Filed Pursuant to Rule 497(c)
Registration File No. 33-60515
Prospectus Dated September 5, 1995
PIPER FUNDS INC. -- II
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
PIPER JAFFRAY TOWER
222 SOUTH NINTH STREET
MINNEAPOLIS, MINNESOTA 55402-3804
(800) 866-7778 (TOLL FREE)
Adjustable Rate Mortgage Securities Fund (the "Fund") is a diversified series
of Piper Funds Inc. -- II (the "Company"), an open-end management investment
company the shares of which can be offered in more than one series. The Fund
is the only series of the Company currently outstanding. The investment
objective of the Fund is to provide the maximum current income that is
consistent with low volatility of principal. 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 ("ARMS").
ARMS include both pass-through securities representing interests in
adjustable rate mortgage loans and floating rate collateralized mortgage
obligations.
AN INVESTMENT IN THE FUND MAY INVOLVE CERTAIN RISKS, INCLUDING THE LOSS OF
PRINCIPAL. THE MARKET VALUE OF THE SECURITIES IN WHICH THE FUND INVESTS WILL
FLUCTUATE WITH CHANGING INTEREST RATES, AS WILL THE FUND'S NET ASSET VALUE.
THE FUND MAY INVEST IN ILLIQUID SECURITIES WHICH WILL INVOLVE GREATER RISK
THAN INVESTMENTS IN OTHER SECURITIES AND MAY INCREASE FUND EXPENSES. SEE
"INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS -- OTHER INVESTMENT
TECHNIQUES." THE FUND INVESTS A SIGNIFICANT PORTION OF ITS ASSETS IN
MORTGAGE-RELATED SECURITIES, WHICH MAY INCLUDE DERIVATIVE MORTGAGE
SECURITIES. SEE "INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS -- ADJUSTABLE
RATE MORTGAGE SECURITIES" AND " -- OTHER ELIGIBLE INVESTMENTS."
This Prospectus concisely describes the information about the Fund that you
should know before investing. Please read it carefully before investing and
retain it for future reference.
A Statement of Additional Information about the Fund dated September 5, 1995 is
available free of charge. Write to the Fund at Piper Jaffray Tower, 222 South
Ninth Street, Minneapolis, Minnesota 55402-3804 or telephone (800) 866-7778
(toll free). The Statement of Additional Information has been filed with the
Securities and Exchange Commission and is incorporated in its entirety by
reference in this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
INTRODUCTION
Adjustable Rate Mortgage Securities Fund (the "Fund") is a diversified series of
Piper Funds Inc. -- II (the "Company"), an open-end management investment
company the shares of which can be offered in more than one series. The Fund is
the only series of the Company currently outstanding. The Company was organized
under the laws of the State of Minnesota on April 10, 1995. On September 1,
1995, four closed-end investment companies, American Adjustable Rate Term Trust
Inc. -- 1996 ("BDJ"), American Adjustable Rate Term Trust Inc. -- 1997 ("CDJ"),
American Adjustable Rate Term Trust Inc. -- 1998 ("DDJ") and American Adjustable
Rate Term Trust Inc. -- 1999 ("EDJ") (collectively, the "Trusts") merged into
the Fund (the "Merger"). Class action lawsuits have been filed in U.S. District
Court against each of the Trusts. The Company may be deemed to be a successor by
merger to the Trusts and, as such, may succeed to their liabilities, including
damages sought in such litigation. However, Piper Jaffray Companies Inc. and
Piper Capital Management Incorporated have agreed to indemnify the Company
against any losses incurred in connection with such litigation. See "General
Information -- Pending Legal Proceedings." The investment objective of the Fund
is to provide the maximum current income that is consistent with low volatility
of principal.
THE INVESTMENT ADVISER
The Fund is managed by Piper Capital Management Incorporated (the "Adviser"),
a wholly owned subsidiary of Piper Jaffray Companies Inc. The Fund pays the
Adviser a fee for managing its investment portfolio. The fee for the Fund is
paid at an annual rate of .35% on the first $500 million of average daily net
assets and .30% on average daily net assets in excess of $500 million. 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 Fund's shares.
RISK FACTORS TO CONSIDER
An investment in the Fund is subject to certain risks, as set forth in detail
under "Investment Objective, Policies and Risk Factors." As with other mutual
funds, there can be no assurance that the Fund will achieve its objective.
The Fund is subject to interest rate risk (the risk that rising interest
rates will make bonds issued at lower interest rates worth less). As a
result, the value of the Fund's shares will vary. The Fund is also subject to
credit risk (the risk that a bond issuer will fail to make timely payments of
interest or principal) to the extent it invests in non-U.S. Government
securities. The Fund may engage in the following investment practices which
involve certain special risks: the use of repurchase agreements, the lending
of portfolio securities, borrowing from banks and through reverse repurchase
agreements (but only for temporary or emergency purposes in an amount up to
10% of the value of its total assets), the use of hedging techniques,
including interest rate transactions, options, futures contracts, options on
futures contracts and investments in Eurodollar instruments, and the purchase
or sale of securities on a "when-issued" or "forward commitment" basis. These
techniques may increase the volatility of the Fund's net asset value.
OFFERING PRICE
Shares of the Fund 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 1.50% of the
offering price (1.52% of the net asset value) on purchases of less than
$100,000. The sales charge is reduced on a graduated scale on purchases of
$100,000 or more. In connection with purchases of $500,000 or more, there is
no initial sales charge; however, a .20% contingent deferred sales charge
will be imposed in the event of a redemption transaction occurring within 24
months following such a purchase. See "How to Purchase Shares -- Purchase Price"
and " -- Purchases of $500,000 or More."
MINIMUM INITIAL AND SUBSEQUENT INVESTMENTS
The minimum initial investment for the Fund is $250. There is no minimum for
subsequent investments. The Distributor, in its discretion, may waive the
minimum. See "How to Purchase Shares -- Minimum Investments."
EXCHANGES
You may exchange your Fund 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, provided that, if you hold your Fund shares through a
broker-dealer other than the Distributor, the exchange privilege may not be
available. Exchanges will be permitted only if there is a valid sales agreement
between your broker-dealer and the Distributor for the fund into which the
exchange will be made. 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. However, exchanges of Fund
shares which were received in the Merger will be permitted without payment of an
additional sales charge. 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 Fund may be redeemed at any time at their net asset value next
determined after a redemption request is received by your Piper Jaffray
Investment Executive or other broker-dealer. A contingent deferred sales
charge will be imposed upon the redemption of certain shares initially
purchased without a sales charge. See "How to Redeem Shares -- Contingent
Deferred Shares Charge." The Fund reserves the right, upon 30 days written
notice, to redeem an account if the net asset value of the shares falls below
$200. See "How to Redeem Shares -- Involuntary Redemption."
SHAREHOLDER INQUIRIES
Any questions or communications regarding a shareholder account should be
directed to your Piper Jaffray Investment Executive or, in the case of shares
held through another broker-dealer, to IFTC at (800) 874-6205. General
inquiries regarding the Fund should be directed to the Fund at the telephone
number set forth on the cover page of this Prospectus.
FUND EXPENSES
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of the offering
price) 1.50%
Exchange Fee $ 0*
ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets)
Management Fee .32%**
Rule 12b-1 Fee .15%
Other Expenses (after voluntary expense reimbursement)*** .13%
Total Fund Operating Expenses (after voluntary expense reimbursement)*** .60%
</TABLE>
* There is a $5.00 fee for each exchange in excess of four exchanges per
year. See "Shareholder Services -- Exchange Privilege."
** .35% on the first $500 million of net assets and .30% on net assets in
excess of $500 million. The .32% fee is based on estimated net assets of
the Fund as of the effective date of the Merger.
*** See the discussion below for an explanation of voluntary expense
reimbursements.
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming 5%
annual return and redemption at the end of each time period:
1 year $21 3 years $34
The purpose of the above Fund Expenses table is to assist you in
understanding the various costs and expenses that investors in the Fund will
bear directly or indirectly. THE EXAMPLE CONTAINED IN THE TABLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN.
The Adviser intends, although not required under the Advisory Agreement, to
reimburse the Fund for the amount, if any, by which the total operating and
management expenses of the Fund (including the Adviser's compensation and
amounts paid pursuant to the Fund's Rule 12b-1 Plan, but excluding interest,
taxes, brokerage fees and commissions, and extraordinary expenses) for the
fiscal year ending August 31, 1996, exceed .60% of average net assets. The
Adviser's limitation on expenses is voluntary and may be modified or
discontinued at any time after August 31, 1996. The foregoing policy will
have the effect of lowering the Fund's overall expense ratio and increasing
yield to investors when such amounts are assumed or the inverse when such
amounts are reimbursed. It is estimated that, absent any voluntary expense
reimbursements, the Fund will have Other Expenses as a percentage of average
net assets (adjusted to an annual basis) of approximately .23% for the
fiscal year ending August 31, 1996, resulting in Total Fund Operating
Expenses of .70%. For additional information, including a more complete
explanation of management and Rule 12b-1 fees, see "Management -- Investment
Adviser" and "Distribution of Fund Shares."
FINANCIAL HIGHLIGHTS
The following financial highlights represent the historical information of
American Adjustable Rate Term Trust Inc. -- 1998 ("DDJ"), one of the closed-end
investment companies that merged into Adjustable Rate Mortgage Securities Fund
on September 1, 1995. DDJ is considered the surviving entity for financial
reporting purposes. These financial highlights (other than for the six months
ended February 28, 1995) have been audited by KPMG Peat Marwick LLP, independent
auditors, whose report thereon appears in the Statement of Additional
Information.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR YEAR PERIOD FROM
2/28/95 ENDED ENDED 1/30/92* TO
(UNAUDITED) 8/31/94 8/31/93 8/31/92
<S> <C> <C> <C> <C>
PER SHARE DATA
Net asset value, beginning of period $ 8.82 9.67 9.74 9.58
Operations:
Net investment income 0.26 0.60 0.69 0.43
Net realized and unrealized gains (losses)
on investments (0.16) (0.89) (0.10) 0.08
Total from operations 0.10 (0.29) 0.59 0.51
Distributions to shareholders:
From net investment income (0.24) (0.56) (0.66) (0.35)
Net asset value, end of period $ 8.68 8.82 9.67 9.74
SELECTED INFORMATION
Total return** 1.30% (3.18%) 6.24% 5.49%
Net assets at end of period (in millions) $ 409 500 551 555
Ratio of expenses to average weekly net
assets 0.59%*** 0.60% 0.58% 0.58%***
Ratio of net investment income to average
weekly net assets 5.70%*** 6.39% 7.25% 7.70%***
Portfolio turnover rate (excluding short-term
securities) 4% 39% 39% 41%
Amount of borrowings outstanding at end of
period (in millions)+ $ 65 145 145 145
Per-share amount of borrowings outstanding at
end of period $ 1.38 2.56 2.54 2.54
Per-share amount of net assets,
excluding borrowings $10.06 11.38 12.21 12.28
Asset coverage ratio 729% 445% 481% 483%
</TABLE>
* Commencement of operations of American Adjustable Rate Term Trust Inc. --
1998.
** Total return is based on the change in net asset value of a share during
the period and assumes reinvestment of distributions at net asset value.
*** Adjusted to an annual basis.
+ American Adjustable Rate Term Trust Inc. -- 1998 was a closed-end
investment management company and was permitted to enter into borrowings
for other than temporary or emergency purposes. The Fund may borrow only
for temporary or emergency purposes.
++ Represents net assets, excluding borrowings, at the end of period divided
by borrowings outstanding at the end of period.
INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS
The Fund's investment objective is to provide the maximum current income that
is consistent with low volatility of principal. This investment objective
cannot be changed without shareholder approval. The investment policies and
techniques employed in pursuit of the Fund's objective may be changed without
shareholder approval, unless otherwise noted. In view of the risks inherent
in all investments in securities, there is no assurance that the Fund will
achieve its objective.
The Fund seeks to achieve its investment objective by investing primarily (at
least 65% of total assets under normal market conditions) 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"). 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 (a) Mortgage-Backed Securities (other
than ARMS), (b) U.S. Government Securities (including, with respect to 10% of
the Fund's net assets, U.S. Government zero-coupon securities); (c)
Asset-Backed Securities; and (d) Corporate Debt Securities (each as defined
below). At least 85% of the Fund's total assets (other than U.S. Government
Securities) must be rated, as of the date of purchase, AA or better by
Standard & Poor's Ratings Group ("Standard & Poor's"), Aa or better by
Moody's Investors Service, Inc. ("Moody's"), comparably rated by any other
nationally recognized statistical rating organization ("NRSRO") or, if
unrated, of a comparable quality as determined by the Adviser. Up to 15% of
the Fund's total assets may be invested in securities rated, as of the date
of purchase, A by Standard & Poor's or Moody's, comparably rated by any other
NRSRO or, if unrated, of comparable quality as determined by the Adviser. The
Fund may not invest in any security rated, as of the date of purchase, lower
than A by Standard & Poor's or Moody's (or below a comparable rating by any
other NRSRO) or, if unrated, of a quality lower than A as determined by the
Adviser. In the event that a security is downgraded to a rating below A or,
if unrated, is no longer of a quality comparable to a security rated A, as
determined by the Adviser, the Fund will sell such a security as promptly as
possible. For a discussion of Standard & Poor's and Moody's ratings, see
Appendix A to the Statement of Additional Information.
The Fund may engage in options and financial futures transactions which
relate to the securities in which it invests, may purchase and sell interest
rate caps and floors, may make investments in Eurodollar instruments for
hedging purposes, may purchase or sell securities on a when-issued or forward
commitment basis and may lend its portfolio 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, P-1 by Moody's or comparably rated by any other NRSRO; (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,
P-1 by Moody's or comparably rated by any other NRSRO (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. Time deposits
maturing in more than seven days are considered illiquid and subject to the
Fund's limitation on investments in illiquid securities. See "Other
Investment Techniques -- Illiquid Securities" below.
Certain securities in which the Fund invests and certain investment
techniques used by the Fund could be considered "derivative instruments." The
term "derivatives" has been used to identify a variety of financial
instruments; there is no discrete class of instruments that is covered by the
term. A "derivative" is commonly defined as a financial instrument whose
value is based upon, or derived from, an underlying index, reference rate
(e.g., interest rates or currency exchange rates), security, commodity, or
other asset. Securities in which the Fund invests which could be considered
derivatives include mortgage-related securities and asset-backed securities,
which derive their value from underlying pools of mortgages and assets,
respectively. In addition, interest rate caps and floors, options on
securities, futures contracts, options on futures contracts and when-issued
securities transactions are derivative contracts. These derivative securities
and contracts involve varying degrees and types of risk, as set forth below
under "Adjustable Rate Mortgage Securities," "Other Eligible Investments --
Mortgage-Backed Securities" and "-- Asset-Backed Securities," and "Other
Investment Techniques."
RISK FACTORS
The Fund is subject to certain risks which could result in volatility of
principal. As with other mutual funds, there can be no assurance that the Fund
will achieve its objective. The Fund is subject to interest rate risk, 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." 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 the Fund's investments are described in detail below.
The Fund also may engage in investment practices which involve certain
special risks. These practices include the use of repurchase agreements, the
lending of portfolio securities, borrowing from banks and through reverse
repurchase agreements (but only for temporary or emergency purposes in an
amount up to 10% of the value of the Fund's total assets), the use of hedging
techniques, including interest rate transactions, options, futures contracts,
options on futures contracts and investments in Eurodollar instruments, and
the purchase or sale of securities on a "when-issued" or "forward commitment"
basis. See "Other Investment Techniques" below. The use of these techniques
may increase the volatility of the Fund's net asset value.
ADJUSTABLE RATE MORTGAGE SECURITIES
Under normal market conditions, the Fund must invest at least 65% of its
total assets in adjustable rate mortgage securities or ARMS, which include
the types of securities discussed below.
U.S. Government Mortgage Pass-through Securities. ARMS include "pass-through"
securities issued or guaranteed by the U.S. Government or one of its agencies
or instrumentalities ("U.S. Government Pass-Throughs"). Pass-through
securities constituting ARMS represent ownership interests in underlying
pools of adjustable rate mortgage loans originated by private lenders. Such
securities differ from conventional debt securities, which provide for
periodic payment of interest in fixed amounts (usually semi-annually) and
principal payments at maturity or on specified call dates, in that
pass-through securities provide for monthly payments that are a pass-through
of the monthly interest and principal payments (including any prepayments)
made by the individual borrowers on the pooled mortgage loans, net of any
fees paid to the guarantor of such securities and the servicers of the
underlying mortgage loans.
The U.S. Government Pass-Throughs in which the Fund 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 the 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
Objective, Policies and Restrictions -- Mortgage-Backed Securities -- Credit
Support" in the Statement of Additional Information.
CMOs and Multiclass Pass-through Securities. ARMS in which the Fund may
invest also include adjustable rate tranches of collateralized mortgage
obligations and multiclass pass-through 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.
Multiclass 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 multiclass pass-through security. Collateralized mortgage obligations and
multiclass pass-through securities (collectively, "CMOs" unless the context
indicates otherwise) may be issued by agencies or instrumentalities of the
U.S. Government or by private organizations.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMO, often referred to as a "tranche," is issued at a specified
coupon rate and has a stated maturity or final distribution date. Principal
prepayments on collateral underlying a CMO may cause it to be retired
substantially earlier than the stated maturities or final distribution dates.
The principal and interest on the mortgages underlying a CMO may be allocated
among the CMO's tranches in many ways. See "Other Eligible Investments --
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," are considered ARMS by the
Fund. 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 seeks to diversify
investments in ARMS among a variety of indices and reset periods to reduce
the exposure to the risk of interest rate fluctuations. In selecting a type
of ARMS for investment, the Adviser also considers the liquidity of the
market for such ARMS.
The underlying adjustable rate mortgages which back ARMS 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 (a) per reset or adjustment
interval and (b) over the life of the loan. Some residential adjustable rate
mortgage loans restrict periodic adjustments by limiting changes in the
borrower's monthly principal and interest payments rather than limiting
interest rate changes. These payment caps may result in negative
amortization, i.e., increase in the balance of the mortgage loan. Floating
rate CMOs are generally backed by fixed rate mortgages and generally have
lifetime caps on the coupon rate thereon.
Interest Rate Risk. The values of ARMS, like other debt securities, generally
vary inversely with changes in market interest rates (increasing in value
during periods of declining interest rates and decreasing in value during
periods of increasing interest rates); however, the values of ARMS should
generally be more resistant to price swings than other debt securities
because the interest rates of ARMS move with market interest rates. The
adjustable rate feature of ARMS will not, however, eliminate fluctuations in
the prices of ARMS, particularly during periods of extreme fluctuations in
interest rates. Also, since many adjustable rate mortgages only reset on an
annual basis, it can be expected that the prices of ARMS will fluctuate to
the extent 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 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.
OTHER ELIGIBLE INVESTMENTS
The balance of the Fund's assets (35% of total assets) may be invested in the
following types of securities to the extent set forth below.
Mortgage-backed Securities.
* General. In addition to ARMS, the Fund 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. The Fund
will not invest in inverse floating, interest-only, principal-only or Z
tranches of CMOs, in residual interests of CMOs, or in stripped
Mortgage-Backed Securities.
* CMOs. As discussed above, investments in ARMS include floating rate CMOs.
The Fund's investments in Mortgage-Backed Securities other than ARMS may
include certain other tranches of CMOs. The principal and interest on the
mortgages underlying a CMO may be allocated among the CMO's several
tranches in many ways. For example, certain tranches may have variable or
floating interest rates and others may provide only the principal or
interest feature of the underlying security. 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
CMOs, one or more tranches generally must be created that absorb most of
the volatility in the cash flows on the underlying mortgage loans. 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. As
noted above, the Fund will not invest in inverse floating, interest-only,
principal-only or Z tranches of CMOs, which can be among the more volatile
CMO tranches.
* 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 the
Fund 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 the Fund 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.
U.S. Government Securities. In addition to U.S. Government ARMS and other
U.S. Government Mortgage-Backed Securities, the Fund may invest in other
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, including up to 10% of its net assets in U.S. Government
zero-coupon securities. U.S. Government Securities include a variety of
Treasury securities, which differ in their interest rates, maturities and
times of issuance. Treasury bills have maturities of one year or less,
Treasury notes have maturities of one to ten years, and Treasury bonds
generally have maturities of greater than ten years. Some obligations issued
or guaranteed by U.S. Government agencies or instrumentalities, for example,
GNMA pass-through certificates, are supported by the full faith and credit of
the U.S. Treasury; others, such as those of the Federal Home Loan Banks, by
the right of the issuer to borrow from the Treasury; others, such as those
issued by FNMA, by the discretionary authority of the U.S. Government to
purchase certain obligations of the agency or instrumentality; finally,
obligations of other agencies or instrumentalities are backed only by the
credit of the agency or instrumentality issuing the obligations. While the
U.S. Government provides financial support to such U.S. Government-sponsored
agencies and instrumentalities, no assurance can be given that it will always
do so since it is not so obligated by law.
* U.S. Government Zero-Coupon Securities. The Fund may invest up to 10% of
its net assets in zero-coupon securities which are issued by the U.S.
Treasury through its STRIPS program and constitute direct obligations of
the U.S. Government. Zero-coupon securities are debt obligations which do
not entitle the holder to any periodic payments of interest prior to
maturity; rather, they offer the right to receive a fixed cash payment at
maturity but without any payments before that date. As a result,
zero-coupon securities are issued and traded at a discount from
their face amounts. Through investment in zero-coupon securities, an
investor is able to in effect lock in a return of principal to the extent
such instruments are held to maturity.
* Risks of Zero-Coupon Securities. Zero-coupon securities do not entitle the
holder to any periodic payments of interest prior to maturity and therefore
are issued and trade at a discount from their face or par value. The
discount, in the absence of financial difficulties of the issuer, decreases
as the final maturity of the security approaches. Zero-coupon securities
can be sold prior to their due date in the secondary market at the then
prevailing market value, which depends primarily on the time remaining to
maturity, prevailing levels of interest rates and the perceived credit
quality of the issuer. The market prices of zero-coupon securities are more
volatile than the market prices of securities of comparable quality and
similar maturity that pay interest periodically and may respond to a
greater degree to fluctuations in interest rates than do such
non-zero-coupon securities. Although holders of zero-coupon securities do
not receive periodic payments of interest, income accretes on such
securities and is subject to the distribution requirements of the Internal
Revenue Code of 1986, as amended. Because such income may not be matched by
a corresponding cash distribution to the Fund, the Fund may be required to
borrow money or dispose of other securities to be able to make
distributions to shareholders.
Asset-Backed Securities. The Fund may invest in Asset-Backed Securities,
which are securities that directly or indirectly represent a participation in
or are secured by and payable from a pool of assets representing the
obligations of a number of different parties. The Fund will only invest in
Asset-Backed Securities rated, as of the date of purchase, AAA by Standard &
Poor's, Aaa by Moody's, comparably rated by any other NRSRO or, if unrated,
of comparable quality as determined by the Adviser.
The securitization techniques used to develop Mortgage-Backed Securities are
now being applied to a broad range of assets. Through the use of trusts and
special purpose corporations, various types of assets, primarily automobile
and credit card receivables, are being securitized in pass-through structures
similar to the mortgage pass-through structures described above or in a
pay-through structure similar to the CMO structure.
In general, the collateral supporting Asset-Backed Securities is of shorter
maturity than mortgage loans and is less likely to experience substantial
prepayments. As with Mortgage-Backed Securities, Asset-Backed Securities are
often backed by a pool of assets representing the obligations of a number of
different parties and use similar credit enhancement techniques.
Asset-Backed Securities do not have the benefit of the same security interest
in the related collateral as do Mortgage-Backed Securities. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of
which give such debtors the right to set off certain amounts owed on the
credit cards, thereby reducing the balance due. Most issuers of automobile
receivables permit the servicers to retain possession of the underlying
obligations. If the servicer were to sell these obligations to another party,
there is a risk that the purchaser would acquire an interest superior to that
of the holders of the related automobile receivables. In addition, because of
the large number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of the automobile
receivables may not have a perfected security interest in all of the
obligations backing such receivables. Therefore, there is the possibility
that recoveries on repossessed collateral may not, in some cases, be
available to support payments on these securities.
Corporate Debt Securities. The Fund may invest in Corporate Debt Securities,
which 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 as a result of increases in interest rates. The
Fund 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 investor.
New Instruments. The Fund expects that, consistent with its investment
limitations, it will invest in those new types of ARMS, other Mortgage-Backed
Securities, U.S. Government Securities, Asset-Backed Securities, hedging
instruments and other securities in which it may invest that the Adviser
believes may assist the Fund in achieving its objective. Shareholders will
receive written notice in advance of a significant investment, i.e., in
excess of 5% of the Fund's net assets, in such newly developed securities.
OTHER INVESTMENT TECHNIQUES
Hedging Transactions. The Fund may enter into certain interest rate, options
and futures transactions and may make investments in Eurodollar instruments
for hedging purposes as described below.
* Interest Rate Transactions. The Fund may purchase or sell interest rate
caps and floors to preserve a return or spread on a particular investment
or portion of its portfolio or for other non-speculative purposes. 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 below. The Fund does not intend to use these transactions for
speculative purposes. 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.
The Fund may enter into interest rate caps and floors on either an
asset-based or liability-based basis, depending on whether it is hedging
its assets or its liabilities. To the extent the Fund 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 cap or floor transaction unless the unsecured senior
debt or the claims-paying ability of the other party thereto is rated at
least A by Standard & Poor's or Moody's or is comparably rated by any other
NRSRO. 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. Interest rate caps and floors are
somewhat recent innovations for which standardized documentation has not
yet been developed and, accordingly, they are less liquid than many other
investments.
* Options Transactions. The Fund may write, i.e., sell, covered put and call
options with respect to the securities in which it may invest. A put option
is sometimes referred to as a "standby commitment" and a call option is
sometimes referred to as a "reverse standby commitment." 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. In
connection with writing put options, the Fund will deposit and maintain in
a segregated account with its custodian cash, U.S. Government securities or
other liquid high-grade debt obligations having a value equal to or greater
than the exercise price of the option. The Fund may not write puts if, as a
result, more than 50% of its assets would be required to be segregated.
The principal reason for writing call or put options is to obtain, through
the receipt of premiums, a greater 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.
The Fund 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 and transaction costs paid for the put plus the initial
excess, if any, of the market price of the underlying security over the
exercise price. However, if the market price of such security increases,
the profit the Fund realizes on the sale of the security will be reduced by
the premium paid for the put option less any amount for which the put is
sold.
The Fund also may 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 options 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, the Fund 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. The
aggregate premiums paid on all put and call options purchased by the Fund,
including options on futures contracts, may not exceed 20% of the Fund's
net assets.
The Fund will purchase and write only exchange-traded put and call options.
For further information concerning the characteristics and risks of options
transactions, see "Investment Objective, Policies and Restrictions --
Options" in the Statement of Additional Information.
* Futures Contracts and Options on Futures Contracts. The Fund 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 the Fund is
to hedge against fluctuations in the value of the Fund's portfolio without
actually buying or selling securities. For example, if the Fund owns
long-term debt securities and interest rates are expected to increase, the
Fund might sell futures contracts. If interest rates did increase, the
value of the debt securities in the Fund's portfolio would decline, but the
value of the Fund's futures contracts would increase at approximately the
same rate, thereby keeping the net asset value of the Fund from declining
as much as it otherwise would have. If, on the other hand, the Fund held
cash reserves and short-term investments pending anticipated investment in
long-term obligations and interest rates were expected to decline, the Fund
might purchase futures contracts for U.S. Government securities. Since the
behavior of such contracts would generally be similar to that of long-term
securities, the Fund could take advantage of the anticipated rise in the
value of long-term securities without actually buying them until the market
had stabilized. At that time, the Fund could accept delivery under the
futures contracts or the futures contracts could be liquidated and the
Fund's reserves could then be used to buy long-term securities in the cash
market. The Fund will engage in such transactions only for hedging
purposes, on either an asset-based or a liability-based basis, in each case
in accordance with the rules and regulations of the Commodity Futures
Trading Commission. See Appendix B to the Statement of Additional
Information.
The Fund 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.
The Fund's aggregate margin deposits in connection with futures contracts
and options thereon may not exceed 5% of the Fund's total assets.
Additional information with respect to futures contracts and options on
futures contracts is set forth in Appendix B to the Statement of Additional
Information.
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.
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 this judgment is incorrect, the Fund will be in a
worse position than if such hedging techniques had not been used.
* Eurodollar Instruments. The Fund may make investments in Eurodollar
instruments for hedging purposes only. Eurodollar instruments are
essentially U.S. dollar denominated futures contracts or options thereon
that are linked to LIBOR. Eurodollar futures contracts enable purchasers to
obtain a fixed rate for the lending of funds and sellers to obtain a fixed
rate for borrowings. The Fund uses Eurodollar futures contracts and options
thereon to hedge against changes in LIBOR, to which many short-term
borrowings and floating rate securities are linked. Eurodollar instruments
are subject to the same limitations and risks as other futures contracts
and options thereon.
When-Issued Securities. The Fund 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. The Fund does 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 likewise segregates securities it sells on a
forward commitment basis. The Fund will purchase securities on a when-issued
or forward commitment basis with the intention of acquiring such securities
for its portfolio. The Fund may dispose of a commitment prior to settlement,
however, if the Adviser deems it appropriate to do so.
The purchase of securities on a when-issued or forward commitment basis
exposes the Fund 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 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.
Illiquid Securities. The Fund may invest up to 15% 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. The Fund may be restricted in its ability to sell such
securities at a time when the Adviser deems it advisable to do so. In addition,
in order to meet redemption requests, the Fund may have to sell other assets,
rather than such illiquid securities, at a time which is not advantageous.
"Restricted securities" are securities which were originally sold in private
placements and which have not been registered under the Securities Act of 1933
(the "1933 Act"). Such securities generally have been considered illiquid, since
they may be resold only subject to statutory restrictions and delays or if
registered under the 1933 Act. In 1990, however, the SEC adopted Rule 144A under
the 1933 Act, which provides a safe harbor exemption from the registration
requirements of the 1933 Act for resales of restricted securities to "qualified
institutional buyers," as defined in the rule. The result of this rule has been
the development of a more liquid and efficient institutional resale market for
restricted securities. Thus, restricted securities are no longer necessarily
illiquid. The Fund is not subject to any limitation on its ability to invest in
securities simply because such securities are restricted. These securities will
be treated as liquid when they have been determined to be liquid by the Board of
Directors of the Fund or by the Adviser subject to the oversight of and pursuant
to procedures adopted by the Board of Directors. See "Investment Objective,
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. Investing in Rule 144A
securities could have the effect of increasing the level of illiquidity of the
Fund to the extent that qualified institutional buyers become, for a time,
uninterested in purchasing these securities.
Lending of Portfolio Securities. In order to generate income, the Fund may
lend portfolio securities representing up to 30% 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 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 is 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.
Repurchase Agreements. The Fund may enter into repurchase agreements
pertaining to the securities in which it may invest. A repurchase agreement
involves the purchase by the Fund of securities with the condition that after
a stated period of time the original seller (a member bank of the Federal
Reserve System or a recognized securities dealer) will buy back the same
securities ("collateral") at a predetermined price or yield. Repurchase
agreements involve certain risks not associated with direct investments in
securities. In the event the original seller defaults on its obligation to
repurchase, as a result of its bankruptcy or otherwise, the Fund will seek to
sell the collateral, which action could involve costs or delays. In such
case, the Fund's ability to dispose of the collateral to recover such
investment may be restricted or delayed. While collateral will at all times
be maintained in an amount equal to the repurchase price under the agreement
(including accrued interest due thereunder), to the extent proceeds from the
sale of collateral were less than the repurchase price, the Fund would suffer
a loss. In the event of a seller's bankruptcy, the 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 the Fund's restriction on investing in illiquid securities. See
"Illiquid Securities" above.
Borrowing. The Fund may borrow money only for temporary or emergency purposes
in an amount up to 10% of the value of its total assets. The Fund may borrow
from a financial institution unrelated to the Fund or by entering into
reverse repurchase agreements with the same parties with whom it may enter
into repurchase agreements (as discussed above). Interest paid by the Fund on
borrowed funds would decrease the net earnings of the Fund. The Fund will not
purchase portfolio securities while outstanding borrowings exceed 5% of the
value of the Fund's total assets. The Fund may mortgage, pledge or
hypothecate its assets to secure permitted borrowings. The policies set forth
in this paragraph are fundamental and may not be changed without a majority
vote of the Fund's shares.
Under a reverse repurchase agreement, the Fund sells securities and agrees to
repurchase them at a mutually agreed date and price. Reverse repurchase
agreements involve the risk that the market value of the securities sold by
the Fund may decline below the price at which the Fund is obligated to
repurchase such securities. In the event the buyer of securities under a
reverse repurchase agreement files for bankruptcy or becomes insolvent, such
buyer or its trustee or receiver may receive an extension of time to
determine whether to enforce the Fund's obligation to repurchase the
securities, and the Fund's use of the proceeds of the reverse repurchase
agreement may effectively be restricted pending such decisions. Reverse
repurchase agreements create leverage, a speculative factor, and are
considered borrowings for purposes of the Fund's limitation on borrowing.
DURATION
The Adviser will attempt to maintain an average effective duration for the
Fund's portfolio of one to four years. 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 price 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 the Fund'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 can be
greatly affected by changes in interest rates.
INVESTMENT RESTRICTIONS
The Fund has adopted certain investment restrictions, which are set forth in
detail in the Statement of Additional Information under "Investment
Objective, Policies and Restrictions." Fundamental restrictions which may not
be changed without a majority vote of shareholders include, among others, the
following: (1) The Fund will not invest 25% or more of its total assets in
the securities of issuers conducting their principal business activities in
the same industry, except that, under normal market conditions, the Fund will
invest 25% or more of the value of its total assets in ARMS issued or
guaranteed by the U.S. Government or its agencies or instrumentalities or by
private organizations. Except for the requirement that the Fund invest 25% or
more of its total assets in ARMS, the foregoing restriction does not apply to
securities of the U.S. Government or its agencies or instrumentalities or
repurchase agreements relating thereto. The Fund will determine the industry
classification of Asset-Backed Securities in its portfolio based on the type
of collateral underlying the securities and will consider ARMS issued by the
U.S. Government or its agencies or instrumentalities and ARMS issued by
private organizations to be securities of issuers in the same industry. (2)
With respect to 75% of its total assets, the Fund will not invest more than
5% of the value of its total assets (taken at market value at the time of
purchase) in the outstanding securities of any one issuer, or own more than
10% of the outstanding voting securities of any one issuer, in each case
other than securities issued or guaranteed by the U.S. Government or any
agency or instrumentality thereof.
PORTFOLIO TURNOVER
The Fund actively uses trading to benefit from yield disparities among different
issues of securities or otherwise to achieve its investment objective and
policies. This strategy may result in a greater degree of portfolio turnover
and, thus, a higher incidence of short-term capital gain than might be expected
from investment companies that invest substantially all of their funds on a
long-term basis. Such a strategy will also result in higher transaction costs.
The portfolio turnover rate of DDJ, which is considered the surviving entity of
the Merger for financial reporting purposes, is set forth above under
"Financial Highlights." The method of calculating portfolio turnover rate is set
forth in the Statement of Additional Information under "Investment Objective,
Policies and Restrictions -- Portfolio Turnover."
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 Fund's investment adviser subject to the authority of the Board of
Directors.
In addition to acting as the investment adviser for the Company, the Adviser,
which was incorporated in 1983, 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 July 31, 1995, the Adviser rendered investment advice
regarding approximately $10 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 the Fund with investment advice and supervises the
management and investment program of the Fund. The Adviser furnishes at its
own expense all necessary administrative services, office space, equipment
and clerical personnel for servicing the investments of the Fund, and
investment advisory facilities and executive and supervisory personnel for
managing the Fund's investments and effecting its portfolio transactions. In
addition, the Adviser pays the salaries and fees of all officers and
directors of the Company who are affiliated persons of the Adviser.
Under the Investment Advisory and Management Agreement, the Fund pays the
Adviser a monthly fee at an annual rate of .35% on the first $500 million of
the Fund's average daily net assets and .30% on average daily net assets in
excess of $500 million.
PORTFOLIO MANAGEMENT
Michael P. Jansen and Thomas S. McGlinch are primarily responsible for the
day-to-day management of the Fund's portfolio. Mr. Jansen has been a Senior
Vice President of the Adviser since October 14, 1993, prior to which he had
been a Managing Director of the Distributor since 1987. He has been an
Executive Vice President and Director of Piper Mortgage Acceptance
Corporation, a wholly owned subsidiary of Piper Jaffray Companies Inc., since
1991 and served as an Executive Vice President and Director of Premier
Acceptance Corporation, a wholly owned subsidiary of Piper Jaffray Companies
Inc. issuing mortgage-backed securities, from 1988 to 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 the Distributor during
1992. From 1988 to January 1992, Mr. McGlinch was a specialty products trader
at FBS Investment Services, Inc. He is a Chartered Financial Analyst with an
M.B.A. from the University of St. Thomas.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN
Investors Fiduciary Trust Company ("IFTC"), 210 West Tenth Street, Kansas
City, Missouri 64105, (800) 874-6205, serves as Custodian for the Fund's
portfolio securities and cash and as Transfer Agent and Dividend Disbursing
Agent for the Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSION
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 shares may also be considered a factor if the Adviser is
satisfied that the Fund would receive from that broker the most favorable
price and execution then available for a transaction. Portfolio transactions
for the Fund may be effected through the Distributor on a securities exchange
in compliance with Section 17(e) of the Investment Company Act of 1940, as
amended (the "1940 Act"). For more information, see "Portfolio Transactions
and Allocation of Brokerage" in the Statement of Additional Information.
DISTRIBUTION OF FUND SHARES
Piper Jaffray acts as the principal distributor of the Fund's shares. The
Company has adopted a Distribution Plan (the "Plan") as required by Rule
12b-1 under the 1940 Act. Pursuant to the provisions of the Plan, the Fund
pays a monthly service fee to the Distributor at an annual rate of .15% of
the Fund's average daily net assets in connection with servicing of the
Fund's shareholder accounts. This fee is intended to compensate the
Distributor for the ongoing servicing and/or maintenance of Fund shareholder
accounts and the costs incurred in connection therewith ("Shareholder
Servicing Costs"). Shareholder Servicing Costs include all expenses of the
Distributor incurred in connection with providing shareholder liaison
services, including, but not limited to, an allocation of the Distributor's
overhead and payments made to persons, including employees of the
Distributor, who respond to inquiries of shareholders regarding their
ownership of shares or their accounts with the Fund, and who provide
information on shareholders' investments.
The Distributor uses all or a portion of its Rule 12b-1 service fee to make
payments to Investment Executives of the Distributor and broker-dealers which
have entered into sales agreements with the Distributor. If shares of the
Fund are sold by a representative of a broker-dealer other than the
Distributor, the broker-dealer is paid .15% of the average daily net assets
of the Fund attributable to shares sold by the broker-dealer's
representative. If shares of the Fund are sold by an Investment Executive of
the Distributor, compensation is paid to the Investment Executive in the
manner set forth in a written agreement, in an amount not to exceed .15% of
the average daily net assets of the Fund attributable to shares sold by the
Investment Executive. Further information regarding the Plan is contained in
the Statement of Additional Information.
SHAREHOLDER GUIDE TO INVESTING
HOW TO PURCHASE SHARES
GENERAL
The Fund's 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 Fund. The
Distributor reserves the right to reject any purchase order. You should be
aware that, because the Fund does not issue stock certificates, Fund shares
must be kept in an account with the Distributor or with IFTC. All investments
must be arranged through your Piper Jaffray Investment Executive or other
broker-dealer.
PURCHASE PRICE
You may purchase shares of the Fund 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>
SALES CHARGE SALES CHARGE
AS A PERCENTAGE OF AS A PERCENTAGE OF
AMOUNT OF TRANSACTION AT OFFERING PRICE OFFERING PRICE NET ASSET VALUE
<S> <C> <C>
Less than $100,000 1.50% 1.52%
$100,000 but less than $250,000 1.25% 1.27%
$250,000 but less than $500,000 1.00% 1.01%
$500,000 and over 0.00% 0.00%
</TABLE>
This table sets forth total sales charges or underwriting commissions. The
Distributor may reallow up to the entire sales charge to broker-dealers in
connection with their sales of shares. Broker-dealers who are reallowed 90%
or more of the sales charge may, by virtue of such reallowance, be deemed to
be "underwriters" under the 1933 Act.
The Distributor will make certain payments to its Investment Executives and
to other broker-dealers in connection with their sales of Fund shares. See
"Distribution of Fund Shares" above. In addition, the Distributor or the
Adviser, at their own expense, will 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
Fund 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.
PURCHASES OF $500,000 OR MORE
If you make a purchase of $500,000 or more (including purchases made under a
Letter of Intent), a .20% contingent deferred sales charge will be assessed
in the event you redeem shares within 24 months following the purchase. This
sales charge will be paid to the Distributor. For more information, please
refer to the Contingent Deferred Sales Charge section of "How to Redeem
Shares." The Distributor will pay its Investment Executives and other
broker-dealers in connection with these purchases as follows:
<TABLE>
<CAPTION>
FEE AS
A PERCENTAGE
AMOUNT OF TRANSACTION OF OFFERING PRICE
<S> <C>
First $3,000,000 .20%
Next $2,000,000 .15%
Next $5,000,000 .10%
Above $10,000,000 .05%
</TABLE>
Piper Jaffray Investment Executives and other broker-dealers generally will
not receive a fee in connection with purchases on which the contingent
deferred sales charge is waived. However, the Distributor, in its discretion,
may pay a fee out of its own assets to its Investment Executives and other
broker-dealers in connection with purchases by employee benefit plans on
which no sales charge is imposed. Please see "Special Purchase Plans" below.
MINIMUM INVESTMENTS
A minimum initial investment of $250 is required. There is no minimum for
subsequent investments. The Distributor, in its discretion, may waive the
minimum.
REDUCING YOUR SALES CHARGE
You 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 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 Fund shares into Piper Jaffray accounts will
be automatically calculated taking into account the dollar amount of any new
purchases along with the higher of current value or cost of shares previously
purchased in the Piper funds that were sold with a sales charge. For other
broker-dealer accounts, you should notify your Investment Executive at the
time of purchase of additional Piper fund shares you may own.
LETTER OF INTENT
Your sales charge 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 the Fund
without incurring a sales charge. The following persons associated with such
entities also may buy Fund 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 the Fund without incurring a sales charge.
PURCHASES BY OTHER INDIVIDUALS WITHOUT A SALES CHARGE
The following other individuals and entities may also buy Fund shares without
paying a sales charge:
* Clients of the Adviser may buy shares of the Fund in their advisory
accounts.
* Discretionary accounts at Piper Trust Company and participants in
investment companies exempt from registration under the 1940 Act that are
managed by the Adviser.
* Trust companies and bank trust departments using funds over which they
exercise exclusive discretionary investment authority and which are held
in a fiduciary, agency, advisory, custodial or similar capacity.
* Investors purchasing shares through a Piper Jaffray Investment Executive
if the purchase of such shares is funded by the proceeds from the sale of
shares of any non-money market open-end mutual fund. This privilege is
available for 30 days after the sale.
PURCHASES BY EMPLOYEE BENEFIT PLANS AND TAX-SHELTERED ANNUITIES
* Shares of the Fund 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") ("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 the Fund without
incurring a sales charge.
PURCHASES USING FINAL TERM TRUST DISTRIBUTIONS
* Prior to the merger of BDJ, CDJ, DDJ and EDJ into the Fund, the
shareholders of BDJ, CDJ and DDJ received special distributions, which
were payable on August 24, 1995, of all of their respective Trust's
previously undistributed net income and net realized capital gains.
Shareholders who received these distributions may use them to purchase
shares of the Fund at net asset value through December 31, 1995, provided
the shareholder holds his or her shares in a Piper Jaffray account or in
the account of a broker-dealer which has a sales agreement with the
Distributor.
HOW TO REDEEM SHARES
NORMAL REDEMPTION
You may redeem all or a portion of your shares on any day that the Fund
values its shares. (Please refer to "Valuation of Shares" below for more
information.) Your shares will be redeemed at the net asset value next
calculated after the receipt of your instructions in good form by your Piper
Jaffray Investment Executive or other broker-dealer as explained below.
