<PAGE>
Filed Pursuant to Rule 497(b)
Registration No. 33-58849
[LOGO]
Piper Capital Management
222 South Ninth Street
Minneapolis, MN 55402-3804
800-866-7778
Dear Shareholders:
Enclosed is the Joint Proxy Statement/Prospectus for a meeting of shareholders
of the American Adjustable Rate Term Trusts 1996, 1997, 1998 and 1999 (BDJ, CDJ,
DDJ and EDJ) to be held on August 1, 1995.
THE PRINCIPAL PURPOSE OF THE JOINT PROXY STATEMENT/PROSPECTUS IS TO SEEK
SHAREHOLDER APPROVAL TO MERGE EACH OF THE CLOSED-END TERM TRUSTS INTO A SINGLE
OPEN-END FUND. The boards of directors for BDJ, CDJ, DDJ and EDJ approved this
proposal, subject to a shareholder vote. We, like you, are disappointed with the
performance of the term trusts and regret that they are not expected to achieve
their $10 per share objective at termination. Given that conclusion, we believe
the proposal to merge the trusts is in the best interests of shareholders as it
would eliminate the market discount at which the term trust shares are currently
trading, thereby allowing you to access your assets under more favorable terms.
The Joint Proxy Statement/Prospectus also seeks shareholder approval to set the
number of board members for each trust at six, to elect each trust's board of
directors to serve until the next annual meeting, and to ratify the selection of
KPMG Peat Marwick LLP as independent public accountants for each trust for the
fiscal year ending August 31, 1995. Shareholders are being asked to vote on
these measures in the event that their trust does not pass the merger proposal.
BOARD MEMBERS RECOMMEND YOU VOTE FOR EACH OF THE PROPOSALS CONTAINED IN THE
JOINT PROXY STATEMENT/ PROSPECTUS. The enclosed shareholder Q&A and Joint Proxy
Statement/Prospectus give more detailed information about the proposals and the
reasons why the boards recommend you vote in favor of them. Please read these
documents carefully.
PLEASE TAKE A MOMENT NOW TO SIGN AND RETURN THE PROXY CARD(S)* IN THE ENCLOSED
POSTAGE-PAID ENVELOPE. As the date of the meeting approaches, if you haven't
already voted, you may receive a telephone call from Shareholder Communications
Corporation, a professional proxy solicitation firm, reminding you to exercise
your right to vote. If you have questions about these proposals, please contact
your broker. Thank you.
Sincerely,
[LOGO]
William H. Ellis
President
* If you hold shares in more than one of the American Adjustable Rate Term
Trusts, you will receive a separate proxy card for each fund you hold. PLEASE
BE SURE TO SIGN AND RETURN EACH PROXY CARD REGARDLESS OF HOW MANY YOU RECEIVE.
<PAGE>
SHAREHOLDER Q&A
JUNE 14, 1995
- --------------------------------------------------------------------------------
QUESTIONS AND ANSWERS CONCERNING THE PROPOSAL TO MERGE THE AMERICAN ADJUSTABLE
RATE TERM TRUSTS 1996, 1997, 1998 AND 1999 (NYSE SYMBOLS: BDJ, CDJ, DDJ AND EDJ)
THE ITEM IN THE JOINT PROXY STATEMENT/PROSPECTUS THAT HAS THE GREATEST IMPACT ON
YOU AS A SHAREHOLDER IS THE PROPOSAL TO MERGE EACH OF THE CLOSED-END TERM TRUSTS
INTO A SINGLE OPEN-END MUTUAL FUND CALLED ADJUSTABLE RATE MORTGAGE SECURITIES
FUND (ADJUSTABLE RATE FUND). THIS Q&A AND THE JOINT PROXY STATEMENT/PROSPECTUS
GIVE DETAILS ABOUT THE PROPOSED MERGER.
WHY HAS THE ADVISER PROPOSED TO MERGE THE FOUR TERM TRUSTS INTO ONE OPEN-END
FUND?
Piper Capital Management, as adviser to BDJ, CDJ, DDJ and EDJ, has determined
that none of the term trusts is expected to accomplish its objective of
returning $10 per share on its termination date without taking unacceptable
risks. In light of that fact, Piper Capital proposed the merger as an
alternative to continuing to manage the trusts to achieve a specific net asset
value at a final termination date, and the trusts' boards agreed with the
recommendation.
WHY IS IT IN MY BEST INTEREST TO VOTE FOR THIS PROPOSAL?
Merging each closed-end term trust into one open-end fund has two principal
advantages:
ELIMINATION OF MARKET DISCOUNT - The price of your term trust shares would
immediately increase because the merger would eliminate the market discounts at
which the term trust shares currently trade. Shares in Adjustable Rate Fund
could be redeemed on each business day at net asset value, unlike shares of the
term trusts which trade at market price on the New York and Chicago stock
exchanges.
MARKET DISCOUNTS OF BDJ THROUGH EDJ AS OF FEBRUARY 9, 1995 (THE DAY BEFORE THE
MERGER PROPOSAL WAS ANNOUNCED)
<TABLE>
<CAPTION>
Total $
Net Asset Market Percent Shares Value of
Value Price Discount Outstanding Discount
------------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
BDJ $ 8.95 $ 8.25 7.8% 21,877,782 $15,314,447
CDJ $ 8.70 $ 7.88 9.5% 42,486,299 $35,051,197
DDJ $ 8.58 $ 7.75 9.7% 47,142,517 $39,128,289
EDJ $ 8.41 $ 7.63 9.3% 28,160,272 $22,105,814
</TABLE>
GREATER INVESTMENT FLEXIBILITY - The current term trust structure imposes
constraints on portfolio management that would not be applicable to Adjustable
Rate Fund. The elimination of the term trust structure would, in the Adviser's
view, facilitate Adjustable Rate Fund's ability to obtain a higher investment
return by allowing it to purchase and retain longer maturity securities than the
trusts could under the term trust structure.
<PAGE>
WHAT IS THE IMPACT OF THE MERGER ON FEES AND EXPENSES?
