<PAGE>
PROSPECTUS DATED NOVEMBER 1, 1995, AS SUPPLEMENTED JUNE 24, 1996
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.
ON JUNE 18, 1996, THE BOARD OF DIRECTORS OF PIPER INSTITUTIONAL FUNDS INC.
(THE "COMPANY") UNANIMOUSLY APPROVED THE MERGER OF INSTITUTIONAL GOVERNMENT
ADJUSTABLE PORTFOLIO INTO ADJUSTABLE RATE MORTGAGE SECURITIES FUND ("ARMS
FUND"), A SERIES OF PIPER FUNDS INC. -- II. SEE "INVESTMENT OBJECTIVES AND
POLICIES -- INSTITUTIONAL GOVERNMENT ADJUSTABLE PORTFOLIO."
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.
2
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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.
3
<PAGE>
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."
4
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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>
5
<PAGE>
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>
6
<PAGE>
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
7
<PAGE>
Corporation, the Financing Corporation and the Student Loan Marketing
Association. Obligations of U.S. Government agencies or instrumentalities are
backed in a variety of ways by the U.S. Government or its agencies or
instrumentalities. Some of these obligations, such as Government National
Mortgage Association mortgage-backed securities, are backed by the full faith
and credit of the U.S. Treasury. Others, such as 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
ON JUNE 18, 1996, THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY APPROVED
THE MERGER OF ADJUSTABLE PORTFOLIO INTO ADJUSTABLE RATE MORTGAGE SECURITIES FUND
("ARMS FUND"), A SERIES OF PIPER FUNDS INC. -- II. PIPER CAPITAL MANAGEMENT
INCORPORATED, ADJUSTABLE PORTFOLIO'S INVESTMENT ADVISER, RECOMMENDED THE MERGER
TO THE BOARD BECAUSE ADJUSTABLE PORTFOLIO HAS BEEN UNABLE TO ATTRACT AND RETAIN
SUFFICIENT ASSETS FOR ITS CONTINUED OPERATION TO BE ECONOMICALLY FEASIBLE. THE
MERGER IS SUBJECT TO SHAREHOLDER APPROVAL. IF THE MERGER IS APPROVED BY
SHAREHOLDERS, ARMS FUND WILL ACQUIRE SUBSTANTIALLY ALL OF THE ASSETS OF
ADJUSTABLE PORFOLIO IN EXCHANGE FOR ARMS FUND SHARES WITH A VALUE EQUAL TO THE
VALUE OF THEIR ADJUSTABLE PORTFOLIO SHARES. THE COMPANY WILL CALL A SPECIAL
MEETING OF ADJUSTABLE PORTFOLIO SHAREHOLDERS AT A DATE TO BE ANNOUNCED FOR THE
PURPOSE OF VOTING ON THE PROPOSED MERGER. ADDITIONAL INFORMATION CONCERNING THE
PROPOSED MERGER WILL BE INCLUDED IN THE PROXY MATERIALS FOR SUCH MEETING.
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.
8
<PAGE>
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'
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
9
<PAGE>
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 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.
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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 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
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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.
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.
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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.
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.
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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. 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
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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).
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
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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 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
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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 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,
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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.
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.
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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 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
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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 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
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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
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
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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 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
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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, 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
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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.
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.
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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.
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SHAREHOLDER GUIDE TO INVESTING
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.
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
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SHAREHOLDER GUIDE TO INVESTING
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 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.
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SHAREHOLDER GUIDE TO INVESTING
- 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.
- American Government Term Trust Inc. ("AGT"), a closed-end fund which was
managed by the Adviser, recently dissolved and distributed its net assets
to shareholders. Former AGT shareholders may invest the distributions
received by them in connection with such dissolution in shares of the Fund
without payment of a sales charge.
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.
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SHAREHOLDER GUIDE TO INVESTING
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 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.
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SHAREHOLDER GUIDE TO INVESTING
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. 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
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SHAREHOLDER GUIDE TO INVESTING
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 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
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SHAREHOLDER GUIDE TO INVESTING
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.
On February 13, 1996, a Settlement Agreement became effective for the
consolidated class action lawsuit, titled In Re: PIPER FUNDS INC. INSTITUTIONAL
GOVERNMENT INCOME PORTFOLIO LITIGATION. The Amended Consolidated Class Action
Complaint was filed on October 5, 1994, in the United States District Court,
District of Minnesota, against PJIGX, Piper Capital Management Incorporated
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("PCM"), Piper Jaffray Inc., William H. Ellis and Edward J. Kohler, and had
alleged the making of materially misleading statements in the prospectus, common
law negligent misrepresentation and breach of fiduciary duty. The Settlement
Agreement will provide approximately $67.5 million, together with interest
earned, less certain disbursements and attorney fees, to class members in
payments scheduled over approximately three years. Such payments will be made by
Piper Jaffray Companies Inc. and PCM and will not be an obligation of Piper
Funds Inc. Three lawsuits and a number of arbitrations brought by some of the
investors who requested exclusion from the settlement class remain pending.
The Adviser and the Distributor do 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 LLP
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..................... 17
Management..................................... 24
SHAREHOLDER GUIDE TO INVESTING
How to Purchase Shares....................... 26
Reducing Your Sales Charge................... 27
Special Purchase Plans....................... 28
How to Redeem Shares......................... 29
Shareholder Services......................... 30
Dividends and Distributions.................. 32
Valuation of Shares............................ 34
Tax Status..................................... 35
Performance Comparisons........................ 35
General Information............................ 36
Appendix A -- Foreign Currency Transactions.... A-1
</TABLE>
INSTITUTIONAL MONEY MARKET FUND
INSTITUTIONAL GOVERNMENT ADJUSTABLE PORTFOLIO
NOVEMBER 1, 1995, AS
SUPPLEMENTED JUNE 24, 1996
PIF-05