Piper Jaffray Inc. Accounts. To redeem your shares, please contact your Piper
Jaffray Investment Executive with a verbal request to redeem your shares.
Other Broker-Dealer Accounts. To redeem your shares, you may either contact
your broker-dealer with a verbal request or send a written request directly
to the Fund's 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.
CONTINGENT DEFERRED SALES CHARGE
If you invest $500,000 or more and, as a result, pay no front-end sales
charge, you may incur a contingent deferred sales charge if you redeem within
24 months. This charge will be equal to .20% of the lesser of the net asset
value of the shares at the time of purchase or at the time of redemption.
This charge does not apply to amounts representing an increase in the value
of Fund shares due to capital appreciation or to shares acquired through
reinvestment of dividend or capital gain distributions. In determining
whether a contingent deferred sales charge is payable, shares that are not
subject to any deferred sales charge will be redeemed first, and other shares
will then be redeemed in the order purchased.
Letter of Intent. In the case of a Letter of Intent, the 24-month period
begins on the date the Letter of Intent is completed.
Special Purchase Plans. If you purchased your shares through one of the plans
described above under "Special Purchase Plans," the contingent deferred sales
charge will be waived. In addition, the contingent deferred sales charge will
be waived in the event of:
* The death or disability (as defined in Section 72(m)(7) of the Code) of
the shareholder. (This waiver will be applied to shares held at the time
of death or the initial determination of disability of either an
individual shareholder or one who owns the shares as a joint tenant with
the right of survivorship or as a tenant in common.)
* A lump sum distribution from an employee benefit plan qualified under
Section 401(a) of the Code, an individual retirement account under
Section 408(a) of the Code or a simplified employee pension plan under
Section 408(k) of the Code.
* Systematic withdrawals from any such plan or account if the shareholder
is at least 59 1/2 years old.
* A tax-free return of the excess contribution to an individual retirement
account under Section 408(a) of the Code.
* Involuntary redemptions effected pursuant to the right to liquidate
shareholder accounts having an aggregate net asset value of less than
$200.
Exchanges. If you exchange your shares, no contingent deferred sales charge
will be imposed. However, the charge will apply if you subsequently redeem
the new shares within 24 months of the original purchase.
Reinstatement Privilege. If you elect to use the Reinstatement Privilege
(please see "Shareholder Services" below), any contingent deferred sales
charge you paid will be credited to your account (proportional to the amount
reinvested). Please see "Redemption of Shares" in the Statement of Additional
Information for more details.
PAYMENT OF REDEMPTION PROCEEDS
After your shares have been redeemed, proceeds will normally be sent to you
or your broker-dealer within three business days. In no event will payment be
made more than seven days after receipt of your order in good form. 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).
INVOLUNTARY REDEMPTION
The Fund reserves the right to redeem your account at any time the net asset
value of the account falls below $200 as the result of a redemption or
exchange request. You will be notified in writing prior to any such
redemption and will be allowed 30 days to make additional investments before
the redemption is processed.
SHAREHOLDER SERVICES
AUTOMATIC MONTHLY INVESTMENT PROGRAM
You may arrange to make additional automated purchases of shares of the Fund
or certain other mutual funds managed by the Adviser. You can automatically
transfer $100 or more per month from your bank, savings and loan or other
financial institution to purchase additional shares. In addition, if you hold
your shares in a Piper Jaffray account you may arrange to make such
additional purchases by having $25 or more automatically transferred each
month from any Piper money market fund. You should contact your Piper Jaffray
Investment Executive or IFTC to obtain authorization forms or for additional
information.
REINSTATEMENT PRIVILEGE
If you have redeemed shares of the Fund, you may be eligible to reinvest in
shares of any fund managed by the Adviser without payment of an additional
sales charge. The reinvestment request must be made within 30 days of the
redemption. 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. You may
reinvest through a broker-dealer other than the Distributor only if there is
a valid sales agreement between your broker-dealer and the Distributor for
the fund in which you wish to invest.
EXCHANGE PRIVILEGE
If your investment goals change, you may prefer a fund with a different
objective. If you are considering an exchange into another mutual fund
managed by the Adviser, you should carefully read the appropriate prospectus
for additional information about that fund. A prospectus may be obtained
through your Piper Jaffray Investment Executive, your broker-dealer or the
Distributor. To exchange your shares, please contact your Piper Jaffray
Investment Executive, your broker-dealer or IFTC.
You may exchange your shares for shares of any other mutual fund managed by
the Adviser that is open to new investors. All exchanges are subject to the
eligibility of share purchases in your state as well as the minimum
investment requirements and any other applicable terms in the prospectus of
the fund being acquired. Exchanges are made on the basis of the net asset
values of the funds involved, except that investors exchanging into a fund
which has a higher sales charge generally must pay the difference. However,
exchanges of Fund shares received in the Merger will be permitted without
payment of an additional sales charge.
If you hold your Fund shares through a broker-dealer other than the
Distributor, the exchange privilege may not be available. Exchanges will be
permitted only if there is a valid sales agreement between your broker-dealer
and the Distributor for the fund into which you wish to exchange.
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 Fund
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 (800-874-6025) for an application or for more details.
The Fund will employ reasonable procedures to confirm that a telephone
request is genuine, including requiring that payment be made only to the
address of record or the bank account designated on the Account Application
and Services Form and requiring certain means of telephonic identification.
If the Fund follows such procedures, it will not be liable for following
instructions communicated by telephone that it reasonably believes to be
genuine. If the Fund does not employ such procedures, it may be liable for
any losses due to unauthorized or fraudulent telephone instructions. It may
be difficult to reach the Fund by telephone during periods when market or
economic conditions lead to an unusually large volume of telephone requests.
If you cannot reach the Fund by telephone, you should contact your
broker-dealer or issue written instructions to IFTC at the address set forth
herein. See "Management -- Transfer Agent, Dividend Disbursing Agent and
Custodian." The Fund reserves the right to suspend or terminate its telephone
services at any time without notice.
DIRECTED DIVIDENDS
You may direct income dividends and capital gains distributions to be
invested in 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. This privilege may not be available if you
hold your Fund shares through a broker-dealer other than the Distributor.
Distributions may be invested in another mutual fund managed by the Adviser
only if there is a valid sales agreement for that fund between your
broker-dealer and the Distributor.
SYSTEMATIC WITHDRAWAL PLAN
If your account has a value of $5,000 or more, you may establish a Systematic
Withdrawal Plan. This plan will allow you to receive regular periodic
payments by redeeming as many shares from your account as necessary. As with
other redemptions, a redemption to make a withdrawal is a sale for federal
income tax purposes. Payments made under a Systematic Withdrawal Plan cannot
be considered as actual yield or income since part of the payments may be a
return of capital.
A request to establish a Systematic Withdrawal Plan must be submitted in
writing to your Piper Jaffray Investment Executive or other broker-dealer.
There are no service charges for maintenance; the minimum amount that you may
withdraw each period is $100. You will be required to have any income
dividends and any capital gains distributions reinvested. You may choose to
have withdrawals made monthly, quarterly or semi-annually. Please contact
your Piper Jaffray Investment Executive, other broker-dealer or IFTC for more
information.
You should be aware that additional investments in an account that has an
active Systematic Withdrawal Plan may be inadvisable due to sales charges and
tax liabilities. As a result, you will not be allowed to make additional
investments of less than $5,000 or three times the annual withdrawals while
you have the plan in effect. Please refer to "Redemption of Shares" in the
Statement of Additional Information for additional details.
ACCOUNT PROTECTION
If you purchased your shares of the Fund through a Piper Jaffray Investment
Executive, you may choose from several account options. Your investments in
the 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 additional account protection guarantees that if Piper
Jaffray were to fail financially, the securities in your account would be
protected. 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. The Fund is required to supply annual
and semi-annual reports that list securities held by the Fund and include the
current financial statements of the Fund.
Householding. If you have multiple accounts with Piper Jaffray, you may
receive some of the above information in combined mailings. This will not
only help to reduce Fund expenses, it will help the environment by saving
paper. Please contact your Piper Jaffray Investment Executive for more
information.
DIVIDENDS AND DISTRIBUTIONS
The net investment income of the Fund will be declared as dividends daily and
will be paid monthly. Net realized capital gains, if any, will be distributed
at least once annually. Each daily dividend is payable to Fund shareholders
of record at the time of its declaration. The term "shareholders of record"
includes holders of shares purchased for which payment has been received by
the Distributor or IFTC, as appropriate, and excludes holders of shares
redeemed on that day. Shares redeemed will earn dividends through the day
prior to the day of redemption. The Fund will not attempt to stabilize
distributions, and intends to distribute to its shareholders substantially
all of the net investment income earned during any period. Thus, dividends
can be expected to vary from month to month.
Distributions Options. All net investment income dividends and net realized
capital gains distributions for the Fund generally will be payable in
additional shares of the Fund at net asset value ("Reinvestment Option"). If
you wish to receive your distributions in cash, you must notify your Piper
Jaffray Investment Executive or other broker-dealer. You may elect either to
receive income dividends in cash and capital gains distributions in
additional 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,
subject to certain restrictions. 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.
VALUATION OF SHARES
The Fund computes its net asset value on each day the New York Stock Exchange
(the "Exchange") is open for business. The calculation is made as of the
regular close of the Exchange (currently 4:00 p.m. New York time) after the
Fund has declared any applicable dividends.
The net asset value per share for the Fund is determined by dividing the
value of the securities owned by the Fund plus any cash and other assets
(including interest accrued and dividends declared but not collected) less
all liabilities by the number of Fund shares outstanding. For the purposes of
determining the aggregate net assets of the Fund, cash and receivables will
be valued at their face amounts. Interest will be recorded as accrued.
The value of certain fixed-income securities will be provided by an
independent pricing service, which determines these valuations at a time
earlier than the close of the Exchange. Pricing services consider such
factors as security prices, yields, maturities, call features, ratings and
developments relating to specific securities in arriving at securities
valuations. 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 Board of Directors. In addition, any securities or other
assets of the Fund for which market prices are not readily available will be
valued at their fair value in accordance with such procedures.
TAX STATUS
The Fund intends to qualify for treatment as a regulated investment company
under the Internal Revenue Code of 1986, as amended (the "Code") during its
current taxable year. If so qualified, the Fund will not be liable for
federal income taxes to the extent it distributes its taxable income to
shareholders.
Distributions by the Fund are generally taxable to the 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") are taxable to shareholders as
long-term capital gains, regardless of the length of time the shareholder has
held the shares of the Fund. The Fund will send written notices to
shareholders regarding the tax status of all distributions made during each
year.
A shareholder will recognize a capital gain or loss upon the sale or exchange
of shares in the Fund 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 Fund, see "Taxation" in the
Statement of Additional Information. Before investing in the Fund, you should
check the consequences of your local and state tax laws.
PERFORMANCE COMPARISONS
Advertisements and other sales literature for the Fund may refer to "average
annual total return," "cumulative total return" and "yield". When the Fund
advertises its yield, it will also advertise its total return as required by the
rules of the Securities and Exchange Commission. All such yield and total return
quotations are based upon historical earnings and are not intended to indicate
future performance. The return on and principal value of an investment in the
Fund will fluctuate, so that an investor's shares, when redeemed, may be worth
more or less than their original cost. Total return quotations will be based
upon the performance of DDJ for periods prior to the Merger. DDJ is considered
the surviving entity of the Merger for financial reporting purposes.
Yield calculations 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 Securities and Exchange Commission 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.
Average annual total return is the average annual compounded rate of return
on a hypothetical $1,000 investment made at the beginning of the advertised
period. Cumulative total return is calculated by subtracting a hypothetical
$1,000 payment to the Fund from the redeemable value of such payment at the
end of the advertised period, dividing such difference by $1,000 and
multiplying the quotient by 100. In calculating average annual and cumulative
total return, the maximum sales charge is deducted from the hypothetical
investment and all dividends and distributions are assumed to be reinvested.
Such total return quotations may be accompanied by quotations which do not
reflect the reduction in value of the initial investment due to the sales
charge, and which thus will be higher.
Comparative performance information also may be used from time to time in
advertising the Fund's shares. For example, advertisements may compare the
Fund's performance to that of various unmanaged market indices, or may
include performance data from Lipper Analytical Services, Inc., Morningstar,
Inc. or other entities or organizations 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.
GENERAL INFORMATION
The Company is authorized to issue a total of 100 billion shares of common
stock, with a par value of $.01 per share. Ten billion of those shares have
been designated as Series A Common Shares, which are the shares of common
stock of the Fund. Currently, Series A is the only outstanding series of
shares of the Company.
The Board of Directors is empowered under the Company's Articles of
Incorporation to issue additional series of the Company's common stock
without shareholder approval. In addition, the Board of Directors may,
without shareholder approval, create and issue one or more additional classes
of shares within the Fund, as well as within any series of the Company
created in the future. See "Capital Stock and Ownership of Shares" in the
Statement of Additional Information.
All shares, when issued, will be fully paid and nonassessable and will be
redeemable. All shares have equal voting rights. They can be issued as full
or fractional shares. A fractional share has pro rata the same kind of rights
and privileges as a full share. The shares possess no preemptive or
conversion rights.
Each share of a series has one vote (with proportionate voting for fractional
shares) irrespective of the relative net asset values 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, 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 contracts and Rule 12b-1
distribution plans. 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
American Adjustable Rate Term Trust Inc. -- 1996 ("BDJ"), American Adjustable
Rate Term Trust Inc. -- 1997 ("CDJ"), American Adjustable Rate Term Trust Inc.
-- 1998 ("DDJ") and American Adjustable Rate Term Trust Inc. -- 1999 ("EDJ")
(collectively, the "Trusts") merged into the Company on September 1, 1995. The
Company may be deemed to be a successor by merger to such Trusts and, as such,
may succeed to their liabilities, including damages sought in any litigation.
On October 20, 1994, Herman D. Gordon filed a complaint in the U.S. District
Court for the District of Minnesota against DDJ and EDJ, the Adviser, the
Distributor, Piper Jaffray Companies Inc. ("Piper") and certain associated
individuals (the "Gordon Litigation"). A second complaint was filed by Frank
Donio, I.R.A., and other plaintiffs on April 14, 1995, in the U.S. District
Court for the District of Minnesota against BDJ, CDJ, DDJ and EDJ, the
Adviser, the Distributor, Piper and certain associated individuals (the
"Donio Litigation"). Plaintiffs in both actions filed a Consolidated Amended
Class Action Complaint on May 23, 1995. The consolidated complaint, which
purports to be a class action, alleges that the defendants violated certain
federal and state securities laws by making materially misleading statements
in prospectuses and other disclosures concerning risks associated with
investing in the Trusts, compliance with the Trusts' investment policies, and
the reasons for proposing and the benefits to be obtained by shareholders
from the Merger and by allegedly breaching their fiduciary duties. Damages
are being sought in an unspecified amount.
Piper and the Adviser have agreed, pursuant to an indemnification agreement
between and among Piper, the Adviser and the Company, to indemnify the Company
against any losses incurred in connection with the Gordon and Donio Litigations.
In addition to the complaints against the Trusts described above, complaints
also have been brought against the Adviser and the Distributor relating to
certain other investment companies for which the Adviser acts or has acted as
investment adviser or subadviser. These lawsuits do not involve the Trusts or
the Company. 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
other 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 propectuses
concerning investment policies and risks. See "Pending Litigation" in the
Statement of Additional Information.
A settlement agreement has been reached with respect to one of the complaints
involving PJIGX. An Amended Consolidated Class Action Complaint, which
represents a consolidation of claims previously brought by 13 persons or
entities, was filed on October 5, 1994 in the United States District Court,
District of Minnesota. The named plaintiffs in this putative class action
(the "PJIGX action") purport to represent a class of individuals and groups
who purchased shares of PJIGX during the period from July 1, 1991 through May
9, 1994. The named plaintiffs and defendants have entered into a settlement
agreement which has received preliminary approval from the Court. If approved
by a sufficiently large percentage of the class, the settlement agreement
would provide up to $70 million to class members in payments scheduled over
approximately three years. Such payments would be made by Piper Jaffray
Companies and the Adviser and would not be an obligation of Piper Funds Inc.
Six additional complaints have been brought and a number of actions have been
commenced in arbitration relating to PJIGX. The complaints generally have
been consolidated with the PJIGX action for pretrial purposes and the
arbitrations have been stayed pending the decision by class members to either
participate in the settlement or opt out of the PJIGX action.
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 Fund, 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 FUND OR PIPER JAFFRAY INC. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN THE STATE IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT
IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
PIPER FUNDS INC. -- II
INVESTMENT ADVISER
Piper Capital Management Incorporated
DISTRIBUTOR
Piper Jaffray Inc.
CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
LEGAL COUNSEL
Dorsey & Whitney P.L.L.P.
Table of Contents
Page
Introduction 2
Fund Expenses 4
Financial Highlights 5
Investment Objective, Policies and
Risk Factors 6
Management 19
Distribution of Fund Shares 20
SHAREHOLDER GUIDE TO
INVESTING
How to Purchase Shares 21
Reducing Your Sales Charge 22
Special Purchase Plans 23
How to Redeem Shares 24
Shareholder Services 26
Dividends and Distributions 29
Valuation of Shares 30
Tax Status 30
Performance Comparisons 30
General Information 31
PJARX-05
PART B
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
A series of Piper Funds Inc.--II
STATEMENT OF ADDITIONAL INFORMATION
September 5, 1995
Table of Contents
Page
Investment Objective, Policies and Restrictions................. 2
Directors and Executive Officers................................ 11
Investment Advisory and Other Services.......................... 15
Portfolio Transactions and Allocation of Brokerage.............. 20
Capital Stock and Ownership of Shares........................... 21
Net Asset Value and Public Offering Price....................... 22
Performance Comparisons......................................... 23
Purchase of Shares.............................................. 25
Redemption of Shares............................................ 25
Taxation........................................................ 27
General Information............................................. 29
Pending Litigation.............................................. 30
Financial Statements............................................ F-1
Appendix A - Corporate Bond and Commercial Paper Ratings........ A-1
Appendix B - Interest Rate Futures Contracts and Related Options B-1
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information relates to the Prospectus dated September 5,
1995, and should be read in conjunction therewith. A copy of the Prospectus may
be obtained without charge by mailing a written request to the Fund at Piper
Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402-3804, or by
calling (800) 866-7778.
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
This Statement of Additional Information relates to Adjustable Rate
Mortgage Securities Fund (the "Fund"), the only outstanding series of Piper
Funds Inc.--II (the "Company"). The Fund and the Company have no prior history.
However, on September 1, 1995, four closed-end investment companies, American
Adjustable Rate Term Trust Inc. -- 1996, American Adjustable Rate Term Trust
Inc. -- 1997, American Adjustable Rate Term Trust Inc. -- 1998 and American
Adjustable Rate Term Trust Inc. -- 1999, merged into the Fund. American
Adjustable Rate Term Trust Inc. -- 1998 ("DDJ") is considered the surviving
entity for financial reporting purposes. The investment objective and policies
of the Fund are set forth in the Prospectus. Certain additional investment
information is set forth below.
Repurchase Agreements
The Fund may invest in repurchase agreements pertaining to the securities
in which it may invest. The Fund's custodian will hold the securities underlying
any repurchase agreement or such securities will be part of the Federal Reserve
Book Entry System. The market value of the collateral underlying the repurchase
agreement will be determined on each business day. If at any time the market
value of the collateral falls below the repurchase price of the repurchase
agreement (including any accrued interest), the Fund will promptly receive
additional collateral (so the total collateral is an amount at least equal to
the repurchase price plus accrued interest).
The closed-end and open-end investment companies currently managed by Piper
Capital Management Incorporated (the "Adviser") and all future investment
companies advised by the Adviser or its affiliates have received from the
Securities and Exchange Commission an exemptive order permitting them to deposit
uninvested cash balances into a large single joint account to be used to enter
into one or more large repurchase agreements.
Mortgage-Backed Securities
GENERAL. Many Mortgage-Backed Securities (principally collateralized
mortgage obligations ("CMOs") secured by GNMA, FNMA and/or FHLMC Certificates)
are issued by entities that operate under orders from the Securities and
Exchange Commission (the "SEC") exempting such issuers from the provisions of
the Investment Company Act of 1940, as amended (the "1940 Act"). Until recently,
the staff of the Division of Investment Management of the SEC had taken the
position that such issuers were investment companies pursuant to Section 3 of
the 1940 Act and that, accordingly, an investment by an investment company (such
as the Fund) in the securities of such issuers was subject to limitations
imposed by Section 12 of the 1940 Act. However, in reliance on a recent SEC
staff interpretation, the Fund may invest in securities issued by certain
"exempted issuers" without regard to the limitations of Section 12 of the 1940
Act. In its interpretation, the SEC staff defined "exempted issuers" as
unmanaged, fixed asset issuers that (a) invest primarily in Mortgage-Backed
Securities, (b) do not issue redeemable securities as defined in Section
2(a)(32) of the Act, (c) operate under general exemptive orders exempting them
from "all provisions of the [1940] Act" and (d) are not registered or regulated
under the 1940 Act as investment companies.
PASS-THROUGH SECURITIES. The investments of the Fund in Mortgage-Backed
Securities include government guaranteed pass-through securities. These
obligations are described below.
(1) GNMA Certificates. Certificates of the Government National Mortgage
Association ("GNMA Certificates") are Mortgage-Backed Securities which evidence
an ownership interest in a pool of mortgage loans. GNMA Certificates differ from
bonds in that principal is paid back monthly by the borrower over the term of
the loan rather than returned in a lump sum at maturity.
GNMA Guarantee -- The National Housing Act authorizes GNMA to guarantee the
timely payment of principal and interest on securities backed by a pool of
mortgages insured by the Federal Housing Administration ("FHA") or the Farmers'
Home Administration ("FHA") or guaranteed by the Veterans Administration ("VA").
The GNMA guarantee is backed by the full faith and credit of the United States.
GNMA is also empowered to borrow without limitation from the U.S. Treasury if
necessary to make any payments required under its guarantee.
Life of GNMA Certificates -- The average life of a GNMA Certificate is
likely to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the greater part of principal
investment long before the maturity of the mortgages in the pool. Foreclosures
impose no risk to principal investment because of the GNMA guarantee.
Because prepayment rates of individual mortgage pools vary widely, it is
not possible to predict accurately the average life of a particular issue of
GNMA Certificates. However, statistics published by the FHA indicate that the
average life of single-family dwelling mortgages with 25- to 30-year maturities,
the type of mortgages backing the vast majority of GNMA Certificates, is
approximately 12 years. Therefore, it is customary to treat GNMA Certificates as
30-year mortgage-backed securities which prepay fully in the twelfth year.
Yield Characteristics of GNMA Certificates -- The coupon rate of interest
on GNMA Certificates is lower than the interest rate paid on the VA-guaranteed
or FHA-insured mortgages underlying the Certificates by the amount of the fees
paid to GNMA and the issuer.
The coupon rate by itself, however, does not indicate the yield which will
be earned on GNMA Certificates. First, GNMA Certificates may be issued at a
premium or discount, rather than at par and, after issuance, GNMA Certificates
may trade in the secondary market at a premium or discount. Second, interest is
earned monthly, rather than semi-annually as with traditional bonds; monthly
compounding raises the effective yield earned. Finally, the actual yield of a
GNMA Certificate is influenced by the prepayment experience of the mortgage pool
underlying it. For example, if the higher-yielding mortgages from the pool are
prepaid, the yield on the remaining pool will be reduced.
(2) FHLMC Securities. The Federal Home Loan Mortgage Corporation ("FHLMC")
was created in 1970 through enactment of Title III of the Emergency Home Finance
Act of 1970. Its purpose is to promote development of a nationwide secondary
market in conventional residential mortgages.
FHLMC issues two types of mortgage pass-through securities, mortgage
participation certificates ("PCs") and guaranteed mortgage certificates
("GMCs"). PCs resemble GNMA Certificates in that each PC represents a pro rata
share of all interest and principal payments made and owed on the underlying
pool. FHLMC guarantees timely payment of interest on PCs and the full return of
principal. Like GNMA Certificates, PCs are assumed to be prepaid fully in their
twelfth year.
GMCs also represent a pro rata interest in a pool of mortgages. However,
these instruments pay interest semi-annually and return principal once a year in
guaranteed minimum payments. The expected average life of these securities is
approximately ten years.
(3) FNMA Securities. The Federal National Mortgage Association was
established in 1938 to create a secondary market in mortgages insured by the
FHA.
FNMA issues guaranteed mortgage pass-through certificates ("FNMA
Certificates"). FNMA Certificates resemble GNMA Certificates in that each FNMA
Certificate represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. FNMA guarantees timely payment of interest
on FNMA Certificates and the full return of principal. Like GNMA Certificates,
FNMA Certificates are assumed to be prepaid fully in their twelfth year.
CREDIT SUPPORT. To lessen the effect of failures by mortgagors to make
payments on underlying mortgages, ARMS and other Mortgage-Backed Securities may
contain elements of credit support. Such credit support falls into two
categories: (a) liquidity protection and (b) protection against losses resulting
from ultimate default by an obligor on the underlying assets. Liquidity
protection refers to the provision of advances, generally by the entity
administering the pool of assets, to ensure that the pass-through of payments
due on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default enhances the likelihood of ultimate payment of
the obligations on at least a portion of the assets in the pool. Such protection
may be provided through guarantees, insurance policies or letters of credit
obtained by the issuer or sponsor from third parties, through various means of
structuring the transaction or through a combination of such approaches. The
Fund will not pay any additional fees for such credit support, although the
existence of credit support may increase the price of a security.
The ratings of securities for which third-party credit enhancement provides
liquidity protection or protection against losses from default are generally
dependent upon the continued creditworthiness of the enhancement provider. The
ratings of such securities could be subject to reduction in the event of
deterioration in the creditworthiness of the credit enhancement provider even in
cases where the delinquency and loss experience on the underlying pool of assets
is better than expected.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of "reserve
funds" (where cash or investments, sometimes funded from a portion of the
payments on the underlying assets, are held in reserve against future losses)
and "over-collateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceed those required to make payment on the
securities and pay any servicing or other fees). The degree of credit support
provided for each issue is generally based on historical information with
respect to the level of credit risk associated with the underlying assets. Other
information which may be considered includes demographic factors, loan
underwriting practices and general market and economic conditions. Delinquency
or loss in excess of that which is anticipated could adversely affect the return
on an investment in such a security.
RESTRICTIONS ON INVESTMENTS IN MORTGAGE-BACKED SECURITIES. As set forth in
the Prospectus, the Fund will not invest in any inverse floating, interest-only,
principal-only or Z tranches of CMOs or in stripped Mortgage-Backed Securities.
In addition, the Fund will not invest in any other Mortgage-Backed Securities
that are considered "high risk" under applicable supervisory policies of the
Office of the Comptroller of the Currency (the "OCC"). In OCC Banking Circular
228 (Rev.) (January 10, 1992), the OCC defined a "high-risk mortgage security"
as any mortgage derivative product that at the time of purchase, or at a
subsequent testing date, meets any of the following three tests:
(a) Average Life Test. The mortgage derivative product has an expected
weighted average life greater than 10.0 years.
(b) Average Life Sensitivity Test. The expected weighted average life
of the mortgage derivative product:
(i) extends by more than 4.0 years, assuming an immediate and
sustained parallel shift in the yield curve of plus 300 basis points;
or
(ii) shortens by more than 6.0 years, assuming an immediate and
sustained parallel shift in the yield curve of minus 300 basis points.
(c) Price Sensitivity Test. The estimated change in the price of the
mortgage derivative product is more than 17%, due to an immediate and
sustained parallel shift in the yield curve of plus or minus 300 basis
points.
Examples of certain "high-risk mortgage securities" include interest-only and
principal-only classes of stripped mortgage-backed securities, inverse floating
CMOs and certain zero coupon Treasury securities.
Options
As set forth in the Prospectus, the Fund may write covered put and call
options with respect to the securities in which it may invest. The principal
reason for writing call or put options is to obtain, through 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 option is exercised. The Fund will write
only covered options. This means that so long as the Fund is obligated as the
writer of a call option, it will own the underlying securities subject to the
option (or comparable securities satisfying the cover requirements of securities
exchanges). The Fund will be considered covered with respect to a put option it
writes if, so long as it is obligated as the writer of a put option, it deposits
and maintains in a segregated account with its custodian cash, U.S. Government
securities or other liquid high-grade debt obligations having a value equal to
or greater than the exercise price of the option.
The Fund may wish to protect certain portfolio securities against a decline
in market value at a time when no put options on those particular securities are
available for purchase. The Fund may therefore purchase a put option on
securities other than those it wishes to protect even though it does not hold
such other securities in its portfolio. While the Fund will only purchase put
options on securities where, in the opinion of the Adviser, changes in the value
of the put option should generally offset changes in the value of the securities
to be hedged, the correlation will be less than in transactions in which the
Fund purchases put options on underlying securities it owns.
The writing by the Fund of options on securities will be subject to
limitations established by each of the registered securities exchanges on which
such options are traded. Such limitations govern the maximum number of options
in each class which may be written by a single investor or group of investors
acting in concert, regardless of whether the options are written on the same or
different securities exchanges or are held or written on one or more accounts or
through one or more brokers. Thus, the number of options which the Fund may
write may be affected by options written by other investment companies managed
by and other investment advisory clients of the Adviser. An exchange may order
the liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
Illiquid Securities
As set forth in the Prospectus, the Fund may invest in Rule 144A securities
and commercial paper issued pursuant to Rule 4(2) under the Securities Act of
1933, and treat such securities as liquid when they have been determined to be
liquid by the Board of Directors or by the Adviser subject to the oversight of
and pursuant to procedures adopted by the Board of Directors. Under these
procedures, factors taken into account in determining the liquidity of a
security include (a) the frequency of trades and quotes for the security; (b)
the number of dealers willing to purchase or sell the security and the number of
other potential purchasers; (c) dealer undertakings to make a market in the
security; and (d) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer).
Portfolio Turnover
Portfolio turnover is the ratio of the lesser of annual purchases or sales
of portfolio securities to the average monthly value of portfolio securities,
not including securities maturing in less than 12 months. A 100% portfolio
turnover rate would occur, for example, if the lesser of the value of purchases
or sales of portfolio securities for a particular year were equal to the average
monthly value of the portfolio securities owned during such year.
Investment Restrictions
In addition to the investment objective and policies set forth in the
Prospectus, the Fund is subject to certain fundamental and nonfundamental
investment restrictions, as set forth below. Fundamental investment restrictions
may not be changed without the vote of a majority of the Fund's outstanding
shares. "Majority," as used in the Prospectus and in this Statement of
Additional Information, means the lesser of (a) 67% of the Fund's outstanding
shares present at a meeting of the holders if more than 50% of the outstanding
shares are present in person or by proxy or (b) more than 50% of the Fund's
outstanding shares.
As fundamental investment restrictions, the Fund will not:
1. With respect to 75% of its total assets, invest more than 5% of the
value of its total assets (taken at market value at the time of purchase) in the
outstanding securities of any one issuer, or own more than 10% of the
outstanding voting securities of any one issuer, in each case other than
securities issued or guaranteed by the U. S. Government or any agency or
instrumentality thereof.
2. Invest 25% or more of the value of its total assets in the securities of
issuers conducting their principal business activities in any one industry,
except that, under normal market conditions, the Fund will invest 25% or more of
the value of its total assets in ARMS issued or guaranteed by the U.S.
Government or its agencies or instrumentalities or by private organizations.
Except for the requirement that the Fund invest 25% or more of its total assets
in ARMS, the foregoing restriction does not apply to securities of the U.S.
Government or its agencies or instrumentalities or repurchase agreements
relating thereto.
3. Issue any senior securities, as defined in the 1940 Act, other than as
set forth in restriction #4 below and except to the extent that using options
and futures contracts or purchasing or selling securities on a when-issued or
forward commitment basis may be deemed to constitute issuing a senior security.
4. Borrow money, except for temporary or emergency purposes. The amount of
such borrowing (including borrowing through reverse repurchase agreements) may
not exceed 10% of the value of the Fund's total assets. The Fund will not
purchase portfolio securities while outstanding borrowings exceeds 5% of the
value of the Fund's total assets. The Fund will not borrow for leverage
purposes.
5. Mortgage, pledge or hypothecate its assets, except in an amount not
exceeding 10% of the value of its total assets to secure temporary or emergency
borrowing. For purposes of this policy, collateral arrangements for margin
deposits on futures contracts or with respect to the writing of options are not
deemed to be a pledge of assets.
6. Purchase or sell commodities or commodity futures contracts, except that
the Fund may enter into financial futures contracts and engage in related
options transactions.
7. Purchase or sell real estate or interests therein (other than securities
backed by mortgages and similar instruments).
8. Act as an underwriter of securities of other issuers, except insofar as
the Fund may be technically deemed an underwriter under the federal securities
laws in connection with the disposition of portfolio securities.
9. Make loans of money or property to any person, except through loans of
portfolio securities, the purchase of debt obligations in which the Fund may
invest consistent with the Fund's investment objective and policies or the
acquisition of securities subject to repurchase agreements.
For purposes of determining compliance with fundamental investment
restriction number 2, relating to industry concentration, the various types of
utilities companies, such as gas, electric, telephone, telegraph, satellite and
microwave communications companies, are considered separate industries and ARMS
issued by private organizations are considered to be securities of issuers in
the same industry. In addition, the industry classification of Asset-Backed
Securities will be determined based on the type of collateral underlying the
securities. For example, Asset-Backed Securities backed by automobile
receivables will be considered to be in a different industry than Asset-Backed
Securities backed by credit card receivables.
As nonfundamental investment restrictions that may be changed at any time
without shareholder approval, the Fund will not:
1. Invest in warrants.
2. Make short sales of securities.
3. Purchase any securities on margin except to obtain such short-term
credits as may be necessary for the clearance of transactions and except that
the Fund may make margin deposits in connection with futures and options
contracts.
4. Purchase or retain the securities of any issuer if, to the Fund's
knowledge, those officers or directors of the Company or its affiliates or of
its investment adviser who individually own beneficially more than 0.5% of the
outstanding securities of such issuer, together own more than 5% of such
outstanding securities.
5. Invest for the purpose of exercising control or management.
6. Purchase or sell oil, gas or other mineral leases, rights or royalty
contracts, except that the Fund may purchase or sell securities of companies
investing in the foregoing.
7. Purchase the securities of other investment companies except as part of
a merger, consolidation or acquisition of assets.
8. Invest in real estate limited partnerships.
9. Invest in the securities of foreign issuers.
10. Invest more than 15% of its net assets in illiquid securities.
In addition, as a nonfundamental policy, the Fund's transactions in
options, futures contracts and options on futures contracts will be subject to
the following limitations:
a. The Fund will write puts and calls only if the security underlying the
put or call is within the investment policies of the Fund and the option is
issued by the Options Clearing Corporation.
b. The Fund will not write puts if, as a result, more than 50% of its
assets would be required to be segregated.
c. The aggregate premiums paid on all put and call options purchased by the
Fund, including options on futures contracts, may not exceed 20% of the
Fund's net assets.
d. The Fund's aggregate margin deposits in connection with futures
contracts and options thereon will not exceed 5% of the Fund's total
assets.
e. The Fund will not enter into futures contracts or purchase or write put
and call options unless such futures contracts or options are listed
on a national securities exchange or commodities exchange.
f. The securities subject to the exercise of a call option written by the
Fund must be owned by the Fund at the time the call is sold and must
continue to be owned by the Fund until the call has been exercised, has
lapsed, or the Fund has purchased a closing call, and such purchase has
been confirmed, thereby extinguishing the Fund's obligation to deliver
securities pursuant to the call it has sold. At the time a put option is
written by the Fund, the Fund must establish a segregated account with its
custodian consisting of cash or short-term United States Government
securities equal in value to the amount the Fund will be obligated to pay
upon exercise of the put. This account must be maintained until the put is
exercised, has expired, or the Fund has purchased a closing put, which is a
put of the same series as the one previously written.
Any investment restriction or limitation referred to above or in the
Prospectus, except the borrowing policy, which involves a maximum percentage of
securities or assets, shall not be considered to be violated unless an excess
over the percentage occurs immediately after an acquisition of securities or
utilization of assets and such excess results therefrom.
DIRECTORS AND EXECUTIVE OFFICERS
The names, addresses and principal occupations during the past five years
of the directors and executive officers of the Funds are given below.
Name, Address and Age Position with the Fund
William H. Ellis* (53) Chairman of the Board
Piper Jaffray Tower of Directors
222 South Ninth Street
Minneapolis, Minnesota 55402
David T. Bennett (54) Director
3400 City Center
33 South Sixth Street
Minneapolis, Minnesota 55402
Jaye F. Dyer (68) Director
4670 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402
Karol D. Emmerich (46) Director
7302 Claredon Drive
Edina, MN 55439
Luella G. Goldberg (58) Director
7019 Tupa Drive
Edina, Minnesota 55439
George Latimer (59) Director
754 Linwood Avenue
St. Paul, Minnesota 55105
Paul A. Dow (44) President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Michael P. Jansen (35) Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Robert H. Nelson (31) Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Amy K. Johnson (29) Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Thomas S. McGlinch (38) Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
David E. Rosedahl (48) Secretary
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Charles N. Hayssen (44) Treasurer
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
* Directors of the Fund who are interested persons (as that term is defined
by the 1940 Act) of Piper Capital Management Incorporated and the Fund.
William H. Ellis has been President of Piper Jaffray Companies Inc. and
Piper Jaffray Inc. (the "Distributor") since September 1982, Chief Operating
Officer of the same two companies since August 1983, Director and Chairman of
the Board of Piper Capital Management Incorporated ("the Adviser") since October
1985 and President of the Adviser since December 1994.
David T. Bennett is of counsel to the law firm of Gray, Plant, Mooty, Mooty
& Bennett, P.A., located in Minneapolis, Minnesota. Mr. Bennett also serves on
the board of directors of a number of privately held and nonprofit corporations.
Jaye F. Dyer has been President of Dyer Management Company, a private
management company, since January 1, 1991. Prior thereto, he was President and
Chief Executive Officer of Dyco Petroleum Corporation, a Minneapolis based oil
and natural gas development subsidiary of Arkla, Inc. from 1971, when he founded
the company, until March 1, 1989, and Chairman of the Board until December 31,
1990. Mr. Dyer also serves on the board of directors of Northwestern National
Life Insurance Company, The ReliaStar Financial Corp. (the holding company of
Northwestern National Life Insurance Company) and various privately held and
nonprofit corporations.
Karol D. Emmerich has been President of The Paraclete Group, a consultant
to nonprofit and other organizations, since May 1993. Prior thereto, she was
Vice President and Treasurer of Dayton Hudson Corporation from 1980 to May 1993.
Ms. Emmerich also serves on the board of directors of a number of privately held
and nonprofit corporations.
Luella G. Goldberg has served on the board of directors of Northwestern
National Life Insurance Company (since 1976), The ReliaStar Financial Corp.
(since January 1989), TCF Bank Savings fsb (since 1986), TCF Financial
Corporation, the holding company of TCF Bank Savings fsb (since 1988) and Hormel
Foods Corp. (since 1993). Ms. Goldberg also serves as a Trustee of Wellesley
College, and as a director of a number of other organizations, including the
University of Minnesota Foundation and the Minnesota Orchestral Association. Ms.
Goldberg was Chairman of the Board of Trustees of Wellesley College from 1985 to
1993 and acting President from July 1, 1993 to October 1, 1993.
George Latimer has been Director, Special Actions Office, Office of the
Secretary, Department of Housing and Urban Development since 1993. Prior
thereto, he had been Dean of Hamline Law School, Saint Paul, Minnesota since
1990. Mr. Latimer serves on the Board of Directors of Digital Biometrics, Inc.
and Payless Cashways, Inc.
Paul A. Dow has been Chief Investment Officer of the Adviser since December
1989 and Senior Vice President of the Adviser since February 1989.
Michael P. Jansen has been a Senior Vice President of the Adviser since
October 1993, prior to which he had been a Managing Director of Piper Jaffray
since 1987. He has been an Executive Vice President and Director of Piper
Mortgage Acceptance Corporation since 1991 and served as an Executive Vice
President and Director of Premier Acceptance Corporation from 1988 to October
1994.
Robert H. Nelson joined the Adviser in 1988 and has been a Senior Vice
President of the Adviser since November 1993, prior to which he had been a Vice
President of the Adviser since November 1991 and an employee of the Adviser
since 1988.
Amy K. Johnson has been a Vice President of the Adviser since November 1994
and an employee of the Adviser since 1992. Prior to joining the Adviser, she was
an audit senior with KPMG Peat Marwick LLP where she was employed form 1990 to
1992.
Thomas S. McGlinch has been a Vice President of the Adviser since November
1992, prior to which he had been an Assistant Vice President of the Adviser
since January 1992 and a specialty products trader at FBS Investment Services,
Inc. from 1988 to January 1992.
David E. Rosedahl has been Secretary and a Director of the Adviser since
October 1985, a Managing Director of the Distributor since November 1986, a
Managing Director of Piper Jaffray Companies Inc. since November 1987, Secretary
of the Distributor since 1993 and General Counsel for the Distributor and Piper
Jaffray Companies Inc. since 1979.
Charles N. Hayssen has been a Managing Director of the Distributor since
November 1986 and of Piper Jaffray Companies Inc. since November 1987, Chief
Financial Officer of the Distributor since January 1988, Director and Chief
Financial Officer of the Adviser since January 1989 and Chief Operating Officer
of the Adviser since December 1994.
Ms. Goldberg and Ms. Emmerich and Mr. Dyer are members of the Audit
Committee of the Board of Directors. Ms. Goldberg acts as the chairperson of
such committee. The Audit Committee oversees the Company's financial reporting
process, reviews audit results and recommends annually to the Company a firm of
independent certified public accountants.
The Board of Directors also has a Committee of the Independent Directors,
consisting of Mr. Bennett, who serves as chairperson of such committee, Messrs.
Dyer and Latimer, Ms. Emmerich and Ms. Goldberg, and a Derivatives Subcommittee
consisting of Ms. Emmerich, who serves as chairperson of such committee, Ms.
Goldberg and Mr. Dyer. The functions of the Committee of the Independent
Directors are: (a) recommendation to the full Board of approval of any
management, advisory, sub-advisory and/or administration agreements; (b)
recommendation to the full Board of approval of any underwriting and/or
distribution agreements; (c) review of the fidelity bond and premium allocation;
(d) review of errors and omissions and any other joint insurance policies and
premium allocation; (e) review of, and monitoring of compliance with, procedures
adopted pursuant to certain rules promulgated under the 1940 Act; and (f) such
other duties as the independent directors shall, from time to time, conclude are
necessary or appropriate to carry out their duties under the 1940 Act. The
functions of the Derivatives Subcommittee are: (a) to oversee practices,
policies and procedures of the Adviser in connection with the use of
derivatives; (b) to receive periodic reports from management and independent
accountants; and (c) to report periodically to the Committee of the Independent
Directors and the Board of Directors.
The directors of the Company who are officers or employees of the Adviser
or any of its affiliates receive no remuneration from the Company. Each of the
other directors receives from the Company a quarterly retainer of $1,000, plus a
fee of $1,000 for each regular quarterly Board of Directors meeting attended.
(The per-meeting fee will increase to $1,500 in the event total Company assets
reach $5 billion or more.) In addition, members of the Audit Committee not
affiliated with the Adviser receive $1,000 for each Audit Committee meeting
attended ($2,000 with respect to the chairperson of the Committee), with such
fee being allocated among the Company and all other publicly-held investment
companies managed by the Adviser on the basis of relative net asset values.
Members of the Committee of the Independent Directors and the Derivatives
Subcommittee currently receive no additional compensation. Directors are also
reimbursed for expenses incurred in connection with attending meetings.
The following table sets forth the total compensation received by each
Director from all open-end and closed-end investment companies managed by the
Adviser or an affiliate of the Adviser during the calendar year ended December
31, 1994. Mr. Ellis, as an officer of the Adviser, did not receive any such
compensation and is not included in the table.