Piper Capital has agreed to cap total expenses for Adjustable Rate Fund through
August 31, 1996, at 0.60% of the Fund's daily net assets, provided that at least
three of the four term trusts approve the merger. In the absence of this cap, it
is possible that Adjustable Rate Fund's fees and expenses might be greater than
those of any individual term trust, particularly if only one term trust approves
the merger. A comparison of fees and expenses as a percent of average daily net
assets, assuming the fee cap for ARM Fund, is shown in the table below.
<TABLE>
<CAPTION>
Adjustable Rate
BDJ CDJ DDJ EDJ Fund
<S> <C> <C> <C> <C> <C>
Management Fee* 0.50% 0.50% 0.50% 0.50% 0.32 %**
Rule 12b-1 Fee N/A N/A N/A N/A 0.15 %
Other expenses (excluding interest expense) 0.15% 0.11% 0.10% 0.10% 0.13 %
Total expenses 0.65% 0.61% 0.60% 0.60% 0.60 %
</TABLE>
* FOR BDJ, CDJ, DDJ AND EDJ, INCLUDES AN ADVISORY FEE OF .35% AND AN
ADMINISTRATION FEE OF .15%. ADJUSTABLE RATE FUND DOES NOT PAY AN
ADMINISTRATION FEE.
** 0.35% ON FIRST $500 MILLION IN NET ASSETS AND 0.30% ON NET ASSETS GREATER
THAN $500 MILLION. THE 0.32% FEE ASSUMES THAT EACH TRUST APPROVES THE MERGER
AND THAT REDEMPTIONS ARE MINIMAL. FEES SHOWN FOR BDJ, CDJ, DDJ AND EDJ ARE
FOR THE FISCAL YEAR ENDED AUGUST 31, 1994.
WHAT WOULD BE THE COSTS TO ME AS A SHAREHOLDER FOR IMPLEMENTING THIS PROPOSAL?
There would be no costs to shareholders for merging and converting the funds.
Piper Capital has agreed to pay for the costs specific to the merger of the term
trusts, estimated at approximately $500,000. This includes Securities and
Exchange Commission and state registration fees, legal and accounting fees,
proxy solicitation fees, shareholder meeting expenses, and the cost of
preparing, printing and mailing the Joint Proxy Statement/Prospectus and other
printed materials.
WHAT ARE THE TAX CONSEQUENCES OF THE MERGER?
It is intended that the merger will be treated as a tax-free reorganization for
federal tax purposes so that, for federal income tax purposes, shareholders will
not recognize any income, gain or loss when exchanging term trust shares for
Adjustable Rate Fund shares. However, each approving term trust intends to make
one or more distributions, prior to the effectiveness of the merger, of all its
undistributed net income and net realized capital gains for the current taxable
year, and these distributions will be taxable to approving term trust
shareholders. It is currently estimated that such distributions for BDJ, CDJ,
DDJ and EDJ will be $0.45, $0.26, $0.08, and $0.00 per share, respectively. For
shareholders participating in their Trust's dividend reinvestment plan, these
distributions will be reinvested in Trust shares only if they are made prior to
the suspension of Trust share trading on the New York Stock Exchange. (Trading
will be suspended for a period of time prior to effectiveness of the merger.)
For a discussion of circumstances that could cause the merger to be treated as a
taxable transaction, see the Joint Proxy Statement/Prospectus.
<PAGE>
WILL THE PENDING LAWSUITS AGAINST THE TERM TRUSTS AFFECT THIS PROPOSAL?
The pending lawsuits against the term trusts do not affect this proposal. Piper
Jaffray Companies and Piper Capital have agreed to pay all the costs and
expenses involved with these lawsuits to ensure that Adjustable Rate Fund is
protected against any losses that may be incurred.
WHAT WOULD BE THE INVESTMENT OBJECTIVE OF ADJUSTABLE RATE FUND?
The investment objective of Adjustable Rate Fund would be to provide the maximum
current income that is consistent with a low volatility of principal. There
would be no final termination date or final termination value in the Adjustable
Rate Fund objective.
HOW WOULD THE INVESTMENTS IN THE ADJUSTABLE RATE FUND DIFFER FROM THE TRUSTS?
Adjustable Rate Fund would be more limited in its investments and investment
techniques than the term trusts. The chart below shows investments and
investment techniques for the term trusts vs. Adjustable Rate Fund.
<TABLE>
<CAPTION>
ADJUSTABLE RATE
INVESTMENTS TERM TRUSTS FUND
<S> <C> <C>
Adjustable Rate Mortgage-Backed Securities (ARMS)........... Yes Yes
Mortgage-Backed Securities Other Than ARMS.................. Yes Yes
U.S. Government Securities.................................. Yes Yes
U.S. Government Zero-Coupon Securities...................... Yes Yes
Asset-Backed Securities..................................... Yes Yes
Corporate Debt Securities................................... Yes Yes
Interest Rate Caps and Floors............................... Yes Yes
Options..................................................... Yes Yes
Futures (Including Eurodollars)............................. Yes Yes
Zero-Coupon Securities (Other Than U.S. Government)......... Yes No
Mortgage Dollar Rolls....................................... Yes No
Inverse Floaters............................................ Yes No
Interest-Only Securities.................................... Yes No
Principal-Only Securities................................... Yes No
Z Tranches.................................................. Yes No
Stripped Mortgage-Backed Securities......................... Yes No
Canadian Debt Securities.................................... Yes No
Foreign Exchange Transactions............................... Yes No
Foreign Linked Index Instruments............................ Yes No
Interest Rate Swaps......................................... Yes No
</TABLE>
FOR A COMPLETE LIST OF INVESTMENTS AND INVESTMENT TECHNIQUES INCLUDING
PERCENTAGE REQUIREMENTS OR LIMITS, SEE THE JOINT PROXY STATEMENT/PROSPECTUS.
WOULD ADJUSTABLE RATE FUND PAY A MONTHLY DIVIDEND?
