company's portfolio. Any investment company wishing to claim the exclusion
provided in Rule 4.5 must file a notice of eligibility with both the CFTC and
the National Futures Association. Before engaging in transactions involving
futures contracts, the Adjustable Portfolio will file such notices and meet
the requirements of Rule 4.5, or such other requirements as the CFTC or its
staff may from time to time issue, in order to render registration as a
commodity pool operator unnecessary.
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