Pension or Estimated Total
Retirement Benefits Annual Benefits Compensation
Accrued as Part of Upon from Fund
Director Fund Expenses Retirement Complex*
David T. Bennett None None $57,500
Jaye F. Dyer None None $68,250
Karol D. Emmerich None None $68,250
Luella G. Goldberg None None $71,250
George Latimer None None $65,250
* Consists of 26 open-end and closed-end investment companies managed by the
Adviser. Each director included in the table, other than Mr. Bennett,
served on the board of each such investment company for all of 1994. Mr.
Bennett served on the board of 24 of such companies during 1994.
INVESTMENT ADVISORY AND OTHER SERVICES
The investment adviser for the Fund is Piper Capital Management
Incorporated (the "Adviser"). Its affiliate, Piper Jaffray Inc. (the
"Distributor"), acts as the Fund's distributor. Each acts as such pursuant to a
written agreement which is periodically approved by the directors or the
shareholders of the Fund. The address of both the Adviser and the Distributor is
Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402-3804.
Control of the Adviser and the Distributor
The Adviser and the Distributor are both wholly owned subsidiaries of Piper
Jaffray Companies Inc., a publicly held corporation which is engaged through its
subsidiaries in various aspects of the financial services industry.
Investment Advisory and Management Agreement
The Adviser acts as the investment adviser of the Fund under an Investment
Advisory and Management Agreement which has been approved by the Board of
Directors (including a majority of the directors who are not parties to the
agreement, or interested persons of any such party, other than as directors of
the Fund) and by the Fund's initial sole shareholder.
The Investment Advisory and Management Agreement will terminate
automatically in the event of its assignment. In addition, the agreement is
terminable at any time, without penalty, by the Board of Directors of the
Company or by vote of a majority of the Company's outstanding voting securities
on not more than 60 days' written notice to the Adviser, and by the Adviser on
60 days' written notice to the Company. The agreement may be terminated at any
time by a vote of the holders of a majority of the outstanding voting securities
of the Fund upon 60 days' written notice to the Adviser. Unless sooner
terminated, the agreement shall continue in effect for more than two years after
its execution only so long as such continuance is specifically approved at least
annually by either the Board of Directors or by a vote of a majority of the
outstanding voting securities of the Company, provided that in either event such
continuance is also approved by a vote of a majority of the directors who are
not parties to such agreement, or interested persons of such parties, cast in
person at a meeting called for the purpose of voting on such approval.
Pursuant to the Investment Advisory and Management Agreement, the Fund pays
the Adviser a monthly advisory fee equal on an annual basis to .35% of the first
$500 million of average daily net assets and .30% of average daily net assets in
excess of $500 million.
The Adviser intends, although not required under the Investment Advisory
and Management Agreement, to reimburse the Fund for the amount, if any, by which
the total operating and management expenses of the Fund (including the Adviser's
compensation and amounts paid pursuant to the Fund's Rule 12b-1 plan, but
excluding interest, taxes, brokerage fees and commissions, and extraordinary
expenses) for the fiscal year ending August 31, 1996, exceed .60% of average net
assets. This arrangement is voluntary and may be modified or discontinued at any
time after August 31, 1996, at the Adviser's discretion. In the event of
discontinuance of this arrangement, the Fund will still be subject to the laws
of certain states, which require that if a mutual fund's expenses (including
advisory fees but excluding interest, taxes, brokerage commissions and
extraordinary expenses) exceed certain percentages of average net assets, the
fund must be reimbursed for such excess expenses. The Investment Advisory and
Management Agreement provides that the Adviser must make any expense
reimbursements to the Fund required under state law. The laws of California
provide that aggregate annual expenses of a mutual fund shall not normally
exceed 2-1/2% of the first $30 million of the average net assets, 2% of the next
$70 million of the average net assets and 1-1/2% of the remaining average net
assets. Such expenses include the Adviser's compensation, but exclude interest,
taxes, brokerage fees and commissions, extraordinary expenses and amounts paid
under the Fund's Rule 12b-1 plan. The Adviser does not believe that the laws of
any other state in which the Fund's shares may be offered for sale contain
expense reimbursement requirements.
Under the Investment Advisory and Management Agreement, the Adviser
provides the Fund with advice and assistance in the selection and disposition of
the Fund's investments. All investment decisions are subject to review by the
Board of Directors of the Fund. The Adviser is obligated to pay the salaries and
fees of any affiliates of the Adviser serving as officers or directors of the
Fund.
The same security may be suitable for the Fund and/or other funds or
private accounts managed by the Adviser or its affiliates. If and when two or
more funds or accounts simultaneously purchase or sell the same security, the
transactions will be allocated as to price and amount in accordance with
arrangements equitable to each fund or account. The simultaneous purchase or
sale of the same securities by the Fund and other funds or accounts may have a
detrimental effect on the Fund, as this may affect the price paid or received by
the Fund or the size of the position obtainable or able to be sold by the Fund.
The Adviser also acted as the investment adviser of DDJ, the surviving
entity of the Merger for financial reporting purposes. Pursuant to the
Investment Advisory and Management Agreement between DDJ and the Adviser, the
Adviser received a monthly management fee at the per annum rate of .35% of DDJ's
average weekly net assets. Under such agreement, the Adviser received
compensation of $1,553,794, $1,917,671 and $1,857,513, respectively, for the
fiscal years ended August 31, 1992, 1993 and 1994.
The Adviser also acted as the administrator of DDJ pursuant to an
Administration Agreement under which the Adviser received a monthly
administration fee at the per annum rate of .15% of DDJ's average weekly net
assets. Under such agreement, the Adviser received compensation of $665,912,
$821,859 and $796,077, respectively, for the fiscal years ended August 31, 1992,
1993 and 1994. The Fund has not entered into an administration agreement with
the Adviser.
Expenses
The expenses of the Fund are deducted from its income before dividends are
paid. These expenses include, but are not limited to, organizational costs, fees
paid to the Adviser, fees and expenses of officers and directors who are not
affiliated with the Adviser, taxes, interest, legal fees, transfer agent,
dividend disbursing agent and custodian fees, audit fees, brokerage fees and
commissions, fees and expenses of registering and qualifying the Fund and its
shares for distribution under federal and state securities laws, expenses of
preparing the prospectus and statement of additional information and of printing
and distributing the prospectus and statement of additional information annually
to existing shareholders, the expenses of reports to shareholders, shareholders'
meetings and proxy solicitations, distribution expenses pursuant to the Rule
12b-1 plan, and other expenses which are not expressly assumed by the Adviser
under the Investment Advisory and Management Agreement.
Distribution Plan
Rule 12b-1(b) under the 1940 Act provides that any payments made by the
Fund in connection with financing the distribution of its shares may only be
made pursuant to a written plan describing all aspects of the proposed financing
of distribution, and also requires that all agreements with any person relating
to the implementation of the plan must be in writing.
Rule 12b-1(b)(1) requires that such plan be approved by a majority of the
Fund's outstanding shares, and Rule 12b-1(b)(2) requires that such plan,
together with any related agreements, be approved by a vote of the Board of
Directors and of the directors who are not interested persons of the Company and
who have no direct or indirect interest in the operation of the plan or in the
agreements related to the plan, cast in person at a meeting called for the
purpose of voting on such plan or agreement. The Fund's Distribution Plan has
been approved by the Board of Directors and by the Fund's initial sole
shareholder in accordance with the Rule. Rule 12b-1(b)(3) requires that the plan
or agreement provide, in substance:
(a) that it shall continue in effect for a period of more than one
year from the date of its execution or adoption only so long as such
continuance is specifically approved at least annually in the manner
described in paragraph (b)(2) of Rule 12b-1;
(b) that any person authorized to direct the disposition of moneys
paid or payable by the Fund pursuant to the plan or any related agreement
shall provide to the Board of Directors, and the directors shall review, at
least quarterly, a written report of the amounts so expended and the
purposes for which such expenditures were made; and
(c) in the case of a plan, that it may be terminated at any time by a
vote of a majority of the members of the Board of Directors who are not
interested persons of the Fund and who have no direct or indirect financial
interest in the operation of the plan or in any agreements related to the
plan or by a vote of a majority of the outstanding voting securities of the
Fund.
Rule 12b-1(b)(4) requires that such a plan may not be amended to increase
materially the amount to be spent for distribution without shareholder approval
and that all material amendments of the plan must be approved in the manner
described in paragraph (b)(2) of Rule 12b-1.
Rule 12b-1(c) provides that the Fund may rely upon Rule 12b-1(b) only if
the selection and nomination of the disinterested directors are committed to the
discretion of such disinterested directors. Rule 12b-1(e) provides that the Fund
may implement or continue a plan pursuant to Rule 12b-1(b) only if the directors
who vote to approve such implementation or continuation conclude, in the
exercise of reasonable business judgment and in light of their fiduciary duties
under state law, and under Sections 36(a) and (b) of the 1940 Act, that there is
a reasonable likelihood that the plan will benefit the Fund and its
shareholders. The Board of Directors has concluded that there is a reasonable
likelihood that the Distribution Plan will benefit the Fund and its
shareholders.
Pursuant to the provisions of the Distribution Plan, the Fund pays the
Distributor a monthly service fee equal, on an annual basis, to .15% of the
Fund's average daily net assets in connection with the servicing of the Fund's
shareholder accounts. This fee is intended to compensate the Distributor for
ongoing servicing and/or maintenance of shareholder accounts and the costs
incurred in connection therewith ("Shareholder Servicing Costs"). Shareholder
Servicing Costs include all expenses of the Distributor incurred in connection
with providing shareholder liaison services, including, but not limited to, an
allocation of the Distributor's overhead and payments made to persons, including
employees of the Distributor, who respond to inquiries of shareholders regarding
their ownership of shares or their accounts with the Fund and who provide
information on shareholders' investments.
Underwriting and Distribution Agreement
Pursuant to the Underwriting and Distribution Agreement, the Distributor
has agreed to act as the principal underwriter for the Fund in the sale and
distribution to the public of shares of the Fund, either through dealers or
otherwise. The Distributor has agreed to offer such shares for sale at all times
when such shares are available for sale and may lawfully be offered for sale and
sold. As compensation for its services, in addition to receiving its service
fees pursuant to the Distribution Plan discussed above, the Distributor receives
the sales load on sales of the Fund shares set forth in the Prospectus.
Auditors
KPMG Peat Marwick LLP, 4200 Norwest Center, Minneapolis, Minnesota 55402,
acts as the independent auditors for the Company, and in such capacity examines
the Company's annual financial statements.
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
The Adviser is responsible for decisions to buy and sell securities, the
selection of broker-dealers to effect the transactions and the negotiation of
brokerage commissions, if any, with respect to the Fund. In placing orders for
securities transactions, the primary criterion for the selection of a
broker-dealer is the ability of the broker-dealer, in the opinion of the
Adviser, to secure prompt execution of the transactions on favorable terms,
including the reasonableness of the commission and considering the state of the
market at the time.
When consistent with these objectives, business may be placed with
broker-dealers who furnish investment research information and statistical and
other services to the Adviser. Such research or services include advice, both
directly and in writing, as to the value of securities; the advisability of
investing in, purchasing or selling securities; and the availability of
securities, or purchasers or sellers of securities; as well as analyses and
reports concerning issues, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts. This allows the Adviser to
supplement its own investment research activities and enables the Adviser to
obtain the views and information of individuals and research staffs of many
different securities firms prior to making investment decisions for the Fund. To
the extent portfolio transactions are effected with broker-dealers who furnish
research services to the Adviser, the Adviser receives a benefit, not capable of
evaluation in dollar amounts, without providing any direct monetary benefit to
the Fund from these transactions. The Adviser believes that most research
services obtained by it generally benefit several or all of the investment
companies and private accounts which it manages, as opposed to solely benefiting
one specific managed fund or account. Normally, research services obtained
through managed funds or accounts investing in common stocks would primarily
benefit the managed funds or accounts which invest in common stock; similarly,
services obtained from transactions in fixed-income securities would normally be
of greater benefit to the managed funds or accounts which invest in debt
securities.
The Adviser has not entered into any formal or informal agreements with any
broker-dealers, nor does it maintain any "formula" which must be followed in
connection with the placement of the Fund's portfolio transactions in exchange
for research services provided the Adviser. However, the Adviser does maintain
an informal list of broker-dealers, which is used from time to time as a general
guide in the placement of the Fund's business, in order to encourage certain
broker-dealers to provide the Adviser with research services which the Adviser
anticipates will be useful to it. Because the list is merely a general guide,
which is to be used only after the primary criterion for the selection of
broker-dealers (discussed above) has been met, substantial deviations from the
list are permissible and may be expected to occur. The Adviser will authorize
the Fund to pay an amount of commission for effecting a securities transaction
in excess of the amount of commission another broker-dealer would have charged
only if the Adviser determines in good faith that such amount of commission is
reasonable in relation to the value of the brokerage and research services
provided by such broker-dealer, viewed in terms of either that particular
transaction or the Adviser's overall responsibilities with respect to the
accounts as to which it exercises investment discretion. Generally, the Fund
pays higher than the lowest commission rates available. The Fund will not
purchase at a higher price or sell at a lower price in connection with
transactions effected with a director, acting as principal, who furnishes
research services to the Adviser than would be the case if no weight were given
by the Adviser to the dealer's furnishing of such services.
Transactions in securities, options on securities, futures contracts and
options on futures contracts, may be effected through the Distributor. In
determining the commissions to be paid to the Distributor in connection with
portfolio transactions on national securities exchanges or commodity exchanges,
it is the policy of the Fund that such commissions will, in the judgment of the
Adviser, subject to review by the Board of Directors, be both (a) at least as
favorable as those which would be charged by other qualified brokers in
connection with comparable transactions during a comparable period of time, and
(b) at least as favorable as commissions contemporaneously charged by the
Distributor on comparable transactions for its most favored comparable
unaffiliated customers. While the Fund does not deem it practicable and in its
best interest to solicit competitive bids for commission rates on each
transaction, consideration will regularly be given to posted commission rates as
well as to other information concerning the level of commissions charged on
comparable transactions by other qualified brokers.
For the fiscal years ended August 31, 1992, 1993 and 1994, DDJ paid
aggregate brokerage commissions of $32,130, $40,800 and $69,650, respectively.
Of such amounts, $28,067, $39,525 and $63,325, respectively, were paid to the
Distributor. For the fiscal year ended August 31, 1994, 91% of DDJ's aggregate
brokerage commissions were paid to the Distributor, which accounted for 81% of
the aggregate dollar amount of transactions involving the payments of
commissions.
CAPITAL STOCK AND OWNERSHIP OF SHARES
The Board of Directors is empowered under the Company's Articles of
Incorporation to issue additional series of the Company's common stock without
shareholder approval. On an issue affecting only a particular series, the shares
of the affected series vote separately. An example of such an issue would be a
fundamental investment restriction pertaining to only one series. In voting on
the Investment Advisory and Management Agreement (the "Agreement"), approval of
the Agreement by the shareholders of a particular series would make the
Agreement effective as to that series whether or not it had been approved by the
shareholders of any other series.
If the Company issues shares in additional series, the assets received by
the Company for the issue or sale of shares of each series, and all income,
earnings, profits and proceeds thereof, subject only to the rights of creditors,
will be allocated to such series, and constitute the underlying assets of such
series. The underlying assets of each series are required to be segregated on
the books of account, and are to be charged with the expenses relating to such
series and with a share of the general expenses of the Company. Any general
expenses of the Company not readily identifiable as belonging to a particular
series shall be allocated among the series based on the relative net assets of
the series at the time such expenses were accrued.
The Board of Directors may, without shareholder approval, create and issue
one or more additional classes of shares within the Fund, as well as within any
series of the Company created in the future. All classes of shares in a series
would be identical except that each class of shares would be available through a
different distribution channel and certain classes might incur different
expenses for the provision of distribution services or the provision of
shareholder services or administration assistance by institutions. Shares of
each class would share equally in the gross income of a series, but any
variation in expenses would be charged separately against the income of the
particular class incurring such expenses. This would result in variations in net
investment income accrued and dividends paid by and in the net asset value of
the different classes of a series. This ability to create multiple classes of
shares within each series of the Company will allow the Company in the future
the flexibility to better tailor its methods of marketing, administering and
distributing shares of the Fund to the needs of particular investors and to
allocate expenses related to such marketing, administration and distribution
methods to the particular classes of shareholders of the Fund incurring such
expenses.
As of August 31, 1995, no shares of the Fund were outstanding.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the public offering price of Fund shares is
summarized in the Prospectus in the text following the headings "How to Purchase
Shares -- Public Offering Price" and "Valuation of Shares." The net asset value
of the Fund's shares is determined on each day on which the New York Stock
Exchange is open, provided that the net asset value need not be determined on
days on which changes in the value of its portfolio securities will not
materially affect the current net asset value of the Fund's shares and days when
no Fund shares are tendered for redemption and no order for Fund shares is
received. The New York Stock Exchange is not open for business on the following
holidays (or on the nearest Monday or Friday if the holiday falls on a weekend):
New Year's Day, Presidents' Day, Good Friday, Memorial Day, July 4th, Labor Day,
Thanksgiving and Christmas.
On February 28, 1995, the net asset value per share for DDJ was calculated
as follows:
Net Assets ($409,244,227)/Shares Outstanding (47,141,017) =
Net Asset Value Per Share ($8.68)
In the case of the Fund, a sales charge of 1.52% of the net asset value (in
the case of sales of less than $100,000) will be added to the net asset value
per share to determine the public offering price per share.
PERFORMANCE COMPARISONS
Advertisements and other sales literature for the Fund may refer to
"average annual total return," "cumulative total return" and "yield." The
Adviser may waive or pay certain expenses of the Fund, thereby increasing total
return and yield. These expenses may or may not be waived or paid in the future
in the Adviser's discretion. No performance data is provided for the Fund since
no shares were outstanding as of the date of this Statement of Additional
Information.
Average annual total return figures are computed by finding the average
annual compounded rates of return over the periods indicated in the
advertisement that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
(nth power)
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end of the
period of a hypothetical $1,000 payment made
at the beginning of such period.
This calculation deducts the maximum sales charge from the initial hypothetical
$1,000 investment, assumes all dividends and capital gains distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus, and includes all recurring fees, such as investment advisory
and management fees, charged to all shareholder accounts.
DDJ's average annual total returns for the one year period ended February
28, 1995 and for the period since inception on January 30, 1992 through February
28, 1995 were -4.40% and 2.65%, respectively.
Cumulative total return is computed by finding the cumulative compounded
rate of return over the period indicated in the advertisement that would equate
the initial amount invested to the ending redeemable value, according to the
following formula:
CTR = [(ERV-P)/P] 100
Where: CTR = Cumulative total return;
ERV = ending redeemable value at the
end of the period of a
hypothetical $1,000 payment made
at the beginning of such period;
and
P = initial payment of $1,000.
This calculation assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus and includes all recurring fees, such as investment advisory
and management fees, charged to all shareholder accounts.
The cumulative total return for DDJ from inception on January 30, 1992
through February 28, 1995 was 8.39%.
Yield is computed by dividing the net investment income per share (as
defined under Securities and Exchange Commission rules and regulations) earned
during the computation period by the maximum offering price per share on the
last day of the period, according to the following formula:
(6th power)
YIELD = 2[((a-b)/cd) + 1) - 1]
Where: a = dividends and interest earned during the
period;
b = expenses accrued for the period (net of
reimbursements);
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends; and
d = the maximum offering price per share on the
last day of the period.
In addition to advertising total return and yield, comparative performance
information may be used from time to time in advertising the Fund's shares,
including data from Lipper Analytical Services, Inc. ("Lipper"), Morningstar,
Inc. and other entities or organizations which track the performance of
investment companies. The Fund's performance may be compared to that of the ARM
Fund Average, as reported by Lipper, and to the performance of the Lehman
Brothers ARM Index, an unmanaged index. Unmanaged indices generally do not
reflect deductions for administrative and management costs and expenses.
PURCHASE OF SHARES
An investor may qualify for a reduced sales charge immediately by signing a
nonbinding Letter of Intent stating the investor's intention to invest within a
13-month period, beginning not earlier than 90 days prior to the date of
execution of the Letter, a specified amount which, if made at one time, would
qualify for a reduced sales charge. Reinvested dividends will be treated as
purchases of additional shares. Any redemptions made during the term of the
Letter of Intent will be subtracted from the amount of purchases in determining
whether the Letter of Intent has been completed. During the term of a Letter of
Intent, IFTC will hold shares representing 5% of the amount that the investor
intends to invest during the 13-month period in escrow for payment of a higher
sales charge if the full amount indicated in the Letter of Intent is not
purchased. Dividends on the escrowed shares will be paid to the shareholder. The
escrowed shares will be released when the full amount indicated has been
purchased. If the full indicated amount is not purchased within the 13-month
period, the investor will be required to pay, either in cash or by liquidating
escrowed shares, an amount equal to the difference in the dollar amount of sales
charge actually paid and the amount of sales charge the investor would have paid
on his or her aggregate purchases if the total of such purchases had been made
at a single time.
REDEMPTION OF SHARES
General
Redemption of shares, or payment, may be suspended at times (a) when the
New York Stock Exchange is closed for other than customary weekend or holiday
closings, (b) when trading on said Exchange is restricted, (c) when an emergency
exists, as a result of which disposal by the Fund of securities owned by it is
not reasonably practicable, or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, or (d) during any other period
when the Securities and Exchange Commission, by order, so permits, provided that
applicable rules and regulations of the Securities and Exchange Commission shall
govern as to whether the conditions prescribed in (b) or (c) exist.
Shareholders who purchased Fund shares through a broker-dealer other than
the Distributor may redeem such shares either by oral request to such
broker-dealer or by written request to IFTC at the address set forth in the
Prospectus. To be considered in proper form, written requests for redemption
should indicate the dollar amount or number of shares to be redeemed, refer to
the shareholder's Fund account number, and give either a social security or tax
identification number. The request should be signed in exactly the same way the
account is registered. If there is more than one owner of the shares, all owners
must sign. If shares to be redeemed have a value of $10,000 or more or
redemption proceeds are to be paid to someone other than the shareholder at the
shareholder's address of record, the signature(s) must be guaranteed by an
"eligible guarantor institution," which includes a commercial bank that is a
member of the Federal Deposit Insurance Corporation, a trust company, a member
firm of a domestic stock exchange, a savings association or a credit union that
is authorized by its charter to provide a signature guarantee. IFTC may reject
redemption instructions if the guarantor is neither a member of nor a
participant in a signature guarantee program. Signature guarantees by notaries
public are not acceptable. The purpose of a signature guarantee is to protect
shareholders against the possibility of fraud. Further documentation will be
requested from corporations, administrators, executors, personal
representatives, trustees and custodians. Redemption requests given by facsimile
will not be accepted. Unless other instructions are given in proper form, a
check for the proceeds of the redemption will be sent to the shareholder's
address of record.
Reinstatement Privilege
A shareholder who has redeemed shares of the Fund may reinvest all or part
of the redemption proceeds in shares of any Fund managed by the Adviser within
30 days without payment of an additional sales charge, provided that a
shareholder may reinvest in a fund through a broker-dealer other than the
Distributor only if there is a valid sales agreement for such fund between such
broker-dealer and the Distributor. The Distributor will refund to the
shareholder a pro rata amount of any contingent deferred sales charge paid by
such shareholder in connection with a redemption of Fund shares if and to the
extent that the redemption proceeds are reinvested within 30 days of such
redemption in any mutual fund managed by the Adviser. Such refund will be based
upon the ratio of the net asset value of shares purchased in the reinvestment to
the net asset value of shares redeemed. Reinvestments will be allowed at net
asset value without the payment of a front-end sales charge, irrespective of the
amounts of the reinvestment, but shall be subject to the same pro rata
contingent deferred sales charge that was applicable to the earlier investment;
however, the period during which the contingent deferred sales charge shall
apply on the newly issued shares shall be the period applicable to the redeemed
shares extended by the number of days between the redemption and the
reinvestment dates (inclusive).
Systematic Withdrawal Plan
To establish a Systematic Withdrawal Plan for the Fund and receive regular
periodic payments, an account must have a value of $5,000 or more. A request to
establish a Systematic Withdrawal Plan must be submitted in writing to an
investor's Piper Jaffray Investment Executive or other broker-dealer. There are
no service charges for maintenance; the minimum amount that may be withdrawn
each period is $100. (This is merely the minimum amount allowed and should not
be interpreted as a recommended amount.) The holder of a Systematic Withdrawal
Plan will have any income dividends and any capital gains distributions
reinvested in full and fractional shares at net asset value. To provide funds
for payment, the Fund will redeem as many full and fractional shares as
necessary at the redemption price, which is net asset value. Redemption of
shares may reduce or possibly exhaust the shares in an account, particularly in
the event of a market decline. As with other redemptions, a redemption to make a
withdrawal payment is a sale for federal income tax purposes. Payments made
pursuant to a Systematic Withdrawal Plan cannot be considered as actual yield or
income since part of such payments may be a return of capital.
The maintenance of a Systematic Withdrawal Plan for the Fund concurrent
with purchases of additional shares of the Fund would be disadvantageous because
of the sales commission involved in the additional purchases. Additional
investments of less than $5,000 or three times the annual withdrawals under the
Systematic Withdrawal Plan will ordinarily not be allowed during the time the
plan is in effect. A confirmation of each transaction showing the sources of the
payment and the share and cash balance remaining in the account will be sent.
The plan may be terminated on written notice by the shareholder or the Fund, and
it will terminate automatically if all shares are liquidated or withdrawn from
the account or upon the death or incapacity of the shareholder. The amount and
schedule of withdrawal payments may be changed or suspended by giving written
notice to your Piper Jaffray Investment Executive or other broker-dealer at
least seven business days prior to the end of the month preceding a scheduled
payment.
TAXATION
The Fund intends to qualify each year as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). To qualify as a regulated investment company the Fund must, among other
things, receive at least 90% of its gross income each year from dividends,
interest, gains from the sale or other disposition of securities and certain
other types of income, including income from options and futures contracts.
The Code also forbids a regulated investment company from earning 30% or
more of its gross income from the sale or other disposition of securities held
less than three months. This restriction may limit the extent to which the Fund
may purchase futures contracts and options. To the extent the Fund engages in
short-term trading and enters into futures and options transactions, the
likelihood of violating this 30% requirement is increased.
The Code requires a regulated investment company to diversify its holdings.
The Internal Revenue Service has not made its position clear regarding the
treatment of futures contracts and options for purposes of the diversification
test, and the extent to which the Fund can buy or sell futures contracts and
options may be limited by this requirement.
If for any taxable year the Fund does not qualify as a regulated investment
company, all of its taxable income will be subject to tax at regular corporate
rates without any deduction for distributions to shareholders, and such
distributions will be taxable to the Fund's shareholders as ordinary dividends
to the extent of the Fund's current or accumulated earnings and profits.
The Fund will be subject to a nondeductible excise tax equal to 4% of the
excess, if any, of the amount required to be distributed pursuant to the Code
for each calendar year over the amount actually distributed. No amount of such
excess, however, will be subject to the excise tax to the extent it is subject
to the corporate-level income tax. In order to avoid the imposition of this
excise tax, the Fund generally must declare dividends by the end of a calendar
year representing 98% of the Fund's ordinary income for the calendar year and
98% of its capital gain net income (both long-term and short-term capital gains)
for the 12-month period ending October 31 of the calendar year.
Gain or loss on futures contracts and options is taken into account when
realized by entering into a closing transaction or by exercise. In addition,
with respect to many types of futures contracts and options held at the end of
the Fund's taxable year, unrealized gain or loss on such contracts is taken into
account at the then current fair market value thereof under a special
"marked-to-market, 60/40 system," and such gain or loss is recognized for tax
purposes. The gain or loss from such futures contracts and options (including
premiums on certain options that expire unexercised) is treated as 60% long-term
and 40% short-term capital gain or loss, regardless of their holding period. The
amount of any capital gain or loss actually realized by the Fund in a subsequent
sale or other disposition of such futures contracts will be adjusted to reflect
any capital gain or loss taken into account by the Fund in a prior year as a
result of the constructive sale under the "marked-to-market, 60/40 system."
Notwithstanding the rules described above, with respect to certain futures
contracts, the Fund may make an election that will have the effect of exempting
all or a part of those identified futures contracts from being treated for
federal income tax purposes as sold on the last business day of the Fund's
taxable year. All or part of any loss realized by the Fund on any closing of a
futures contract may be deferred until all of the Fund's offsetting positions
with respect to the futures contract are closed.
Ordinarily, distributions and redemption proceeds earned by a shareholder
are not subject to withholding of federal income tax. However, 31% of a
shareholder's distributions and redemption proceeds must be withheld if a
shareholder fails to supply the Fund or its agent with such shareholder's
taxpayer identification number or if a shareholder, who is otherwise exempt from
withholding, fails to properly document such shareholder's status as an exempt
recipient.
The Fund may make investments that produce income that is not matched by a
corresponding distribution to the Fund, such as investments in obligations
having original issue discount, such as zero coupon securities, or market
discount (if the Fund elects to accrue the market discount on a current basis
with respect to such instruments). Such income would be treated as income earned
by the Fund and therefore would be subject to the distribution requirements of
the Code. Because such income may not be matched by a corresponding cash
distribution to the Fund, the Fund may be required to borrow money or dispose of
other securities to be able to make distributions to shareholders.
Any loss on the sale or exchange of shares of the Fund generally will be
disallowed to the extent that a shareholder acquires or contracts to acquire
shares of the Fund within 30 days before or after such sale or exchange. In
addition, if a shareholder disposes of shares within 90 days of acquiring such
shares and purchases shares of another mutual fund managed by the Adviser at a
reduced sales charge, the shareholder's tax basis for determining gain or loss
on the shares which are disposed of is reduced by the lesser of the amount of
the sales charge that was paid when the shares disposed of were acquired or the
amount by which the sales charge for the new shares is reduced. If a
shareholder's tax basis is so reduced, the amount of the reduction is treated as
part of the tax basis of the new shares.
Additionally, distributions may be subject to state and local income taxes,
and the treatment thereof may differ from the federal income tax consequences
discussed above.
GENERAL INFORMATION
Minnesota has enacted legislation which authorizes corporations to
eliminate or limit the personal liability of a director to the corporation or
its shareholders for monetary damages for breach of the fiduciary duty of "care"
(the duty to act with the care an ordinarily prudent person in a like position
would exercise under similar circumstances). Minnesota law does not, however,
permit a corporation to eliminate or limit the liability of a director (a) for
any breach of the director's duty of "loyalty" to the corporation or its
shareholders (the duty to act in good faith and in a manner reasonably believed
to be in the best interest of the corporation), (b) for acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of law,
(c) for authorizing a dividend, stock repurchase or redemption or other
distribution in violation of Minnesota law or for violation of certain
provisions of Minnesota securities laws, or (d) for any transaction from which
the director derived an improper personal benefit. Minnesota law does not permit
elimination or limitation of a director's liability under the Securities Act of
1933 or the Securities Exchange Act of 1934, and the 1940 Act prohibits
elimination or limitation of a director's liability for acts involving willful
malfeasance, bad faith, gross negligence or reckless disregard of the duties of
a director. The Articles of Incorporation of the Company limit the liability of
directors to the fullest extent permitted by Minnesota law and the 1940 Act.
PENDING LITIGATION
Complaints have been brought in federal and state court relating to one
open-end and eight closed-end investment companies managed by the Adviser and to
two open-end funds for which the Adviser has acted as sub-adviser. An Amended
Consolidated Class Action Complaint was filed on October 5, 1994 in the United
States District Court, District of Minnesota, against the Institutional
Government Income Portfolio (a series of Piper Funds Inc.), the Adviser, the
Distributor, William H. Ellis and Edward J. Kohler alleging certain violations
of federal and state securities laws, including the making of materially
misleading statements in the prospectus, common law negligent misrepresentation
and breach of fiduciary duty. This is a consolidated putative class action in
which claims brought by 13 persons or entities have been consolidated under the
title In Re: Piper Funds Inc. Institutional Government Income Portfolio
Litigation. The named plaintiffs in the complaint are Richard J. Rodney, Jr.,
Doug Shonka, Carl Patrick Monahan, Jerry Hoehnen, Rosemary Boris, Thomas W.
Newcome, Delvin D. Junker, Printing Mailing Trade District (affiliated with the
Newspaper Drivers' Division of the International Brotherhood of the Teamsters),
The History Theatre, Inc., Paul Gold, and Bernard Friedman. These named
plaintiffs purport to represent a class of individuals and groups who purchased
shares of Institutional Government Income Portfolio during the putative class
period of July 1, 1991 through May 9, 1994. The named plaintiffs and defendants
have entered into a settlement agreement which has received preliminary approval
from the Court. If approved by a sufficiently large percentage of the class, the
settlement agreement would provide up to $70 million, together with interest
earned, less certain disbursements and attorneys' fees as approved by the Court,
to class members in payments scheduled over approximately three years. Such
payments would be made by Piper Jaffray Companies Inc. and the Adviser and would
not be an obligation of the Institutional Government Income Portfolio or Piper
Funds Inc.
Six additional complaints, which are based on claims similar to those
asserted in the first complaint, have been brought relating to the Institutional
Government Income Portfolio. The first of such complaints was filed in the same
court against the same parties on October 21, 1994, by Eltrax Systems, Inc. A
second additional complaint was filed against the Company, the Adviser, the
Distributor and Piper Jaffray Companies Inc. on September 30, 1994 in the United
States District Court, District of Colorado. Plaintiffs in the complaint are
Gary Pashel and Gregg S. Hayutin, Trustees of the Mae Pashel Trust; Mae Pashel,
individually; Gary Pashel and Michael H. Feinstein, Trustees of the Robert
Hayutin Insurance Trust; and Dennis E. Hayutin, Gregg S. Hayutin and Gary
Pashel, Trustees of the Marie Ellen Hayutin Trust. The third additional
complaint, a putative class action, was filed on November 1, 1994 in the United
States District Court, District of Idaho by the Idaho Association of Realtors,
Inc., a non-profit Idaho corporation. The complaint was filed against the
Institutional Government Income Portfolio, the Adviser, the Distributor, Piper
Jaffray Companies Inc., William H. Ellis and Edward J. Kohler. The fourth
complaint, also a putative class action, was filed in the United States District
Court for the District of Minnesota, Third Division, on January 25, 1995. The
complaint was brought by Louise S. Maher and John A. Raetz against Piper Funds
Inc., Institutional Government Income Portfolio, the Adviser, the Distributor,
Piper Jaffray Companies Inc., William H. Ellis and Edward J. Kohler. The fifth
complaint was brought on April 11, 1995, and in the future may be filed in the
Minnesota State District Court, Hennepin County. The plaintiff, Frank R. Berman,
Trustee of Frank R. Berman Professional CP Pension Plan Trust, sued individually
and not on behalf of any putative class. Defendants are the Distributor, Piper
Funds Inc., Morton Silverman and Worth Bruntjen. A sixth complaint relating to
the Institutional Government Income Portfolio was filed on June 22, 1995 in the
Montana Thirteenth Judicial District Court, Yellowstone County, by Beverly Muth
against the Distributor and Teresa L. Darnielle. In addition to the above
complaints, a number of actions have been commenced in arbitration by individual
investors in the Institutional Government Income Portfolio. The complaints
discussed in this paragraph generally have been consolidated with the In Re:
Piper Funds Inc. action for pretrial purposes and the arbitrations have been
stayed pending the decision by class members to either participate in the
settlement or opt out of the In Re: Piper Funds Inc. action.
A complaint was filed by Herman D. Gordon on October 20, 1994, in the
United States District Court, District of Minnesota, against American Adjustable
Rate Term Trust Inc.--1998, American Adjustable Rate Term Trust Inc.--1999, the
Adviser, the Distributor, Piper Jaffray Companies Inc., Benjamin Rinkey, Jeffrey
Griffin, Charles N. Hayssen and Edward J. Kohler. A second complaint was filed
by Frank Donio, I.R.A. and other plaintiffs on April 14, 1995, in the United
States District Court, District of Minnesota, against American Adjustable Rate
Term Trust Inc.--1996, American Adjustable Rate Term Trust Inc.--1997, American
Adjustable Rate Term Trust Inc.--1998, American Adjustable Rate Term Trust
Inc.--1999, the Adviser, the Distributor, Piper Jaffray Companies Inc. and
certain associated individuals. Plaintiffs in both actions filed a Consolidated
Amended Class Action Complaint on May 23, 1995. The consolidated amended
complaint, which purports to be a class action, alleges certain violations of
federal and state securities laws, breach of fiduciary duty and negligent
misrepresentation.
A complaint was filed by Carson H. Bradley on February 3, 1995 in the Sixth
Judicial District of the State of Idaho against American Government Income Fund
Inc., American Government Income Portfolio Inc., the Adviser, the Distributor
and Worth Bruntjen. The complaint alleges negligent misrepresentation, breach of
fiduciary duty and breach of contract.
A complaint was filed by Gary E. Nelson on June 28, 1995 in the United
States District Court for the Western District of Washington at Seattle against
American Strategic Income Portfolio Inc. -- II, the Adviser, the Distributor,
Piper Jaffray Companies Inc., Worth Bruntjen, Charles N. Hayssen, Michael
Jansen, William H. Ellis and Edward J. Kohler. The complaint, which purports to
be a class action, alleges certain violations of federal and state securities
laws and the Washington Consumer Protection Act, breach of fiduciary duty and
negligent misrepresentation.
Another putative class action was filed by the same individual in the same
court on July 12, 1995 against American Opportunity Income Fund Inc., the
Adviser, the Distributor, Piper Jaffray Companies Inc., Worth Bruntjen, Charles
N. Hayssen, Michael Jansen, William H. Ellis and Edward J. Kohler. The complaint
alleges violations of the Racketeer Influenced and Corrupt Organizations Act,
state securities laws and the Washington Consumer Protection Act, breach of
fiduciary duty and negligent misrepresentation.
Complaints have also been filed relating to two open-end funds for which
the Adviser has acted as sub-adviser, Managers Intermediate Mortgage Fund and
Managers Short Government Fund. A complaint was filed on September 26, 1994 in
the United States District Court, District of Connecticut, by Florence R. Hosea,
Bobby W. Hosea, Getrud B. Dale and Peter M. Dale, Andrew Poffel and Diane Poffel
as tenants by the Entireties, Myrone Sarone, Donna M. DiPalo, Bernard B. Geltner
and Gail Geltner and Paul Delman. The complaint was filed against The Managers
Funds, the Managers Funds, L.P., Robert P. Watson, the Adviser, the Distributor,
an individual associated with the Adviser, Evaluation Associates, Inc. and
Managers Intermediate Mortgage Fund. The complaint, which is a putative class
action, alleges certain violations of federal securities laws, including the
making of false and misleading statements in the prospectus, and alleges
negligent misrepresentation, breach of fiduciary duty and common law fraud. A
similar complaint was filed as a putative class action in the same court on
November 4, 1994. The complaint was filed by Karen E. Kopelman against The
Managers Fund, The Managers Funds, L.P., Robert P. Watson, the Adviser, the
Distributor, Worth Bruntjen, Evaluation Associates, Inc. and Managers
Intermediate Mortgage Fund. The two putative class actions were consolidated by
court order on December 13, 1994. Plaintiffs filed an Amended and Restated
Complaint on July 19, 1995. A complaint relating to the Managers Short
Government Fund was filed on November 18, 1994 in the United States District
Court, District of Minnesota. The complaint was filed by Robert Fleck as a
putative class action against The Managers Funds, The Managers Funds, L.P., the
Adviser, the Distributor, Worth Bruntjen, Evaluation Associates, Inc., Robert P.
Watson, John E. Rosati, William M. Graulty, Madeline H. McWhinney, Steven J.
Pasggioli, Thomas R. Schneeweis and Managers Short Government Fund, F/K/A/
Managers Short Government Income Fund. The complaint alleges certain violations
of federal securities laws, including the making of false and misleading
statements in the prospectus, and negligent misrepresentation.
The Adviser and Distributor do not believe that the settlement reached in
connection with the first lawsuit described above, or any other of the above
lawsuits, will have a material adverse effect upon their ability to perform
under their agreements with the Fund, and they intend to defend the remaining
lawsuits vigorously.
--------------------------------------------------------------------------------
FINANCIAL STATEMENTS
The following financial statements include those of Piper Funds Inc. -- II
Adjustable Rate Mortgage Securities Fund (formerly American Adjustable Rate Term
Trust Inc. -- 1998 ("DDJ"), one of the closed-end investment companies that
merged into Adjustable Rate Mortgage Securities Fund on September 1, 1995). DDJ,
as represented by Piper Funds Inc. -- II Adjustable Rate Mortgage Securities
Fund in the following financial statements, is considered the surviving entity
for financial reporting purposes.
--------------------------------------------------------------------------------
FINANCIAL STATEMENTS (UNAUDITED)
STATEMENTS OF ASSETS AND LIABILITIES
FEBRUARY 28, 1995
<TABLE>
<CAPTION>
Piper Funds
Inc. -- II
American American Adjustable American
Adjustable Adjustable Rate Mortgage Adjustable
Rate Term Rate Term Securities Rate Term
Trust 1996 Trust 1997 Fund** Trust 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS:
Investments in securities at market value* (note
2)
(including repurchase agreements of $27,747,000;
$46,476,000; $32,816,000 and $17,032,000,
respectively) .............................. $ 221,204,945 452,005,820 460,488,418 267,022,964
Investments in put options (note 5) (cost:
$1,528,800; $2,575,600; $2,613,500 and
$2,010,000, respectively) .................... 30,412 440,335 1,049,577 1,323,278
Cash in bank on demand deposit ................. 53,806 50,802 185,826 145,470
Receivable for investment securities sold ...... -- 10,772,536 9,608,323 5,024,719
Accrued interest receivable .................... 1,583,689 2,552,686 3,179,373 2,573,348
----------- ----------- ----------- -----------
Total assets ............................... 222,872,852 465,822,179 474,511,517 276,089,779
----------- ----------- ----------- -----------
LIABILITIES:
Reverse repurchase agreements payable .......... 25,000,000 90,000,000 65,000,000 36,000,000
Accrued investment management fee .............. 52,649 99,539 108,753 63,524
Accrued administrative fee ..................... 22,564 42,660 46,608 27,225
Accrued interest ............................... 115,218 788,541 55,521 236,641
Payable for federal excise taxes (note 2) ...... 96,670 -- -- --
Other accrued expenses ......................... 47,383 71,137 56,408 41,415
----------- ----------- ----------- -----------
Total liabilities .......................... 25,334,484 91,001,877 65,267,290 36,368,805
----------- ----------- ----------- -----------
Net assets applicable to outstanding capital
stock ........................................ $ 197,538,368 374,820,302 409,244,227 239,720,974
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
REPRESENTED BY:
Capital stock - authorized 1 billion shares of
$0.01 par value; outstanding, 21,874,282;
42,481,599; 47,141,017 and 28,152,572 shares,
respectively (notes 7 and 8) ............... $ 218,743 424,816 471,410 281,526
Additional paid-in capital ..................... 212,231,909 413,478,779 460,593,623 275,899,646
Undistributed net investment income ............ 11,434,011 12,200,609 6,890,639 1,516,163
Accumulated net realized loss on investments ... (21,174,651) (42,707,902) (47,636,669) (32,634,607)
Unrealized depreciation of investments ......... (5,171,644) (8,576,000) (11,074,776) (5,341,754)
----------- ----------- ----------- -----------
Total - representing net assets applicable
to outstanding capital stock ........... $ 197,538,368 374,820,302 409,244,227 239,720,974
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net asset value per share of outstanding
capital stock .......................... $ 9.03 8.82 8.68 8.52
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
* Investments in securities at identified
cost ......................................... $ 224,878,201 458,446,555 469,999,271 271,677,996
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
** Formerly American Adjustable Rate Term Trust 1998. See note 10 to the
financial statements.