Adjustable Rate Fund would pay dividends from its net investment income on a
monthly basis and distribute net realized capital gains, if any, at least once
annually. Adjustable Rate Fund would not attempt to stabilize distributions by
retaining income but instead would distribute to its shareholders substantially
all of the investment income earned during any period. Dividends and capital
gains would be payable in additional shares of Adjustable Rate Fund or any other
fund managed by the adviser or payable in cash.
<PAGE>
HOW WOULD THE EXCHANGE RATIO OF TERM TRUST SHARES FOR ADJUSTABLE RATE FUND
SHARES BE DETERMINED?
Shareholders of each approving trust would become shareholders of Adjustable
Rate Fund and would receive, on the effective date, shares of Adjustable Rate
Fund with a total net asset value equal to the total net asset value of their
term trust shares on that date. For example, someone who owns $100 worth of BDJ
shares immediately prior to the merger would own $100 worth of Adjustable Rate
Fund shares immediately after the merger.
WOULD ADJUSTABLE RATE FUND BE PREPARED FOR REDEMPTIONS AS A RESULT OF THIS
MERGER?
The adviser believes Adjustable Rate Fund will have no difficulties satisfying
redemption requests.
WHO WOULD BE THE PORTFOLIO MANAGERS FOR ADJUSTABLE RATE FUND?
Tom McGlinch, who was added to the term trusts' management team in October 1994,
and Mike Jansen, who was added in February 1995, will manage the portfolios
regardless of the open- or closed-end status.
IF I HOLD MY TERM TRUST SHARES AT A FIRM OTHER THAN PIPER JAFFRAY INC., HOW WILL
I REDEEM MY SHARES OR BUY MORE SHARES OF ADJUSTABLE RATE FUND?
If you want to redeem your shares after the merger, you can do so through
Investors Fiduciary Trust Company. If you want to buy shares after the merger
takes place, Adjustable Rate Fund shares may be purchased through Piper Jaffray
and any other firms which have sales agreements with Piper Jaffray.
IF SHAREHOLDERS APPROVE THIS PROPOSAL, WHEN WILL IT BECOME EFFECTIVE?
The merger is expected to become effective at the close of business on or about
September 1, 1995, for each term trust which approves the proposal.
WHAT PERCENTAGE OF "YES" VOTES ARE NEEDED FOR EACH TRUST TO APPROVE THE MERGER?
Each trust votes separately on the merger. Two-thirds of each trust's
outstanding shares must vote "yes" in order for this proposal to pass for that
trust.
WHEN IS MY PROXY DUE? WHERE DO I SEND IT?
We'd like to receive your completed, signed and dated proxy as soon as possible.
A postage-paid envelope is enclosed for mailing your proxy. If you have
misplaced your envelope, please mail your proxy to: Piper Capital Management
Incorporated, Proxy Services, P.O. Box 9150, Farmingdale, New York 11735-9807.
If you haven't returned your ballot as the meeting date approaches, you may
receive a call from Shareholder Communications Corporation (SCC) reminding you
to vote. Piper Capital has hired SCC to assist with the solicitation of proxies.
WHEN AND WHERE WILL THE SHAREHOLDER MEETING TAKE PLACE?
The shareholder meeting will take place on August 1, 1995, on the eleventh floor
of the Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota.
Regardless of whether you plan to attend the meeting, you should return your
proxy card in the mail as soon as possible.
<PAGE>
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
PIPER JAFFRAY TOWER
222 SOUTH NINTH STREET
MINNEAPOLIS, MINNESOTA 55402-3804
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 1, 1995
NOTICE IS HEREBY GIVEN that the annual meeting of shareholders of 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 (individually, a "Trust," and
collectively, the "Trusts") will be held at 10:00 a.m., Central Time, on August
1, 1995, on the eleventh floor of the Piper Jaffray Tower, 222 South Ninth
Street, Minneapolis, Minnesota. The purposes of the meeting are as follows:
1. To approve, for each Trust, an Agreement and Plan of Merger whereby
each approving Trust will merge with and into Adjustable Rate Mortgage
Securities Fund ("Adjustable Rate Fund"), a series of a newly created,
open-end management investment company, with Adjustable Rate Fund as the
surviving entity (the "Merger").
2. To set the number of members of the Board of Directors of each Trust
at six and to elect each Trust's Board of Directors to serve until the next
Annual Meeting or until their successors have been duly elected and
qualified (or, if the Merger is approved with respect to a Trust, until the
effective time of the Merger).
3. To ratify the selection by a majority of the independent members of
the Board of Directors of each Trust of KPMG Peat Marwick LLP as independent
public accountants for each Trust for the fiscal year ending August 31,
1995.
4. To transact such other business as may properly come before the
meeting.
Shareholders of record on June 14, 1995, are the only persons entitled to
notice of and to vote at the meeting.
Your attention is directed to the attached Joint Proxy Statement/Prospectus.
WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE UPCOMING MEETING, PLEASE FILL IN,
SIGN, DATE, AND MAIL THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN ORDER TO SAVE
THE TRUSTS FURTHER SOLICITATION EXPENSE. A stamped return envelope is enclosed
for your convenience.
David Evans Rosedahl
SECRETARY
Dated: June 14, 1995
<PAGE>
MERGER OF
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
INTO ADJUSTABLE RATE MORTGAGE SECURITIES FUND
A SERIES OF PIPER FUNDS INC. -- II
JOINT PROXY STATEMENT/PROSPECTUS
JUNE 14, 1995
This Joint Proxy Statement/Prospectus is being furnished in connection with
the Annual Meeting of Shareholders (the "Meeting") of 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") (BDJ, CDJ, DDJ and EDJ
are sometimes referred to herein collectively as the "Trusts" or individually as
a "Trust"), to be held on August 1, 1995. This document is both a proxy
statement for each of the Trusts, discussing items that Trust shareholders will
be asked to vote upon at the Meeting, and a prospectus for the shares of
Adjustable Rate Mortgage Securities Fund ("Adjustable Rate Fund").