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
--------------------------------------------------------------------------------
FINANCIAL STATEMENTS (UNAUDITED)
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1995
<TABLE>
<CAPTION>
Piper Funds
American American Inc. -- II American
Adjustable Adjustable Adjustable Rate Adjustable
Rate Term Rate Term Mortgage Rate Term
Trust 1996 Trust 1997 Securities Fund** Trust 1999
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
INCOME:
Interest (net of interest expense of $1,362,361;
$3,055,019; $3,124,489 and $1,894,709,
respectively) .............................. $ 6,154,161 11,860,545 12,991,817 7,688,337
Fee income (note 2) ............................ 130,648 356,398 300,962 197,723
------------ ------------ ------------- -------------
Total investment income .................... 6,284,809 12,216,943 13,292,779 7,886,060
------------ ------------ ------------- -------------
EXPENSES (NOTE 3):
Investment management fee ...................... 359,741 671,098 727,704 423,772
Administrative fee ............................. 154,175 287,614 306,057 176,590
Custodian, accounting and transfer agent
fees ......................................... 74,016 100,041 100,051 75,549
Reports to shareholders ........................ 56,387 98,846 80,994 47,395
Audit and legal fees ........................... 26,675 25,900 26,240 24,907
Directors' fees ................................ 7,333 8,833 10,333 8,833
Federal excise taxes (note 2) .................. 96,670 -- -- --
Other expenses ................................. -- 59,505 -- --
------------ ------------ ------------- -------------
Total expenses ............................. 774,997 1,251,837 1,251,379 757,046
------------ ------------ ------------- -------------
Net investment income ...................... 5,509,812 10,965,106 12,041,400 7,129,014
------------ ------------ ------------- -------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON
INVESTMENTS:
Net realized loss on investments (note 4) ...... (3,070,178) (8,355,566) (8,990,424) (6,969,365)
Net realized gain (loss) on closed interest rate
swap contracts ............................... 527,325 1,374,546 (9,831,106) (7,968,599)
Net realized gain on closed futures
contracts .................................... 75,713 148,300 209,151 116,228
------------ ------------ ------------- -------------
Net realized loss on investments ............. (2,467,140) (6,832,720) (18,612,379) (14,821,736)
Net change in unrealized appreciation or
depreciation of investments .................. 779,579 1,647,292 10,658,039 8,773,058
------------ ------------ ------------- -------------
Net loss on investments ...................... (1,687,561) (5,185,428) (7,954,340) (6,048,678)
------------ ------------ ------------- -------------
Net increase in net assets resulting from
operations ............................. $ 3,822,251 5,779,678 4,087,060 1,080,336
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
** Formerly American Adjustable Rate Term Trust 1998. See note 10 to the
financial statements.
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
--------------------------------------------------------------------------------
FINANCIAL STATEMENTS (UNAUDITED)
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1995
<TABLE>
<CAPTION>
Piper Funds
American American Inc. -- II American
Adjustable Adjustable Adjustable Rate Adjustable
Rate Term Rate Term Mortgage Rate Term
Trust 1996 Trust 1997 Securities Fund** Trust 1999
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and fee income ...................... $ 6,284,809 12,216,943 13,292,779 7,886,060
Expenses ....................................... (774,997) (1,251,837) (1,251,379) (757,046)
----------- ------------- ------------- -------------
Net investment income ...................... 5,509,812 10,965,106 12,041,400 7,129,014
----------- ------------- ------------- -------------
Adjustments to reconcile net investment income to
cash provided by operating expenses:
Change in accrued interest receivable ........ 1,238,442 784,028 1,048,441 94,235
Net amortization of bond discount and
premium .................................... (1,113,530) (2,100,514) (1,804,849) (994,739)
Change in accrued fees and expenses .......... (31,686) 469,996 (257,583) 98,584
----------- ------------- ------------- -------------
Total adjustments .......................... 93,226 (846,490) (1,013,991) (801,920)
----------- ------------- ------------- -------------
Net cash provided by operating
activities ............................... 5,603,038 10,118,616 11,027,409 6,327,094
----------- ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments ............. 88,991,602 159,338,925 169,659,830 111,945,755
Purchases of investments ....................... (41,689,620) (68,887,500) (63,564,700) (48,867,190)
Net sales of short-term securities ............. 39,838,995 11,408,866 69,410,303 45,328,307
Cash received from (paid for) interest rate swap
transactions ................................. 527,325 1,374,546 (11,533,881) (9,245,680)
Net variation margin received from futures
contracts .................................... 75,713 148,300 209,151 116,228
----------- ------------- ------------- -------------
Net cash provided by investing
activities ............................... 87,744,015 103,383,137 164,180,703 99,277,420
----------- ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments for reverse repurchase
agreements ................................... (45,000,000) (35,000,000) (80,000,000) (49,000,000)
Tender of fund shares (note 8) ................. (42,827,852) (65,033,835) (79,419,655) (47,240,592)
Retirement of fund shares (note 7) ............. (1,289,698) (3,149,477) (3,450,850) (1,740,741)
Distributions paid to shareholders ............. (4,314,211) (10,313,160) (12,211,005) (7,728,042)
----------- ------------- ------------- -------------
Net cash used by financing activities ...... (93,431,761) (113,496,472) (175,081,510) (105,709,375)
----------- ------------- ------------- -------------
Net increase (decrease) in cash ................ (84,708) 5,281 126,602 (104,861)
Cash at beginning of period .................... 138,514 45,521 59,224 250,331
----------- ------------- ------------- -------------
Cash at end of period .................... $ 53,806 50,802 185,826 145,470
----------- ------------- ------------- -------------
----------- ------------- ------------- -------------
Supplemental disclosure of cash flow information:
Cash paid for interest on reverse repurchase
agreements ................................. $ 1,510,810 2,608,695 3,380,326 1,802,243
----------- ------------- ------------- -------------
----------- ------------- ------------- -------------
** Formerly American Adjustable Rate Term Trust 1998. See note 10 to the
financial statements.
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
--------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
AMERICAN ADJUSTABLE RATE TERM TRUST 1996
<TABLE>
<CAPTION>
Six Months
Ended 2/28/95 Year Ended
(Unaudited) 8/31/94
------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income ........................ $ 5,509,812 17,520,126
Net realized loss on investments ............... (2,467,140) (10,318,058)
Net change in unrealized appreciation or
depreciation of investments .................. 779,579 (9,945,239)
------------- -------------
Net increase (decrease) in net assets
resulting from operations ................... 3,822,251 (2,743,171)
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ..................... (4,314,211) (12,495,376)
------------- -------------
CAPITAL SHARE TRANSACTIONS:
Payments for tender of 4,767,018 shares (note
8) ........................................... (42,827,852) --
Payments for retirement of 146,000 and 142,700
shares, respectively (note 7) ................ (1,229,488) (1,215,470)
------------- -------------
Decrease in net assets from capital share
transactions ................................ (44,057,340) (1,215,470)
------------- -------------
Total decrease in net assets ............... (44,549,300) (16,454,017)
Net assets at beginning of period ................ 242,087,668 258,541,685
------------- -------------
Net assets at end of period .................... $ 197,538,368 242,087,668
------------- -------------
------------- -------------
Undistributed net investment income ............ $ 11,434,011 10,238,410
------------- -------------
------------- -------------
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
AMERICAN ADJUSTABLE RATE TERM TRUST 1997
<TABLE>
<CAPTION>
Six Months
Ended 2/28/95 Year Ended
(Unaudited) 8/31/94
------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income ........................ $ 10,965,106 31,764,264
Net realized loss on investments ............... (6,832,720) (23,803,088)
Net change in unrealized appreciation or
depreciation of investments .................. 1,647,292 (19,413,596)
------------- -------------
Net increase (decrease) in net assets
resulting from operations ................... 5,779,678 (11,452,420)
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ..................... (10,313,160) (26,867,223)
------------- -------------
CAPITAL SHARE TRANSACTIONS:
Payments for tender of 7,396,113 shares (note
8) ........................................... (65,033,835) --
Payments for retirement of 372,200 and 290,700
shares, respectively (note 7) ................ (3,000,946) (2,437,499)
------------- -------------
Decrease in net assets from capital share
transactions ................................ (68,034,781) (2,437,499)
------------- -------------
Total decrease in net assets ............... (72,568,263) (40,757,142)
Net assets at beginning of period ................ 447,388,565 488,145,707
------------- -------------
Net assets at end of period .................... $ 374,820,302 447,388,565
------------- -------------
------------- -------------
Undistributed net investment income ............ $ 12,200,609 11,548,663
------------- -------------
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
--------------------------------------------------------------------------------
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
PIPER FUNDS INC. -- II ADJUSTABLE RATE MORTGAGE SECURITIES FUND
(FORMERLY AMERICAN ADJUSTABLE RATE TERM TRUST 1998)
Six Months
Ended 2/28/95 Year Ended
(Unaudited) 8/31/94
------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income ........................ $ 12,041,400 33,892,114
Net realized loss on investments ............... (18,612,379) (25,012,875)
Net change in unrealized appreciation or
depreciation of investments .................. 10,658,039 (25,676,685)
------------- -------------
Net increase (decrease) in net assets
resulting from operations ................... 4,087,060 (16,797,446)
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ..................... (12,211,005) (31,740,989)
------------- -------------
CAPITAL SHARE TRANSACTIONS:
Payments for tender of 9,135,819 shares (note
8) ........................................... (79,419,655) --
Payments for retirement of 413,100 and 335,000
shares, respectively (note 7) ................ (3,273,925) (2,768,772)
------------- -------------
Decrease in net assets from capital share
transactions ................................ (82,693,580) (2,768,772)
------------- -------------
Total decrease in net assets ............... (90,817,525) (51,307,207)
Net assets at beginning of period ................ 500,061,752 551,368,959
------------- -------------
Net assets at end of period .................... $ 409,244,227 500,061,752
------------- -------------
------------- -------------
Undistributed net investment income ............ $ 6,890,639 7,060,244
------------- -------------
------------- -------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
AMERICAN ADJUSTABLE RATE TERM TRUST 1999
Six Months
Ended 2/28/95 Year Ended
(Unaudited) 8/31/94
------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income ........................ $ 7,129,014 20,160,682
Net realized loss on investments ............... (14,821,736) (17,443,179)
Net change in unrealized appreciation or
depreciation of investments .................. 8,773,058 (14,015,353)
------------- -------------
Net increase (decrease) in net assets
resulting from operations ................... 1,080,336 (11,297,850)
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ..................... (7,728,042) (19,270,500)
In excess of net realized gains ................ -- (183,586)
------------- -------------
Total distributions .......................... (7,728,042) (19,454,086)
------------- -------------
CAPITAL SHARE TRANSACTIONS:
Payments for tender of 5,535,062 shares (note
8) ........................................... (47,240,592) --
Payments for retirement of 198,600 and 205,100
shares, respectively (note 7) ................ (1,549,618) (1,674,424)
------------- -------------
Decrease in net assets from capital share
transactions ................................ (48,790,210) (1,674,424)
------------- -------------
Total decrease in net assets ............... (55,437,916) (32,426,360)
Net assets at beginning of period ................ 295,158,890 327,585,250
------------- -------------
Net assets at end of period .................... $ 239,720,974 295,158,890
------------- -------------
------------- -------------
Undistributed net investment income ............ $ 1,516,163 2,115,191
------------- -------------
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(1) ORGANIZATION
American Adjustable Rate Term Trusts 1996
(BDJ), 1997 (CDJ), 1998 (DDJ) and 1999 (EDJ)
are registered under the Investment Company
Act of 1940 (as amended) as diversified,
closed-end management investment companies.
BDJ, CDJ, DDJ and EDJ commenced operations on
September 27, 1990; July 24, 1991; January 30,
1992; and September 24, 1992; respectively,
upon completion of initial public offerings of
common stock. Shares of the funds are listed
on the New York Stock Exchange and the Chicago
Stock Exchange. Hereafter, DDJ is referred to
in the financial statements and notes thereto
as its successor, Piper Funds Inc. -- II
Adjustable Rate Mortgage Securities Fund (ARM).
(2) SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES
INVESTMENTS IN SECURITIES
The values of fixed income securities are
determined using pricing services or prices
quoted by independent brokers. Exchange-listed
options are valued at the last sale price and
open financial futures contracts are valued at
the last settlement price. When market
quotations are not readily available,
securities are valued at fair value according
to methods selected in good faith by the board
of directors. Short-term securities with
maturities less than 60 days are valued at
amortized cost which approximates market
value.
Securities transactions are accounted for on
the date the securities are purchased or sold.
Realized gains and losses are calculated on
the identified-cost basis. Interest income,
including amortization of bond discount and
premium computed on a level-yield basis, is
accrued daily.
OPTION TRANSACTIONS
For hedging purposes, the funds may buy and
sell put and call options, write covered call
options on portfolio securities, write
cash-secured puts, and write call options that
are not covered for cross-hedging purposes.
The risk in writing a call option is that a
fund gives up the opportunity for profit if
the market price of the security increases.
The risk in writing a put option is that a
fund may incur a loss if the market price of
the security decreases and the option is
exercised. The risk in buying an option is
that a fund pays a premium whether or not the
option is exercised. A fund also has the
additional risk of not being able to enter
into a closing transaction if a liquid
secondary market does not exist. The funds
also may write over-the-counter options where
the completion of the obligation is dependent
upon the credit standing of another party.
Option contracts are valued daily, and
unrealized appreciation or depreciation is
recorded. A fund will realize a gain or loss
upon expiration or closing of the option
transaction. When an option is exercised, the
proceeds on sales for a written call option,
the purchase cost for a written put option, or
the cost of a security for a purchased put or
call option is adjusted by the amount of
premium received or paid.
FUTURES TRANSACTIONS
In order to gain exposure to or protect
against changes in the market, the funds may
buy and sell interest rate futures contracts
and related options. Risks of entering into
futures contracts and related options include
the possibility of an illiquid market and that
a change in the value of the contract or
option may not correlate with changes in the
value of the underlying securities.
Upon entering into a futures contract, the
fund is required to deposit either cash or
securities in an amount (initial margin) equal
to a certain percentage of the contract value.
Subsequent payments (variation margin) are
made or received by a fund each
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
day. The variation margin payments are equal
to the daily changes in the contract value and
are recorded as unrealized gains and losses. A
fund recognizes a realized gain or loss when
the contract is closed or expires.
INTEREST RATE TRANSACTIONS
To preserve a return or spread on a particular
investment or portion of its portfolio or for
other non-speculative purposes, the funds may
enter into interest rate swaps and the
purchase or sale of interest rate caps and
floors. Interest rate swaps involve the
exchange of commitments to pay or receive
interest, e.g., an exchange of floating-rate
payments for fixed rate payments. The purchase
of an interest rate cap entitles the
purchaser, to the extent that a specified
index exceeds a predetermined interest rate,
to receive payments of interest on a
contractually based notional principal amount
from the party selling such an interest rate
cap. The purchase of an interest rate floor
entitles the purchaser, to the extent that a
specified index falls below a predetermined
interest rate, to receive payments of interest
on a contractually based notional principal
amount from the party selling such an interest
rate floor.
If forecasts of interest rates and other
market factors are incorrect, investment
performance will diminish compared to what
performance would have been if these
investment techniques were not used. Even if
the forecasts are correct, there is risk that
the positions may correlate imperfectly with
the asset or liability being hedged. Other
risks of entering into these transactions are
that a liquid secondary market may not always
exist, or that another party to a transaction
may not perform.
For interest rate swaps, the funds accrue
weekly, as an increase or decrease to interest
income, the net amount due or owed by the
funds. Interest rate swap, cap and floor
valuations are based on prices quoted by
independent brokers. These valuations
represent the net present value of all future
cash settlement amounts based on implied
forward interest rates. As of February 28,
1995, the funds had no open interest rate swap
agreements.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS
Delivery and payment for securities that have
been purchased by the funds on a
forward-commitment or when-issued basis can
take place one month or more after the
transaction date. During this period, such
securities do not earn interest, are subject
to market fluctuations and may increase or
decrease in value prior to their delivery. The
funds maintain, in segregated accounts with
their custodian, securities with a market
value equal to the amount of their purchase
commitments. The purchase of securities on a
when-issued or forward-commitment basis may
increase the volatility of the funds' NAVs to
the extent the funds make such purchases while
remaining substantially fully invested. As of
February 28, 1995, the funds had no
outstanding when-issued or forward
commitments.
Consistent with their ability to purchase
securities on a when-issued or forward-
commitment basis, the funds may enter into
mortgage "dollar rolls" in which the funds
sell securities for delivery in the current
month and simultaneously contract with the
same counterparty to repurchase similar (same
type, coupon and maturity) but not identical
securities. As an inducement to "roll over"
their purchase commitments, the funds receive
negotiated fees. For the six months ended
February 28, 1995, such fees earned by the
funds amounted to $130,648; $356,398; $300,962
and $197,723 for BDJ, CDJ, ARM and EDJ,
respectively.
FEDERAL TAXES
Each fund's policy is to comply with the
requirements of the Internal Revenue Code
applicable to regulated investment companies
and not be subject to federal income
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
tax. Therefore, no income tax provision is
required. However, BDJ incurred federal excise
taxes of $96,670 ($0.004 per share) on income
retained by the fund during the 1994 excise
tax year.
Net investment income and net realized gains
(losses) may differ for financial statement
and tax purposes primarily because of the
recognition of certain foreign currency gains
(losses) as ordinary income for tax purposes,
and losses deferred due to "wash sale" and
"straddle" transactions. The character of
distributions made during the year from net
investment income or net realized gains may
differ from their ultimate characterization
for federal income tax purposes. The effect on
dividend distributions of certain book-to-tax
differences is presented an as "excess
distribution" in the statement of changes in
net assets and the financial highlights. Also,
due to the timing of dividend distributions,
the fiscal year in which amounts are
distributed may differ from the year that the
income or realized gains (losses) were
recorded by the fund.
DISTRIBUTIONS
The funds pay monthly distributions from net
investment income. Realized capital gains, if
any, will be distributed on an annual basis.
These distributions are recorded as of the
close of business on the ex-dividend date.
Such distributions are payable in cash or,
pursuant to the funds' dividend reinvestment
plan, reinvested in additional shares of the
funds' common stock. Under the plan, fund
shares will be purchased in the open market.
REPURCHASE AGREEMENTS
For repurchase agreements entered into with
certain broker-dealers, the funds along with
other affiliated registered investment
companies may transfer uninvested cash
balances into a joint trading account, the
daily aggregate of which is invested in
repurchase agreements secured by U.S.
government and agency obligations. Securities
pledged as collateral for all individual and
joint repurchase agreements are held by the
funds' custodian bank until maturity of the
repurchase agreements. Provisions for all
agreements ensure the daily market value of
the collateral is in excess of the repurchase
amount in the event of default.
(3) EXPENSES
The funds have entered into the following
agreements with Piper Capital Management
Incorporated (the adviser and administrator):
The investment advisory agreement provides the
adviser with a monthly investment management
fee based on each fund's average weekly net
assets computed at the per-annum rate of
0.35%. For its fee, the adviser provides
investment advice and, in general, conducts
the management and investment activity of the
fund.
The administration agreement provides the
administrator with a monthly fee in an amount
equal to an annualized rate of 0.15% of the
each fund's average weekly net assets. For its
fee, the administrator provides certain
reporting, regulatory and record-keeping
services for the funds.
In addition to the investment management fee
and the administrative fee, the funds are
responsible for paying most other operating
expenses including outside directors' fees and
expenses, custodian fees, registration fees,
printing and shareholder reports, transfer
agent fees and expenses, legal, auditing and
accounting services, insurance, interest,
taxes and other miscellaneous expenses.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(4) SECURITIES
TRANSACTIONS
Cost of purchases and proceeds from sales of
securities (other than temporary investments
in short-term securities) for the six months
ended February 28, 1995, were as follows:
<TABLE>
<CAPTION>
Sales
Purchases Proceeds
----------- ------------
<S> <C> <C>
BDJ .......................................... $ 18,413,992 88,991,602
CDJ .......................................... $ 7,034,889 170,111,461
ARM .......................................... $ 21,641,424 179,268,153
EDJ .......................................... $ 10,863,492 116,970,474
</TABLE>
During the six months ended February 28, 1995,
the funds paid Piper Jaffray Inc., an
affiliated broker, brokerage commissions of
$850; $1,700; $1,700 and $850 for BDJ, CDJ,
ARM and EDJ, respectively.
(5) INVESTMENTS IN PUT
OPTIONS
In order to hedge the value of adjustable rate
mortgage securities under certain interest
rate scenarios, each fund purchased four-year
U.S. Treasury note put option contracts. Each
fund will be entitled to a cash payment during
the exercise period if at such time yields on
the then current four-year U.S. Treasury notes
are in excess of the strike yield specified in
the option contracts.
<TABLE>
<CAPTION>
Piper Funds
American American Inc. -- II American
Adjustable Adjustable Adjustable Rate Adjustable
Rate Term Rate Term Mortgage Rate Term
Trust 1996 Trust 1997 Securities Fund** Trust 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Number of contracts ..... 2,170 4,060 4,550 2,650
Notional value ........ $ 217,000,000 406,000,000 455,000,000 265,000,000
Purchase price ........ $ 1,528,800 2,575,600 2,613,500 2,010,000
Exercise period ......... 3/1/96-3/31/96 3/1/97-3/31/97 3/1/98-3/31/98 3/1/99-3/31/99
Strike yield ............ 11.25% 11.00% 11.00% 10.50%
</TABLE>
** Formerly American Adjustable Rate Term Trust 1998.
(6) CAPITAL LOSS
CARRYOVER
For federal income tax purposes, the funds had
capital loss carryovers of $18,707,511;
$35,875,182; $29,024,290 and $17,812,871 for
BDJ, CDJ, ARM and EDJ, respectively, at August
31, 1994. If these loss carryovers are not
offset by subsequent capital gains, they will
expire at various times during 1999 through
2003. It is unlikely the board of directors
will authorize a distribution of any net
realized capital gains until the available
capital loss carryovers have been offset or
expire.
(7) RETIREMENT OF FUND
SHARES
The funds' board of directors has approved a
plan to repurchase shares of the funds in the
open market and retire those shares.
Repurchases may only be made when the previous
day's closing market price was at a discount
from net asset value. Daily repurchases are
limited to 25% of the previous four weeks
average daily trading volume on the New York
Stock Exchange. Under the current plan,
cumulative repurchases in each fund cannot
exceed 3% of the total shares originally
issued. The board of directors will review the
plan every six months and may change the
amount which may be repurchased. The plan was
last reviewed and reapproved by the board of
directors on February 9, 1995. Pursuant to the
plan, the funds have repurchased and retired
the following cumulative number of shares as
of February 28, 1995:
<TABLE>
<CAPTION>
Shares Percent of Shares
Repurchased Originally Issued
------------ -------------------
<S> <C> <C>
BDJ ....................................... 288,700 1.07%
CDJ ....................................... 662,900 1.31%
ARM ....................................... 748,100 1.31%
EDJ ....................................... 403,700 1.18%
</TABLE>
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(8) TENDER OFFER OF
FUND SHARES
On August 22, 1994, shareholders of the funds
approved a fundamental policy that allows
shareholders of BDJ, CDJ, ARM, and EDJ to
periodically tender their shares back to the
respective fund at net asset value. A tender
of 5% to 25% of the outstanding shares will be
offered annually and is voluntary.
Shareholders may elect not to tender their
shares or may tender only a portion of their
shares.
The first tender offer to repurchase up to 25%
of each fund's outstanding shares was mailed
to shareholders on September 6, 1994. The
deadline for participating in the offer was
October 3, 1994. The repurchase prices were
determined on October 10, 1994, at the close
of the New York Stock Exchange (4 p.m. Eastern
Time). Proceeds of the tender offer were paid
to shareholders on October 17, 1994. The total
proceeds (including tender fees) paid by the
funds and number and percentage of shares
tendered are as follows:
<TABLE>
<CAPTION>
Percentage Shares Proceeds
Tendered Tendered Paid
--------------- --------- ------------
<S> <C> <C> <C>
BDJ .......................................... 18% 4,767,018 $ 42,827,852
CDJ .......................................... 15% 7,396,113 $ 65,033,835
ARM .......................................... 16% 9,135,819 $ 79,419,655
EDJ .......................................... 16% 5,535,062 $ 47,240,592
</TABLE>
(9) PENDING LITIGATION
A complaint purporting to be a class action
lawsuit has been filed in the United States
District Court for the District of Minnesota,
by Herman D. Gordon, against DDJ and EDJ,
Piper Capital Management Incorporated, Piper
Jaffray Inc., and certain affiliated
individuals. The complaint, which was filed on
October 20, 1994, alleges violations of
federal securities laws. DDJ and EDJ intend to
defend this lawsuit vigorously. Although it is
impossible to predict the outcome, management
believes, based on the facts currently
available, there will be no material adverse
effect on the financial statements of DDJ or
EDJ.
(10) SUBSEQUENT EVENT
-- FUND MERGER
On August 10, 1995, shareholders of each of
the funds approved a merger with and into
Piper Funds Inc.-II Adjustable Rate Mortgage
Securities Fund, an open-end management
investment company. The merger became
effective at the close of business on
September 1, 1995, the date the Articles of
Merger were filed with the Secretary of State
of Minnesota. DDJ is considered the surviving
entity for financial reporting purposes. As
such, only the historical financial information
of DDJ is material with respect to the future
financial reporting of Piper Funds Inc. -- II
Adjustable Rate Mortgage Securities Fund.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(11) QUARTERLY DATA
<TABLE>
<CAPTION>
Net Realized Net Increase
Total and Unrealized (Decrease) in Net Distributions Quarter End
Investment Net Investment Gains (Losses) Assets Resulting From Net Investment Net Asset
Quarter Ended Income Income on Investments from Operations Income Value
------------------ ---------- ----------------- ------------------- ------------------ ------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AMERICAN ADJUSTABLE RATE TERM TRUST 1996
<CAPTION>
Per Per Per Per
Amount Share Amount Share Amount Share Amount Share
---------- ----- ----------- ----- ---------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
11/30/94 $ 3,467,478 2,960,212 0.13 (3,750,264) (0.16) (790,052) (0.03) (2,177,611) (0.10) 8.91
2/28/95 2,817,331 2,549,600 0.12 2,062,703 0.09 4,612,303 0.21 (2,136,600) (0.09) 9.03
---------- ---------- ----- ----------- ----- ---------- ----- ----------- -----
$ 6,284,809 5,509,812 0.25 (1,687,561) (0.07) 3,822,251 0.18 (4,314,211) (0.19)
---------- ---------- ----- ----------- ----- ---------- ----- ----------- -----
---------- ---------- ----- ----------- ----- ---------- ----- ----------- -----
AMERICAN ADJUSTABLE RATE TERM TRUST 1997
<CAPTION>
Per Per Per Per
Amount Share Amount Share Amount Share Amount Share
---------- ----- ----------- ----- ---------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
11/30/94 $ 6,734,775 6,055,630 0.15 (10,412,854) (0.23) (4,357,224) (0.08) (5,200,212) (0.12) 8.70
2/28/95 5,482,168 4,909,476 0.12 5,227,426 0.12 10,136,902 0.24 (5,112,948) (0.12) 8.82
---------- ---------- ----- ----------- ----- ---------- ----- ----------- -----
$ 12,216,943 10,965,106 0.27 (5,185,428) (0.11) 5,779,678 0.16 (10,313,160) (0.24)
---------- ---------- ----- ----------- ----- ---------- ----- ----------- -----
---------- ---------- ----- ----------- ----- ---------- ----- ----------- -----
PIPER FUNDS INC. -- II ADJUSTABLE RATE MORTGAGE SECURITIES FUND
(FORMERLY AMERICAN ADJUSTABLE RATE TERM TRUST 1998)
<CAPTION>
Per Per Per Per
Amount Share Amount Share Amount Share Amount Share
---------- ----- ----------- ----- ---------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
11/30/94 $ 7,336,741 6,642,223 0.14 (13,545,000) (0.28) (6,902,777) (0.14) (6,183,665) (0.12) 8.56
2/28/95 5,956,038 5,399,177 0.12 5,590,660 0.12 10,989,837 0.24 (6,027,340) (0.12) 8.68
---------- ---------- ----- ----------- ----- ---------- ----- ----------- -----
$ 13,292,779 12,041,400 0.26 (7,954,340) (0.16) 4,087,060 0.10 (12,211,005) (0.24)
---------- ---------- ----- ----------- ----- ---------- ----- ----------- -----
---------- ---------- ----- ----------- ----- ---------- ----- ----------- -----
AMERICAN ADJUSTABLE RATE TERM TRUST 1999
<CAPTION>
Per Per Per Per
Amount Share Amount Share Amount Share Amount Share
---------- ----- ----------- ----- ---------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
11/30/94 $ 4,210,736 3,781,356 0.13 (9,724,958) (0.32) (5,943,602) (0.19) (3,917,275) (0.13) 8.39
2/28/95 3,675,324 3,347,658 0.12 3,676,280 0.14 7,023,938 0.26 (3,810,767) (0.13) 8.52
---------- ---------- ----- ----------- ----- ---------- ----- ----------- -----
$ 7,886,060 7,129,014 0.25 (6,048,678) (0.18) 1,080,336 0.07 (7,728,042) (0.26)
---------- ---------- ----- ----------- ----- ---------- ----- ----------- -----
---------- ---------- ----- ----------- ----- ---------- ----- ----------- -----
</TABLE>
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(12) FINANCIAL
HIGHLIGHTS
Per-share data for a share of capital stock
outstanding throughout each period and
selected information for each period are as
follows:
AMERICAN ADJUSTABLE RATE TERM TRUST 1996
<TABLE>
<CAPTION>
Period
Six Months from
Ended Year Year Year 9/27/90*
2/28/95 Ended Ended Ended to
(Unaudited) 8/31/94 8/31/93 8/31/92 8/31/91
---------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period ........... $ 9.04 9.60 9.74 9.64 9.53
---------- --------- --------- --------- --------
Operations:
Net investment income .......................... 0.25 0.65 0.75 0.82 0.83
Net realized and unrealized gains (losses) on
investments .................................. (0.07) (0.75) (0.27) 0.07 0.05
---------- --------- --------- --------- --------
Total from operations ........................ 0.18 (0.10) 0.48 0.89 0.88
---------- --------- --------- --------- --------
Distributions to shareholders:
From net investment income ..................... (0.19) (0.46) (0.62) (0.79) (0.77)
---------- --------- --------- --------- --------
Net asset value, end of period ................. $ 9.03 9.04 9.60 9.74 9.64
---------- --------- --------- --------- --------
---------- --------- --------- --------- --------
Per share market value, end of period .......... $ 8.63 8.50 9.50 10.25 10.13
---------- --------- --------- --------- --------
---------- --------- --------- --------- --------
SELECTED INFORMATION
Total investment return, net asset value+ ........ 2.03% (1.06%) 5.18% 9.58% 9.55%
Total investment return, market value** .......... 3.75% (5.94%) (1.37%) 9.29% 9.15%
Net assets at end of period (in millions) ...... $ 197 242 259 262 260
Ratio of expenses to average weekly net
assets*** ...................................... 0.75%++ 0.65% 0.61% 0.62% 0.64%++
Ratio of net investment income to average weekly
net assets*** .................................. 5.36%++ 6.97% 7.91% 8.44% 9.90%++
Portfolio turnover rate (excluding short-term
securities) .................................... 8% 43% 58% 26% 60%
Amount of borrowings outstanding at end of period
(in millions)+++ ............................. $ 25 70 86 70 70
Per-share amount of borrowings outstanding at end
of period .................................... $ 1.14 2.61 3.18 2.60 2.60
Per-share asset coverage of borrowings outstanding
at end of period++++ ......................... $ 10.17 11.65 12.78 12.34 12.24
</TABLE>
* COMMENCEMENT OF OPERATIONS.
** TOTAL INVESTMENT RETURN, MARKET VALUE, IS BASED ON THE CHANGE IN MARKET
PRICE OF A SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF
DISTRIBUTIONS AT ACTUAL PRICES PURSUANT TO THE FUND'S DIVIDEND REINVESTMENT
PLAN.
*** INCLUDES 0.09% AND 0.01% FROM FEDERAL EXCISE TAXES IN THE SIX MONTHS ENDED
FEBRUARY 28, 1995 AND FISCAL YEAR 1994, RESPECTIVELY.
+ TOTAL INVESTMENT RETURN, NET ASSET VALUE, IS BASED ON THE CHANGE IN NET
ASSET VALUE OF A SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF
DISTRIBUTIONS AT NET ASSET VALUE.
++ ADJUSTED TO AN ANNUAL BASIS.
+++ SECURITIES PURCHASED ON A WHEN-ISSUED BASIS FOR WHICH LIQUID, HIGH-GRADE
OBLIGATIONS ARE MAINTAINED IN A SEGREGATED ACCOUNT ARE NOT CONSIDERED
BORROWINGS. SEE FOOTNOTE 2 IN THE NOTES TO FINANCIAL STATEMENTS.
++++ REPRESENTS NET ASSETS (EXCLUDING BORROWINGS) DIVIDED BY SHARES OUTSTANDING.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(12) FINANCIAL
HIGHLIGHTS
(CONTINUED)
Per-share data for a share of capital stock
outstanding throughout each period and
selected information for each period are as
follows:
AMERICAN ADJUSTABLE RATE TERM TRUST 1997
<TABLE>
<CAPTION>
Period
from
Six Months Year Year Year 7/24/91*
Ended 2/28/95 Ended Ended Ended to
(Unaudited) 8/31/94 8/31/93 8/31/92 8/31/91
------------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period ........... $ 8.90 9.66 9.68 9.68 9.58
------ --------- --------- --------- --------
Operations:
Net investment income .......................... 0.27 0.63 0.72 0.78 0.07
Net realized and unrealized gains (losses) on
investments .................................. (0.11) (0.86) (0.10) 0.05 0.03
------ --------- --------- --------- --------
Total from operations ........................ 0.16 (0.23) 0.62 0.83 0.10
------ --------- --------- --------- --------
Distributions to shareholders:
From net investment income ..................... (0.24) (0.53) (0.63) (0.80) --
From net realized gains ........................ -- -- (0.01) (0.03) --
------ --------- --------- --------- --------
Total distributions to shareholders .......... (0.24) (0.53) (0.64) (0.83) --
------ --------- --------- --------- --------
Net asset value, end of period ................. $ 8.82 8.90 9.66 9.68 9.68
------ --------- --------- --------- --------
------ --------- --------- --------- --------
Per share market value, end of period .......... $ 8.25 8.50 9.38 10.00 10.25
------ --------- --------- --------- --------
------ --------- --------- --------- --------
SELECTED INFORMATION
Total investment return, net asset value+ ........ 1.80% (2.46%) 6.73% 8.97% 1.04%
Total investment return, market value** .......... (0.13%) (3.96%) 0.04% 5.87% 2.50%
Net assets at end of period (in millions) ...... $ 375 447 488 489 212
Ratio of expenses to average weekly net assets ... 0.65%++ 0.61% 0.58% 0.60% 0.60%++
Ratio of net investment income to average weekly
net assets ..................................... 5.71%++ 6.76% 7.55% 7.99% 7.88%++
Portfolio turnover rate (excluding short-term
securities) .................................... 1% 43% 47% 38% 10%
Amount of borrowings outstanding at end of period
(in millions)+++ ............................. $ 90 125 162 143 50
Per-share amount of borrowings outstanding at end
of period .................................... $ 2.12 2.49 3.20 2.83 2.29
Per-share asset coverage of borrowings outstanding
at end of period++++ ......................... $ 10.94 11.39 12.86 12.51 11.97
</TABLE>
* COMMENCEMENT OF OPERATIONS.
** TOTAL INVESTMENT RETURN, MARKET VALUE, IS BASED ON THE CHANGE IN MARKET
PRICE OF A SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF
DISTRIBUTIONS AT ACTUAL PRICES PURSUANT TO THE FUND'S DIVIDEND REINVESTMENT
PLAN.
+ TOTAL INVESTMENT RETURN, NET ASSET VALUE, IS BASED ON THE CHANGE IN NET
ASSET VALUE OF A SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF
DISTRIBUTIONS AT NET ASSET VALUE.
++ ADJUSTED TO AN ANNUAL BASIS.
+++ SECURITIES PURCHASED ON A WHEN-ISSUED BASIS FOR WHICH LIQUID, HIGH-GRADE
OBLIGATIONS ARE MAINTAINED IN A SEGREGATED ACCOUNT ARE NOT CONSIDERED
BORROWINGS. SEE FOOTNOTE 2 IN THE NOTES TO FINANCIAL STATEMENTS.
++++ REPRESENTS NET ASSETS (EXCLUDING BORROWINGS) DIVIDED BY SHARES OUTSTANDING.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(12) FINANCIAL
HIGHLIGHTS
(CONTINUED)
Per-share data for a share of capital stock
outstanding throughout each period and
selected information for each period are as
follows:
PIPER FUNDS INC. -- II ADJUSTABLE RATE MORTGAGE SECURITIES FUND
(FORMERLY AMERICAN ADJUSTABLE RATE TERM TRUST 1998)
<TABLE>
<CAPTION>
Period
from
Six Months Year Year 1/30/92*
Ended 2/28/95 Ended Ended to
(Unaudited) 8/31/94 8/31/93 8/31/92
------------- --------- --------- --------
<S> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period ........... $ 8.82 9.67 9.74 9.58
------ --------- --------- --------
Operations:
Net investment income .......................... 0.26 0.60 0.69 0.43
Net realized and unrealized gains (losses) on
investments .................................. (0.16) (0.89) (0.10) 0.08
------ --------- --------- --------
Total from operations ........................ 0.10 (0.29) 0.59 0.51
------ --------- --------- --------
Distributions to shareholders:
From net investment income ..................... (0.24) (0.56) (0.66) (0.35)
------ --------- --------- --------
Net asset value, end of period ................. $ 8.68 8.82 9.67 9.74
------ --------- --------- --------
------ --------- --------- --------
Per share market value, end of period .......... $ 8.13 8.38 9.63 9.88
------ --------- --------- --------
------ --------- --------- --------
SELECTED INFORMATION
Total investment return, net asset value+ ........ 1.30% (3.18%) 6.24% 5.49%
Total investment return, market value** .......... 0.08% (7.48%) 4.23% 2.31%
Net assets at end of period (in millions) ...... $ 409 500 551 555
Ratio of expenses to average weekly net assets ... 0.59%++ 0.60% 0.58% 0.58%++
Ratio of net investment income to average weekly
net assets ..................................... 5.70%++ 6.39% 7.25% 7.70%++
Portfolio turnover rate (excluding short-term
securities) .................................... 4% 39% 39% 41%
Amount of borrowings outstanding at end of period
(in millions)+++ ............................. $ 65 145 145 145
Per-share amount of borrowings outstanding at end
of period .................................... $ 1.38 2.56 2.54 2.54
Per-share asset coverage of borrowings outstanding
at end of period++++ ......................... $ 10.06 11.38 12.21 12.28
</TABLE>
* COMMENCEMENT OF OPERATIONS.
** TOTAL INVESTMENT RETURN, MARKET VALUE, IS BASED ON THE CHANGE IN MARKET
PRICE OF A SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF
DISTRIBUTIONS AT ACTUAL PRICES PURSUANT TO THE FUND'S DIVIDEND REINVESTMENT
PLAN.
+ TOTAL INVESTMENT RETURN, NET ASSET VALUE, IS BASED ON THE CHANGE IN NET
ASSET VALUE OF A SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF
DISTRIBUTIONS AT NET ASSET VALUE.
++ ADJUSTED TO AN ANNUAL BASIS.
+++ SECURITIES PURCHASED ON A WHEN-ISSUED BASIS FOR WHICH LIQUID, HIGH-GRADE
OBLIGATIONS ARE MAINTAINED IN A SEGREGATED ACCOUNT ARE NOT CONSIDERED
BORROWINGS. SEE FOOTNOTE 2 IN THE NOTES TO FINANCIAL STATEMENTS.
++++ REPRESENTS NET ASSETS (EXCLUDING BORROWINGS) DIVIDED BY SHARES OUTSTANDING.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(12) FINANCIAL
HIGHLIGHTS
(CONTINUED)
Per-share data for a share of capital stock
outstanding throughout each period and
selected information for each period are as
follows:
AMERICAN ADJUSTABLE RATE TERM TRUST 1999
<TABLE>
<CAPTION>
Period
from
Six Months Year 9/24/92*
Ended 2/28/95 Ended to
(Unaudited) 8/31/94 8/31/93
------------- --------- --------
<S> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period ........... $ 8.71 9.61 9.58
----- --------- --------
Operations:
Net investment income .......................... 0.25 0.60 0.60
Net realized and unrealized losses on
investments .................................. (0.18) (0.93) (0.04)
----- --------- --------
Total from operations ........................ 0.07 (0.33) 0.56
----- --------- --------
Distributions to shareholders:
From net investment income ..................... (0.26) (0.56) (0.53)
In excess of net realized gains ................ -- (0.01) --
----- --------- --------
Total distributions to shareholders .......... (0.26) (0.57) (0.53)
----- --------- --------
Net asset value, end of period ................. $ 8.52 8.71 9.61
----- --------- --------
----- --------- --------
Per share market value, end of period .......... $ 7.88 8.25 9.63
----- --------- --------
----- --------- --------
SELECTED INFORMATION
Total investment return, net asset value+ ........ 0.93% (3.61%) 6.05%
Total investment return, market value** .......... (1.31%) (8.75%) 1.62%
Net assets at end of period (in millions) ...... $ 240 295 328
Ratio of expenses to average weekly net assets ... 0.61%++ 0.60% 0.57%++
Ratio of net investment income to average weekly
net assets ..................................... 5.77%++ 6.40% 6.76%++
Portfolio turnover rate (excluding short-term
securities) .................................... 4% 35% 40%
Amount of borrowings outstanding at end of period
(in millions)+++ ............................. $ 36 85 102
Per-share amount of borrowings outstanding at end
of period .................................... $ 1.28 2.51 3.00
Per-share asset coverage of borrowings outstanding
at end of period++++ ......................... $ 9.80 11.22 12.61
</TABLE>
* COMMENCEMENT OF OPERATIONS.
** TOTAL INVESTMENT RETURN, MARKET VALUE, IS BASED ON THE CHANGE IN MARKET
PRICE OF A SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF
DISTRIBUTIONS AT ACTUAL PRICES PURSUANT TO THE FUND'S DIVIDEND REINVESTMENT
PLAN.
+ TOTAL INVESTMENT RETURN, NET ASSET VALUE, IS BASED ON THE CHANGE IN NET
ASSET VALUE OF A SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF
DISTRIBUTIONS AT NET ASSET VALUE.
++ ADJUSTED TO AN ANNUAL BASIS.
+++ SECURITIES PURCHASED ON A WHEN-ISSUED BASIS FOR WHICH LIQUID, HIGH-GRADE
OBLIGATIONS ARE MAINTAINED IN A SEGREGATED ACCOUNT ARE NOT CONSIDERED
BORROWINGS. SEE FOOTNOTE 2 IN THE NOTES TO FINANCIAL STATEMENTS.
++++ REPRESENTS NET ASSETS (EXCLUDING BORROWINGS) DIVIDED BY SHARES OUTSTANDING.
--------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
AMERICAN ADJUSTABLE RATE TERM TRUST 1996
FEBRUARY 28, 1995
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
--------------------------------------------------------- -------------- ------------
<S> <C> <C>
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS)
MORTGAGE-BACKED SECURITIES (77.5%):
U.S. AGENCY ADJUSTABLE-RATE MORTGAGES (43.0%):
7.41%, FHLMC, 10/1/22 .............................. $ 2,976,706 3,039,958
6.37%, FHLMC, 7/1/23 ................................. 7,543,059 7,651,490
6.07%, FHLMC, 9/1/23 ................................. 1,619,298 1,601,081
6.88%, FHLMC, 6/1/21 ................................. 2,711,992 2,774,693
7.25%, FHLMC, 11/1/16 ................................ 10,395,903(b) 10,493,313
7.41%, FHLMC, 6/1/18 ................................. 2,243,436 2,285,500
6.93%, FHLMC, 5/1/19 ................................. 2,244,192 2,279,246
7.04%, FHLMC, 10/1/18 ................................ 7,158,192(b) 7,274,513
7.37%, FHLMC, 10/1/19 ................................ 2,744,581 2,815,337
6.50%, FHLMC, 8/1/20 ................................. 10,918,192 11,054,669
6.00%, FHLMC, 1/1/24 ................................. 1,679,507 1,679,507
6.24%, FHLMC, 1/1/24 ................................. 1,890,572 1,904,751
6.49%, FNMA, 7/1/17 .................................. 1,945,441 1,929,625
6.62%, FNMA, 4/1/18 .................................. 5,218,850 5,287,321
6.96%, FNMA, 1/1/28 .................................. 2,507,498 2,549,023
7.07%, FNMA, 5/1/27 .................................. 1,847,177 1,881,239
6.71%, FNMA, 1/1/20 .................................. 2,185,878 2,236,415
6.03%, FNMA, 12/1/23 ................................. 3,794,163 3,749,088
6.07%, FNMA, 8/1/23 .................................. 2,305,412 2,339,993
7.00%, GNMA II, 8/20/23 .............................. 5,105,190(b) 5,143,479
6.00%, GNMA II, 5/20/21 .............................. 4,909,887(b) 4,897,612
------------
84,867,853
------------
COLLATERALIZED MORTGAGE OBLIGATIONS AND
OTHER MORTGAGE-BACKED SECURITIES (34.5%):
ADJUSTABLE RATE (34.5%):
6.48%, Citicorp Mortgage Securities, Series 1991-14,
Class M, 9/25/21 .................................... 5,879,874 5,802,701
7.36%, Columbia Savings and Loan, Series 1987-1, Class
A, 12/1/17 .......................................... 396,157 396,977
7.79%, Donaldson, Lufkin and Jenrette, Series
1992-MF3, Class A3, 5/25/22 ......................... 6,000,000 6,093,750
7.00%, FHLMC, Series 1249, Class A, 4/15/22 .......... 15,144,357 15,115,885
6.47%, Meridian Asset Acceptance Corporation, Series
1991-1, Class A1, 4/27/20 ........................... 2,400,677 2,367,668
5.69%, Merrill Lynch Mortgage Investors, Series
1993-D, Class A1-2, 10/25/23 ........................ 2,000,000 1,924,380
6.00%, Merrill Lynch Mortgage Investors, Series
1993-H, Class A1-2, 10/25/23 ........................ 2,320,000 2,228,105
6.00%, Paine Webber Mortgage Acceptance Corporation,
Series 1993-10, Class M1, 11/25/23 .................. 13,226,235 13,160,104
7.01%, Paine Webber Mortgage Acceptance Corporation,
Series 1993-8, Class M2, 8/25/23 .................... 5,115,940 4,860,143
6.63%, Residential Funding Corporation, Series
1992-S25, Class A, 7/25/22 .......................... 5,054,286 5,065,254
</TABLE>
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
--------------------------------------------------------- -------------- ------------
<S> <C> <C>
7.54%, Residential Funding Corporation, Series
1993-S8, Class A, 2/25/23 ......................... $ 5,651,338 5,722,601
6.70%, Ryland Mortgage Securities, Series 1991-B1,
Class 1, 3/25/20 .................................... 1,770,646 1,784,756
7.04%, Salomon Brothers Mortgage, Series 1987-2, Class
A, 12/25/16 ......................................... 3,122,465 3,044,403
5.61%, Salomon Brothers Mortgage, Series 1988-3, Class
A, 6/25/17 .......................................... 751,830 732,094
------------
68,298,821
------------
Total Mortgage-Backed Securities
(cost: $157,202,562) ............................... 153,166,674
------------
MUNICIPAL ZERO-COUPON SECURITIES (C) (20.4%):
Alabama State Public School and College, 6.73%,
11/1/96 ............................................. 725,000 662,469
Alief, Texas, School District, 4.24%, 2/15/97 ........ 760,000 690,650
Arlington, Texas, Independent School District,
6.10%-6.78%, 2/15/96 ................................ 680,000 649,400
Bellevue, Washington Convention Center, 6.06%,
12/1/96 ............................................. 1,000,000 918,225
California State Custodial Receipts, 4.63%-4.68%,
7/25/95-4/25/96 ..................................... 13,209,863 12,510,606
Clairton, Pennsylvania, School District, 6.83%,
11/1/96 ............................................. 1,035,000 949,613
Corpus Christi, Texas, Series A, 6.78%, 11/1/96 ...... 735,000 678,488
Eastern Illinois University Facility, 5.67%,
10/1/96 ............................................. 1,055,000 985,106
Illinois Educational Facility, 6.07%, 7/1/96 ......... 5,550,000 5,223,938
Maricopa County, Arizona, School District, 6.48%,
7/1/96 .............................................. 3,050,000 2,863,188
Mesa, Arizona, General Obligation, 6.01%, 7/1/96 ..... 1,845,000 1,729,688
North Slope Boro, Alaska, Series I, 5.07%-5.72%,
6/30/96 ............................................. 9,800,000 9,163,000
Orleans Parish, Louisiana, School Board, 5.83%,
8/1/96 .............................................. 400,000 426,000
Phoenix, Arizona, Excise Tax Parking Revenue, 6.22%,
7/1/96 .............................................. 1,000,000 940,000
Illinois State Sales Tax Revenue,
6.38%, 6/15/96 ...................................... 500,000 471,875
University of Illinois Auxillary Facility, 6.01%,
4/1/96 .............................................. 1,140,000 1,085,850
Vermont State College Savers, General Obligation,
5.75%, 10/15/96 ..................................... 370,000 343,175
------------
Total Municipal Zero-Coupon Securities
(cost: $39,928,639) ................................ 40,291,271
------------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
--------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
AMERICAN ADJUSTABLE RATE TERM TRUST 1996
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
--------------------------------------------------------- -------------- ------------
<S> <C> <C>
SHORT-TERM SECURITIES (14.0%):
Repurchase agreement with Morgan Stanley in a joint
trading account collateralized by U.S. government
agency securities, acquired on 2/28/95, accrued
interest at repurchase date of $4,702, 6.10%, 3/1/95
(cost: $27,747,000) ............................... $ 27,747,000 27,747,000
------------
Total Investments in Securities
(cost: $224,878,201) (d) ......................... $ 221,204,945
------------
------------
</TABLE>
NOTES TO INVESTMENTS IN SECURITIES:
<TABLE>
<S> <C>
(A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN
NOTE 2 TO THE FINANCIAL STATEMENTS.
(B) ON FEBRUARY 28, 1995, SECURITIES VALUED AT $26,618,103 ARE
PLEDGED AS COLLATERAL FOR THE FOLLOWING OUTSTANDING REVERSE
REPURCHASE AGREEMENTS:
</TABLE>
<TABLE>
<CAPTION>
NAME OF
BROKER AND
DESCRIPTION
ACQUISITION ACCRUED OF
AMOUNT DATE RATE* DUE INTEREST COLLATERAL
------------ ---------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
$25,000,000 2/2/95 6.15% 5/30/95 $115,218 (1)
*INTEREST RATE IS AS OF FEBRUARY 28, 1995. RATE IS BASED ON THE LONDON
INTERBANK OFFERED RATE (LIBOR) AND RESETS MONTHLY.
</TABLE>
<TABLE>
<S> <C> <C>
NAME OF BROKER AND DESCRIPTION OF COLLATERAL:
(1) MORGAN STANLEY: GNMA II, ARM, 7.00%, 8/20/23, $5,105,190 PAR.
GNMA II, ARM, 6.00%, 5/20/21, $4,909,887 PAR.
FHLMC, ARM, 7.25%, 11/1/16, $10,395,903 PAR.
FHLMC, ARM, 7.04%, 10/1/18, $5,986,419 PAR.
(C) FOR ZERO-COUPON INVESTMENTS, THE INTEREST RATE SHOWN IS THE
EFFECTIVE YIELD ON THE DATE OF PURCHASE.
(D) AT FEBRUARY 28, 1995, FOR FEDERAL INCOME TAX PURPOSES, THE COST
OF INVESTMENTS IN SECURITIES, INCLUDING THE PUT OPTIONS DESCRIBED
IN NOTE 5 TO THE FINANCIAL STATEMENTS, APPROXIMATED $226,407,001.
THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF
INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS:
</TABLE>
<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION .... $ 465,593
GROSS UNREALIZED DEPRECIATION ...... (5,637,237)
-------------
NET UNREALIZED DEPRECIATION .... $ (5,171,644)
-------------
-------------
</TABLE>
AMERICAN ADJUSTABLE RATE TERM TRUST 1997
FEBRUARY 28, 1995
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
--------------------------------------------------------- -------------- ------------
<S> <C> <C>
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS)
MORTGAGE-BACKED SECURITIES (87.2%):
U.S. AGENCY ADJUSTABLE-RATE MORTGAGES (46.4%):
7.10%, FHLMC, 5/1/20 ............................... $ 2,485,069 2,545,208
6.86%, FHLMC, 6/1/21 ................................. 4,735,260(b) 4,868,416
7.41%, FHLMC, 10/1/22 ................................ 5,953,412 6,079,922
6.07%, FHLMC, 9/1/23 ................................. 1,619,298 1,601,081
6.34%, FHLMC, 8/1/19 ................................. 2,013,726 2,038,898
7.30%, FHLMC, 1/1/19 ................................. 209,536 214,118
5.94%, FHLMC, 4/1/22 ................................. 1,050,711 1,065,484
6.10%, FHLMC, 10/1/23 ................................ 1,684,822 1,695,352
6.00%, FHLMC, 1/1/24 ................................. 2,522,527(b) 2,522,527
6.24%, FHLMC, 1/1/24 ................................. 4,145,150 4,176,238
7.53%, FNMA, 1/1/18 .................................. 2,137,600 2,180,352
6.99%, FNMA, 1/1/29 .................................. 3,856,473 3,909,499
6.97%, FNMA, 5/1/18 .................................. 1,635,526 1,656,984
7.07%, FNMA, 8/1/27 .................................. 9,372,030(b) 9,506,706
6.62%, FNMA, 4/1/18 .................................. 8,744,722 8,859,452
6.96%, FNMA, 1/1/28 .................................. 1,355,888 1,378,341
6.98%, FNMA, 3/1/28 .................................. 10,724,485(b) 10,871,947
6.62%, FNMA, 1/1/20 .................................. 3,252,843(b) 3,252,843
6.83%, FNMA, 11/1/20 ................................. 5,837,002 5,917,261
6.78%, FNMA, 12/1/20 ................................. 8,316,137(b) 8,430,484
6.28%, FNMA, 5/1/21 .................................. 7,408,603(b) 7,552,107
7.32%, FNMA, 8/1/21 .................................. 3,956,202(b) 4,017,998
6.01%, FNMA, 12/1/23 ................................. 3,897,917 3,934,441
6.08%, FNMA, 12/1/23 ................................. 3,813,400(b) 3,856,301
6.12%, FNMA, 1/1/24 .................................. 3,593,808(b) 3,631,974
6.13%, FNMA, 7/1/23 .................................. 4,987,106 5,050,691
5.96%, FNMA, 2/1/24 .................................. 8,857,861(b) 8,780,355
4.01%, FNMA, 3/1/24 .................................. 4,505,705 4,432,487
6.63%, GNMA II, 11/20/21 ............................. 4,017,589(b) 4,050,212
6.50%, GNMA II, 6/20/22 .............................. 1,213,992 1,227,650
6.75%, GNMA II, 6/20/23 .............................. 1,730,580 1,737,069
6.50%, GNMA II, 10/20/23 ............................. 4,613,352(b) 4,590,285
6.50%, GNMA II, 11/20/23 ............................. 4,599,503(b) 4,576,506
5.50%, GNMA II, 12/20/23 ............................. 9,147,443(b) 8,735,808
4.50%, GNMA II, 5/20/24 .............................. 5,025,168(b) 4,761,347
4.50%, GNMA II, 4/20/24 .............................. 739,542 685,926
4.50%, GNMA II, 6/20/24 .............................. 4,292,885(b) 4,067,509
6.00%, GNMA II, 8/20/21 .............................. 7,807,772(b) 7,798,012
6.13%, GNMA II, 10/20/21 ............................. 7,708,113(b) 7,606,906
------------
173,864,697
------------
COLLATERALIZED MORTGAGE OBLIGATIONS AND OTHER MORTGAGE-BACKED SECURITIES (40.8%):
ADJUSTABLE RATE (40.8%):
7.79%, Donaldson, Lufkin and Jenrette, Series
1992-MF3, Class A3, 5/25/22 ......................... 17,000,000 17,265,621
7.17%, First Federal of Rochester, Series 1988-SE1,
Class A, 10/25/18 ................................... 3,122,188 3,091,942
6.78%, Glendale Federal Savings, Series 1989-5, Class
A, 4/1/29 ........................................... 19,295,932 19,155,265
6.89%, Greenwich Capital Acceptance, Series 1992-LB5,
Class A3, 7/25/22 ................................... 12,883,000 12,432,095
6.76%, Merrill Lynch Mortgage Investors, Series
1988-M, Class A, 10/1/18 ............................ 3,386,628 3,360,009
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
--------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
AMERICAN ADJUSTABLE RATE TERM TRUST 1997
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
--------------------------------------------------------- -------------- ------------
<S> <C> <C>
6.81%, Merrill Lynch Mortgage Investors, Series
1993-C, Class A4, 3/15/18 ......................... $ 7,000,000 6,816,250
5.69%, Merrill Lynch Mortgage Investors, Series
1993-D, Class A1-2, 10/25/23 ........................ 6,000,000 5,773,140
6.00%, Merrill Lynch Mortgage Investors, Series
1993-H, Class A1-2, 10/25/23 ........................ 6,523,000 6,264,624
6.35%, Paine Webber Mortgage Acceptance Corporation,
Series 1993-11, Class M1, 12/1/23 ................... 2,890,709 2,878,063
7.19%, Prudential Home Mortgage Securities, Series
1991-9, Class A1, 7/25/21 ........................... 7,220,737 7,286,518
6.63%, Residential Funding Corporation, Series
1992-S25, Class A, 7/25/22 .......................... 12,635,715 12,663,134
7.54%, Residential Funding Corporation, Series
1993-S8, Class A, 2/25/23 ........................... 8,477,007 8,583,902
7.23%, Resolution Trust Corporation, Series 1991-10,
Class A1, 5/25/21 ................................... 5,604,194 5,574,267
6.74%, Resolution Trust Corporation, Series 1991-2,
Class B, 4/25/21 .................................... 5,000,000 4,997,000
7.39%, Resolution Trust Corporation, Series 1991-8,
Class A-1, 12/25/20 ................................. 12,625,787 12,955,241
6.78%, Resolution Trust Corporation, Series 1992-4,
Class B2, 7/25/28 ................................... 15,000,601 14,871,690
7.39%, Resolution Trust Corporation, Series 1992-9,
Class A6, 7/25/20 ................................... 2,053,453 2,004,684
6.70%, Ryland Mortgage Securities, Series 1991-B1,
Class 1, 3/25/20 .................................... 6,843,105 6,897,636
------------
152,871,081
------------
Total Mortgage-Backed Securities
(cost: $335,696,515) ............................... 326,735,778
------------
MUNICIPAL ZERO-COUPON SECURITIES (C) (21.0%):
Austin, Texas, Public Parking, 5.72%-6.03%, 9/1/97 ... 5,000,000 4,443,750
Bellevue, Washington, Convention Center, 6.24%,
12/1/97 ............................................. 1,370,000 1,188,544
Bismark, North Dakota, Hospital Revenue, 6.19%,
5/1/97 .............................................. 2,530,000 2,289,650
Blue Ridge Texas, West Municipal Utility General
Obligation, 6.09%, 4/1/97 ........................... 440,000 399,850
Boulder, Colorado, School District, 6.26%,
12/15/97 ............................................ 4,000,000 3,530,000
Calallen, Texas, School District, 5.88%, 2/15/98 ..... 1,485,000 1,282,669
Cambria, Pennsylvania, School District, 6.39%,
8/15/97 ............................................. 1,030,000 912,838
</TABLE>
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
--------------------------------------------------------- -------------- ------------
<S> <C> <C>
Cypress-Fairbanks, Texas, School District,
5.82%-5.93%, 2/1/98 ............................... $ 8,340,000 7,203,675
Eastern Camden, New Jersey, School District, 5.88%,
9/1/97 .............................................. 500,000 442,500
Illinois State College Savers, 5.93%, 8/1/98 ......... 890,000 744,263
Intermountain Power Authority, 3.10%, 7/1/97 ......... 470,000 478,813
Irving, Texas, School District, 6.31%, 2/15/97 ....... 960,000 871,200
Kansas City, Kansas Utility Systems Revenue,
6.24%-6.26%, 9/1/97 ................................. 6,520,000 5,805,412
Kentucky Development Finance Authority, 5.60%-6.08%,
11/1/97 ............................................. 1,980,000 1,732,500
Kentucky Turnpike Revenue, 3.95%, 7/1/97 ............. 1,000,000 1,057,500
Lewisburg, Pennsylvania, School District, 6.29%,
8/15/97 ............................................. 500,000 444,375
Louisiana College Savers, General Obligation, 5.99%,
7/1/97 .............................................. 4,000,000 3,580,000
Lubbock, Texas, Electric Power, 6.29%, 4/15/97 ....... 1,360,000 1,234,200
Maricopa County, Arizona, School District, 5.47%,
7/1/97 .............................................. 1,010,000 900,163
Massachusetts, General Obligation Bonds, 5.96%-5.98%,
6/1/98 .............................................. 12,345,000 10,462,388
McHenry County, Illinois, Conservation District,
5.88%, 2/1/98 ....................................... 1,580,000 1,360,775
Michigan Municipal Bond Authority, 6.02%, 5/15/97 .... 1,500,000 1,338,750
North Montgomery, Indiana, School Bond, 5.82%-5.98%,
1/1/97-7/1/98 ....................................... 2,100,000 1,834,875
North Slope Boro, Alaska, 5.88%-6.39%,
6/30/97-6/30/98 ..................................... 12,000,000 10,340,000
Oklahoma City, Oklahoma, Water and Sewer, 5.83%,
7/1/97 .............................................. 1,000,000 898,750
Rosemont, Illinois, Various Purpose, 6.22%,
12/1/97 ............................................. 2,670,000 2,319,563
Sioux City, Iowa, Hospital Revenue, 2.93%, 1/1/97 .... 11,510,000 11,697,039
------------
Total Municipal Zero-Coupon Securities
(cost: $76,274,040) ................................ 78,794,042
------------
SHORT-TERM SECURITIES (12.4%):
Repurchase agreement with Morgan Stanley in a joint
trading account collateralized by U.S. government
agency securities, acquired on 2/28/95, accrued
interest at repurchase date of $7,707, 5.97%, 3/1/95
(cost: $46,476,000) ................................. 46,476,000 46,476,000
------------
Total Investments in Securities
(cost: $458,446,555) (d) ......................... $ 452,005,820
------------
------------
</TABLE>
--------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
NOTES TO INVESTMENTS IN SECURITIES:
<TABLE>
<S> <C>
(A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN
NOTE 2 TO THE FINANCIAL STATEMENTS.
(B) ON FEBRUARY 28, 1995, SECURITIES VALUED AT $97,556,369 WERE
PLEDGED AS COLLATERAL FOR THE FOLLOWING OUTSTANDING REVERSE
REPURCHASE AGREEMENTS:
</TABLE>
<TABLE>
<CAPTION>
NAME OF
BROKER AND
DESCRIPTION
ACQUISITION ACCRUED OF
AMOUNT DATE RATE* DUE INTEREST COLLATERAL
------------ ---------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
$50,000,000 2/1/95 6.16% 8/1/95 $239,652 (1)
40,000,000 12/15/94 6.50% 3/15/95 548,889 (2)
------------ ---------
$90,000,000 $788,541
------------ ---------
------------ ---------
*INTEREST RATE IS AS OF FEBRUARY 28, 1995. RATES ARE BASED ON THE
LONDON INTERBANK OFFERED RATE (LIBOR) AND RESET MONTHLY OR QUARTERLY.
</TABLE>
<TABLE>
<S> <C> <C>
NAME OF BROKER AND DESCRIPTION OF COLLATERAL:
(1) MORGAN STANLEY: GNMA II, ARM, 4.50%, 5/20/24, $5,025,168 PAR.
GNMA II, ARM, 4.50%, 6/20/24, $4,292,885 PAR.
GNMA II, ARM, 6.63%, 11/20/21, $4,017,589 PAR.
FNMA, ARM, 7.07%, 8/1/27, $2,343,008 PAR.
FNMA, ARM, 6.78%, 12/1/20, $8,316,137 PAR.
FNMA, ARM, 7.32%, 8/1/21, $3,956,202 PAR.
FNMA, ARM, 6.08%, 12/1/23, $3,813,400 PAR.
FNMA, ARM, 6.12%, 1/1/24, $3,194,496 PAR.
FNMA, ARM, 5.96%, 2/1/24, $8,857,861 PAR.
FNMA, ARM, 6.62%, 1/1/20, $3,252,843 PAR.
FHLMC, ARM, 6.86%, 6/1/21, $4,735,260 PAR.
FHLMC, ARM, 6.00%, 1/1/24, $2,522,527 PAR.
(2) MORGAN STANLEY: GNMA II, ARM, 6.00%, 8/20/21, $7,807,772 PAR.
GNMA II, ARM, 6.13%, 10/20/21, $7,708,113 PAR.
GNMA II, ARM, 6.50%, 11/20/23, $4,599,503 PAR.
GNMA II, ARM, 6.50%, 10/20/23, $4,613,352 PAR.
GNMA II, ARM, 5.50%, 12/20/23, $9,147,443 PAR.
FNMA, ARM, 6.28%, 5/1/21, $910,752 PAR.
FNMA, ARM, 7.07%, 8/1/27, $5,154,617 PAR.
FNMA, ARM, 6.98%, 3/1/28, $3,865,529 PAR.
(C) FOR ZERO-COUPON INVESTMENTS, THE INTEREST RATE SHOWN IS THE
EFFECTIVE YIELD ON THE DATE OF PURCHASE.
(D) AT FEBRUARY 28, 1995, FOR FEDERAL INCOME TAX PURPOSES, THE COST
OF INVESTMENTS IN SECURITIES, INCLUDING THE PUT OPTIONS DESCRIBED
IN NOTE 5 TO THE FINANCIAL STATEMENTS, APPROXIMATED $461,022,155.
THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF
INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS:
</TABLE>
<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION .... $ 2,550,712
GROSS UNREALIZED DEPRECIATION ...... (11,126,712)
-------------
NET UNREALIZED DEPRECIATION .... $ (8,576,000)
-------------
-------------
</TABLE>
PIPER FUNDS INC. -- II ADJUSTABLE RATE MORTGAGE SECURITIES FUND
(FORMERLY AMERICAN ADJUSTABLE RATE TERM TRUST 1998)
FEBRUARY 28, 1995
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
--------------------------------------------------------- -------------- ------------
<S> <C> <C>
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS)
MORTGAGE-BACKED SECURITIES (88.6%):
U.S. AGENCY ADJUSTABLE-RATE MORTGAGES (45.4%):
7.05%, FHLMC, 2/1/22 ............................... $ 12,510,519(b) 12,655,172
7.14%, FHLMC, 2/1/22 ................................. 17,026,683(b) 17,420,340
6.12%, FHLMC, 8/1/23 ................................. 7,140,906(b) 7,123,054
7.13%, FHLMC, 11/1/16 ................................ 3,702,454 3,732,518
6.00%, FHLMC, 5/1/17 ................................. 3,778,140 3,791,401
5.96%, FHLMC, 1/1/21 ................................. 6,236,161(b) 6,261,106
6.10%, FHLMC, 10/1/23 ................................ 3,369,644(b) 3,390,704
6.93%, FNMA, 9/1/17 .................................. 4,086,944 4,145,673
6.97%, FNMA, 5/1/18 .................................. 6,371,737(b) 6,455,334
7.04%, FNMA, 7/1/17 .................................. 6,700,593 6,784,350
7.93%, FNMA, 7/1/19 .................................. 2,910,727 2,933,922
6.73%, FNMA, 11/1/20 ................................. 5,272,421(b) 5,236,147
6.69%, FNMA, 11/1/17 ................................. 10,572,300 10,691,238
7.15%, FNMA, 7/1/19 .................................. 4,570,437 4,687,532
6.73%, FNMA, 11/1/21 ................................. 7,893,764 8,012,170
7.01%, FNMA, 10/1/20 ................................. 3,773,294 3,615,268
6.03%, FNMA, 12/1/23 ................................. 1,686,295 1,666,261
6.10%, FNMA, 2/1/24 .................................. 4,328,577 4,312,344
6.00%, GNMA II, 7/20/22 .............................. 8,641,928(b) 8,539,262
6.50%, GNMA II, 7/20/22 .............................. 8,338,926(b) 8,380,621
6.00%, GNMA II, 4/20/22 .............................. 7,229,997 7,166,734
6.00%, GNMA II, 5/20/22 .............................. 3,222,573(b) 3,194,375
6.00%, GNMA II, 6/20/22 .............................. 8,907,032 8,851,363
6.75%, GNMA II, 6/20/23 .............................. 8,652,899 8,685,347
7.00%, GNMA II, 8/20/23 .............................. 9,556,745(b) 9,628,421
6.50%, GNMA II, 10/20/23 ............................. 9,226,707(b) 9,180,573
4.50%, GNMA II, 5/20/24 .............................. 3,854,407 3,652,050
4.50%, GNMA II, 4/20/24 .............................. 6,189,564 5,740,821
------------
185,934,101
------------
COLLATERALIZED MORTGAGE OBLIGATIONS AND
OTHER MORTGAGE-BACKED SECURITIES (43.2%):
ADJUSTABLE RATE (43.2%):
7.36%, Columbia Savings and Loan, Series 1987-1, Class
A, 12/1/17 .......................................... 594,234 595,464
7.79%, Donaldson, Lufkin and Jenrette, Series
1992-MF3, Class A3, 5/25/22 ......................... 5,000,000 5,078,125
7.17%, First Federal of Rochester, Series 1988-SE1,
Class A, 10/25/18 ................................... 6,634,649 6,570,376
6.37%, Glendale Federal Savings, Series 1988-3,
8/1/28 .............................................. 6,740,191 6,651,726
6.47%, Meridian Asset Acceptance Corporation, Series
1991-1, Class A1, 4/27/20 ........................... 5,404,404 5,330,094
7.13%, Merrill Lynch Mortgage Investor, Series 88-V,
Class A, 1/25/19 . 1,155,110 1,145,003
6.66%, Merrill Lynch Mortgage Investors, Series
1992-C, Class A-2, 6/15/17 .......................... 25,000,000 24,926,750
5.69%, Merrill Lynch Mortgage Investors, Series
1993-D, Class A1-2, 10/25/23 ........................ 6,000,000 5,773,140
6.00%, Merrill Lynch Mortgage Investors, Series
1993-H, Class A1-2, 10/25/23 ........................ 7,340,000 7,049,263
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
--------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
AMERICAN ADJUSTABLE RATE TERM TRUST 1998
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
--------------------------------------------------------- -------------- ------------
<S> <C> <C>
5.24%, Merrill Lynch Mortgage Investors, Series 88-C,
3/1/18 ............................................ $ 3,740,036 3,524,984
6.30%, Paine Webber Mortgage Acceptance, Series
1993-3, Class M2, 4/25/23 ........................... 2,720,913 2,666,494
6.35%, Paine Webber Mortgage Acceptance Corporation,
Series 1993-11, Class M1, 12/1/23 ................... 2,951,731 2,938,817
7.01%, Paine Webber Mortgage Acceptance Corporation,
Series 1993-8, Class M1, 8/25/23 .................... 6,771,161 6,720,377
7.19%, Prudential Home Mortgage Securities, Series
1991-9, Class A1, 7/25/21 ........................... 7,220,653 7,286,434
7.19%, Residential Funding Corporation, Series
1992-S8, Class A, 3/25/22 ........................... 12,752,859 12,799,407
6.63%, Residential Funding Corporation, Series
1992-S25, Class A, 7/25/22 .......................... 12,635,715 12,663,134
7.54%, Residential Funding Corporation, Series
1993-S8, Class A, 2/25/23 ........................... 8,477,007 8,583,902
6.85%, Resolution Trust Corporation, Series 1992-1,
Class A1, 5/25/28 ................................... 3,793,198 3,770,325
5.68%, Resolution Trust Corporation, Series 1992-3,
Class B2, 9/25/19 ................................... 8,094,806 8,013,858
6.78%, Resolution Trust Corporation, Series 1992-4,
Class B2, 7/25/28 ................................... 10,000,401 9,914,460
7.06%, Resolution Trust Corporation, Series 1992-6,
Class B3, 1/25/26 ................................... 13,342,983 13,142,838
6.70%, Ryland Mortgage Securities, Series 1991-B1,
Class 1, 3/25/20 .................................... 5,663,259 5,708,389
6.32%, Sears Mortgage Securities, Series 1991-K, Class
A1, 9/25/21 ......................................... 16,149,816 15,685,508
------------
176,538,868
------------
Total Mortgage-Backed Securities
(cost: $373,289,389) ............................... 362,472,969
------------
MUNICIPAL ZERO-COUPON SECURITIES (C) (15.9%):
Allegheny County, Pennsylvania, 4.69%, 2/15/98 ....... 2,000,000 1,905,000
Boulder, Larimer and Weld County, South Dakota, School
District, 5.58%, 12/15/98 ........................... 4,000,000 3,305,000
California, General Obligation, Various Purpose,
5.72%-5.93%, 3/1/98-3/1/99 . 10,465,000 8,733,125
Chelan County, Washington, Public Utilities District,
5.88%, 7/1/98 ....................................... 1,370,000 1,155,938
Collin County, Texas, Community College District,
5.98%, 8/15/98 ...................................... 4,475,000 3,753,406
Connecticut, State College, Capital Appreciation,
5.27%, 12/15/97 ..................................... 985,000 858,181
Corpus Christi, Texas, General Improvement Refunding
Bonds, 5.59%, 11/1/98 ............................... 4,225,000 3,506,950
</TABLE>
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
--------------------------------------------------------- -------------- ------------
<S> <C> <C>
Dallas County, Texas, Road Improvement Refunding
Bonds, 6.19%, 8/15/98 ............................. $ 3,085,000 2,602,969
Grand Prairie, Texas, Independent School District,
5.93%, 2/15/98 ...................................... 1,150,000 993,313
Harris County, Texas, Toll Road Refunding Bonds,
6.09%, 8/15/98 ...................................... 845,000 708,744
Idaho Falls, Idaho, General Obligation and Electric
Refunding Bonds, 5.63%, 4/1/98 ...................... 1,500,000 1,286,250
Lake County, Illinois, General Obligation Forest
Preservation District, 6.09%, 12/1/98 ............... 1,000,000 823,750
Larimer, Weld and Boulder County, Colorado, School
District, 5.58%, 12/15/98 ........................... 3,260,000 2,709,875
Maricopa County, Arizona, School District,
5.57%-5.88%, 1/1/98-7/1/99 .......................... 16,140,000 13,358,732
Mesquite, Texas, School District, 5.57%-5.73%,
8/15/98-8/15/99 ..................................... 3,665,000 3,017,356
North East, Texas, Independent School District, 5.98%,
2/1/99 .............................................. 1,000,000 817,500
North Lawrence, Indiana, School Building Refunding,
Capital Appreciation, 5.62%-5.88%, 1/1/98-7/1/99 .... 2,320,000 1,911,825
Pleasanton, California, School District, 5.78%,
8/1/98 .............................................. 1,000,000 848,750
Salt Lake County, Utah, Water Conservation District,
5.83%, 10/1/98 . 1,300,000 1,090,372
Shreveport, Louisianna, Water and Sewer, 6.03%,
12/1/98 ............................................. 5,880,000 4,821,600
State of Texas, Veterans' Land General Obligation,
5.83%, 6/1/98 ....................................... 1,000,000 855,000
Tarrant County, Texas, Junior College District, 6.08%,
2/15/98 ............................................. 1,750,000 1,502,813
Tomball, Texas, Hospital Authority Revenue, 6.09%,
7/1/99 .............................................. 1,000,000 800,000
Utah Associated Municipal Power System, 5.57%,
7/1/98 .............................................. 2,765,000 2,350,250
Will County, Illinois, School District, 5.57%,
12/15/98 ............................................ 1,800,000 1,482,750
------------
Total Municipal Zero-Coupon Securities
(cost: $63,893,882) ................................ 65,199,449
------------
SHORT-TERM SECURITIES (8.0%):
Repurchase agreement with Morgan Stanley in a joint
trading account collateralized by U.S. government
agency securities, acquired on 2/28/95, accrued
interest at repurchase date of $5,560, 6.10%, 3/1/95
(cost: $32,816,000) ................................. 32,816,000 32,816,000
------------
Total Investments in Securities
(cost: $469,999,271) (d) ......................... $ 460,488,418
------------
------------
</TABLE>
--------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
NOTES TO INVESTMENTS IN SECURITIES:
<TABLE>
<S> <C>
(A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN
NOTE 2 TO THE FINANCIAL STATEMENTS.
(B) ON FEBRUARY 28, 1995, SECURITIES VALUED AT $70,488,321 WERE
PLEDGED AS COLLATERAL FOR THE FOLLOWING OUTSTANDING REVERSE
REPURCHASE AGREEMENTS:
</TABLE>
<TABLE>
<CAPTION>
NAME OF
BROKER AND
DESCRIPTION
ACQUISITION ACCRUED OF
AMOUNT DATE RATE* DUE INTEREST COLLATERAL
------------ ---------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
$65,000,000 2/24/95 6.15% 3/2/95 $55,521 (1)
*INTEREST RATE IS AS OF FEBRUARY 28, 1995. RATES ARE BASED ON THE
LONDON INTERBANK OFFERED RATE (LIBOR) AND RESET MONTHLY.
</TABLE>
<TABLE>
<S> <C> <C>
NAME OF BROKER AND DESCRIPTION OF COLLATERAL:
(1) MORGAN STANLEY: FHLMC, ARM, 7.05%, 2/1/22, $12,510,519 PAR.
FHLMC, ARM, 7.14%, 2/1/22, $2,642,072 PAR.
FHLMC, ARM, 6.12%, 8/1/23, $7,140,906 PAR.
FHLMC, ARM, 5.96%, 1/1/21, $6,236,161 PAR.
FHLMC, ARM, 6.10%, 10/1/23, $3,369,644 PAR.
FNMA, ARM, 6.97%, 5/1/18, $3,748,081 PAR.
FNMA, ARM, 6.73%, 11/1/20, $2,146,999 PAR.
GNMA II, ARM, 6.00%, 7/20/22, $8,641,928 PAR.
GNMA II, ARM, 6.50%, 7/20/22, $8,338,926 PAR.
GNMA II, ARM, 7.00%, 8/20/23, $3,107,507 PAR.
GNMA II, ARM, 6.50%, 10/20/23, $9,226,707 PAR.
GNMA II, ARM, 6.00%, 5/20/22, $3,222,573 PAR.
(D) AT FEBRUARY 28, 1995, FOR FEDERAL INCOME TAX PURPOSES, THE COST
OF INVESTMENTS IN SECURITIES, INCLUDING THE PUT OPTIONS DESCRIBED
IN NOTE 5 TO THE FINANCIAL STATEMENTS, APPROXIMATED $472,612,771.
THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF
INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS:
</TABLE>
<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION .... $ 1,305,568
GROSS UNREALIZED DEPRECIATION ...... (12,380,344)
-------------
NET UNREALIZED DEPRECIATION .... $ (11,074,776)
-------------
-------------
</TABLE>
AMERICAN ADJUSTABLE RATE TERM TRUST 1999
FEBRUARY 28, 1995
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
--------------------------------------------------------- -------------- ------------
<S> <C> <C>
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS)
MORTGAGE-BACKED SECURITIES (89.1%):
U.S. AGENCY ADJUSTABLE-RATE MORTGAGES (38.7%):
6.30%, FHLMC, 6/1/22 ............................... $ 29,434,791(b) 29,986,694
7.27%, FHLMC, 11/1/22 ................................ 10,835,163 11,068,796
7.34%, FHLMC, 9/1/22 ................................. 5,906,203 6,016,944
6.37%, FHLMC, 7/1/23 ................................. 5,900,016(b) 5,984,829
6.52%, FHLMC, 4/1/23 ................................. 4,599,168 4,665,258
6.21%, FNMA, 11/1/22 ................................. 3,504,049 3,545,677
5.96%, FNMA, 2/1/24 .................................. 8,857,861 8,780,355
6.50%, GNMA II, 7/20/22 .............................. 4,169,463(b) 4,190,310
6.50%, GNMA II, 9/20/22 .............................. 3,781,360(b) 3,800,267
6.00%, GNMA II, 9/20/22 .............................. 2,549,517 2,519,229
6.00%, GNMA II, 7/20/23 .............................. 6,661,894(b) 6,549,441
6.75%, GNMA II, 6/20/23 .............................. 5,628,874 5,649,982
------------
92,757,782
------------
COLLATERALIZED MORTGAGE OBLIGATIONS AND
OTHER MORTGAGE-BACKED SECURITIES (50.4%):
ADJUSTABLE RATE (50.4%):
6.73%, California Federal, Series 1987-F, Class A2,
7/1/17 .............................................. 5,629,518 5,531,002
6.79%, Donaldson, Lufkin and Jenrette, Series 1991-3,
Class A1, 3/20/21 ................................... 7,948,462 8,013,043
6.94%, Donaldson, Lufkin and Jenrette, Series 1992-12,
Class A1, 12/25/22 .................................. 6,779,144 6,815,158
6.71%, Donaldson, Lufkin and Jenrette, Series 1992-6,
Class A3, 7/25/22 ................................... 3,512,459 3,497,092
7.79%, Donaldson, Lufkin and Jenrette, Series
1992-MF3, Class A3, 5/25/22 ......................... 10,000,000 10,156,250
7.17%, First Federal of Rochester, Series 1988-SE1,
Class A, 10/25/18 ................................... 10,572,510 10,470,088
6.66%, Merrill Lynch Mortgage Investors, Series
1992-E, Class A3, 9/15/17 ........................... 5,000,000 4,983,750
7.69%, Merrill Lynch Mortgage Investors, Series
1992-H, Class A1-2, 1/25/23 ......................... 4,392,791 4,399,512
6.71%, Merrill Lynch Mortgage Investors, Series
1993-B, Class A3, 12/15/17 .......................... 13,650,000 13,649,864
5.69%, Merrill Lynch Mortgage Investors, Series
1993-D, Class A1-2, 10/25/23 ........................ 4,000,000 3,848,760
6.81%, Merrill Lynch Mortgage Investors, Series
1993-E, Class A4, 6/15/18 ........................... 6,500,000 6,326,320
6.00%, Merrill Lynch Mortgage Investors, Series
1993-H, Class A1-2, 10/25/23 ........................ 3,640,000 3,495,820
6.35%, Paine Webber Mortgage Acceptance Corporation,
Series 1993-11, Class M1, 12/1/23 ................... 1,475,865 1,469,408
7.01%, Paine Webber Mortgage Acceptance Corporation,
Series 1993-8, Class M1, 8/25/23 .................... 6,771,161 6,720,377
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
--------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
AMERICAN ADJUSTABLE RATE TERM TRUST 1999
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
--------------------------------------------------------- -------------- ------------
<S> <C> <C>
6.63%, Residential Funding Corporation, Series
1992-S25, Class A, 7/25/22 ........................ $ 3,689,629 3,697,635
7.54%, Residential Funding Corporation, Series
1993-S8, Class A, 2/25/23 ........................... 5,651,338 5,722,601
6.78%, Resolution Trust Corporation, Series 1992-4,
Class B2, 7/25/28 ................................... 3,000,120 2,974,338
7.06%, Resolution Trust Corporation, Series 1992-6,
Class B3, 1/25/26 ................................... 10,002,236 9,852,202
7.74%, Salomon Brothers Mortgage, Series 1992-5, Class
A1, 11/25/22 ........................................ 3,348,845 3,323,729
6.52%, Sears Mortgage Securities, Series 1992-12,
Class A1, 7/25/22 ................................... 5,940,407 5,769,620
------------
120,716,569
------------
Total Mortgage-Backed Securities
(cost: $218,256,688) ............................... 213,474,351
------------
MUNICIPAL ZERO-COUPON SECURITIES (C) (15.2%):
Amarillo, Texas, School District, 5.44%, 2/1/99 ...... 4,300,000 3,504,500
Brazoria County, Texas, General Obligation,
5.54%-5.59%, 9/1/99-9/1/00 .......................... 1,425,000 1,084,656
Chelan County, Washington, Public Utilities District,
5.98%-6.09%, 7/1/99-7/1/00 .......................... 2,970,000 2,361,419
Cook and Will County, Illinois, Series A, 5.63%,
12/1/99 ............................................. 2,390,000 1,852,250
Copperas Cove, Texas, School District, 5.52%,
6/1/99 .............................................. 920,000 733,700
Cypress-Fairbanks, Texas, School District,
5.47%-5.64%, 2/1/99-2/1/00 .......................... 5,065,000 3,988,382
District of Columbia, General Obligation, 5.57%-5.71%,
6/1/99-6/1/00 ....................................... 13,900,000 10,609,500
Mesquite, Texas, School District, 5.63%, 8/15/99 ..... 1,605,000 1,265,944
Metropolitan Pier and Exposition Authority, Illinois,
State Revenue, 5.67%-5.69%, 6/15/99-12/15/99 ........ 7,875,000 6,217,762
North Slope Boro, Alaska, 5.58%, 6/30/99 ............. 4,710,000 3,673,800
Texas State General Obligation, 5.68%, 10/1/00 ....... 1,655,000 1,224,700
------------
Total Municipal Zero-Coupon Securities
(cost: $36,389,308) ................................ 36,516,613
------------
</TABLE>
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
--------------------------------------------------------- -------------- ------------
<S> <C> <C>
SHORT-TERM SECURITIES (7.1%):
Repurchase agreement with Morgan Stanley in a joint
trading account collateralized by U.S. government
agency securities, acquired on 2/28/95, accrued
interest at repurchase date of $2,886, 6.10%, 3/1/95
(cost: $17,032,000) ............................... $ 17,032,000 17,032,000
------------
Total Investments in Securities
(cost: $271,677,996) (d) ......................... $ 267,022,964
------------
------------
</TABLE>
NOTES TO INVESTMENTS IN SECURITIES:
<TABLE>
<S> <C>
(A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN
NOTE 2 TO THE FINANCIAL STATEMENTS.
(D) ON FEBRUARY 28, 1995, SECURITIES VALUED AT $39,416,280 WERE
PLEDGED AS COLLATERAL FOR THE FOLLOWING OUTSTANDING REVERSE
REPURCHASE AGREEMENTS:
</TABLE>
<TABLE>
<CAPTION>
NAME OF
BROKER AND
DESCRIPTION
ACQUISITION ACCRUED OF
AMOUNT DATE RATE* DUE INTEREST COLLATERAL
------------ ---------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
$16,000,000 12/15/94 6.50% 3/15/95 $219,558 (1)
20,000,000 2/24/95 6.15% 3/2/95 17,083 (2)
------------ ---------
$36,000,000 $236,641
------------ ---------
------------ ---------
*INTEREST RATE IS AS OF FEBRUARY 28, 1995. RATES ARE BASED ON THE
LONDON INTERBANK OFFERED RATE (LIBOR) AND RESET MONTHLY OR QUARTERLY.
</TABLE>
<TABLE>
<S> <C> <C>
NAME OF BROKER AND DESCRIPTION OF COLLATERAL:
(1) MORGAN STANLEY: FHLMC, ARM, 6.37%, 8/1/23, $1,269,624 PAR.
FHLMC, ARM, 6.30%, 6/1/22, $15,507,412 PAR.
(2) MORGAN STANLEY: GNMA II, ARM, 6.50%, 7/20/22, $4,169,463 PAR.
GNMA II, ARM, 6.50%, 9/20/22, $1,167,374 PAR.
GNMA II, ARM, 6.00%, 7/20/23, $2,893,178 PAR.
FHLMC, ARM, 6.30%, 6/1/22, $13,210,017 PAR.
(C) FOR ZERO-COUPON INVESTMENTS, THE INTEREST RATE SHOWN IS THE
EFFECTIVE YIELD ON THE DATE OF PURCHASE.
(D) AT FEBRUARY 28, 1995, FOR FEDERAL INCOME TAX PURPOSES, THE COST
OF INVESTMENT IN SECURITIES, INCLUDING THE PUT OPTIONS DESCRIBED
IN NOTE 5 TO THE FINANCIAL STATEMENTS, APPROXIMATED $273,687,996.