At the Meeting, shareholders of each Trust are being asked to approve the
merger (the "Merger") of the Trusts pursuant to an Agreement and Plan of Merger
(the "Merger Agreement") between the Trusts and Piper Funds Inc. -- II (the
"Company"), a newly created, open-end management investment company. The Merger
Agreement provides for the merger of the Trusts into the Company. Shareholders
of each Trust approving the Merger will become shareholders of Adjustable Rate
Fund, a series of the Company, and will receive, on the effective date of the
Merger, shares of Adjustable Rate Fund with a net asset value equal to the net
asset value of their Trust shares on that date.
The terms and conditions of the Merger are more fully described in this
Joint Proxy Statement/Prospectus and in the Merger Agreement, a copy of which is
attached as Appendix A hereto.
Shareholders of each Trust are being asked to vote on certain additional
matters unrelated to the Merger to avoid the need for a separate meeting in the
event the Merger is not approved by their Trust. These matters are the election
of directors and the ratification of the selection of KPMG Peat Marwick LLP as
each Trust's independent accountants.
The Company is a newly created, open-end management investment company, of
which Adjustable Rate Fund is a series. The investment objective of Adjustable
Rate Fund is to provide the maximum current income that is consistent with a low
volatility of principal.
The principal executive offices of both the Trusts and the Company are
located at Piper Jaffray Tower, 222 South Ninth Street, 20th Floor, Minneapolis,
Minnesota 55402. Their telephone number is (800) 866-7778.
This Joint Proxy Statement/Prospectus sets forth concisely the information
that shareholders of the Trusts should know about Adjustable Rate Fund before
voting on the proposed Merger. It should be read and retained for future
reference. A Statement of Additional Information dated June 14, 1995 containing
additional information about the Trusts and the Company has been filed with the
Securities and Exchange Commission (the "Commission") and is hereby incorporated
by reference in its entirety into this Joint Proxy Statement/Prospectus. A copy
of the Statement of Additional Information is available without charge upon
request by writing or calling the Company or the Trusts at the address or
telephone number set forth above.
Shares of Adjustable Rate Fund are not bank deposits and are not federally
insured by, guaranteed by, obligations of or otherwise supported by the U.S.
Government, the Federal Deposit Insurance Corporation, the Federal Reserve Bank
or any other governmental agency. An investment in Adjustable Rate Fund may
involve certain investment risks, including the possible loss of principal.
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.
No person has been authorized to give any information or to make any
representations other than those contained in this Joint Proxy
Statement/Prospectus and in the materials expressly incorporated herein by
reference and, if given or made, such other information or representations must
not be relied upon as having been authorized by the Trusts or the Company.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Summary.................................................................................................... 3
Risk Factors............................................................................................... 8
The Annual Meetings........................................................................................ 11
General.................................................................................................. 11
Voting; Proxies.......................................................................................... 11
Proposal No. 1 -- The Merger............................................................................... 12
General.................................................................................................. 12
Terms of the Merger...................................................................................... 13
Reasons for the Merger................................................................................... 14
Federal Income Tax Consequences.......................................................................... 16
Expenses Associated with the Merger...................................................................... 17
Fees and Expenses........................................................................................ 18
Capitalization........................................................................................... 19
Description and Comparison of Trust and Adjustable Rate Fund Shares...................................... 19
History of Public Trading of the Trusts' Common Shares................................................... 21
Comparison of Investment Objectives and Policies of Adjustable Rate Fund and the Trusts.................. 22
Management of the Trusts and Adjustable Rate Fund........................................................ 28
Share Purchase, Exchange and Redemption Procedures....................................................... 30
Valuation of Shares...................................................................................... 32
Dividends, Distributions and Taxes....................................................................... 32
Surrender of Approving Trust Share Certificates.......................................................... 33
Portfolio Transactions and Brokerage Commissions......................................................... 34
Pending Litigation....................................................................................... 34
Dissenters' Rights....................................................................................... 35
Vote Required............................................................................................ 35
Recommendation of the Board of Directors................................................................. 35
Proposal No. 2 -- Election of Directors.................................................................... 35
Proposal No. 3 -- Ratification of Independent Public Accountants........................................... 38
Proposals for the Next Annual Meeting...................................................................... 39
Legal Matters.............................................................................................. 39
Financial Statements and Experts........................................................................... 39
Available Information...................................................................................... 39
Other Matters.............................................................................................. 40
Appendix A -- Agreement and Plan of Merger................................................................. A-1
Appendix B -- Investments, Investment Techniques and Risks................................................. B-1
Appendix C -- Shareholder Guide to Investing............................................................... C-1
Appendix D -- Dissenting Shareholders' Rights of Appraisal................................................. D-1
Appendix E -- Indemnification Agreement.................................................................... E-1
</TABLE>
2
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS JOINT PROXY STATEMENT/PROSPECTUS. THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY
BY THE MORE DETAILED INFORMATION CONTAINED HEREIN AND IN THE ATTACHED
APPENDICES. SHAREHOLDERS SHOULD READ THE ENTIRE JOINT PROXY
STATEMENT/PROSPECTUS. CERTAIN CAPITALIZED TERMS USED BUT NOT DEFINED IN THIS
SUMMARY ARE DEFINED ELSEWHERE IN THE TEXT OF THIS JOINT PROXY
STATEMENT/PROSPECTUS OR IN APPENDIX A HERETO.
THE MEETING
This Joint Proxy Statement/Prospectus (the "Joint Proxy
Statement/Prospectus") is being furnished to shareholders in connection with the
solicitation of proxies by the Boards of Directors of 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") (BDJ, CDJ, DDJ and EDJ
are sometimes referred to herein collectively as the "Trusts" or individually as
a "Trust") to be held on August 1, 1995 at 10:00 a.m. local time at the Piper
Jaffray Tower, 222 South Ninth Street, eleventh floor, Minneapolis, Minnesota
55402, and any adjournment thereof, for the purposes set forth in the foregoing
Notice of Annual Meeting of Shareholders. Holders of record of shares of each
Trust as of the close of business on June 14, 1995 will be entitled to notice of
and to vote at their respective Trust's Meeting, as described elsewhere in this
Joint Proxy Statement/Prospectus. The first mailing of this Joint Proxy
Statement/Prospectus and the enclosed form of proxy (the "Proxy") is expected to
occur on or about June 14, 1995. The annual report of the Trusts for the fiscal
year ended August 31, 1994 and semiannual report for the six months ended
February 28, 1995, including financial statements, were previously mailed to
shareholders. If you have not received a report for your Trust or would like to
receive another copy, please call the Trusts at (800) 866-7778, and one will be
sent by first-class mail within 48 hours.