THE AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF
INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS FOLLOWS:
</TABLE>
<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION .... $ 427,964
GROSS UNREALIZED DEPRECIATION ...... (5,769,718)
-------------
NET UNREALIZED DEPRECIATION .... $ (5,341,754)
-------------
</TABLE>
THE BOARD OF DIRECTORS AND SHAREHOLDERS
American Adjustable Rate Term Trust Inc. -- 1996,
American Adjustable Rate Term Trust Inc. -- 1997,
Piper Funds Inc. -- II Adjustable Rate Mortgage Securities Fund
(formerly American Adjustable Rate Term Trust Inc. -- 1998), and
American Adjustable Rate Term Trust Inc. -- 1999:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments in securities, of American Adjustable Rate Term
Trust Inc. -- 1996, American Adjustable Rate Term Trust Inc. -- 1997, Piper
Funds Inc. -- II Adjustable Rate Mortgage Securities Fund (formerly American
Adjustable Rate Term Trust Inc. -- 1998), and American Adjustable Rate Term
Trust Inc. -- 1999 as of August 31, 1994, and the related statements of
operations and cash flows for the year then ended, the statements of changes in
net assets for each of the years in the two-year period ended August 31, 1994
(year ended August 31, 1994 and the period from September 24, 1992, commencement
of operations, to August 31, 1993 for American Adjustable Rate Term Trust Inc.
-- 1999) and the financial highlights presented in footnote 13 to the financial
statements. These financial statements and the financial highlights are the
responsibility of the funds' management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased but not received, we request confirmations
from brokers and, where replies are not received, we carry out other appropriate
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Adjustable Rate Term
Trust Inc. -- 1996, American Adjustable Rate Term Trust Inc. -- 1997, Piper
Funds Inc. -- II Adjustable Rate Mortgage Securities Fund (formerly American
Adjustable Rate Term Trust Inc. -- 1998), and American Adjustable Rate Term
Trust Inc. -- 1999 as of August 31, 1994, the results of their operations and
cash flows for the year then ended, the changes in their net assets for each
of the years in the two-year period ended August 31, 1994 (year ended
August 31, 1994 and the period from September 24, 1992 to August 31, 1993 for
American Adjustable Rate Term Trust Inc. -- 1999) and the financial
highlights presented in footnote 13 to the financial statements, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
October 20, 1994
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
AUGUST 31, 1994
Piper Funds
American American Inc. -- II American
Adjustable Adjustable Adjustable Rate Adjustable
Rate Term Rate Term Mortgage Rate Term
Trust 1996 Trust 1997 Securities Fund** Trust 1999
<S> <C> <C> <C> <C>
ASSETS:
Investments in securities at market value* (note 2) (including
repurchase agreements of $27,020,000; $18,339,000;
$33,714,000 and $25,644,000, respectively)..............$ 333,049,555 629,727,397 690,171,194 420,463,243
Investments in put options at market value (note 6)
(cost: $1,528,800; $2,575,600; $2,613,500 and
$2,010,000, respectively)................................ 9,233 1,367,220 2,846,703 3,729,875
Open interest rate swap transactions at market value (note 2) 883,773 2,545,250 2,494,235 276,000
Cash in bank on demand deposit.............................. 138,514 45,521 59,224 250,331
Accrued interest and mortgage security paydowns receivable.. 2,822,131 3,336,714 4,227,814 2,667,583
Total assets............................................. 336,903,206 637,022,102 699,799,170 427,387,032
LIABILITIES:
Payable for interest rate swap transactions at market value (note 2) -- -- 8,604,720 6,491,280
Deferred interest received on interest rate swap transaction (note 2) -- -- 1,702,775 1,277,081
Payable for investment securities purchased - when-issued
transactions (note 2).................................... 24,389,158 63,953,125 43,728,125 38,998,437
Reverse repurchase agreements payable....................... 70,000,000 125,000,000 145,000,000 85,000,000
Payable for fund shares retired............................. 60,210 148,531 176,925 191,123
Accrued investment management fee........................... 71,752 132,765 149,458 88,232
Accrued administrative fee.................................. 30,751 56,899 64,057 37,814
Accrued interest............................................ 263,667 342,217 311,358 144,175
Total liabilities........................................ 94,815,538 189,633,537 199,737,418 132,228,142
Net assets applicable to outstanding capital stock......$ 242,087,668 447,388,565 500,061,752 295,158,890
REPRESENTED BY:
Capital stock - authorized 1 billion shares of $0.01
par value for each fund, outstanding, 26,787,300;
50,249,912; 56,689,936 and 33,886,234 shares,
respectively (note 7)...................................$ 267,873 502,499 566,899 338,862
Additional paid-in capital.................................. 256,240,119 481,435,877 543,191,714 324,632,520
Undistributed net investment income......................... 10,238,410 11,548,663 7,060,244 2,115,191
Accumulated net realized loss on investments................ (18,707,511) (35,875,182) (29,024,290) (17,812,871)
Unrealized depreciation of investments (note 2)............. (5,951,223) (10,223,292) (21,732,815) (14,114,812)
Total representing net assets applicable to outstanding
capital stock.........................................$ 242,087,668 447,388,565 500,061,752 295,158,890
Net asset value per share of outstanding capital stock.....$ 9.04 8.90 8.82 8.71
* Investments in securities at identified cost.............$ 338,364,984 641,287,559 706,026,727 430,082,650
** Formerly American Adjustable Rate Term Trust 1998. See note 12 to the
financial statements.
</TABLE>
See accompanying Notes to Financial Statements.
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED
AUGUST 31, 1994
Piper Funds
American American Inc. -- II American
Adjustable Adjustable Adjustable Rate Adjustable
Rate Term Rate Term Mortgage Rate Term
Trust 1996 Trust 1997 Securities Fund** Trust 1999
<S> <C> <C> <C> <C>
INCOME:
Interest (net of interest expense of $2,836,648;
$5,157,609; $5,444,229 and $3,440,574, respectively)..$ 16,577,759 30,631,250 32,695,497 18,701,634
Fee income (note 2)...................................... 2,564,315 3,976,672 4,378,739 3,347,864
Total income........................................... 19,142,074 34,607,922 37,074,236 22,049,498
EXPENSES (note 3):
Investment management fee................................ 880,094 1,643,704 1,857,513 1,101,996
Administrative fee....................................... 377,183 704,445 796,077 472,284
Custodian, accounting and transfer agent fees............ 165,276 235,002 258,270 177,831
Audit and legal fees..................................... 24,443 33,061 33,141 29,593
Directors' fees.......................................... 22,481 22,481 29,980 22,480
Registration fees........................................ 32,340 48,410 40,650 24,260
Shareholder reports...................................... 73,503 120,315 131,840 54,088
Federal excise tax expense (note 2)...................... 26,538 -- -- --
Other expenses........................................... 20,090 36,240 34,651 6,284
Total expenses......................................... 1,621,948 2,843,658 3,182,122 1,888,816
Investment income - net................................ 17,520,126 31,764,264 33,892,114 20,160,682
REALIZED AND UNREALIZED GAINS (LOSSES)
ON INVESTMENTS:
Net realized loss on investments (note 4)................ (11,402,927) (19,668,298) (23,344,737) (16,565,853)
Net realized gain on closed or expired
option contracts written (note 5)...................... 62,650 87,650 87,650 86,869
Net realized loss on closed interest rate swap transactions -- (4,248,003) (1,513,807) (1,283,807)
Net realized gain (loss) on closed futures contracts..... 1,022,219 25,563 (241,981) 319,612
Net realized loss on investments....................... (10,318,058) (23,803,088) (25,012,875) (17,443,179)
Net change in unrealized appreciation or
depreciation of investments............................ (9,945,239) (19,413,596) (25,676,685) (14,015,353)
Net loss on investments............................. (20,263,297) (43,216,684) (50,689,560) (31,458,532)
Net decrease in net assets resulting
from operations....................................$ (2,743,171) (11,452,420) (16,797,446) (11,297,850)
** Formerly American Adjustable Rate Term Trust 1998. See note 12 to the
financial statements.
</TABLE>
See accompanying Notes to Financial Statements.
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED
AUGUST 31, 1994
Piper Funds
American American Inc. -- II American
Adjustable Adjustable Adjustable Rate Adjustable
Rate Term Rate Term Mortgage Rate Term
Trust 1996 Trust 1997 Securities Fund** Trust 1999
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and fee income.................................$ 19,142,074 34,607,922 37,074,236 22,049,498
Expenses................................................. (1,621,948) (2,843,658) (3,182,122) (1,888,816)
Net investment income.................................. 17,520,126 31,764,264 33,892,114 20,160,682
ADJUSTMENTS TO RECONCILE NET INVESTMENT INCOME TO CASH PROVIDED (USED) BY
OPERATING ACTIVITIES:
Change in accrued interest and mortgage
security paydowns receivable........................... 1,484,909 2,761,661 2,181,429 2,340,832
Net amortization of discount and premium................. (2,166,643) (3,681,606) (3,114,617) (1,718,087)
Change in accrued fees/expenses and other payables....... 52,655 158,268 155,968 70,981
Total adjustments...................................... (629,079) (761,677) (777,220) 693,726
Net cash provided by operating activities............ 16,891,047 31,002,587 33,114,894 20,854,408
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments....................... 311,555,744 481,222,722 530,203,690 325,116,671
Purchases of investments................................. (236,101,024) (394,836,979) (433,538,389) (249,792,032)
Net purchases of short-term securities................... (66,810,995) (52,049,866) (99,832,303) (60,993,307)
Cash received (paid) for interest rate swap transactions. -- (4,248,003) 188,968 (6,726)
Net variation margin receipts for futures contracts...... 2,894,094 3,002,126 2,984,582 2,583,675
Net premium receipts (payments) for option
contracts written ..................................... 20,462 3,275 3,275 (10,006)
Net cash provided by investment activities........... 11,558,281 33,093,275 9,823 16,898,275
CASH FLOWS FROM FINANCING ACTIVITIES:
Retirement of fund shares (note 7)....................... (1,155,260) (2,288,968) (2,591,847) (1,483,301)
Net payments for reverse repurchase agreements........... (15,574,000) (36,500,000) -- (17,148,000)
Distributions paid to shareholders....................... (12,495,376) (26,867,223) (31,740,989) (19,454,086)
Net cash used by financing activities................ (29,224,636) (65,656,191) (34,332,836) (38,085,387)
Net decrease in cash........................................ (775,308) (1,560,329) (1,208,119) (332,704)
Cash at beginning of year................................... 913,822 1,605,850 1,267,343 583,035
Cash at end of year........................................$ 138,514 45,521 59,224 250,331
Supplemental disclosure of cash flow information:
Cash paid for interest on reverse
repurchase agreements.................................$ 2,764,019 4,964,126 5,248,856 3,346,462
** Formerly American Adjustable Rate Term Trust 1998. See note 12 to the
financial statements.
</TABLE>
See accompanying Notes to Financial Statements.
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
AMERICAN ADJUSTABLE RATE TERM TRUST 1996
Year Year
Ended Ended
8/31/94 8/31/93
<S> <C> <C>
OPERATIONS:
Net investment income..................................................................$ 17,520,126 20,300,960
Net realized loss on investments........................................................ (10,318,058) (8,675,071)
Net change in unrealized appreciation or depreciation of investments.................... (9,945,239) 1,318,716
Net increase (decrease) in net assets resulting from operations....................... (2,743,171) 12,944,605
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................................................................... (12,495,376) (16,736,995)
CAPITAL STOCK TRANSACTIONS:
Payments for retirement of 142,700 and 0 shares, respectively (note 7).................. (1,215,470) --
Total decrease in net assets.......................................................... (16,454,017) (3,792,390)
Net assets at beginning of year............................................................ 258,541,685 262,334,075
Net assets at end of year.................................................................$ 242,087,668 258,541,685
Undistributed net investment income.......................................................$ 10,238,410 5,738,725
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
AMERICAN ADJUSTABLE RATE TERM TRUST 1997
Year Year
Ended Ended
8/31/94 8/31/93
OPERATIONS:
<S> <C> <C>
Net investment income..................................................................$ 31,764,264 36,536,397
Net realized loss on investments........................................................ (23,803,088) (12,813,686)
Net change in unrealized appreciation or depreciation of investments.................... (19,413,596) 7,929,744
Net increase (decrease) in net assets resulting from operations....................... (11,452,420) 31,652,455
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................................................................... (26,867,223) (32,189,316)
Net realized gains...................................................................... -- (368,946)
Total distributions................................................................... (26,867,223) (32,558,262)
CAPITAL STOCK TRANSACTIONS:
Payments for retirement of 290,700 and 0 shares, respectively (note 7).................. (2,437,499) --
Total decrease in net assets.......................................................... (40,757,142) (905,807)
Net assets at beginning of year............................................................ 488,145,707 489,051,514
Net assets at end of year.................................................................$ 447,388,565 488,145,707
Undistributed net investment income.......................................................$ 11,548,663 7,788,501
</TABLE>
See accompanying Notes to Financial Statements.
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
PIPER FUNDS INC. -- II AMERICAN ADJUSTABLE RATE TERM TRUST 1998
(FORMERLY AMERICAN ADJUSTABLE RATE TERM TRUST 1998)
Year Year
Ended Ended
8/31/94 8/31/93
<S> <C> <C>
OPERATIONS:
Net investment income..................................................................$ 33,892,114 39,718,318
Net realized loss on investments........................................................ (25,012,875) (4,404,168)
Net change in unrealized appreciation or depreciation of investments.................... (25,676,685) (1,499,321)
Net increase (decrease) in net assets resulting from operations....................... (16,797,446) 33,814,829
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................................................................... (31,740,989) 37,830,343)
CAPITAL STOCK TRANSACTIONS:
Payments for retirement of 335,000 and 0 shares, respectively (note 7).................. (2,768,772) --
Total decrease in net assets.......................................................... (51,307,207) (4,015,514)
Net assets at beginning of year............................................................ 551,368,959 555,384,473
Net assets at end of year.................................................................$ 500,061,752 551,368,959
Undistributed net investment income.......................................................$ 7,060,244 6,170,672
</TABLE>
See accompanying Notes to Financial Statements.
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
AMERICAN ADJUSTABLE RATE TERM TRUST 1999
Year Year
Ended Ended
8/31/94 8/31/93
<S> <C> <C>
OPERATIONS:
Net investment income..................................................................$ 20,160,682 18,083,052
Net realized loss on investments........................................................ (17,443,179) (1,365,376)
Net change in unrealized depreciation of investments.................................... (14,015,353) (99,459)
Net increase (decrease) in net assets resulting from operations....................... (11,297,850) 16,618,217
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income.............................................................. (19,270,500) (15,678,773)
In excess of net realized gains (note 2)................................................ (183,586) --
Total distributions................................................................... (19,454,086) (15,678,773)
CAPITAL STOCK TRANSACTIONS:
Proceeds from initial and additional public offerings of 30,000,000 total shares,
net of underwriting discounts and offering expenses of $12,635,000.................... -- 287,365,000
Proceeds from issuance of 4,081,334 shares in connection with exercising of
over-allotment options granted to underwriters of the initial and
additional public offerings, net of underwriting discounts of $1,632,534.............. -- 39,180,806
Payments for retirement of 205,100 and 0 shares, respectively (note 7).................. (1,674,424) --
Increase (decrease) in net assets from capital stock transactions..................... (1,674,424) 326,545,806
Total increase (decrease) in net assets............................................ (32,426,360) 327,485,250
Net assets at beginning of period (note 1)................................................. 327,585,250 100,000
Net assets at end of period...............................................................$ 295,158,890 327,585,250
Undistributed net investment income.......................................................$ 2,115,191 2,321,134
</TABLE>
* Commencement of operations.
See accompanying Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION
American Adjustable Rate Term Trusts 1996 (BDJ), 1997 (CDJ), 1998 (DDJ) and 1999
(EDJ) are registered under the Investment Company Act of 1940 (as amended) as
diversified, closed-end management investment companies. BDJ, CDJ, DDJ and EDJ
commenced operations on September 27, 1990; July 24, 1991; January 30, 1992; and
September 24, 1992; respectively, upon completion of initial public offerings of
common stock. Shares of the funds are listed on the New York Stock Exchange. The
only transaction for each fund prior to commencement of operations was the sale
to Piper Jaffray Companies Inc. of 10,000 shares of common stock for $100,000.
Hereafter, DDJ is referred to in the financial statements and notes thereto as
its successor Piper Funds Inc. -- II Adjustable Rate Mortgage Securities Fund
(ARM).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investments in Securities
The values of fixed income securities are determined using pricing services or
prices quoted by independent brokers. Exchange-listed options are valued at the
last sale price and open financial futures contracts are valued at the last
settlement price. When market quotations are not readily available, securities
are valued at fair value according to methods selected in good faith by the
board of directors. Short-term securities with maturities less than 60 days are
valued at amortized cost which approximates market value.
Securities transactions are accounted for on the date the securities are
purchased or sold. Realized gains and losses are calculated on the
identified-cost basis. Interest income, including amortization of bond discount
and premium computed on a level-yield basis, is accrued daily.
Option Transactions
For hedging purposes, the funds may buy and sell put and call options, write
covered call options on portfolio securities, write cash-secured puts, and write
call options that are not covered for cross-hedging purposes. The risk in
writing a call option is that a fund gives up the opportunity for profit if the
market price of the security increases. The risk in writing a put option is that
a fund may incur a loss if the market price of the security decreases and the
option is exercised. The risk in buying an option is that a fund pays a premium
whether or not the option is exercised. A fund also has the additional risk of
not being able to enter into a closing transaction if a liquid secondary market
does not exist. The funds also may write over-the-counter options where the
completion of the obligation is dependent upon the credit standing of another
party.
Option contracts are valued daily, and unrealized appreciation or depreciation
is recorded. A fund will realize a gain or loss upon expiration or closing of
the option transaction. When an option is exercised, the proceeds on sales for a
written call option, the purchase cost for a written put option, or the cost of
a security for a purchased put or call option is adjusted by the amount of
premium received or paid.
Futures Transactions
In order to gain exposure to or protect against changes in the market, the funds
may buy and sell interest rate futures contracts and related options. Risks of
entering into futures contracts and related options include the possibility of
an illiquid market and that a change in the value of the contract or option may
not correlate with changes in the value of the underlying securities.
Upon entering into a futures contract, a fund is required to deposit either cash
or securities in an amount (initial margin) equal to a certain percentage of the
contract value. Subsequent payments (variation margin) are made or received by a
fund each day. The variation margin payments are equal to the daily changes in
the contract value and are recorded as unrealized gains and losses. A fund
recognizes a realized gain or loss when the contract is closed or expires.
Interest Rate Transactions
To preserve a return or spread on a particular investment or portion of its
portfolio or for other non-speculative purposes, the funds may enter into
interest rate swaps and the purchase or sale of interest rate caps and floors.
Interest rate swaps involve the exchange of commitments to pay or receive
interest, e.g., an exchange of floating-rate payments for fixed rate payments.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
interest on a contractually based notional principal amount from the party
selling such an interest rate cap. The purchase of an interest rate floor
entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on a contractually
based notional principal amount from the party selling such an interest rate
floor.
If forecasts of interest rates and other market factors are incorrect,
investment performance will diminish compared to what performance would have
been if these investment techniques were not used. Even if the forecasts are
correct, there is risk that the positions may correlate imperfectly with the
asset or liability being hedged. Other risks of entering into these transactions
are that a liquid secondary market may not always exist, or that another party
to a transaction may not perform.
For interest rate swaps, the funds accrue weekly, as an increase or decrease to
interest income, the net amount due or owed by the funds. Interest rate swap,
cap and floor valuations are based on prices quoted by independent brokers.
These valuations represent the net present value of all future cash settlement
amounts based on implied forward interest rates.
As of August 31, 1994, BDJ, CDJ, ARM and EDJ had entered into the following
interest rate swap agreements. In each agreement, the funds have exchanged
floating rates for floating or fixed rates. The terms vary among the contracts
but provide for the interest rate differential to be settled either on a
monthly, quarterly or semi-annual basis. During the year ended August 31, 1994,
cash payments were received by ARM and EDJ in connection with certain interest
rate swap agreements. The payments were initially deferred and are being
amortized as interest income over the life of the interest rate swap agreements.
At August 31, 1994, remaining amounts of deferred interest were $1,702,775 and
$1,277,081 for ARM and EDJ, respectively.
<TABLE>
<CAPTION>
Rate Paid Rate Received Net Net
Swap Notional by the Fund by the Fund Floating Termination Unrealized Unrealized
Fund Counter-Party Principal at 8/31/94 at 8/31/94 Rate Index Date Gain Loss
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BDJ Lehman Brothers $ 30,000,000 3.80% (a) 6.76% (b) 11th District COFI 3/22/96 $ 883,773 --
CDJ Lehman Brothers $ 50,000,000 3.80% (a) 6.76% (b) 11th District COFI 11/22/96 $ 1,726,225 --
Lehman Brothers 25,000,000 3.08% (a) 6.63% (b) 11th District COFI 2/27/97 819,025 --
$ 2,545,250 --
ARM Lehman Brothers $ 50,000,000 3.80% (a) 6.67% (b) 11th District COFI 1/28/97 $ 1,675,730 --
Lehman Brothers 25,000,000 3.08% (a) 6.63% (b) 11th District COFI 5/25/97 818,505 --
Merrill Lynch 100,000,000 4.98% (a) 3.59% (a) FNMA Discount Rate/
10x10-year Swap Spread 4/23/98 -- (8,604,720)
$ 2,494,235 (8,604,720)
EDJ Merrill Lynch $ 30,000,000 3.08% (a) 5.53% (b) 11th District COFI 10/5/97 $ 276,000 --
Merrill Lynch 75,000,000 4.98% (a) 3.59% (a) FNMA Discount Rate/
10x10-year Swap Spread 4/23/98 -- (6,491,280)
$ 276,000 (6,491,280)
</TABLE>
(a) Floating rate.
(b) Fixed rate.
Securities Purchased on a When-Issued Basis
Delivery and payment for securities that have been purchased by the funds on a
forward-commitment or when-issued basis can take place one month or more after
the transaction date. During this period, such securities do not earn interest,
are subject to market fluctuations and may increase or decrease in value prior
to their delivery. The funds maintain, in segregated accounts with their
custodian, securities with a market value equal to the amount of their purchase
commitments. The purchase of securities on a when-issued or forward-commitment
basis may increase the volatility of the funds' NAVs to the extent the funds
make such purchases while remaining substantially fully invested. As of August
31, 1994, the funds had entered into outstanding when-issued or forward
commitments of $24,389,158; $63,953,125; $43,728,125 and $38,998,437 for BDJ,
CDJ, ARM and EDJ, respectively.
Consistent with their ability to purchase securities on a when-issued or
forward-commitment basis, the funds may enter into mortgage "dollar rolls" in
which the funds sell securities for delivery in the current month and
simultaneously contract with the same counterparty to repurchase similar (same
type, coupon and maturity) but not identical securities sold. As an inducement
to "roll over" their purchase commitments, the funds receive negotiated fees.
For the year ended August 31, 1994, such fees earned by the funds amounted to
$2,564,315; $3,976,672; $4,378,739 and $3,347,864 for BDJ, CDJ, ARM and EDJ,
respectively.
Federal Taxes
Each fund's policy is to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and not be subject to federal
income tax. Therefore, no income tax provision is required. However, BDJ
incurred federal excise taxes of $26,538 ($0.001 per share) on income retained
by the funds during the 1993 excise tax year.
Net investment income and net realized gains (losses) may differ for financial
statement and tax purposes primarily because of the recognition of certain
foreign currency gains (losses) as ordinary income for tax purposes, and losses
deferred due to "wash sale" and "straddle" transactions. The character of
distributions made during the year from net investment income or net realized
gains may differ from their ultimate characterization for federal income tax
purposes. The effect on dividend distributions of certain book-to-tax
differences is presented as an "excess distribution" in the statement of changes
in net assets. Also, due to the timing of dividend distributions, the fiscal
year in which amounts are distributed may differ from the year that the income
or realized gains (losses) were recorded by the fund.
On the statements of assets and liabilities, as a result of permanent
book-to-tax differences, reclassification adjustments have been made as follows:
<TABLE>
<CAPTION>
BDJ CDJ ARM EDJ
<S> <C> <C> <C> <C>
Decrease accumulated net realized
loss on investments $ 551,603 1,136,879 1,261,553 1,096,125
Decrease undistributed net
investment income 525,065 1,136,879 1,261,553 1,096,125
Decrease additional paid-in capital $ 26,538 -- -- --
</TABLE>
Distributions
The funds pay monthly distributions from net investment income. Realized capital
gains, if any, will be distributed on an annual basis. These distributions are
recorded as of the close of business on the ex-dividend date. Such distributions
are payable in cash or, pursuant to the funds' dividend reinvestment plan,
reinvested in additional shares of the funds' common stock. Under the plan, fund
shares will be purchased in the open market.
Repurchase Agreements
For repurchase agreements entered into with certain broker-dealers, the funds
along with other affiliated registered investment companies may transfer
uninvested cash balances into a joint trading account, the daily aggregate of
which is invested in repurchase agreements secured by U.S. government and agency
obligations. Securities pledged as collateral for all individual and joint
repurchase agreements are held by the funds' custodian bank until maturity of
the repurchase agreements. Provisions for all agreements ensure the daily market
value of the collateral is in excess of the repurchase amount in the event of
default.
(3) EXPENSES
The funds have entered into the following agreements with Piper Capital
Management Incorporated (the adviser and administrator):
The investment advisory agreement provides the adviser with a monthly investment
management fee based on fund's average weekly net assets computed at the
per-annum rate of 0.35%. For its fee, the adviser provides investment advice
and, in general, conducts the management and investment activity of the fund.
The administration agreement provides the administrator with a monthly fee in an
amount equal to an annualized rate of 0.15% of the fund's average weekly net
assets. For its fee, the administrator provides certain reporting, regulatory
and record-keeping services for the funds.
In addition to the investment management fee and the administrative fee, the
funds are responsible for paying most other operating expenses including outside
directors' fees and expenses, custodian fees, registration fees, printing and
shareholder reports, transfer agent fees and expenses, legal, auditing and
accounting services, insurance, interest, taxes and other miscellaneous
expenses.
(4) SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other than
temporary investments in short-term securities) for the year ended August 31,
1994, were as follows:
Purchases Sales Proceeds
BDJ........................$ 162,505,754 311,372,150
CDJ........................$ 302,755,288 480,590,691
ARM........................$ 299,438,007 529,572,440
EDJ........................$ 165,609,875 324,311,984
During the year ended August 31, 1994, the funds paid Piper Jaffray Inc., an
affiliated broker, brokerage commissions of $48,875; $61,625; $63,325 and
$48,450 for BDJ, CDJ, ARM and EDJ, respectively.
(5) OPTION CONTRACTS WRITTEN
The number of contracts and premium amounts associated with option contracts
written during the year ended August 31, 1994, for BDJ, CDJ, ARM and EDJ were as
follows:
<TABLE>
<CAPTION>
Call Options Put Options
Number of Premium Number of Premium
Contracts Amount Contracts Amount
American Adjustable Rate Term Trust 1996
<S> <C> <C> <C> <C>
Balance at August 31, 1993.......... 100 $ 42,188 -- $ --
Opened.............................. 350 239,775 100 16,338
Closed or expired................... (450) (281,963) (100) (16,338)
Balance at August 31, 1994.......... -- $ -- -- $ --
</TABLE>
<TABLE>
<CAPTION>
Call Options Put Options
Number of Premium Number of Premium
Contracts Amount Contracts Amount
American Adjustable Rate Term Trust 1997
<S> <C> <C> <C> <C>
Balance at August 31, 1993.......... 200 $ 84,375 -- $ --
Opened.............................. 600 450,713 100 16,338
Closed or expired................... (800) (535,088) (100) (16,338)
Balance at August 31, 1994.......... -- $ -- -- $ --
</TABLE>
<TABLE>
<CAPTION>
Call Options Put Options
Number of Premium Number of Premium
Contracts Amount Contracts Amount
Piper Funds Inc. -- II Adjustable Rate Mortgage
Securities Fund
(Formerly American Adjustable Rate Term Trust 1998)
<S> <C> <C> <C> <C>
Balance at August 31, 1993.......... 200 $ 84,375 -- $ --
Opened.............................. 600 450,713 100 16,338
Closed or expired................... (800) (535,088) (100) (16,338)
Balance at August 31, 1994.......... -- $ -- -- $ --
</TABLE>
<TABLE>
<CAPTION>
Call Options Put Options
Number of Premium Number of Premium
Contracts Amount Contracts Amount
American Adjustable Rate Term Trust 1999
<S> <C> <C> <C> <C>
Balance at August 31, 1993.......... 200 $ 96,875 -- $ --
Opened.............................. 800 503,838 100 16,338
Closed or expired................... (1,000) (600,713) (100) (16,338)
Balance at August 31, 1994.......... -- $ -- -- $ --
</TABLE>
(6) INVESTMENTS IN PUT OPTIONS
In order to hedge the value of adjustable rate mortgage securities under certain
interest rate scenarios, each fund purchased four-year U.S. Treasury note put
option contracts. Each fund will be entitled to a cash payment during the
exercise period if at such time yields on the then current four-year U.S.
Treasury notes are in excess of the strike yield specified in the option
contracts.
<TABLE>
<CAPTION>
Piper Funds
American American Inc. -- II American
Adjustable Adjustable Adjustable Rate Adjustable
Rate Term Rate Term Mortgage Rate Term
Trust 1996 Trust 1997 Securities Fund** Trust 1999
<S> <C> <C> <C> <C>
Number of contracts..... 2,170 4,060 4,550 2,650
Notional value.........$ 217,000,000 406,000,000 455,000,000 265,000,000
Purchase price.........$ 1,528,800 2,575,600 2,613,500 2,010,000
Exercise period......... 3/1/96-3/31/96 3/1/97-3/31/97 3/1/98-3/31/98 3/1/99-3/31/99
Strike yield............ 11.25% 11.00% 11.00% 10.50%
</TABLE>
** Formerly American Adjustable Rate Term Trust 1998.
(7) RETIREMENT OF FUND SHARES
The funds' board of directors has approved a plan to repurchase shares of the
funds in the open market and retire those shares. Repurchases may only be made
when the previous day's closing market price was at a discount from net asset
value. Daily repurchases are limited to 25% of the previous four weeks average
daily trading volume on the New York Stock Exchange. Under the current plan,
cumulative repurchases in each fund cannot exceed 3% of the total shares
originally issued. The board of directors will review the plan every six months
and may change the amount which may be repurchased. The plan was last reviewed
and reapproved by the board of directors on August 22, 1994. Pursuant to the
plan, the funds have repurchased and retired the following number of shares as
of August 31, 1994: Call Options Put Options
Shares Percent of Shares
Repurchased Originally Issued
BDJ........................ 142,700 0.53%
CDJ........................ 290,700 0.58%
ARM........................ 335,000 0.59%
EDJ........................ 205,100 0.60%
(8) QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
Net Realized Net Increase (Decrease) Distributions Distributions Quarter
Total Net and Unrealized in Net Assets From Net in Excess of End
Investment Investment Losses Resulting Investment Net Realized Net Asset
Quarter Ended Income Income on Investments from Operations Income Gains Value
American Adjustable Rate Term Trust 1996
Per Per Per Per Per
Amount Share Amount Share Amount Share Amount Share Amount Share
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
November 30,
1993.......$5,253,479 4,840,044 0.18 (1,053,003) (0.04) 3,787,041 0.14 (3,616,699) (0.13) -- -- 9.61
February 28,
1994....... 5,269,613 4,853,352 0.18 (5,018,340) (0.19) (164,988) (0.01) (3,433,577) (0.13) -- -- 9.47
May 31,
1994....... 4,357,981 3,973,214 0.15 (12,433,124) (0.46) (8,459,910) (0.31) (3,029,250) (0.11) -- -- 9.05
August 31,
1994....... 4,261,001 3,853,516 0.14 (1,758,830) (0.06) 2,094,686 0.08 (2,415,850) (0.09) -- -- 9.04
$ 19,142,074 17,520,126 0.65 (20,263,297) (0.75) (2,743,171) (0.10) (12,495,376) (0.46) -- --
</TABLE>
American Adjustable Rate Term Trust 1997
<TABLE>
<CAPTION>
Per Per Per Per Per
Amount Share Amount Share Amount Share Amount Share Amount Share
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
November 30,
1993.......$9,463,769 8,686,761 0.17 (3,784,984) (0.08) 4,901,777 0.09 (7,581,090) (0.15) -- -- 9.60
February 28,
1994....... 9,317,595 8,659,087 0.17 (10,702,263) (0.21) (2,043,176) (0.04) (7,126,226) (0.14) -- -- 9.42
May 31,
1994....... 8,134,251 7,497,603 0.15 (26,630,581) (0.53) (19,132,978) (0.38) (6,492,302) (0.13) -- -- 8.91
August 31,
1994....... 7,692,307 6,920,813 0.14 (2,098,856) (0.04) 4,821,957 0.10 (5,667,605) (0.11) -- -- 8.90
$ 34,607,922 31,764,264 0.63 (43,216,684) (0.86) (11,452,420) (0.23) (26,867,223) (0.53) -- --
</TABLE>
Piper Funds Inc. -- II Adjustable Rate Mortgage Securities Fund
(Formerly American Adjustable Rate Term Trust 1998)
<TABLE>
<CAPTION>
Per Per Per Per Per
Amount Share Amount Share Amount Share Amount Share Amount Share
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
November 30,
1993.....$ 10,296,384 9,487,106 0.17 (3,332,834) (0.06) 6,154,272 0.11 (8,895,890) (0.16) -- -- 9.62
February 28,
1994..... 10,095,038 9,295,712 0.16 (9,663,007) (0.17) (367,295) (0.01) (8,382,665) (0.15) -- -- 9.46
May 31,
1994..... 9,009,810 8,188,824 0.15 (30,378,368) (0.53) (22,189,544) (0.38) (7,640,641) (0.13) -- -- 8.95
August 31,
1994..... 7,673,004 6,920,472 0.12 (7,315,351) (0.13) (394,879) (0.01) (6,821,793) (0.12) -- -- 8.82
$ 37,074,236 33,892,114 0.60 (50,689,560) (0.89) (16,797,446) (0.29) (31,740,989) (0.56) -- --
</TABLE>
American Adjustable Rate Term Trust 1999
<TABLE>
<CAPTION>
Per Per Per Per Per
Amount Share Amount Share Amount Share Amount Share Amount Share
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
November 30,
1993.....$ 5,927,953 5,463,717 0.16 (486,747) (0.01) 4,976,970 0.15 (5,318,248) (0.16) -- -- 9.60
February 28,
1994..... 5,720,578 5,232,284 0.16 (4,595,870) (0.13) 636,414 0.03 (5,113,700) (0.15) (183,586)(0.01) 9.47
May 31,
1994..... 5,533,724 5,067,342 0.15 (20,710,774) (0.61) (15,643,432) (0.46) (4,503,696) (0.13) -- -- 8.88
August 31,
1994..... 4,867,243 4,397,339 0.13 (5,665,141) (0.18) (1,267,802) (0.05) (4,334,856) (0.12) -- -- 8.71
$ 22,049,498 20,160,682 0.60 (31,458,532) (0.93) (11,297,850) (0.33) (19,270,500) (0.56) (183,586)(0.01)
</TABLE>
(9) CAPITAL LOSS CARRYOVER
For federal income tax purposes, the funds had capital loss carryovers of
$18,707,511; $35,875,182; $29,024,290 and $17,812,871 for BDJ, CDJ, ARM and EDJ,
respectively, at August 31, 1994. If these loss carryovers are not offset by
subsequent capital gains, they will expire at various times during 1999 through
2003. It is unlikely the board of directors will authorize a distribution of any
net realized capital gains until the available capital loss carryovers have been
offset or expire.
(10) SUBSEQUENT EVENT -- TENDER OFFER OF FUND SHARES
On August 22, 1994, shareholders of the funds approved a fundamental policy that
allows shareholders of BDJ, CDJ, ARM, and EDJ to periodically tender their
shares back to the respective fund at net asset value. A tender of 5% to 25% of
the outstanding shares will be offered annually and is voluntary. Shareholders
may elect not to tender their shares, or may tender only a portion of their
shares.
The first tender offer to repurchase up to 25% of each fund's outstanding shares
was mailed to shareholders on September 6, 1994. The deadline for participating
in the offer was October 3, 1994. The repurchase prices were determined on
October 10, 1994, at the close of the New York Stock Exchange (4 p.m. Eastern
Time). Proceeds of the tender offer were paid to shareholders on October 17,
1994. The total proceeds paid by the funds and number and percentage of shares
tendered are as follows:
<TABLE>
<CAPTION>
Percentage Shares Repurchase Proceeds
Tendered Tendered Price Paid
<S> <C> <C> <C> <C>
BDJ........................ 18% 4,767,018 $8.98 $42,807,822
CDJ........................ 15% 7,396,113 $8.79 $65,011,833
DDJ........................ 16% 9,135,819 $8.69 $79,390,267
EDJ........................ 16% 5,535,062 $8.53 $47,214,079
</TABLE>
(11) SUBSEQUENT EVENT -- PENDING LITIGATION
A complaint purporting to be a class action lawsuit has been filed in the United
States District Court for the District of Minnesota, by Herman D. Gordon,
against DDJ and EDJ, Piper Capital Management Incorporated, Piper Jaffray Inc.,
and certain affiliated individuals. The complaint, which was filed on October
20, 1994, alleges violations of federal securities laws. DDJ and EDJ intend to
defend this lawsuit vigorously. Although it is impossible to predict the
outcome, management believes, based on the facts currently available, there will
be no material adverse effect on the financial statements of DDJ or EDJ.
(12) SUBSEQUENT EVENT -- FUND MERGER (UNAUDITED)
On August 10, 1995 Shareholders of each of the funds approved a merger with and
into Piper Funds Inc.--II Adjustable Rate Mortgage Securities Fund, an open-end
management investment company. The merger became effective at the close of
business on September 1, 1995, the date the Articles of Merger were filed with
the Secretary of State of Minnesota. DDJ is considered the surviving entity for
financial reporting purposes. As such, only the historical financial information
of DDJ is material with respect to the future financial reporting of Piper Funds
Inc. -- II Adjustable Rate Mortgage Securities Fund.
(13) FINANCIAL HIGHLIGHTS
Per-share data for a share of capital stock outstanding throughout each period
and selected information for each period are as follows:
<TABLE>
<CAPTION>
Year Year Year Period from
Ended Ended Ended 9/27/90*
Per-Share Data 8/31/94 8/31/93 8/31/92 to 8/31/91
American Adjustable Rate Term Trust 1996
<S> <C> <C> <C> <C>
Net asset value, beginning of period............................$ 9.60 9.74 9.64 9.53
Operations:
Net investment income......................................... 0.65 0.75 0.82 0.83
Net realized and unrealized gains (losses) on investments..... (0.75) (0.27) 0.07 0.05
Total from operations..................................... (0.10) 0.48 0.89 0.88
Distributions to shareholders from:
Net investment income......................................... (0.46) (0.62) (0.79) (0.77)
Net asset value, end of period..................................$ 9.04 9.60 9.74 9.64
Per share market value, end of period...........................$ 8.50 9.50 10.25 10.13
Selected Information
Total investment return, market value**.......................... (5.94%) (1.37%) 9.29% 9.15%
Total investment return, net asset value+........................ (1.06%) 5.18% 9.58% 9.55%
Net assets at end of period (000s omitted)......................$ 242,088 258,542 262,334 259,506
Ratio of expenses to average weekly net assets***................ 0.65% 0.61% 0.62% 0.64%++
Ratio of net investment income to average weekly net assets***... 6.97% 7.91% 8.44% 9.09%++
Portfolio turnover rate (excluding short-term securities)........ 43% 58% 26% 60%
Amount of borrowings outstanding at end of period
(000s omitted)+++.............................................$ 70,000 85,574 70,000 70,117
Per-share amount of borrowings outstanding at end of period.....$ 2.61 3.18 2.60 2.60
Per-share asset coverage of borrowings outstanding at end of
period++++....................................................$ 11.65 12.78 12.34 12.24
</TABLE>
* Commencement of operations.
** Total investment return, market value, is based on the change in market
price of a common share during the period and assumes reinvestment of
distributions at actual prices pursuant to the fund's dividend
reinvestment plan.
*** Includes 0.01% from federal excise taxes in fiscal year 1994.
+ Total investment return, net asset value, is based on the change in net
asset value of a common share during the period and assumes reinvestment
of distributions at net asset value.
++ Adjusted to an annual basis.
+++ Securities purchased on a when-issued basis for which liquid, high-grade
debt obligations are maintained in a segregated account are not considered
borrowings. See footnote 2 in the Notes to Financial Statements.
++++ Represents net assets (excluding borrowings) divided by common shares
outstanding.
Per-share data for a share of capital stock outstanding throughout each period
and selected information for each period are as follows:
<TABLE>
<CAPTION>
American Adjustable Rate Term Trust 1997
Year Year Year Period from
Ended Ended Ended 7/24/91*
Per-Share Data 8/31/94 8/31/93 8/31/92 to 8/31/91
<S> <C> <C> <C> <C>
Net asset value, beginning of period............................$ 9.66 9.68 9.68 9.58
Operations:
Net investment income......................................... 0.63 0.72 0.78 0.07
Net realized and unrealized gains (losses) on investments..... (0.86) (0.10) 0.05 0.03
Total from operations..................................... (0.23) 0.62 0.83 0.10
Distributions to shareholders from:
Net investment income......................................... (0.53) (0.63) (0.80) --
Net realized gains............................................ -- (0.01) (0.03) --
Total distributions to shareholders....................... (0.53) (0.64) (0.83) --
Net asset value, end of period..................................$ 8.90 9.66 9.68 9.68
Per share market value, end of period...........................$ 8.50 9.38 10.00 10.25
Selected Information
Total investment return, market value**.......................... (3.96%) 0.04% 5.87% 2.50%
Total investment return, net asset value+........................ (2.46%) 6.73% 8.97% 1.04%
Net assets at end of period (000s omitted)......................$ 447,389 488,146 489,052 211,731
Ratio of expenses to average weekly net assets................... 0.61% 0.58% 0.60% 0.60%++
Ratio of net investment income to average weekly net assets...... 6.76% 7.55% 7.99% 7.88%++
Portfolio turnover rate (excluding short-term securities)........ 43% 47% 38% 10%
Amount of borrowings outstanding at end of period
(000s omitted)+++.............................................$ 125,000 161,500 143,000 50,000
Per-share amount of borrowings outstanding at end of period.....$ 2.49 3.20 2.83 2.29
Per-share asset coverage of borrowings outstanding at end of
period++++....................................................$ 11.39 12.86 12.51 11.97
</TABLE>
* Commencement of operations.
** Total investment return, market value, is based on the change in market
price of a common share during the period and assumes reinvestment of
distributions at actual prices pursuant to the fund's dividend
reinvestment plan.
+ Total investment return, net asset value, is based on the change in net
asset value of a common share during the period and assumes reinvestment
of distributions at net asset value.
++ Adjusted to an annual basis.
+++ Securities purchased on a when-issued basis for which liquid, high-grade
debt obligations are maintained in a segregated account are not considered
borrowings. See footnote 2 in the Notes to Financial Statements.
++++ Represents net assets (excluding borrowings) divided by common shares
outstanding.
Per-share data for a share of capital stock outstanding throughout each period
and selected information for each period are as follows:
<TABLE>
<CAPTION>
Piper Funds Inc. -- II Adjustable Rate Mortgage Securities Fund
(Formerly American Adjustable Rate Term Trust 1998)
Year Year Period from
Ended Ended 1/30/92*
Per-Share Data 8/31/94 8/31/93 to 8/31/92
<S> <C> <C> <C>
Net asset value, beginning of period............................$ 9.67 9.74 9.58
Operations:
Net investment income......................................... 0.60 0.69 0.43
Net realized and unrealized gains (losses) on investments..... (0.89) (0.10) 0.08
Total from operations..................................... (0.29) 0.59 0.51
Distributions to shareholders from:
Net investment income......................................... (0.56) (0.66) (0.35)
Net asset value, end of period..................................$ 8.82 9.67 9.74
Per share market value, end of period...........................$ 8.38 9.63 9.88
Selected Information
Total investment return, market value**.......................... (7.48%) 4.23% 2.31%
Total investment return, net asset value+........................ (3.18%) 6.24% 5.49%
Net assets at end of period (000s omitted)......................$ 500,062 551,369 555,384
Ratio of expenses to average weekly net assets................... 0.60% 0.58% 0.58%++
Ratio of net investment income to average weekly net assets...... 6.39% 7.25% 7.70%++
Portfolio turnover rate (excluding short-term securities)........ 39% 39% 41%
Amount of borrowings outstanding at end of period
(000s omitted)+++.............................................$ 145,000 145,000 145,000
Per-share amount of borrowings outstanding at end of period.....$ 2.56 2.54 2.54
Per-share asset coverage of borrowings outstanding at end of
period++++....................................................$ 11.38 12.21 12.28
</TABLE>
* Commencement of operations.
** Total investment return, market value, is based on the change in market
price of a common share during the period and assumes reinvestment of
distributions at actual prices pursuant to the fund's dividend
reinvestment plan.
+ Total investment return, net asset value, is based on the change in net
asset value of a common share during the period and assumes reinvestment
of distributions at net asset value.
++ Adjusted to an annual basis.
+++ Securities purchased on a when-issued basis for which liquid, high-grade
debt obligations are maintained in a segregated account are not considered
borrowings. See footnote 2 in the Notes to Financial Statements.
++++ Represents net assets (excluding borrowings) divided by common shares
outstanding.
Per-share data for a share of capital stock outstanding throughout each period
and selected information for each period are as follows:
<TABLE>
<CAPTION>
American Adjustable Rate Term Trust 1999
Year Period from
Ended 9/24/92*
Per-Share Data 8/31/94 to 8/31/93
<S> <C> <C>
Net asset value, beginning of period............................$ 9.61 9.58
Operations:
Net investment income......................................... 0.60 0.60
Net realized and unrealized losses on investments............. (0.93) (0.04)
Total from operations..................................... (0.33) 0.56
Distributions to shareholders:
From net investment income.................................... (0.56) (0.53)
In excess of net realized gains............................... (0.01) --
Total distributions to shareholders........................ (0.57) (0.53)
Net asset value, end of period..................................$ 8.71 9.61
Per share market value, end of period...........................$ 8.25 9.63
Selected Information
Total investment return, market value**.......................... (8.75%) 1.62%
Total investment return, net asset value+........................ (3.61%) 6.05%
Net assets at end of period (000s omitted)......................$ 295,159 327,585
Ratio of expenses to average weekly net assets................... 0.60% 0.57%++
Ratio of net investment income to average weekly net assets...... 6.40% 6.76%++
Portfolio turnover rate (excluding short-term securities)........ 35% 40%
Amount of borrowings outstanding at end of period
(000s omitted)+++.............................................$ 85,000 102,148
Per-share amount of borrowings outstanding at end of period.....$ 2.51 3.00
Per-share asset coverage of borrowings outstanding at end of
period++++....................................................$ 11.22 12.61
</TABLE>
* Commencement of operations.
** Total investment return, market value, is based on the change in market
price of a common share during the period and assumes reinvestment of
distributions at actual prices pursuant to the fund's dividend
reinvestment plan.
+ Total investment return, net asset value, is based on the change in net
asset value of a common share during the period and assumes reinvestment
of distributions at net asset value.
++ Adjusted to an annual basis.
+++ Securities purchased on a when-issued basis for which liquid, high-grade
debt obligations are maintained in a segregated account are not considered
borrowings. See footnote 2 in the Notes to Financial Statements.
++++ Represents net assets (excluding borrowings) divided by common shares
outstanding.
INVESTMENTS IN SECURITIES
<TABLE>
<CAPTION>
AMERICAN ADJUSTABLE RATE TERM TRUST 1996
AUGUST 31, 1994 Principal Market
Name of Issuer Amount Value (a)
(Percentages of each investment category relate to total net assets)
MORTGAGE-BACKED SECURITIES (86.0%):
U.S. AGENCY FIXED-RATE MORTGAGES (4.0%):
<S> <C> <C>
GNMA, 7.00%, 1/1/23.................$ 5,000,000(b) 4,670,300
FNMA, 7.50%, 1/1/2000................ 5,000,000(b) 5,046,850
9,717,150
U.S. AGENCY ADJUSTABLE-RATE MORTGAGES (43.7%):
GNMA, 5.50%, 1/01/21.................15,000,000(b) 14,634,450
GNMA, 6.00%, 5/20/21................. 5,168,529(d) 5,026,394
GNMA, 6.00%, 8/20/23................. 5,316,737(d) 5,353,289
FHLMC, 5.25%, 11/1/16................11,177,126(d) 11,386,697
FHLMC, 5.65%, 6/1/18................. 2,444,273(d) 2,506,896
FHLMC, 5.91%, 10/1/18................ 7,543,482(d) 7,656,634
FHLMC, 5.83%, 5/1/19................. 2,333,229(d) 2,385,727
FHLMC, 5.97%, 10/1/19................ 2,901,352(d) 2,983,866
FHLMC, 5.79%, 8/1/20.................11,407,536(d) 11,614,241
FHLMC, 6.88%, 6/1/21................. 2,941,847(d) 3,026,426
FHLMC, 5.81%, 10/1/22................ 3,379,510(d) 3,474,575
FHLMC, 6.10%, 7/1/23................. 8,214,973 8,327,929
FHLMC, 4.26%, 9/1/23................. 1,782,342(d) 1,766,747
FHLMC, 4.00%, 1/1/24................. 1,880,500(d) 1,892,253
FHLMC, 4.22%, 1/1/24................. 1,959,936(d) 1,981,985
FNMA, 6.19%, 7/1/17.................. 2,061,445(d) 2,105,250
FNMA, 5.47%, 4/1/18.................. 5,626,155 5,742,166
FNMA, 5.83%, 1/1/20.................. 2,209,143(d) 2,268,502
FNMA, 5.82%, 8/1/23.................. 2,681,479(d) 2,745,164
FNMA, 5.09%, 12/1/23................. 4,110,957(d) 4,100,679
FNMA, 5.99%, 5/1/27.................. 1,950,119 1,985,163
FNMA, 6.23%, 1/1/28.................. 2,693,377(d) 2,734,208
105,699,241
COLLATERALIZED MORTGAGE OBLIGATIONS AND
OTHER MORTGAGE-BACKED SECURITIES (e)(38.3%):
U.S. AGENCY ADJUSTABLE RATE (6.8%):
FHLMC, 7.00%, Series 1249, Class A,
4/15/22............................16,312,777 16,455,514
PRIVATE ADJUSTABLE RATE (30.3%):
California Federal, Series 1988-PAL,
Class A, 6.17%, 4/1/17............. 1,821,211 1,799,584
Citicorp Mortgage Securities, Series
1991-14, Class M, 5.34%, 9/25/21... 6,080,207 6,049,806
Columbia Savings and Loan, Series
1987-1, Class A, 6.14%, 12/1/17.... 674,796 674,796
Donaldson, Lufkin and Jenrette,
Series 1992-MF3, Class A3,
6.26%, 5/25/22..................... 6,000,000 6,127,500
Glendale Federal Savings, Series
1988-1, Class A, 5.42%, 11/25/27... 1,154,212 1,149,884
Glendale Federal Savings, Series
1988-2, Class A, 5.82%, 5/1/28..... 4,343,547 4,359,836
Meridian Asset Acceptance Corporation,
Series 1991-1, Class A1,
5.71%, 4/27/20..................... 2,696,131 2,702,872
Merrill Lynch Mortgage Investors,
Series 1993-D, Class A1-2,
4.82%, 10/25/23.................... 2,000,000 1,975,320
Merrill Lynch Mortgage Investors,
Series 1993-H, Class A1-2,
4.99%, 10/25/23.................... 2,320,000 2,279,122
Paine Webber Mortgage Acceptance
Corporation, Series 1993-10,
Class M1, 5.71%, 11/25/23..........13,300,648 13,483,532
Paine Webber Mortgage Acceptance
Corporation, Series 1993-8,
Class M2, 5.83%, 8/25/23.......... 5,152,523 5,068,794
Residential Funding Corporation,
Series 1992-S25, Class A,
6.04%, 7/25/22..................... 5,942,189 5,957,461
Residential Funding Corporation,
Series 1993-S8, Class A,
5.88%, 2/25/23..................... 6,837,646 6,898,364
Resolution Trust Corporation, Series
1991-5 Class A-1, 6.42%, 9/25/19... 2,250,122 2,261,440
Ryland - First Nationwide, Series
1989-FN1, Class A, 5.72%, 11/1/18.. 6,367,354 6,361,384
Ryland Mortgage Securities, Series
1991-B1, Class 1, 5.65%, 3/25/20... 1,955,153 1,955,153
Salomon Brothers Mortgage, Series
1987-2, Class A, 6.98%, 12/25/16... 3,354,854 3,346,467
Salomon Brothers Mortgage, Series
1988-3, Class A, 5.76%, 6/25/17.... 879,738 863,516
73,314,831
U.S. AGENCY INVERSE FLOATER (1.0%):
FHLMC, 8.26%, Series 1362, Class S,
Treasury, 1/15/21.................. 3,000,000 2,218,125
FNMA, 9.63%, Series G93-19, Class SM,
COFI, 4/25/23...................... 336,075 157,955
2,376,080
U.S. AGENCY INVERSE INTEREST-ONLY (0.2%):
FHLMC, 12.03%, Series 1381, Class SB,
COFI, 10/15/07..................... -- 607,379
Total Mortgage-Backed Securities
(cost: $212,680,343)............... 208,170,195
STRUCTURED SECURITIES (g)(2.5%):
FOREIGN LINKED INDEX SECURITIES (2.0%):
Commerzbank, A.G., New York, 9.00%,
due 3/20/95........................ 3,000,000(1) 2,791,590
Rabobank Nederland, New York, 10.00%,
due 7/17/95........................ 2,000,000(2) 1,993,000
4,784,590
OTHER STRUCTURED SECURITIES (0.5%):
Bayerische Vereinsbank, New York, 10.00%
due 8/15/95........................ 1,500,000(3) 1,240,050
Total Structured Securities
(cost: $6,500,000)................. 6,024,640
MUNICIPAL ZERO-COUPON SECURITIES (c)(14.6%):
Alabama State Public School and
College, 6.73%, 11/1/96
(callable at 94.03 on 11/1/95)..... 725,000 649,781
Alief, Texas, School District,
4.24%, 2/15/97..................... 760,000 679,250
Arlington, Texas, Independent School
District, 6.10%-6.78%, 2/15/96..... 1,120,000 1,049,750
Bellevue, Washington, Convention
Center, 6.05%, 12/1/96............. 1,000,000 902,500
Clairton, Pennsylvania, School
District, 6.83%, 11/1/96........... 1,035,000 932,794
Corpus Christi, Texas, Series A,
6.78%, 11/1/96.................... 735,000 669,638
Eastern Illinois University Facility,
5.67%, 10/1/96..................... 1,055,000 960,050
Illinois Educational Facility,
6.07%, 7/1/96...................... 5,550,000 5,112,938
Maricopa County, Arizona, School
District, 6.48%, 7/1/96............ 3,050,000 2,821,250
Mesa, Arizona, General Obligation,
6.01%, 7/1/96...................... 1,845,000 1,699,706
North Slope Boro, Alaska, Series I,
5.76% - 6.68%, 6/30/96.............14,300,000 13,227,500
Orleans Parish, Louisiana, School
Board, 4.10%-4.33%, 2/1/96-8/1/96.. 800,000 846,000
Phoenix, Arizona, Excise Tax Parking
Revenue, 6.22%, 7/1/96............. 1,000,000 922,500
Provo, Utah, Energy System Revenue,
4.68%, 11/1/96..................... 3,000,000 3,108,750
Illinois State Sales Tax Revenue,
6.38%, 6/15/96..................... 500,000 461,875
University of Illinois Auxiliary
Facility, 6.01%, 4/1/96............ 1,140,000 1,064,475
Vermont State College Savers, General
Obligation, 5.57%, 10/15/96........ 370,000 338,088
Total Municipal Zero-Coupon Securities
(cost: $34,128,414)................ 35,446,845
CANADIAN SECURITIES (f)(6.5%):
Canadian Government Real Return Bond,
4.25%, 12/1/21..................... 3,000,000 2,099,468
Canadian Government Note, 8.49%,
3/1/96............................. 5,000,000 3,278,724
Canadian Government Residual, 7.23%,
6/1/95............................. 1,320,000(c) 919,994
Canadian Treasury Bill, 7.27%, 5/4/95 1,900,000(c) 1,333,154
Firstline Trust, 7.13%, 3/1/98....... 2,361,105 1,646,419
Manufacturers Life, 7.50%, 8/1/95.... 2,738,895 2,005,886
Manufacturers Life, 8.25%, 8/1/97.... 2,175,304 1,578,571
Royal Trust, 9.00%, 3/1/97........... 3,882,873 2,872,241
Total Canadian Securities
(cost: $17,135,225)................ 15,734,457
INTEREST RATE CONTRACTS (0.0%):
Interest rate floor with Morgan Stanley,
$5,000,000 notional principal on three-
month Deutschemark LIBOR,
(5.00% on 8/31/94), exercise rate
of 5.00%, due 4/6/98
(cost: $81,861).................... -- 12,000
OPTIONS (0.0%):
Canadian dollar, 200 put option contracts,
exercise price of 1.37, expire
September 1994 (cost: $253,146).... -- 93,118
SHORT-TERM SECURITIES (27.9%):
U.S. Treasury Bill, 5.29%, 4/6/95....20,000,000 19,400,800
U.S. Treasury Bill, 5.23%, 6/1/95....22,000,000 21,147,500
Repurchase agreement with Morgan Stanley
in a joint trading account, 4.65%,
acquired on 8/31/94 and due 9/1/94
with accrued interest of $3,490
(collateralized by U.S. government
agency obligations $27,020,000 27,020,000
Total Short-Term Securities
(cost: $67,585,995)................ 67,568,300
Total Investments in Securities
(cost: $338,364,984)(h)...........$ 333,049,555
</TABLE>
Notes to Investments in Securities:
(a) Securities are valued in accordance with procedures described in note 2 to
the financial statements.
(b) On August 31, 1994, the total cost of investments purchased on a
when-issued basis was $24,389,158.
(c) For zero-coupon investments, the interest rate shown is the effective yield
on the date of purchase.
(d) On August 31, 1994, securities valued at $72,768,640 were pledged as
collateral for the following outstanding reverse repurchase agreement:
Name
of Broker and
Acquisition Accrued Description
Amount Date Rate* Due Interest of Collateral
$ 70,000,000 6/2/94 4.52% 5/30/95 $263,667 (1)
* Interest rate is as of August 31, 1994. Rate is based on the London
Interbank Offered Rate (LIBOR) and resets monthly.
Name of broker and description of collateral:
(1) Morgan Stanley; GNMA, 6.00%, 8/20/23, $5,316,737 par.
GNMA, 6.00%, 5/20/21, $5,168,529 par.
FNMA, 6.19%, 7/1/17, $2,061,445 par.
FNMA, 6.23%, 1/1/28, $2,693,377 par.
FNMA, 5.83%, 1/1/20, $2,209,143 par.
FNMA, 5.09%, 12/1/23, $4,110,957 par.
FNMA, 5.82%, 8/1/23, $2,681,479 par.
FHLMC, 5.81%, 10/1/22, $2,838,790 par.
FHLMC, 4.26%, 9/1/23, $1,336,757 par.
FHLMC, 6.88%, 6/1/21, $2,941,847 par.
FHLMC, 5.25%, 11/1/16, $11,177,126 par.
FHLMC, 5.65%, 6/1/18, $2,444,273 par.
FHLMC, 5.83%, 5/1/19, $2,333,229 par.
FHLMC, 5.91%, 10/1/18, $7,543,482 par.
FHLMC, 5.79%, 8/1/20, $11,407,536 par.
FHLMC, 5.97%, 10/1/19, $1,692,455 par.
FHLMC, 4.00%, 1/1/24, $1,880,500 par.
FHLMC, 4.22%, 1/1/24, $1,959,936 par.
(e) Descriptions of certain collateralized mortgage obligations are as follows:
LIBOR - London InterBank Offered Rate
COFI (11th District) - Cost of Funds Index of the Federal Reserve's 11th
District.
Inverse floater - represent securities that pay interest at rates that
increase (decrease) with a decline (increase) in a specified index.
The relationship between a change in the specified index and the
interest rate paid by the inverse floater is generally greater than a
one-to-one relationship. Interest rates disclosed are in effect on
August 31, 1994.
Inverse interest-only - represent securities that entitle holders to
receive only interest payments on the underlying mortgages. Interest
is paid at a rate that increases (decreases) with a decline (increase)
in a specified index. The yield to maturity of an inverse
interest-only is extremely sensitive to the rate of principal payments
on the underlying mortgage assets. A rapid (slow) rate of principal
repayments may have an adverse (positive) effect on yield to maturity.
Interest rate disclosed represents current yield based upon the
current cost basis and estimated timing and amount of future cash
flows.
(f) Par value is in Canadian dollars.
(g) Structured securities are issued by U.S. issuers and are denominated in
U.S. dollars. These securities were purchased as part of a private
placement, have not been registered with the Securities and Exchange
Commission under the Securities Act of 1933 and are deemed to be illiquid
by the adviser. These securities return principal and/or interest in
amounts which are linked to the indices indicated below. Principal received
at maturity and interest earned may be limited to certain maximum and
minimum levels. The relationship between the specified index and the
resultant effect on principal or interest may be greater than a one-to-one
relationship.
(1) Principal amount at maturity is linked inversely to the Canadian
dollar/U.S. dollar exchange rate.
(2) Coupon is earned when the spread between the two-year French Franc
swap rate and the two-year German Deutschemark swap rate stays within
a range of 60 to 75 basis points.
(3) Principal amount at maturity is linked to the spread between the
ten-year U.S. swap rate and the yield on the ten-year 10.75% U.S.
Treasury bond. (h) On August 31, 1994, for federal income tax
purposes, the cost of investments in securities, including the put
options described in note 6 to and the interest rate swap transactions
described in note 2 to the financial statements, was $339,880,537. The
aggregate gross unrealized appreciation and depreciation of
investments in securities based on this cost were as follows:
Gross unrealized appreciation.....$ 2,489,440
Gross unrealized depreciation......(8,427,416)
Net unrealized depreciation......$(5,937,976)
See acommpanying Notes to Investments in Securities.
<TABLE>
<CAPTION>
AMERICAN ADJUSTABLE RATE TERM TRUST 1997
AUGUST 31, 1994 Principal Market
Name of Issuer Amount Value (a)
(Percentages of each investment category relate to total net assets)
MORTGAGE-BACKED SECURITIES (97.8%):
U.S. AGENCY FIXED-RATE MORTGAGES (7.7%):
<S> <C> <C>
GNMA, 8.00%, 4/1/22.................$10,000,000(b) 9,937,500
FNMA, 7.50%, 1/1/00.................. 5,000,000(b) 5,046,850
FNMA, 8.00%, 1/1/21..................15,000,000(b) 14,943,750
FNMA, 7.00%, 1/1/23.................. 5,000,000(b) 4,726,550
34,654,650
U.S. AGENCY ADJUSTABLE-RATE MORTGAGES (48.2%):
GNMA, 5.50%, 1/1/21..................30,000,000(b) 29,268,900
GNMA, 5.00%, 8/20/21................. 8,119,309(d) 8,017,818
GNMA, 5.13%, 10/20/21................ 8,071,340(d) 7,829,199
GNMA, 5.63%, 11/20/21................ 4,239,500(d) 4,205,033
GNMA, 6.50%, 6/20/22................. 1,287,432 1,297,886
GNMA, 6.75%, 6/20/23................. 1,812,872 1,826,469
GNMA, 5.50%, 10/20/23................ 4,744,763(d) 4,697,316
GNMA, 5.50%, 11/20/23................ 4,705,150(d) 4,658,099
GNMA, 5.50%, 12/20/23................ 9,451,803(d) 9,227,323
GNMA, 4.50%, 4/20/24................. 748,763 695,878
GNMA, 4.50%, 5/20/24................. 5,084,598(d) 4,696,898
GNMA, 4.50%, 6/20/24................. 4,336,933(d) 4,006,242
FHLMC, 5.99%, 1/1/19................. 257,304 264,861
FHLMC, 6.33%, 8/1/19................. 2,123,616(d) 2,135,551
FHLMC, 5.90%, 5/1/20................. 2,640,466(d) 2,715,112
FHLMC, 6.63%, 6/1/21................. 5,248,266(d) 5,412,274
FHLMC, 5.94%, 4/1/22................. 1,115,413(d) 1,137,375
FHLMC, 5.81%, 10/1/22................ 6,759,019(d) 6,949,150
FHLMC, 4.26%, 9/1/23................. 1,782,342 1,766,747
FHLMC, 4.13%, 10/1/23................ 1,802,866 1,831,026
FHLMC, 4.00%, 1/1/24................. 2,824,408 2,842,060
FHLMC, 4.22%, 1/1/24................. 4,297,233 4,345,576
FNMA, 5.54%, 1/1/18.................. 2,467,688 2,544,803
FNMA, 5.47%, 4/1/18.................. 9,427,203(d) 9,621,592
FNMA, 5.42%, 5/1/18.................. 1,818,950 1,857,602
FNMA, 5.63%, 1/1/20.................. 3,651,428(d) 3,674,249
FNMA, 6.47%, 11/1/20................. 6,649,015(d) 6,686,383
FNMA, 5.81%, 12/1/20................. 9,025,436(d) 9,200,259
FNMA, 6.22%, 5/1/21.................. 7,508,445(d) 7,602,301
FNMA, 7.32%, 8/1/21.................. 4,627,660(d) 4,723,083
FNMA, 6.14%, 7/1/23.................. 5,539,431 5,647,617
FNMA, 4.02%, 12/1/23................. 4,095,779 4,157,216
FNMA, 4.05%, 12/1/23................. 4,179,436(d) 4,249,943
FNMA, 4.14%, 1/1/24.................. 4,105,729(d) 4,167,315
FNMA, 3.98%, 2/1/24.................. 9,504,790(d) 9,445,385
FNMA, 4.01%, 3/1/24.................. 4,783,351 4,662,272
FNMA, 5.88%, 8/1/27.................. 9,892,434(d) 10,102,648
FNMA, 6.23%, 1/1/28.................. 1,456,398 1,478,477
FNMA, 5.49%, 3/1/28..................11,347,177(d) 11,609,524
FNMA, 5.99%, 1/1/29.................. 4,128,315 4,205,721
215,463,183
COLLATERALIZED MORTGAGE OBLIGATIONS AND
OTHER MORTGAGE-BACKED SECURITIES(e)(41.9%):
PRIVATE ADJUSTABLE RATE (37.7%):
Donaldson, Lufkin and Jenrette,
Series 1992-MF3, CLass A3,
6.26%, 5/25/22.....................17,000,000 17,361,250
First Federal of Rochester, Series
1988-SE1, Class A, 5.58%, 10/25/18. 3,332,902 3,307,906
Glendale Federal Savings, Series
1989-5, Class A, 5.79%, 4/1/29.....20,668,576 20,678,083
Greenwich Capital Acceptance, Series
1992-LB5, Class A3, 6.19%, 7/25/22$12,883,000 12,887,026
Merrill Lynch Mortgage Investors,
Series 1988-M, Class A,
5.42%, 10/1/18..................... 3,996,310 3,993,592
Merrill Lynch Mortgage Investors,
Series 1993-C, Class A4,
5.63%, 3/15/18..................... 7,000,000 6,864,900
Merrill Lynch Mortgage Investors,
Series 1993-D, Class A1-2,
4.82%, 10/25/23.................... 6,000,000 5,925,960
Merrill Lynch Mortgage Investors,
Series 1993-H, Class A1-2,
4.99%, 10/25/23.................... 6,523,000 6,408,065
Paine Webber Mortgage Acceptance
Corporation, Series 1993-11, Class
M1, 5.15%, 12/1/23................. 2,908,087 2,886,277
Prudential Home Mortgage, Series
1991-9, Class A1, 6.69%, 7/25/21... 8,180,329 8,272,849
Residential Funding Corporation,
Series 1992-S25, Class A,
6.04%, 7/25/22.....................14,855,473 14,893,652
Residential Funding Corporation,
Series 1993-S8, Class A,
5.88%, 2/25/23.....................10,256,468 10,347,546
Resolution Trust Corporation,
Series 1991-10, Class A1,
6.56%, 5/25/21..................... 6,025,729 6,006,145
Resolution Trust Corporation,
Series 1991-2, Class B,
5.18%, 4/25/21..................... 5,000,000 4,976,500
Resolution Trust Corporation,
Series 1991-5 Class A-1,
6.42%, 9/25/19..................... 4,500,243 4,522,879
Resolution Trust Corporation,
Series 1991-8, Class A-1,
6.70%, 12/25/20....................13,749,561 13,801,121
Resolution Trust Corporation,
Series 1992-4, Class B2,
5.92%, 7/25/28.....................15,000,428 14,962,927
Resolution Trust Corporation,
Series 1992-9, Class A6,
7.49%, 7/25/20..................... 2,216,331 2,249,298
Ryland - First Nationwide,
Series 1989-FN1, Class A,
5.72%, 11/1/18..................... 819,560 818,792
Ryland Mortgage Securities,
Series 1991-B1, Class 1,
5.65%, 3/25/20..................... 7,556,178 7,556,175
168,720,943
U.S. AGENCY INVERSE FLOATER (2.6%):
FHLMC, 17.31%, Series 1269, Class S,
COFI, 5/15/97...................... 2,244,435 2,581,100
FHLMC, 12.71%, Series 1404, Class HA,
COFI, 10/15/07..................... 3,958,000 3,027,870
FNMA, 12.94%, Series 92-155, Class SA,
COFI, 10/25/05..................... 5,572,000 5,209,820
FNMA, 4.99%, Series 94-23, Class PS,
Treasury, 4/25/23.................. 1,000,000 605,000
11,423,790
U.S. AGENCY INVERSE INTEREST-ONLY (0.2%):
FHLMC, 0.00%, Series 1381, Class SB,
COFI, 10/15/07..................... --(h) 1,138,835
U.S. AGENCY PRINCIPAL-ONLY (1.4%):
FNMA, 1.09%, Series 224, Class A1,
6/25/23...........................$ 8,804,465 6,295,192
Total Mortgage-Backed Securities
(cost: $448,303,435)............... 437,696,593
STRUCTURED SECURITIES (g)(5.6%):
FOREIGN LINKED INDEX SECURITIES (5.4%):
Bayerische Landesbank, New York,
9.60%, due 6/26/95................. 5,000,000(1) 4,907,000
Commerzbank, A.G., New York, 9.00%,
due 3/20/95........................ 5,000,000(2) 4,652,650
Bayerische Landesbank, New York,
6.81%, 5/26/95..................... 5,000,000(3) 4,628,500
Rabobank Nederland, New York, 10.00%,
due 7/17/95........................ 5,000,000(4) 4,982,500
Swiss Bank Corporation, New York,
8.50%, due 7/10/95................. 5,000,000(5) 5,100,000
24,270,650
OTHER STRUCTURED SECURITIES (0.2%):
Bayerische Vereinsbank, New York,
10.00%, due 8/15/95................ 1,000,000(6) 826,700
Total Structured Securities
(cost: $26,000,000)................ 25,097,350
MUNICIPAL ZERO-COUPON SECURITIES (c)(17.3%):
Austin, Texas, Public Parking,
5.72%-6.03%, 9/1/97................ 5,000,000 4,368,750
Bellevue, Washington, Convention
Center, 6.24%, 12/1/97 ............ 1,370,000 1,173,063
Bismarck, North Dakota, Hospital
Revenue, 6.19%, 5/1/97 ............ 2,530,000 2,232,725
Blue Ridge, Texas, West Municipal
Utility, 6.09%, 4/1/97 ............ 440,000 389,950
Boulder, Colorado, School District,
6.26%, 12/15/97 ................... 4,000,000 3,435,000
Calallen, Texas, School District,
5.88%, 2/15/98..................... 1,485,000 1,262,250
Cambria, Pennsylvania, School District,
6.39%, 8/15/97 .................... 1,030,000 896,100
Cypress-Fairbanks, Texas, School
District, 5.82%-5.93%, 2/1/98 ..... 8,340,000 7,089,000
Eastern Camden, New Jersey, School
District, 5.88%, 9/1/97 ........... 500,000 436,250
Illinois State College Savers,
5.93%, 8/1/98...................... 890,000 732,025
Intermountain Power Authority, Utah,
3.10% 7/1/97 ...................... 470,000 465,300
Irving, Texas, School District,
6.31%, 2/15/97..................... 960,000 858,000
Kansas City, Kansas, Utility
Revenue, 6.24%-6.26%, 9/1/97 ...... 6,520,000 5,675,012
Kentucky Development Finance Authority,
5.60%-6.08%, 11/1/97 .............. 1,980,000 1,700,325
Kentucky Turnpike Revenue,
3.95%, 7/1/97...................... 1,000,000 1,031,250
Lewisburg, Pennsylvania, School
District, 6.29%, 8/15/97 .......... 500,000 436,875
Louisiana College Savers, General
Obligation, 5.99%, 7/1/97 ......... 4,000,000 3,520,000
Lubbock, Texas, Electric Power,
6.29%, 4/15/97 ................... 1,360,000 1,201,900
Maricopa County, Arizona, School
District, 5.47%, 7/1/97 ........... 1,010,000 887,538
Massachusetts, General Obligation,
5.96%-5.98%, 6/1/98 ...............12,345,000 10,277,213
McHenry County, Illinois, Conservation
District, 5.88%, 2/1/98 ........... 1,580,000 1,339,050
Michigan Municipal Bond Authority,
6.09%, 5/15/97 .................... 1,500,000 1,312,500
North Montgomery, Indiana, School
Bond, 5.82%-5.98%, 1/1/97-7/1/98 .. 2,100,000 1,794,844
North Slope Boro, Alaska,
5.88%-6.39%, 6/30/97-6/30/98 ......12,000,000 10,328,750
Oklahoma City, Oklahoma, Water and
Sewer, 5.83%, 7/1/97 .............. 1,000,000 876,250
Rosemont, Illinois, Various Purpose,
6.22%, 12/1/97 .................... 2,670,000 2,286,188
Sioux City, Iowa, Hospital Revenue,
2.93%, 1/1/97 .....................11,510,000 11,438,063
Total Municipal Zero-Coupon Securities
(cost: $74,255,797)................ 77,444,171
CANADIAN SECURITIES (f)(7.0%):
BANK OF NOVA SCOTIA, 7.13%, 8/1/97... 4,940,671 3,450,845
Canadian Government Real Return Bond,
4.25%, 12/1/21..................... 5,000,000 3,499,114
Canadian Government Note, 8.49%,
3/1/96.............................10,000,000 6,557,449
Canadian Government Residual, 7.23%,
6/1/95............................. 3,550,000(c) 2,474,225
Canadian Treasury Bill, 7.27%, 5/4/95 4,500,000(c) 3,157,471
Firstline Trust, 8.50%, 4/1/97....... 3,154,964 2,297,473
Manufacturers Life, 8.25%, 8/1/97.... 3,625,509 2,630,953
Manufacturers Life, 7.75%, 5/1/19.... 2,489,662 1,635,551
Royal Trust, 9.00%, 3/1/97........... 7,765,748 5,744,484
Total Canadian Securities
(cost: $34,192,844)................ 31,447,565
INTEREST RATE CONTRACTS (0.0%):
Interest rate floor with Morgan Stanley,
$15,000,000 notional principal on three-
month Deutschemark LIBOR, (5.00%
on 8/31/94), exercise rate of 5.00%,
due 4/6/98
(cost: $245,583)................... -- 36,000
OPTIONS (0.0%):
Canadian dollar, 320 put option contracts,
exercise price of 1.37, expire September 1994
(cost: $405,034)................... -- 149,988
SHORT-TERM SECURITIES (12.9%):
U.S. Treasury Bill, 5.30%, 4/6/95....12,000,000 11,640,480
U.S. Treasury Bill, 5.23%, 6/1/95....29,000,000 27,876,250
Repurchase agreement with Morgan
Stanley in a joint trading account,
4.65%, acquired on 8/31/94 and
due 9/1/94 with accrued interest of
$646 (collateralized by
U.S. government agency obligations) 5,000,000 5,000,000
Repurchase agreement with Goldman Sachs
in a joint trading account, 4.80%,
acquired on 8/31/94 and due 9/1/94
with accrued interest of $1,779
(collateralized by U.S. government
agency obligations) $13,339,000 13,339,000
Total Short-Term Securities
(cost: $57,884,866)................ 57,855,730
Total Investments in Securities
(cost: $641,287,559)(i)........$ 629,727,397
</TABLE>
Notes to Investments in Securities:
(a) Securities are valued in accordance with procedures described in note 2 to
the financial statements.
(b) On August 31, 1994, the total cost of investments purchased on a
when-issued basis was $63,953,125.
(c) For zero-coupon investments, the interest rate shown is the effective yield
on the date of purchase.
(d) On August 31, 1994, securities valued at $131,903,181 were pledged as
collateral for the following outstanding reverse repurchase agreements:
Name
of Broker and
Acquisition Accrued Description
Amount Date Rate* Due Interest of Collateral
$ 50,000,000 8/4/94 4.54% 8/1/95 $176,556 (1)
75,000,000 10/14/93 4.68% 10/6/94 165,661 (2)
$ 125,000,000 $342,217
* Interest rate is as of August 31, 1994. Rates are based on the London
Interbank Offered Rate (LIBOR) and reset monthly.
Name of broker and description of collateral:
(1) Morgan Stanley; FNMA, 5.88%, 8/1/27, $2,473,108 par.
FNMA, 5.81%, 12/1/20, $9,025,436 par.
FNMA, 7.32%, 8/1/21, $4,627,660 par.
FNMA, 4.05%, 12/1/23, $4,179,436 par.
FNMA, 4.14%, 1/1/24, $3,649,537 par.
FNMA, 3.98%, 2/1/24, $9,504,790 par.
FHLMC, 6.63%, 6/1/21, $5,248,266 par.
GNMA, 4.50%, 5/20/24, $5,084,598 par.
GNMA, 4.50%, 6/20/24, $4,336,933 par.
GNMA, 5.63%, 11/20/21, $4,239,500 par.
FNMA, 5.63%, 1/1/20, $3,651,428 par.
(2) Morgan Stanley; FNMA, 6.47%, 11/1/20, $6,649,015 par.
FNMA, 6.22%, 5/1/21, $7,508,445 par.
GNMA, 5.00%, 8/20/21, $8,119,309 par.
GNMA, 5.13%, 10/20/21, $8,071,340 par.
FNMA, 5.47%, 4/1/18, $9,427,203 par.
FHLMC, 6.33%, 8/1/19, $400,970 par.
FHLMC, 5.81%, 10/1/22, $5,542,396 par.
FHLMC, 5.94%, 4/1/22, $1,115,413 par.
FNMA, 5.88%, 8/1/27, $5,440,839 par.
GNMA, 5.50%, 10/20/23, $4,744,763 par.
GNMA, 5.50%, 11/20/23, $4,705,150 par.
GNMA, 5.50%, 12/20/23, $9,451,803 par.
FNMA, 5.49%, 3/1/28, $4,089,971 par.
FHLMC, 5.90%, 5/1/20, $719,611 par.
(e) Descriptions of certain collateralized mortgage obligations are as follows:
LIBOR - London InterBank Offered Rate
COFI (11th District) - Cost of Funds Index of the Federal Reserve's 11th
District
Inverse floater - represent securities that pay interest at rates that
increase (decrease) with a decline (increase) in a specified index.
The relationship between a change in the specified index and interest
rate paid by the inverse floater is generally greater than a one-
to-one relationship. Interest rates disclosed are in effect on August
31, 1994.
Principal-only - represent securities that entitle holders to receive only
principal payments on the underlying mortgages. The yield to maturity
of a principal-only security is extremely sensitive to the rate of
principal payments on the underlying mortgage assets. A slower (more
rapid) than expected rate of principal repayments may have an adverse
(positive) effect on yield to maturity. Interest rate disclosed
represents current yield based upon the current cost basis and
estimated timing of future cash flows.
Inverse interest-only - represent securities that entitle holders to
receive only interest payments on the underlying mortgages. Interest
is paid at a rate that increases (decreases) with a decline (increase)
in a specified index. The yield to maturity of an inverse
interest-only is extremely sensitive to the rate of principal payments
on the underlying mortgage assets. A rapid (slow) rate of principal
repayments may have an adverse (positive) effect on yield to maturity.
Interest rate disclosed represents current yield based upon the
current cost basis and estimated timing and amount of future cash
flows.
(f) Par value is in Canadian dollars.
(g) Structured securities are issued by U.S. issuers and are denominated in
U.S. dollars. These securities were purchased as part of a private
placement, have not been registered with the Securities and Exchange
Commission under the Securities Act of 1933 and are deemed to be illiquid
by the Adviser. These securities return principal and/or interest in
amounts which are linked to the indices indicated below. Principal received
at maturity and interest earned may be limited to certain maximum and
minimum levels. The relationship between the specified index and the
resultant effect on principal or interest may be greater than a one-to-one
relationship.
(1) Coupon is earned when the spread between the two-year British Sterling
swap rate and the seven-year British Sterling swap rate stays between
1.30% and 2.46%.
(2) Principal amount at maturity is linked inversely to the Canadian
dollar/U.S. dollar exchange rate.
(3) Principal amount at maturity is linked inversely to the one-year
German Deutschemark swap rate. The coupon varies with the one-month
U.S. dollar LIBOR.
(4) Coupon is earned when the spread between the two-year French Franc
swap rate and the two-year German Deutschemark swap rate stays within
a range of 60 to 75 basis points.
(5) Principal amount at maturity is linked with the Japanese Yen/U.S.
dollar exchange rate.
(6) Principal amount at maturity is linked to the spread between the
ten-year U.S. swap rate and the yield on the ten-year 10.75% U.S.
Treasury bond.
(h) Based upon estimated timing and amount of future cash flows, income is
currently not being recognized on the inverse interest-only security with a
market value of $1,138,835.