The Meeting has been called for the principal purpose of considering the
merger of each Trust, as described in more detail below (the "Merger"), into a
single series of Piper Funds Inc. -- II (the "Company"), an open-end management
investment company. Such series will be called Adjustable Rate Mortgage
Securities Fund ("Adjustable Rate Fund"). Shareholders of each Trust approving
the Merger will become shareholders of Adjustable Rate Fund and will receive, on
the effective date of the Merger, shares of Adjustable Rate Fund with a net
asset value equal to the net asset value of their Trust shares on that date.
THE BOARD OF DIRECTORS OF EACH TRUST RECOMMENDS THAT THE SHAREHOLDERS OF THE
RESPECTIVE TRUSTS VOTE FOR THE MERGER.
In addition, in accordance with the Trusts' regular annual meeting
procedures, the shareholders of each Trust are being asked to approve the
election of six directors to serve until their successors are duly elected and
qualified and to ratify the selection of KPMG Peat Marwick LLP as independent
accountants for their respective Trusts. Shareholders are being asked to vote on
these additional matters in case their Trust does not participate in the Merger
and remains a separate entity.
THE MERGER
The Merger Agreement sets forth the terms of the Merger under which each
Trust approving the transaction (individually an "Approving Trust" and
collectively the "Approving Trusts") will merge with and into the Company, with
the Company as the surviving entity. As a result of the Merger, the assets and
liabilities of each Approving Trust will be combined, and the shareholders of
each Approving Trust will become shareholders of Adjustable Rate Fund. The
articles of incorporation, bylaws, Investment Advisory Agreement, Rule 12b-1
Plan and Distribution Agreement of Adjustable Rate Fund described herein, in
effect immediately prior to the Merger, will be those of the surviving
corporation. The Board of Directors of the Company, which consists of the same
individuals who serve as directors of the Trusts, will continue as the directors
of the surviving corporation. If the proposal
3
<PAGE>
relating to the Merger Agreement is approved, the Merger will become effective
at the close of business on the date the Articles of Merger are filed with the
Secretary of State of the State of Minnesota (the "Effective Time"), which is
expected to occur on or about August 31, 1995.
REASONS FOR THE MERGER
Piper Capital Management Incorporated (the "Adviser") believes that none of
the Trusts can be expected to accomplish its objective of returning $10 per
share on its termination date without incurring an unacceptable level of risk.
In light of the foregoing, the Adviser has proposed and the Board of
Directors has recommended, as an alternative to continuing to manage the Trusts
subject to the constraints of the term trust structure, merging each Trust into
one newly organized open-end fund. The Merger is intended to offer the following
benefits to shareholders of each Trust:
ELIMINATION OF MARKET DISCOUNT
On February 9, 1995, immediately prior to the public announcement of the
Merger proposal, each Trust's shares were trading at discounts to net asset
value as follows:
<TABLE>
<CAPTION>
NET ASSET MARKET PERCENT SHARES DOLLAR VALUE
VALUE PRICE DISCOUNT OUTSTANDING OF DISCOUNT
----------- --------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C>
BDJ..................................... $ 8.950 $ 8.250 7.82% 21,877,782 $ 15,314,447
CDJ..................................... $ 8.700 $ 7.875 9.48% 42,486,299 $ 35,051,197
DDJ..................................... $ 8.580 $ 7.750 9.67% 47,142,517 $ 39,128,289
EDJ..................................... $ 8.410 $ 7.625 9.33% 28,160,272 $ 22,105,814
</TABLE>
The Merger would effectively eliminate this market discount because Approving
Trust shareholders would receive in the Merger redeemable shares of Adjustable
Rate Fund with a net asset value equal to the net asset value of their Trust
shares on the date of the Merger.
ENHANCED INVESTMENT FLEXIBILITY
The Adviser believes the term trust structure imposes constraints on
portfolio management that would not be applicable to a fund like Adjustable Rate
Fund. In the Adviser's view, the increased flexibility it would have in managing
Adjustable Rate Fund should facilitate its ability to achieve a higher
investment return than it could obtain in continuing to manage the Trusts under
the term trust structure.
FEES AND EXPENSES
While open-end funds like Adjustable Rate Fund generally require more effort
and expense to administer than closed-end funds, the Adviser has agreed to cap
expenses of Adjustable Rate Fund through August 31, 1996 at .60% of average net
assets (the expense ratios of DDJ and EDJ for the most recent fiscal year,
excluding interest expense), provided that shareholders of at least three of the
Trusts approve the Merger. In addition, the Adviser has agreed to bear all
expenses incurred in connection with the Merger (estimated at approximately
$500,000).
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors considered a variety of factors in evaluating the
Merger, including (a) the potential benefits associated with elimination of the
market discount at which the Trusts' shares are trading; (b) the continuing
appropriateness of the term trust structure in light of the Adviser's view that
each Trust cannot be expected to achieve its objective of returning $10 per
share on its termination date without incurring an unacceptable level of risk;
(c) the potential benefits associated with affording the Adviser greater
flexibility to manage the portfolios through elimination of the term trust
structure; and (d) the risks and costs to shareholders of each Trust associated
with the Merger. After consideration of all of the factors deemed relevant by
them, the Board of Directors of each Trust unanimously determined that the
Merger is in the best interests of each Trust and its shareholders.
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DISSENTING SHAREHOLDERS' RIGHTS OF APPRAISAL
Although under Minnesota law shareholders of a company acquired in a merger
who do not vote to approve the merger generally have "appraisal rights" (where
they may elect to have the "fair value" of their shares (determined in
accordance with Minnesota law) judicially appraised and paid to them), the
Division of Investment Management of the Commission has taken the position that
Rule 22c-1 under the Investment Company Act of 1940 (the "1940 Act") supersedes
appraisal provisions in state statutes. This rule provides that no open-end
investment company may redeem its shares other than at net asset value next
computed after receipt of a tender of such security for redemption. See
"Proposal No. 1 -- Dissenting Shareholders' Rights of Appraisal" and Appendix D.
TAX CONSEQUENCES OF THE REORGANIZATION
It is intended that the Merger will be treated as a tax-free reorganization
within the meaning of Section 368(a)(1)(A) of the Internal Revenue Code of 1986,
as amended (the "Code") and that, for federal income tax purposes, no income,
gain or loss will be recognized by any shareholder of any Approving Trust upon
the receipt solely of Adjustable Rate Fund common shares for Approving Trust
common shares pursuant to the Merger. If, however, shortly after the Effective
Time the shareholders of any Approving Trust sell or otherwise dispose of a
number of Adjustable Rate Fund common shares received pursuant to the Merger
having a value significantly in excess of 50% of the value of the shares of such
Approving Trust held immediately before the Merger, the Merger may be treated
under the Code as a taxable transaction with respect to that Approving Trust and
its shareholders. For federal income tax reasons, each Approving Trust will
distribute to its respective shareholders, immediately prior to the Effective
Time, all of its net income and net realized capital gains for the current
taxable year not previously distributed, if any, prior to the end of the fiscal
year, and this distribution will be taxable to Approving Trust shareholders
subject to taxation. See "Proposal No. 1 -- Tax Consequences of the Merger."
COMPARISON OF ADJUSTABLE RATE FUND AND THE TRUSTS
GENERAL
Each Trust is a closed-end, diversified management investment company.
Adjustable Rate Fund is a diversified series of an open-end investment company.
Shares of each Trust are listed and currently trade on the New York and the
Chicago Stock Exchanges and may only be purchased and sold at their current
market price through a broker that customarily charges sales commissions. Shares
of Adjustable Rate Fund will be offered to the public on a continuous basis at
net asset value plus a sales charge and may be redeemed on each business day at
net asset value or exchanged for shares of certain other open-end investment
companies managed by Adjustable Rate Fund's investment adviser. The Company and
the Trusts are organized as corporations under the laws of the State of
Minnesota. The common shares of each Trust and of Adjustable Rate Fund have
equal voting rights and equal rights with respect to the payment of dividends
and distribution of assets upon liquidation and have no preemptive, conversion
or exchange rights or rights to cumulative voting. See "Proposal No. 1 --
Description and Comparison of Trust and Adjustable Rate Fund Shares."
INVESTMENT OBJECTIVES AND POLICIES
In the opinion of the Adviser, the investment objectives and policies of
Adjustable Rate Fund and each Trust are similar. Each Trust's investment
objective is to provide a high level of current income and to return $10 per
share to common shareholders on its termination date. Adjustable Rate Fund has
an investment objective of providing the maximum current income that is
consistent with low volatility of principal. In seeking to achieve their
respective investment objectives, Adjustable Rate Fund and the Trusts are guided
by many similar policies and restrictions that should be considered by the
shareholders of the Trusts. No assurance can be given that the investment
objectives of Adjustable Rate Fund or any Trust will be achieved.
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The Trusts and Adjustable Rate Fund each seek to achieve their investment
objectives 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. See "Proposal No. 1 --
Comparison of Investment Objectives and Policies of Adjustable Rate Fund and the
Trusts -- Adjustable Rate Mortgage Securities."
The balance of Adjustable Rate 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 Adjustable Rate Fund's
net assets, U.S. Government Zero Coupon Securities), (c) Asset-Backed Securities
and (d) Corporate Debt Securities (each as defined herein).
The balance of each Trust's total assets (up to 35% of total assets) may be
invested in a slightly broader range of assets, including (a) Mortgage-Backed
Securities (other than ARMS), (b) U.S. Government Securities, (c) Asset-Backed
Securities, (d) Corporate Debt Securities, (e) Zero Coupon Securities, (f)
Canadian Debt Securities and (g) Foreign Index-Linked Instruments (each as
defined herein).
The Trusts and Adjustable Rate Fund may engage in options and financial
futures transactions which relate to the securities in which they invest, may
purchase and sell interest rate caps and floors, may purchase or sell securities
on a when-issued or forward commitment basis (including, with respect to the
Trusts but not Adjustable Rate Fund, the use of mortgage dollar rolls), may make
investments in Eurodollar instruments for hedging purposes and may lend their
portfolio securities. The Trusts also may enter into interest rate swaps and, in
connection with their investments in Canadian Debt Securities, may enter into
foreign exchange transactions, currency forward and futures contracts and
foreign currency options. Adjustable Rate Fund may not make such investments.
The types of securities in which the Trusts and Adjustable Rate Fund may
invest are discussed in more detail below. See "Proposal No. 1 -- Comparison of
Investment Objectives and Policies of Adjustable Rate Fund and the Trusts" and
Appendix B.
MANAGEMENT OF THE TRUSTS
Adjustable Rate Fund and each Trust have the same directors and the same
officers. In addition, the Adviser acts as the investment adviser for, and
manages the investment and reinvestment of the assets of, each Trust and will
also act in that capacity for Adjustable Rate Fund. Pursuant to an Investment
Advisory Agreement between the Adviser and each Trust, each Trust pays an annual
management fee for the services and facilities furnished by the Adviser on a
monthly basis at the rate of .35% of each Trust's average weekly net assets. The
Investment Advisory Agreement between the Adviser and Adjustable Rate Fund
provides for an advisory fee of .35% of average daily net assets on the first
$500 million of Adjustable Rate Fund net assets and .30% on assets in excess of
$500 million.
The Adviser also acts as the administrator for each Trust pursuant to
Administration Agreements between the Adviser and each Trust. Under each
Administration Agreement, the Adviser is required to manage the respective
Trust's business affairs, supervise its overall day-to-day operations (other
than providing investment advice) and provide other administrative expenses. For
the administrative services rendered to the Trusts, each Trust currently pays
the Adviser an administrative fee, calculated and paid monthly, at an annual
rate of .15% of such Trust's average weekly net assets. Adjustable Rate Fund
will not enter into an Administration Agreement with the Adviser. However, the
Adviser will continue to provide the services it currently provides under the
Administration Agreement, without additional compensation.