(i) On August 31, 1994, for federal income tax purposes, the cost of
investments in securities, including the put options described in note 6
and the interest rate swap transactions described in note 2 to the
financial statements, was $644,256,895. The aggregate gross unrealized
appreciation and depreciation of investments in securities based on this
cost were as follows:
Gross unrealized appreciation.....$ 6,616,450
Gross unrealized depreciation......(17,233,478)
Net unrealized depreciation......$(10,617,028)
See accompanying Notes to Investments in Securities
<TABLE>
<CAPTION>
PIPER FUNDS INC. -- II ADJUSTABLE RATE MORTGAGE SECURITIES FUND
(FORMERLY AMERICAN ADJUSTABLE RATE TERM TRUST 1998)
AUGUST 31, 1994 Principal Market
Name of Issuer Amount Value (a)
(Percentages of each investment category relate to total net assets)
MORTGAGE-BACKED SECURITIES (92.1%):
U.S. AGENCY FIXED-RATE MORTGAGES (5.8%):
<S> <C> <C>
GNMA, 7.50%, 5/17/22................$10,000,000(b) 9,656,200
GNMA, 7.00%, 1/1/23..................10,000,000(b) 9,340,600
FNMA, 7.50%, 1/1/2000................10,000,000(b) 10,093,700
29,090,500
U.S. AGENCY ADJUSTABLE-RATE MORTGAGES (42.7%):
GNMA, 5.50%, 1/1/21..................15,000,000(b) 14,634,450
GNMA, 6.00%, 4/20/22................. 7,526,536 7,408,897
GNMA, 6.00%, 5/20/22................. 3,361,294(d) 3,308,757
GNMA, 6.00%, 6/20/22................. 9,211,419(d) 9,107,790
GNMA, 5.00%, 7/20/22................. 8,925,977(d) 8,641,417
GNMA, 5.50%, 7/20/22................. 8,637,022(d) 8,550,652
GNMA, 6.75%, 6/20/23................. 9,064,363(d) 9,132,346
GNMA, 6.00%, 8/20/23................. 9,952,754(d) 10,021,179
GNMA, 5.50%, 10/20/23................ 9,489,530(d) 9,394,634
GNMA, 4.50%, 4/20/24................. 6,266,734(d) 5,824,115
GNMA, 4.50%, 5/20/24................. 3,899,991(d) 3,602,616
FHLMC, 5.13%, 11/1/16................ 3,979,091(d) 4,041,245
FHLMC, 6.00%, 5/1/17................. 3,994,148(d) 4,050,306
FHLMC, 5.77%, 1/1/21................. 6,705,542 6,772,598
FHLMC, 5.61%, 2/1/22.................13,909,686(d) 14,153,105
FHLMC, 6.03%, 2/1/22.................18,431,489(d) 18,984,434
FHLMC, 5.53%, 8/1/23................. 7,913,719(d) 7,992,856
FHLMC, 4.13%, 10/1/23................ 3,605,731(d) 3,662,053
FNMA, 5.25%, 7/1/17.................. 7,072,404(d) 7,218,237
FNMA, 6.04%, 9/1/17.................. 4,511,380(d) 4,601,608
FNMA, 5.54%, 11/1/17.................11,660,928(d) 11,646,352
FNMA, 5.42%, 5/1/18.................. 7,086,324(d) 7,236,909
FNMA, 6.47%, 7/1/19.................. 4,801,897(d) 4,948,931
FNMA, 6.74%, 7/1/19.................. 3,150,445(d) 3,161,274
FNMA, 6.51%, 10/1/20................. 4,180,840 4,073,685
FNMA, 5.74%, 11/1/20................. 5,792,403(d) 5,748,960
FNMA, 5.73%, 11/1/21................. 8,777,389(d) 8,935,119
FNMA, 5.09%, 12/1/23................. 1,827,092 1,822,524
FNMA, 4.11%, 2/1/24.................. 4,912,324(d) 4,857,060
213,534,109
COLLATERALIZED MORTGAGE OBLIGATIONS AND
OTHER MORTGAGE-BACKED SECURITIES (e)(43.6%):
PRIVATE ADJUSTABLE RATE (39.9%):
Columbia Savings and Loan, Series
1987-1, Class A, 6.14%, 12/1/17.... 1,012,174 1,012,174
Donaldson, Lufkin and Jenrette,
Series 1992-MF3, Class A3,
5.39%, 5/25/22..................... 5,000,000 5,106,250
First Federal of Rochester, Series
1988-SE1, Class A, 5.58%, 10/25/18. 7,082,418 7,029,299
Glendale Federal Savings,
5.73%, 8/1/28...................... 7,411,799 7,439,593
Glendale Federal Savings, Series
1988-2, Class A, 5.82%, 5/1/28..... 6,612,700 6,637,497
Meridian Asset Acceptance Corporation,
Series 1991-1, Class A1,
5.71%, 4/27/20..................... 6,069,531 6,084,705
Merrill Lynch Mortgage Investors,
5.18%, 3/1/18...................... 4,095,885 3,923,090
Merrill Lynch Mortgage Investors,
5.48%, 6/15/17.....................25,000,000 25,000,000
Merrill Lynch Mortgage Investors,
6.15%, 1/25/19.................... 1,298,208 1,299,020
Merrill Lynch Mortgage Investors,
Series 1993-D, Class A1-2,
4.82%, 10/25/23.................... 6,000,000 5,925,960
Merrill Lynch Mortgage Investors,
Series 1993-H, Class A1-2,
4.99%, 10/25/23.................... 7,340,000 7,210,669
Paine Webber Mortgage Acceptance
Corporation, Series 1993-11,
Class M1, 5.15%, 12/1/23........... 2,969,475 2,947,204
Paine Webber Mortgage Acceptance
Corporation, Series 1993-8,
Class M1, 5.83%, 8/25/23........... 6,819,580 6,828,104
Paine Webber Mortgage Acceptance,
5.28%, 4/25/23..................... 3,052,621 2,993,476
Prudential Home Mortgage, Series
1991-9, Class A1, 6.69%, 7/25/21... 8,180,329 8,272,849
Residential Funding Corporation,
5.98%, 3/25/22.....................15,449,434 15,508,915
Residential Funding Corporation,
Series 1992-S25, Class A,
6.04%, 7/25/22.....................14,855,473 14,893,652
Residential Funding Corporation,
Series 1993-S8, Class A,
5.88%, 2/25/23.....................10,256,468 10,347,546
Resolution Trust Corporation,
5.63%, 9/25/19..................... 8,173,967 8,255,707
Resolution Trust Corporation,
5.97%, 5/25/28..................... 4,199,933 4,209,593
Resolution Trust Corporation,
Series 1992-4, Class B2,
5.92%, 7/25/28.....................10,000,286 9,975,285
Resolution Trust Corporation,
Series 1992-6, Class B3,
6.27%, 1/25/26.....................13,342,952 13,317,934
Ryland Mortgage Securities,
Series 1991-B1, Class 1,
5.65%, 3/25/20..................... 6,253,388 6,253,388
Ryland Perpetual Savings,
Series 1988-P1, Class A1,
5.74%, 12/25/18.................... 1,241,376 1,228,962
Sears Mortgage Securities,
Series 1991-K, Class A1,
5.32%, 9/25/21.....................17,815,872 17,871,545
199,572,417
U.S. AGENCY INVERSE FLOATER (2.2%):
FHLMC, 17.31%, Series 1269, Class S,
COFI, 5/15/97...................... 3,968,609 4,563,900
FHLMC, 11.69%, Series 1469, Class I,
COFI, 3/15/2000.................... 1,885,254 1,852,262
FNMA, 12.12%, Series 1992-201, Class SB
COFI, 10/25/22..................... 4,205,000 3,148,494
FNMA, 4.99%, Series 94-23, Class PS
Treasury, 4/25/23.................. 2,500,000 1,512,500
11,077,156
U.S. AGENCY INVERSE INTEREST-ONLY (0.2%):
FHLMC, 0.00%, Series 1381, Class SB,
COFI floater, 10/15/07............. --(h) 1,138,835
U.S. Agency Principal-Only (1.3%):
FNMA, 1.09%, Series 224, Class A1,
6/25/23...........................$ 8,804,465 6,295,192
Total Mortgage-Backed Securities
(cost: $472,966,201)............... 460,708,209
STRUCTURED SECURITIES (g)(5.0%):
FOREIGN LINKED INDEX SECURITIES (4.8%):
Bayerische Landesbank, New York,
9.60%, due 6/26/95................. 5,000,000(1) 4,907,000
Commerzbank, A.G., New York, 9.00%,
due 3/20/1995...................... 5,000,000(2) 4,652,650
Bayerische Landesbank, New York,
6.81%, 5/26/95..................... 5,000,000(3) 4,628,500
Rabobank Nederland, New York, 10.00%,
due 7/17/95........................ 5,000,000(4) 4,982,500
Swiss Bank Corporation, New York,
8.50%, due 7/10/95................. 5,000,000(5) 5,100,000
24,270,650
OTHER STRUCTURED SECURITIES (0.2%):
Bayerische Vereinsbank, New York,
10.00%, due 8/15/95................ 1,000,000(6) 826,700
Total Structured Securities
(cost: $26,000,000)................ 25,097,350
MUNICIPAL ZERO-COUPON SECURITIES (c)(12.8%):
Allegheny County, Pennsylvania,
4.69%, 2/15/98 .................... 2,000,000 1,857,500
Boulder, Larimer and Weld County,
Colorado, School District,
5.58%, 12/15/98 ................... 7,260,000 5,933,200
California, General Obligation,
Various Purpose, 5.72%-5.93%,
3/1/98-3/1/99......................10,465,000 8,567,638
Chelan County, Washington, Public
Utilities District, 5.88%, 7/1/98 . 1,370,000 1,133,675
Collin County, Texas, Community
College District, 5.98%, 8/15/98 .. 4,475,000 3,697,469
Connecticut, State College, Capital
Appreciation, 5.27%, 12/15/97 ..... 985,000 855,719
Corpus Christi, Texas, General
Improvement Refunding Bonds,
5.59%, 11/1/98 .................... 4,225,000 3,453,688
Dallas County, Texas, Road Improvement
Refunding Bonds, 6.19%, 8/15/98 ... 3,085,000 2,556,694
Grand Prairie, Texas, Independent
School District, 5.93%, 2/15/98 ... 1,150,000 977,500
Harris County, Texas, Toll Road
Refunding Bonds, 6.09%, 8/15/98 ... 845,000 698,181
Idaho Falls, Idaho, General Obligation
and Electric Refunding Bonds,
5.63%, 4/1/98 ..................... 1,500,000 1,267,500
Lake County, Illinois, General
Obligation Forest Preservation
District, 6.09%, 12/1/98 .......... 1,000,000 810,000
Maricopa County, Arizona, School
District, 5.57%-5.88%,
1/1/98-7/1/99 .....................16,140,000 13,171,213
Mesquite, Texas, School District,
5.57%-5.73%, 8/15/98-8/15/99....... 3,665,000 2,978,206
North East, Texas, Independent
School District, 5.98%, 2/1/99 .... 1,000,000 802,500
North Lawrence, Indiana, School Building
Refunding, Capital Appreciation
5.62%-5.88%, 1/1/98-7/1/99 ....... 2,320,000 1,869,050
Pleasanton, California, School
District, 5.78%, 8/1/98 ........... 1,000,000 830,000
Salt Lake County, Utah, Water
Conservation District, 5.83%,
10/1/98............................ 1,300,000 1,064,375
Shreveport, Louisiana, Water and
Sewer, 6.03%, 12/1/98 ............. 5,880,000 4,748,100
State of Texas, Veterans Land
General Obligation, 5.76%, 6/1/98 . 1,000,000 832,500
Tarrant County, Texas, Junior College
District, 6.08%, 2/15/98 .......... 1,750,000 1,476,563
Tomball, Texas, Hospital Authority
Revenue, 6.09%, 7/1/99 ............ 1,000,000 781,250
Utah Associated Municipal Power
System, 5.57%, 7/1/98 ............. 2,765,000 2,291,494
Will County, Illinois, School
District, 5.57%, 12/15/98 ......... 1,800,000 1,467,000
Total Municipal Zero-Coupon Securities
(cost: $62,151,252)................ 64,121,015
CANADIAN SECURITIES (f)(7.6%):
Bank of Nova Scotia, 7.13%, 8/1/97... 4,940,671 3,450,845
Canadian Government Real Return Bond,
4.25%, 12/1/21.....................13,000,000 9,097,696
Canadian Government Note, 8.49%,
3/1/96............................. 9,000,000 5,901,704
Canadian Government Residual, 7.23%,
6/1/95............................. 3,550,000(c) 2,474,225
Canadian Treasury Bill, 7.27%, 5/4/95 4,500,000(c) 3,157,471
Firstline Trust, 8.50%, 4/1/97....... 3,154,966 2,297,474
Firstline Trust, 8.50%, 6/1/18....... 2,418,236 1,653,520
Manufacturers Life, 8.25%, 8/1/97.... 7,251,020 5,261,908
Manufacturers Life, 7.75%, 5/1/19.... 2,489,663 1,635,552
Royal Trust, 9.00%, 3/1/97........... 3,882,874 2,872,242
Total Canadian Securities
(cost: $41,829,838)................ 37,802,637
INTEREST RATE CONTRACTS (0.0%):
Interest rate floor with Morgan Stanley,
$15,000,000 notional principal on three-
month Deutschemark LIBOR, (5.00%
on 8/31/94), exercise rate of 5.00%,
due 4/6/98
(cost: $245,583)................... -- 36,000
OPTIONS (0.00%):
Canadian dollar, 480 put option contracts,
exercise price of 1.3668, expire September 1994
(cost: $607,550)................... -- 223,483
SHORT-TERM SECURITIES (20.4%):
U.S. Treasury Bill, 5.30%, 4/6/95....25,000,000 24,251,000
U.S. Treasury Bill, 5.23%, 6/1/95....46,000,000 44,217,500
Repurchase agreement with Goldman
Sachs in a joint trading account,
4.80%, acquired on 8/31/94 and
due 9/1/94 with accrued interest
of $4,495 (collateralized by
U.S. government agency
obligations).......................33,714,000 33,714,000
Total Short-Term Securities
(cost: $102,226,303)............ 102,182,500
Total Investments in Securities
(cost: $706,026,727)(i)........$ 690,171,194
</TABLE>
Notes to Investments in Securities:
(a) Securities are valued in accordance with procedures described in note 2 to
the financial statements.
(b) On August 31, 1994, the total cost of investments purchased on a
when-issued basis was $43,728,125.
(c) For zero-coupon investments, the interest rate shown is the effective yield
on the date of purchase.
(d) On August 31, 1994, securities valued at $154,581,991 were pledged as
collateral for the following outstanding reverse repurchase agreements:
Name
of Broker and
Acquisition Accrued Description
Amount Date Rate* Due Interest of Collateral
$ 100,000,000 2/16/94 4.75% 2/9/95 $211,111 (1)
45,000,000 7/14/94 4.72% 7/13/95 100,247 (2)
$ 145,000,000 $311,358
* Interest rate is as of August 31, 1994. Rates are based on the London
Interbank Offered Rate (LIBOR) and reset monthly.
Name of broker and description of collateral:
(1) Morgan Stanley: FNMA, 5.25%, 07/1/17, $7,072,404 par.
FNMA, 5.54%, 11/1/17, $11,660,928 par.
FHLMC, 5.61%, 2/1/22, $13,909,686 par.
FNMA, 6.74%, 7/1/19, $3,150,445 par.
FNMA, 5.74%, 11/1/20, $2,358,742 par.
FNMA, 5.42%, 5/1/18, $4,168,425 par.
GNMA, 5.50%, 7/20/22, $8,637,022 par.
FHLMC, 5.53%, 8/1/23, $7,913,719 par.
FNMA, 6.04%, 9/1/17, $4,511,380 par.
FHLMC, 4.13%, 10/1/23, $3,605,731 par.
GNMA, 5.50%, 10/20/23, $9,489,530 par.
GNMA, 6.00%, 5/20/22, $3,361,294 par.
GNMA, 6.00%, 8/20/23, $3,236,274 par.
FNMA, 6.47%, 7/1/19, $4,801,897 par.
FHLMC, 6.00%, 5/1/17, $3,994,148 par.
GNMA, 5.00%, 7/20/22, $8,925,977 par.
FHLMC, 6.03%, 2/1/22, $4,766,764 par.
(2) Morgan Stanley: FHLMC, 5.13%, 11/1/16, $3,979,091 par.
GNMA, 6.00%, 8/20/23, $1,849,299 par.
FNMA, 5.73%, 11/1/21, $8,777,389 par.
GNMA, 6.00%, 6/20/22, $6,602,276 par.
FNMA, 4.11%, 2/1/24, $4,912,323 par.
GNMA, 6.75%, 6/20/23, $7,160,848 par.
GNMA, 6.00%, 8/20/23, $4,867,180 par.
GNMA, 4.50%, 4/20/24, $6,266,734 par.
GNMA, 4.50%, 5/20/24, $3,899,991 par.
FHLMC, 6.03%, 2/1/22, $699,125 par.
(e) Descriptions of certain collateralized mortgage obligations are as follows:
LIBOR - London InterBank Offered Rate
COFI (11th District) - Cost of Funds Index of the Federal Reserve's 11th
District
Inverse floater - represent securities that pay interest at rates that
increase (decrease) with a decline (increase) in a specified index.
The relationship between a change in the specified index and interest
rate paid by the inverse floater is generally greater than a
one-to-one relationship. Interest rates disclosed are in effect on
August 31, 1994.
Principal-only - represent securities that entitle holders to receive only
principal payments on the underlying mortgages. The yield to maturity
of a principal-only security is extremely sensitive to the rate of
principal payments on the underlying mortgage assets. A slower (more
rapid) than expected rate of principal repayments may have an adverse
(positive) effect on yield to maturity. Interest rate disclosed
represents current yield based upon the current cost basis and
estimated timing of future cash flows.
Inverse interest-only - represent securities that entitle holders to
receive only interest payments on the underlying mortgages. Interest
is paid at a rate that increases (decreases) with a decline (increase)
in a specified index. The yield to maturity of an inverse
interest-only is extremely sensitive to the rate of principal payments
on the underlying mortgage assets. A rapid (slow) rate of principal
repayments may have an adverse (positive) effect on yield to maturity.
Interest rate disclosed represents current yield based upon the
current cost basis and estimated timing and amount of future cash
flows.
(f) Par value is in Canadian dollars.
(g) Structured securities are issued by U.S. issuers and are denominated in
U.S. dollars. These securities were purchased as part of a private
placement, have not been registered with the Securities and Exchange
Commission under the Securities Act of 1933 and are deemed to be illiquid
by the Adviser. These securities return principal and/or interest in
amounts which are linked to the indices indicated below. Principal received
at maturity and interest earned may be limited to certain maximum and
minimum levels. The relationship between the specified index and the
resultant effect on principal or interest may be greater than a one-to-one
relationship.
(1) Coupon is earned when the spread between the two-year British Sterling
swap rate and the seven-year British Sterling swap rate stays between
1.30% and 2.46%.
(2) Principal amount at maturity is linked inversely to the Canadian
dollar/U.S. dollar exchange rate.
(3) Principal amount at maturity is linked inversely to the one-year
German Deutschemark swap rate. The coupon varies with the one-month
U.S. dollar LIBOR.
(4) Coupon is earned when the spread between the two-year French Franc
swap rate and the two-year German Deutschemark swap rate stays within
a range of 60 to 75 basis points.
(5) Principal amount at maturity is linked to the Japanese Yen/U.S. dollar
exchange rate.
(6) Principal amount at maturity is linked to the spread between the
ten-year U.S. swap rate and the yield on the ten-year 10.75% U.S.
Treasury bond.
(h) Based upon estimated timing and amount of future cash flows, income is
currently not being recognized on the inverse interest-only security with a
market value of $1,138,835.
(i) On August 31, 1994, for federal income tax purposes, the cost of
investments in securities, including the put options described in note 6
and the interest rate swap transactions described in note 2 to the
financial statements, was $708,754,169. The aggregate gross unrealized
appreciation and depreciation of investments in securities based on this
cost were as follows:
Gross unrealized appreciation..$ 5,742,681
Gross unrealized depreciation... (27,589,438)
Net unrealized depreciation..$ (21,846,757)
See accompanying Notes to Investments in Securities.
<TABLE>
<CAPTION>
AMERICAN ADJUSTABLE RATE TERM TRUST 1999
AUGUST 31, 1994 Principal Market
Name of Issuer Amount Value (a)
(Percentages of each investment category relate to total net assets)
MORTGAGE-BACKED SECURITIES (95.1%):
U.S. AGENCY FIXED-RATE MORTGAGES (6.6%):
<S> <C> <C>
FNMA, 7.50%, 1/1/2000...............$10,000,000(b) 10,093,700
FNMA, 7.00%, 1/1/23..................10,000,000(b) 9,453,100
19,546,800
U.S. AGENCY ADJUSTABLE-RATE MORTGAGES (40.2%):
GNMA, 5.50%, 1/1/21..................20,000,000(b) 19,512,600
GNMA, 5.50%, 7/20/22................. 4,318,511 4,275,326
GNMA, 5.00%, 9/20/22................. 2,643,309(d) 2,559,040
GNMA, 5.50%, 9/20/22................. 3,944,605(d) 3,905,159
GNMA, 6.75%, 6/20/23................. 5,896,540(d) 5,940,764
GNMA, 5.00%, 7/20/23................. 6,821,012(d) 6,603,558
FHLMC, 6.28%, 6/1/22.................31,605,955(d) 32,376,192
FHLMC, 6.02%, 9/1/22................. 6,728,115(d) 6,963,599
FHLMC, 5.91%, 11/1/22................11,864,666(d) 12,131,621
FHLMC, 5.70%, 4/1/23................. 4,635,114(d) 4,736,484
FHLMC, 6.10%, 7/1/23................. 6,425,573 6,513,925
FNMA, 5.46%, 11/1/22................. 3,688,644 3,783,184
FNMA, 3.99%, 2/1/24.................. 9,504,790(d) 9,445,385
118,746,837
COLLATERALIZED MORTGAGE OBLIGATIONS AND
OTHER MORTGAGE-BACKED SECURITIES (e)(48.3%):
PRIVATE ADJUSTABLE RATE (45.4%):
California Federal, Series 1987-F,
Class A2, 6.39%, 7/1/17............ 5,986,639 5,898,710
Capstead Security Corporation,
Series 1992-9, Class B,
5.60%, 6/25/20..................... 4,894,823 4,824,338
Donaldson, Lufkin and Jenrette,
Series 1991-3, Class A1,
5.51%, 3/20/21..................... 8,457,703 8,531,708
Donaldson, Lufkin and Jenrette,
Series 1992-12, Class A1,
5.93%, 12/25/22.................... 7,428,386 7,433,029
Donaldson, Lufkin and Jenrette,
Series 1992-6, Class A3,
5.71%, 7/25/22..................... 3,798,142 3,744,730
Donaldson, Lufkin and Jenrette,
Series 1992-MF3, Class A3,
6.26%, 5/25/22.....................10,000,000 10,212,500
First Federal of Rochester, Series
1988-SE1, Class A, 5.56%, 10/25/18.11,286,041 11,201,395
Merrill Lynch Mortgage Investors,
Series 1992-E, Class A3,
5.48%, 9/15/17..................... 5,000,000 5,000,000
Merrill Lynch Mortgage Investors,
Series 1992-H, Class A1-2,
5.70%, 1/25/23..................... 5,757,410 5,788,788
Merrill Lynch Mortgage Investors,
Series 1993-B, Class A3,
5.53%, 12/15/17....................13,650,000 13,700,642
Merrill Lynch Mortgage Investors,
Series 1993-D, Class A1-2,
4.82%, 10/25/23.................... 4,000,000 3,950,640
Merrill Lynch Mortgage Investors,
Series 1993-E, Class A4,
5.63%, 6/15/18..................... 6,500,000 6,372,665
Merrill Lynch Mortgage Investors,
Series 1993-H, Class A1-2,
4.99%, 10/25/23................... 3,640,000 3,575,863
Paine Webber Mortgage Acceptance
Corporation, Series 1993-11,
Class M1, 5.15%, 12/1/23........... 1,484,738 1,473,602
Paine Webber Mortgage Acceptance
Corporation, Series 1993-8,
Class M1, 5.83%, 8/25/23........... 6,819,580 6,828,104
Residential Funding Corporation,
Series 1992-S25, Class A,
6.04%, 7/25/22..................... 4,337,798 4,348,946
Residential Funding Corporation,
Series 1993-S8, Class A,
5.88%, 2/25/23..................... 6,837,646 6,898,364
Resolution Trust Corporation,
Series 1992-4, Class B2,
5.92%, 7/25/28..................... 3,000,086 2,992,585
Resolution Trust Corporation,
Series 1992-6, Class B3,
6.27%, 1/25/26.....................10,002,213 9,983,459
Salomon Brothers Mortgage, Series
1992-5, Class A1, 5.86%, 11/25/22.. 4,594,124 4,640,065
Sears Mortgage Securities, Series
1992-12, Class A1, 5.52%, 7/25/22.. 6,520,333 6,467,358
133,867,491
U.S. AGENCY INVERSE FLOATER (2.4%):
FHLMC, 8.26%, Series 1362, Class S,
Treasury, 1/15/21.................. 4,000,000 2,957,500
FNMA, 12.12%, Series 1992-201, Class
SB, COFI, 10/25/22................. 4,000,000 2,995,000
FNMA, 4.99%, Series 94-23, Class PS,
Treasury, 4/25/23.................. 1,754,000 1,061,170
7,013,670
U.S. AGENCY PRINCIPAL-ONLY (0.5%):
FNMA, 1.09%, Series 224,
Class A1, 6/25/23.................. 2,173,828 1,554,287
Total Mortgage-Backed Securities
(cost: $287,991,626)............... 280,729,085
STRUCTURED SECURITIES (g)(5.2%):
FOREIGN LINKED INDEX SECURITIES (5.2%):
Bayerische Landesbank, New York,
9.60%, due 6/26/95................. 3,000,000(1) 2,944,200
Commerzbank, A.G., New York, 9.00%,
due 3/20/1995...................... 4,000,000(2) 3,722,120
Bayerische Landesbank, New York,
6.81%, 5/26/95..................... 3,000,000(3) 2,777,100
Rabobank Nederland, New York, 10.00%,
due 7/17/95........................ 3,000,000(4) 2,989,500
Swiss Bank Corporation, New York,
8.50%, due 7/10/95................. 3,000,000(5) 3,060,000
Total Structured Securities
(cost: $16,000,000)................ 15,492,920
MUNICIPAL ZERO-COUPON SECURITIES (c)(12.2%):
Amarillo, Texas, School District,
5.44%, 2/1/99...................... 4,300,000 3,445,375
Brazoria County, Texas, General Obligation,
5.54%-5.59%, 9/1/99-9/1/00 ........ 1,425,000 1,064,531
Chelan County, Washington, Public
Utilities District, 5.98%-6.09%,
7/1/99-7/1/00 ....................$ 2,970,000 2,312,863
Cook and Will County, Illinois,
Series A, 5.63%, 12/1/99 .......... 2,390,000 1,813,413
Copperas Cove, Texas, School District,
5.52%, 6/1/99 ..................... 920,000 722,200
Cypress-Fairbanks, Texas, School District
5.47%-5.64%, 2/1/99-2/1/00 ........ 5,065,000 3,908,844
District of Columbia, General Obligation
5.57%-5.71%, 6/1/99-6/1/00 ........13,900,000 10,548,750
Mesquite, Texas, School District,
5.63%, 8/15/99..................... 1,605,000 1,245,881
Metropolitan Pier and Exposition Authority,
Illinois, State Revenue,
5.67%-5.69%, 6/15/99-12/15/99 ..... 7,875,000 6,045,413
North Slope Boro, Alaska, 5.58%,
6/30/99............................ 4,710,000 3,697,350
Texas State General Obligation,
5.68%, 10/1/00 .................... 1,655,000 1,201,944
Total Municipal Zero-Coupon Securities
(cost: $35,428,697)................ 36,006,564
CANADIAN SECURITIES (f)(21.1%):
Canadian Government Real Return Bond,
4.25%, 12/1/21..................... 6,353,000 4,445,974
Canadian Government Note,
8.49%, 3/1/96...................... 6,000,000 3,934,469
Canadian Government Residual, 7.23%,
6/1/95............................. 2,358,000 1,643,443
Canadian Treasury Bill, 7.27%, 5/4/95 3,000,000 2,104,981
Firstline Trust, 7.38%, 11/1/97...... 2,944,714 2,081,932
Firstline Trust, 7.88%, 2/1/98....... 8,431,648 6,022,156
Firstline Trust, 7.97%, 4/1/18....... 1,652,838 1,130,803
Manufacturers Life, 7.75%, 5/1/19.... 1,867,246 1,226,663
Royal Trust, 7.50%, 9/1/97........... 4,371,714 3,111,965
Total Canadian Securities
(cost: $27,651,403)................ 25,702,386
INTEREST RATE CONTRACTS (0.0%):
Interest rate floor with Morgan Stanley,
$15,000,000 notional principal on three-
month Deutschemark LIBOR, (5.00%
on 8/31/94), exercise rate of 5.00%,
due 4/6/98,
(cost: $245,583)................... -- 36,000
OPTIONS (0.0%):
Canadian dollar, 320 put option contracts,
exercise price of 1.3668, expire September 1994
(cost: $405,034)................... -- 148,988
SHORT-TERM SECURITIES (21.1%):
U.S. Treasury Bill, 5.30%, 4/6/95....20,000,000 19,400,800
U.S. Treasury Bill, 5.23%, 6/1/95....18,000,000 17,302,500
Repurchase agreement with Goldman Sachs
in a joint trading account, 4.80%,
acquired on 8/31/94 and due 9/1/94
with accrued interest of $3,419
(collateralized by U.S. government
agency obligations)...............$25,644,000 25,644,000
Total Short-Term Securities
(cost: $62,360,307)............. 62,347,300
Total Investments in Securities
(cost: $430,082,650)(h)........$ 420,463,243
</TABLE>
Notes to Investments in Securities:
(a) Securities are valued in accordance with procedures described in note 2 to
the financial statements.
(b) On August 31, 1994, the total cost of investments purchased on a
when-issued basis was $38,998,437.
(c) For zero-coupon investments, the interest rate shown is the effective yield
on the date of purchase.
(d) On August 31, 1994, securities valued at $90,470,961 were pledged as
collateral for the following outstanding reverse repurchase agreements:
Name
of Broker and
Acquisition Accrued Description
Amount Date Rate* Due Interest of Collateral
$ 50,000,000 10/21/93 4.80% 10/13/94 $ 66,701 (1)
35,000,000 2/14/94 4.69% 2/9/95 77,474 (2)
$ 85,000,000 $144,175
* Interest rate is as of August 31, 1994. Rates are based on the London
Interbank Offered Rate (LIBOR) and reset monthly.
Name of broker and description of collateral:
(1) Morgan Stanley: FHLMC, 6.28%, 6/1/22, $16,651,267 par.
FHLMC, 5.91%, 11/1/22, $11,864,666 par.
FHLMC, 6.10%, 7/1/23, $3,660,137 par.
FHLMC, 5.70%, 4/1/23, $2,495,115 par.
FNMA, 3.99%, 2/1/24, $3,861,996 par.
GNMA, 5.50%, 9/20/22, $2,204,933 par.
GNMA, 5.00%, 9/20/22, $2,643,309 par.
GNMA, 6.75%, 6/20/23, $5,896,540 par.
GNMA, 5.00%, 7/20/23, $2,894,049 par.
(2) Morgan Stanley: FHLMC, 6.28%, 6/1/22, $14,954,688 par.
FHLMC, 6.02%, 9/1/22, $6,728,115 par.
FHLMC, 6.10%, 7/1/23, $1,382,718 par.
FNMA, 3.99%, 2/1/24, $5,642,794 par.
GNMA, 5.50%, 7/20/22, $4,318,511 par.
GNMA, 5.50%, 9/20/22, $1,217,770 par.
GNMA, 5.00%, 7/20/23, $2,962,281 par.
(e) Descriptions of certain collateralized mortgage obligations are as
follows:
LIBOR - London InterBank Offered Rate
COFI (11th District) - Cost of Funds Index of the Federal Reserve's
11th District
Inverse floater - represent securities that pay interest at rates that
increase (decrease) with a decline (increase) in a specified index.
The relationship between a change in the specified index and interest
rate paid by the inverse floater is generally greater than a
one-to-one relationship. Interest rates disclosed are in effect on
August 31, 1994.
Principal-only - represent securities that entitle holders to receive only
principal payments on the underlying mortgages. The yield to maturity
of a principal-only security is extremely sensitive to the rate of
principal payments on the underlying mortgage assets. A slower (more
rapid) than expected rate of principal repayments may have an adverse
(positive) effect on yield to maturity. Interest rate disclosed
represents current yield based upon the current cost basis and
estimated timing of future cash flows.
(f) Par value is in Canadian dollars.
(g) Structured securities are issued by U.S. issuers and are denominated in
U.S. dollars. These securities were purchased as part of a private
placement, have not been registered with the Securities and Exchange
Commission under the Securities Act of 1933 and are deemed to be illiquid
by the Adviser. These securities return principal and/or interest in
amounts which are linked to the indices indicated below. Principal received
at maturity and interest earned may be limited to certain maximum and
minimum levels. The relationship between the specified index and the
resultant effect on principal or interest may be greater than a one-to-one
relationship.
(1) Coupon is earned when the spread between the two-year British Sterling
swap rate and the seven-year British Sterling swap rate stays between
1.30% and 2.46%.
(2) Principal amount at maturity is linked inversely to the Canadian
dollar/U.S. dollar exchange rate.
(3) Principal amount at maturity is linked inversely to the one-year
German Deutschemark swap rate. The coupon varies with the one-month
U.S. dollar LIBOR.
(4) Coupon is earned when the spread between the two-year French Franc
swap rate and the two-year German Deutschemark swap rate stays within
a range of 60 to 75 basis points.
(5) Principal amount at maturity is linked to the Japanese Yen/U.S. dollar
exchange rate.
(h) On August 31, 1994, for federal income tax purposes, the cost of
investments in securities, including the put options described in note 6
and the interest rate swap transactions described in note 2 to the
financial statements, was $432,126,396. The aggregate gross unrealized
appreciation and depreciation of investments in securities based on this
cost were as follows:
Gross unrealized appreciation.....$ 3,218,256
Gross unrealized depreciation......(17,366,814)
Net unrealized depreciation......$(14,148,558)
See accompanying Notes to Investments in Securities.
APPENDIX A
CORPORATE BOND AND
COMMERCIAL PAPER RATINGS
Commercial Paper Ratings
Standard & Poor's Corporation. Commercial paper ratings are graded into
four categories, ranging from "A" for the highest quality obligations to "D" for
the lowest. Issues assigned the A rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
designation 1, 2 and 3 to indicate the relative degree of safety. The "A-1"
designation indicates that the degree of safety regarding timely payment is very
strong. Those issues determined to possess overwhelming safety characteristics
will be denoted with a plus sign designation.
Moody's Investors Service, Inc. Moody's commercial paper ratings are
opinions of the ability of the issuers to repay punctually promissory
obligations not having an original maturity in excess of nine months. Moody's
makes no representation that such obligations are exempt from registration under
the Securities Act of 1933, nor does it represent that any specific note is a
valid obligation of a rated issuer or issued in conformity with any applicable
law. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime-1 Superior capacity for repayment of short-term promissory
obligations
Prime-2 Strong capacity for repayment of short-term promissory
obligations
Prime-3 Acceptable capacity for repayment of short-term promissory
obligations
Corporate Bond Ratings
Standard & Poor's Corporation. Standard & Poor's ratings for corporate
bonds have the following definitions:
Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in a small degree.
Debt rated "A" has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Moody's Investors Service, Inc. Moody's ratings for corporate bonds include
the following:
Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than in Aaa securities.
Bonds which are rated "A" possess many favorable attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Bonds which are rated "Baa" are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
APPENDIX B
INTEREST RATE FUTURES CONTRACTS AND RELATED OPTIONS
Interest Rate Futures Contracts
The Fund may purchase and sell interest rate futures contracts and options
thereon. An interest rate futures contract creates an obligation on the part of
the seller (the "short") to deliver, and an offsetting obligation on the part of
the purchaser (the "long") to accept delivery of, the type of financial
instrument called for in the contract in a specified delivery month for a stated
price. A majority of transactions in interest rate futures contracts, however,
do not result in the actual delivery of the underlying instrument, but are
settled through liquidation, i.e., by entering into an offsetting transaction.
The interest rate futures contracts to be traded by the Fund are traded only on
commodity exchanges--known as "contract markets"--approved for such trading by
the Commodity Futures Trading Commission and must be executed through a futures
commission merchant or brokerage firm which is a member of the relevant contract
market. These contract markets, through their clearing corporations, guarantee
that the contracts will be performed. Presently, futures contracts are based
upon such debt securities as long-term U.S. Treasury bonds, Treasury notes,
Government National Mortgage Association modified pass-through mortgage-backed
securities, three-month U.S. Treasury bills and bank certificates of deposit. In
addition, futures contracts are traded in the Moody's Investment Grade Corporate
Bond Index and the Long Term Corporate Bond Index.
Although most futures contracts by their terms call for actual delivery or
acceptance of commodities or securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out a short position is effected by purchasing a futures contract for the same
aggregate amount of the specific type of financial instrument or commodity and
the same delivery month. If the price of the initial sale of the futures
contract exceeds the price of the offsetting purchase, the seller is paid the
difference and realizes a gain. Conversely, if the price of the offsetting
purchase exceeds the price of the initial sale, the trader realizes a loss.
Similarly, the closing out of a long position is effected by the purchaser
entering into a futures contract sale. If the offsetting sale price exceeds the
purchase price, the purchaser realizes a gain and, if the purchase price exceeds
the offsetting sale price, the purchaser realizes a loss.
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the Adviser and the relevant contract
market, which varies but is generally about 2% of the contract amount, must be
deposited with the custodian in the name of the broker. This amount is known as
"initial margin," and represents a "good faith" deposit assuring the performance
of both the purchaser and the seller under the futures contract. Subsequent
payments to and from the broker, known as "variation margin," are required to be
made on a daily basis as the price of the futures contract fluctuates, making
the long or short positions in the futures contract more or less valuable, a
process known as "marking to the market." Prior to the settlement date of the
futures contract, the position may be closed out by taking an opposite position
which will operate to terminate the position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the broker, and the purchaser realizes a loss or gain.
In addition, a commission is paid on each completed purchase and sale
transaction.
The purpose of the acquisition or sale of a futures contract by the Fund,
as the holder of long-term fixed-income securities, is to hedge against
fluctuations in rates on such securities without actually buying or selling
long-term fixed-income securities. For example, if the Fund owns long-term bonds
and interest rates are expected to increase, the Fund might sell futures
contracts. Such a sale would have much the same effect as selling some of the
long-term bonds in the Fund's portfolio. If interest rates increase as
anticipated by the Adviser, the value of certain long-term securities in the
portfolio would decline, but the value of the Fund's futures contracts would
increase at approximately the same rate, thereby keeping the net asset value of
the Fund from declining as much as it otherwise would have. Of course, since the
value of the securities in the Fund's portfolio will far exceed the value of the
futures contracts sold by the Fund, an increase in the value of the futures
contracts could only mitigate--but not totally offset--the decline in the value
of the portfolio.
Similarly, when it is expected that interest rates may decline, futures
contracts could be purchased to hedge against the Fund's anticipated purchases
of long-term fixed-income securities, such as bonds, at higher prices. Since the
rate of fluctuation in the value of futures contracts should be similar to that
of long-term bonds, the Fund could take advantage of the anticipated rise in the
value of long-term bonds without actually buying them until the market had
stabilized. At that time, the futures contracts could be liquidated and the
Fund's cash could then be used to buy long-term bonds on the cash market. The
Fund could accomplish similar results by selling bonds with long maturities and
investing in bonds with short maturities when interest rates are expected to
increase or by buying bonds with long maturities and selling bonds with short
maturities when interest rates are expected to decline. However, in
circumstances when the market for bonds may not be as liquid as that for futures
contracts, the ability to invest in such contracts could enable the Fund to
react more quickly to anticipated changes in market conditions or interest
rates.
Options on Interest Rate Futures Contracts
The Fund may purchase and sell put and call options on interest rate
futures contracts which are traded on a United States exchange or board of trade
as a hedge against changes in interest rates, and will enter into closing
transactions with respect to such options to terminate existing positions. An
interest rate futures contract provides for the future sale by one party and the
purchase by the other party of a certain amount of a specific financial
instrument (debt security) at a specified price, date, time and place. An option
on an interest rate futures contract, as contrasted with the direct investment
in such a contract, gives the purchaser the right, in return for the premium
paid, to assume a position in an interest rate futures contract at a specified
exercise price at any time prior to the expiration date of the option. Options
on interest rate futures contracts are similar to options on securities, which
give the purchaser the right, in return for the premium paid, to purchase or
sell securities. A call option gives the purchaser of such option the right to
buy, and obliges its writer to sell, a specified underlying futures contract at
a specified exercise price at any time prior to the expiration date of the
option. A purchaser of a put option has the right to sell, and the writer has
the obligation to buy, such contract at the exercise price during the option
period. Upon exercise of an option, the delivery of the futures position by the
writer of the option to the holder of the option will be accompanied by delivery
of the accumulated balance in the writer's future margin account, which
represents the amount by which the market price of the futures contract exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option on the futures contract. If an option is exercised on the last
trading day prior to the expiration date of the option, the settlement will be
made entirely in cash equal to the difference between the exercise price of the
option and the closing price of the interest rate futures contract on the
expiration date. A Fund will pay a premium for purchasing options on interest
rate futures contracts. Because the value of the option is fixed at the point of
sale, there are no daily cash payments to reflect changes in the value of the
underlying contract; however, the value of the option does change daily and that
change would be reflected in the net asset value of the Fund. In connection with
the writing of options on interest rate futures contracts, a Fund will make
initial margin deposits and make or receive maintenance margin payments that
reflect changes in the market value of such options. Premiums received from the
writing of an option are included in initial margin deposits.
Purchase of Put Options on Futures Contracts. The Fund will purchase put
options on interest rate futures contracts if the Adviser anticipates a rise in
interest rates. Because the value of an interest rate futures contract moves
inversely in relation to changes in interest rates, a put option on such a
contract becomes more valuable as interest rates rise. By purchasing put options
on interest rate futures contracts at a time when the Adviser expects interest
rates to rise, the Fund will seek to realize a profit to offset the loss in
value of its portfolio securities.
Purchase of Call Options on Futures Contracts. The Fund will purchase call
options on interest rate futures contracts if the Adviser anticipates a decline
in interest rates. The purchase of a call option on an interest rate futures
contract represents a means of obtaining temporary exposure to market
appreciation at limited risk. Because the value of an interest rate futures
contract moves inversely in relation to changes to interest rates, a call option
on such a contract becomes more valuable as interest rates decline. The Fund
will purchase a call option on an interest rate futures contract to hedge
against a decline in interest rates in a market advance when the Fund is holding
cash. The Fund can take advantage of the anticipated rise in the value of
long-term securities without actually buying them until the market is
stabilized. At that time, the options can be liquidated and the Fund's cash can
be used to buy long-term securities.
Writing Call Options on Futures Contracts. The Fund will write call options
on interest rate futures contracts if the Adviser anticipates a rise in interest
rates. As interest rates rise, a call option on such a contract becomes less
valuable. If the futures contract price at expiration of the option is below the
exercise price, the option will not be exercised and the Fund will retain the
full amount of the option premium. Such amount provides a partial hedge against
any decline that may have occurred in the Fund's portfolio securities.
Writing Put Options on Futures Contracts. The Fund will write put options
on interest rate futures contracts if the Adviser anticipates a decline in
interest rates. As interest rates decline, a put option on an interest rate
futures contract becomes less valuable. If the futures contract price at
expiration of the option has risen due to declining interest rates and is above
the exercise price, the option will not be exercised and the Fund will retain
the full amount of the option premium. Such amount can then be used by the Fund
to buy long-term securities when the market has stabilized.
Risks of Transactions in Futures Contracts and Options on Futures Contracts
Hedging Risks in Futures Contracts Transactions. There are several risks in
using futures contracts as hedging devices. One risk arises because the prices
of futures contracts may not correlate perfectly with movements in the
underlying fixed-income security due to certain market distortions. First, all
participants in the futures market are subject to initial margin and variation
margin requirements. Rather than making additional variation margin payments,
investors may close the contracts through offsetting transactions which could
distort the normal relationship between the security and the futures market.
Second, the margin requirements in the futures market are lower than margin
requirements in the securities market, and as a result the futures market may
attract more speculators than does the securities market. Increased
participation by speculators in the futures market may also cause temporary
price distortions. Because of possible price distortion in the futures market
and because of imperfect correlation between movements in securities and
movements in the prices of futures contracts, even a correct forecast of general
market trends may not result in a successful hedging transaction over a very
short period. Another risk arises because of imperfect correlation between
movements in the value of the futures contracts and movements in the value of
securities subject to the hedge.
Successful use of futures contracts by the Fund is subject to the ability
of the Adviser to predict correctly movements in the direction of interest
rates. If the Fund has hedged against the possibility of an increase in interest
rates adversely affecting the value of fixed-income securities held in its
portfolio and interest rates decrease instead, the Fund will lose part or all of
the benefit of the increased value of its security which it has hedged because
it will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell securities to
meet daily variation margin requirements. Such sales of securities may, but will
not necessarily, be at increased prices which reflect the decline in interest
rates. The Fund may have to sell securities at a time when it may be
disadvantageous to do so.
Liquidity of Futures Contracts. The Fund may elect to close some or all of
its contracts prior to expiration. The purpose of making such a move would be to
reduce or eliminate the hedge position held by the Fund. The Fund may close its
positions by taking opposite positions. Final determinations of variation margin
are then made, additional cash as required is paid by or to the Fund, and the
Fund realizes a loss or a gain.
Positions in futures contracts may be closed only on an exchange or board
of trade providing a secondary market for such futures contracts. Although the
Fund intend to enter into futures contracts only on exchanges or boards of trade
where there appears to be an active secondary market, there is no assurance that
a liquid secondary market will exist for any particular contract at any
particular time.
In addition, most domestic futures exchanges and boards of trade limit the
amount of fluctuation permitted in futures contract prices during a single
trading day. The daily limit establishes the maximum amount that the price of a
futures contract may vary either up or down from the previous day's settlement
price at the end of a trading session. Once the daily limit has been reached in
a particular contract, no trades may be made that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses because the limit may prevent
the liquidation of unfavorable positions. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses. In such event, it
will not be possible to close a futures position and, in the event of adverse
price movements, the Fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the portion
of the portfolio being hedged, if any, may partially or completely offset losses
on the futures contract. However, as described above, there is no guarantee that
the price of the securities being hedged will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on a
futures contract.
Risks of Options on Futures Contracts. The use of options on futures
contracts also involves additional risk. Compared to the purchase or sale of
futures contracts, the purchase of call or put options on futures contracts
involves less potential risk to a Fund because the maximum amount at risk is the
premium paid for the options (plus transactions costs). The writing of a call
option on a futures contract generates a premium which may partially offset a
decline in the value of the Fund's portfolio assets. By writing a call option,
the Fund becomes obligated to sell a futures contract, which may have a value
higher than the exercise price. Conversely, the writing of a put option on a
futures contract generates a premium, but the Fund becomes obligated to purchase
a futures contract, which may have a value lower than the exercise price. Thus,
the loss incurred by the Fund in writing options on futures contracts may exceed
the amount of the premium received.
The effective use of options strategies is dependent, among other things,
on a Fund's ability to terminate options positions at a time when the Adviser
deems it desirable to do so. Although the Fund will enter into option positions
only if the Adviser believes that a liquid secondary market exists for such
options, there is no assurance that the Fund will be able to effect closing
transactions at any particular time or at an acceptable price. The Fund's
transactions involving options on futures contracts will be conducted only on
recognized exchanges. The Fund's purchase or sale of put or call options on
futures contracts will be based upon predictions as to anticipated interest
rates by the Adviser, which could prove to be inaccurate. Even if the
expectations of the Adviser are correct, there may be an imperfect correlation
between the change in the value of the options and of the Fund's portfolio
securities.
Regulatory Matters
To the extent required to comply with applicable Securities and Exchange
Commission releases and staff positions, when entering into futures contracts,
the Fund will maintain, in a segregated account, cash or liquid high-grade debt
securities equal to the value of such contracts.
The Commodity Futures Trading Commission (the "CFTC"), a federal agency,
regulates trading activity on the exchanges pursuant to the Commodity Exchange
Act, as amended. The CFTC requires the registration of "commodity pool
operators," defined as any person engaged in a business which is of the nature
of an investment company, syndicate or a similar form of enterprise, and who, in
connection therewith, solicits, accepts or receives from others, funds,
securities or property for the purpose of trading in any commodity for future
delivery on or subject to the rules of any contract market. The CFTC has adopted
Rule 4.5, which provides an exclusion from the definition of commodity pool
operator for any registered investment company which meets the requirements of
the Rule. Rule 4.5 requires, among other things, that an investment company
wishing to avoid commodity pool operator status use futures and options
positions only (a) for "bona fide hedging purposes" (as defined in CFTC
regulations) or (b) for other purposes so long as aggregate initial margins and
premiums required in connection with non-hedging positions do not exceed 5% of
the liquidation value of the investment company's portfolio. Any investment
company wishing to claim the exclusion provided in Rule 4.5 must file a notice
of eligibility with both the CFTC and the National Futures Association. Before
engaging in transactions involving interest rate futures contracts, the Funds
will file such notices and meet the requirements of Rule 4.5, or such other
requirements as the CFTC or its staff may from time to time issue, in order to
render registration as a commodity pool operator unnecessary.