An open-end investment company, unlike a closed-end investment company, is
permitted to finance the distribution of its shares by adopting a plan of
distribution pursuant to Rule 12b-1 under the 1940 Act. Adjustable Rate Fund has
entered into an Underwriting and Distribution Agreement
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with Piper Jaffray Inc. (the "Distributor") pursuant to a Distribution Plan
adopted in accordance with Rule 12b-1. Pursuant to the provisions of the
Distribution Plan, Adjustable Rate Fund will pay a monthly service fee to the
Distributor at an annual rate of .15% of such 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 Adjustable Rate Fund shareholder accounts and the costs incurred
in connection therewith. The Distributor will use 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. See "Proposal No. 1 -- Management of the Trusts and Adjustable Rate
Fund."
EXCHANGE AND REDEMPTION
Currently, Trust shareholders, as shareholders of a closed-end investment
company, must sell their shares at market prices through a broker (which prices
may be at either a discount or a premium to net asset value), with a commission
generally charged for each sale. In addition, the shareholders of each Trust, at
a meeting held August 22, 1994, approved a fundamental policy that allows
shareholders to periodically tender their shares back to the respective Trust at
net asset value. Following the Merger of the Trusts into an open-end investment
company, shareholders will be permitted to redeem their shares at net asset
value on each business day. (For shares purchased with no initial sales charge
in connection with a purchase of $500,000 or more, a .2% contingent deferred
sales charge will be imposed in the event of a redemption transaction occurring
within 24 months following such a purchase.) In addition, following the Merger,
shareholders of the Trusts will be able to (a) purchase additional shares of
Adjustable Rate Fund at net asset value plus any applicable sales charge or (b)
exchange their shares for shares of certain other open-end investment companies
managed by the Adviser at net asset value plus any difference in sales charge;
provided that exchanges of Adjustable Rate Fund shares received in the Merger
will be permitted without payment of an additional sales change. If you hold
your Adjustable Rate 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 dealer agreement between your broker-dealer
and the Distributor for the fund into which the exchange will be made. See
"Proposal No. 1 -- Share Purchase, Exchange and Redemption Procedures."
DIVIDENDS AND DISTRIBUTIONS
The Trusts have identical dividend policies. Each Trust's present policy,
which may be changed by its Board, is to make regular monthly cash distributions
to holders of its common shares at a level rate that reflects the past and
projected performance of such Trust, which over time will result in the
distribution of all net investment income of such Trust. Holders of common
shares of each Trust may elect to have all distributions automatically
reinvested in common shares of that Trust at the prevailing market price, plus
customary brokerage charges, pursuant to that Trust's Dividend Reinvestment
Plan. See "Proposal No. 1 -- Dividends, Distributions and Taxes."
Adjustable Rate Fund intends to pay dividends from its net investment income
on a monthly basis and distribute net realized capital gains, if any, at least
one annually. Adjustable Rate 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. All net investment income dividends
and net realized capital gains distributions for Adjustable Rate Fund generally
will be payable in additional shares of Adjustable Rate Fund (or, if requested,
shares of another mutual fund managed by the Adviser) at net asset value.
Shareholders who want to receive their distributions in cash must notify their
investment executive. The taxable status of income dividends and/or net capital
gains distributions is not affected by whether they are reinvested or paid in
cash.
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RISK FACTORS
INVESTMENT RISKS
Because Adjustable Rate Fund and the Trusts each seek to achieve their
investment objectives 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"), they are subject to
many of the same risks. The risks of the securities in which Adjustable Rate
Fund and the Trusts may invest are set forth in detail in Appendix B. These
risks include, but are not limited to, the following:
INTEREST RATE RISK. Because interest rates on ARMS are adjusted in response
to changing interest rates, fluctuations in prices of ARMS due to changes in
interest rates should be less than in the case of traditional debt securities.
The adjustable rate feature of ARMS will not, however, eliminate such price
fluctuations, particularly during periods of extreme fluctuations in interest
rates. Also, since many adjustable rate mortgages only reset on an annual basis,
it can be expected that the prices of ARMS will fluctuate to the extent that
changes in prevailing interest rates are not immediately reflected in the
interest rates payable on the underlying adjustable rate mortgages.
PREPAYMENT RISK. ARMS, like other Mortgage-Backed Securities, differ from
conventional bonds in that principal is paid back over the life of the ARMS
rather than at maturity. As a result, the holder of the ARMS 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
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 some loss of the holders' principal investment to the
extent 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.
CAP RISK. Adjustable rate mortgages typically have caps which limit the
maximum amount by which the interest rate may be increased in any one year or
over the life of the loan. Such annual caps currently range from 1% to 2% per
year; lifetime caps currently range from 5% to 6%. The adjustable rate portion
of collateralized mortgage obligations ("CMOs") ("floating rate CMOs") also
generally have lifetime caps on the amount by which the coupon rate thereon may
be increased. To the extent that ARMS cannot be adjusted in response to interest
rate increases due to caps, such ARMS will behave more like securities backed by
fixed rate mortgages than by adjustable rate mortgages. Consequently, interest
rate increases in excess of caps can be expected to cause ARMS to behave more
like traditional debt securities than adjustable rate securities and accordingly
to decline in value to a greater extent than would be the case in the absence of
such caps.
DERIVATIVE MORTGAGE-BACKED SECURITIES. Certain derivative Mortgage-Backed
Securities (such as certain tranches of CMOs and Stripped Mortgage-Backed
Securities) may involve risks in addition to those found in other
Mortgage-Backed Securities. These risks are discussed in detail under "Other
Eligible Investments -- Mortgage-Backed Securities" in Appendix B. However,
Adjustable Rate Fund will not invest in inverse floating, interest-only,
principal-only or Z tranches of CMOs or in stripped Mortgage- Backed Securities.
The Trusts are subject to no such limitation and may each invest up to 35% of
their total assets in such securities.
ZERO COUPON SECURITIES. The Trusts may invest up to 35% of their total
assets in Zero Coupon Securities. Adjustable Rate Fund may invest up to 10% of
its net assets in U.S. Government Zero
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Coupon Securities. The market prices of Zero Coupon Securities are generally
more volatile than the market prices of securities that pay interest
periodically and are likely to respond to changes in interest rates to a greater
degree than non-Zero Coupon Securities having similar maturities and credit
quality.
ILLIQUID SECURITIES. Certain of the securities in which Adjustable Rate
Fund and each Trust is authorized to invest may lack an established secondary
trading market or otherwise be considered illiquid. Adjustable Rate Fund or a
Trust may be limited in its ability to sell such securities at a time when the
Adviser deems it advisable to do so. As an open-end investment company,
Adjustable Rate Fund may invest no more than 15% of its net assets in illiquid
securities. The Trusts may currently invest up to 10% of their total assets in
securities that are not listed on a stock exchange or traded in an
over-the-counter market and that cannot be readily resold due to legal or
contractual restrictions or which otherwise are not readily marketable.
OTHER INVESTMENT TECHNIQUES. Adjustable Rate Fund and each Trust may engage
in options and financial futures transactions which relate to the securities in
which they invest, 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 (including, with respect
to the Trusts but not Adjustable Rate Fund, the use of mortgage dollar rolls),
may lend their portfolio securities and may enter into repurchase agreements
pertaining to the securities in which they may invest. In addition, each Trust
also may enter into interest rate swaps and, in connection with its investments
in Canadian Debt Securities, may enter into foreign exchange transactions,
currency forward and futures contracts and foreign currency options. Adjustable
Rate Fund may not make such investments. Each of these investment techniques
involves certain risks, as set forth in Appendix B.
DIFFERENCES BETWEEN CLOSED- AND OPEN-END FUNDS
ELIMINATION OF POTENTIAL FOR PURCHASE DISCOUNT OR SALE PREMIUM. To the
extent Trust shares trade at a discount from net asset value, shareholders
currently may purchase shares at this discounted price and hold them until the
Trust's termination date, at which time such shares will be liquidated at their
net asset value. If the Merger is approved, shares of Adjustable Rate Fund will
be purchased and redeemed at their net asset value (plus, in the case of
purchases, any applicable sales load), thereby eliminating the potential of
purchasing at a discount from, and later liquidating at, net asset value.
In addition, shareholders in Adjustable Rate Fund who wish to realize the
value of their shares will be able to do so by redeeming their shares at net
asset value. While this will eliminate any discount from the net asset value, it
also will eliminate any possibility that a shareholder will be able to sell his
or her shares at a premium over net asset value.
SALES LOADS. Shares of the Trusts are currently traded on the New York and
Chicago Stock Exchanges. Investors thus generally pay brokerage commissions when
purchasing and selling shares of the Trusts. Investors in Adjustable Rate Fund
will not be required to pay brokerage commissions; however, investors will pay a
sales charge upon the purchase of Adjustable Rate Fund shares (other than shares
acquired as a result of the Merger), as described herein. Sales charges may
discourage future investment in Adjustable Rate Fund and restrict the size of
Adjustable Rate Fund, thereby limiting the investment opportunities available to
Adjustable Rate Fund, which could adversely affect Adjustable Rate Fund. The
Board of Directors of the Trusts, however, believes that the activity of the
Distributor's sales force in distributing shares of Adjustable Rate Fund, in
part resulting from the incentive of sales charges, will likely offset any risk
resulting from the sales loads.
EXPENSES; POTENTIAL NET REDEMPTIONS. The Adviser has undertaken to cap
Adjustable Rate Fund's fees and expenses at .60% of net assets through August
31, 1996, provided that shareholders of at least three of the Trusts approve the
merger. Absent such cap, it is possible that Adjustable Rate Fund's fees and
expenses might be greater than those of any individual Trust, particularly if
only one
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Trust approves the Merger. See "Proposal No. 1 -- Fees and Expenses." There
could be immediate, substantial redemptions following the Merger which, if only
one Trust approves the Merger, would result in Adjustable Rate Fund having an
asset base of decreased size when compared to the asset base of such Trust prior
to the Merger. Accordingly, Adjustable Rate Fund's ratio of operating costs to
average net assets could increase substantially. In addition, the costs of
additional services available to shareholders of an open-end investment company
would contribute to an increased expense ratio.
PORTFOLIO MANAGEMENT. Unlike open-end funds, closed-end investment
companies are not subject to pressures to sell portfolio securities at
disadvantageous times in order to meet net redemptions. Most open-end funds
maintain adequate reserves of cash or cash equivalents in order to meet net
redemptions as they arise. Because closed-end investment companies do not have
to meet redemptions, their cash reserves can be substantial or minimal,
depending primarily on management's perception of market conditions and on
decisions to use fund assets to repurchase shares. The larger reserves of cash
or cash equivalents required to operate prudently as an open-end fund when net
redemptions are anticipated could reduce Adjustable Rate Fund's investment
flexibility and the scope of its investment opportunities. Adjustable Rate Fund
may have to sell portfolio securities in order to accommodate the need for
larger reserves of cash or cash equivalents, resulting in an increase in
transaction costs, taxable distributions and portfolio turnover.
INVESTMENT RESTRICTIONS. In order to register its shares and continuously
offer such shares to the public under state securities laws as an open-end
investment company, Adjustable Rate Fund will have to agree to conform to
certain restrictions imposed by laws and regulations of various states
concerning mutual fund investments. The Trusts are not currently subject to
these restrictions. The Adviser does not believe that the existence of these
restrictions will affect the fundamental investment policies or investment
practices of Adjustable Rate Fund or hamper Adjustable Rate Fund's ability to
react to changing market conditions.
SENIOR SECURITIES. The Investment Company Act of 1940, as amended (the
"1940 Act") prohibits open-end investment companies from issuing "senior
securities" representing indebtedness (I.E., bonds, debentures, notes and other
similar securities), other than indebtedness to banks where there is an asset
coverage of at least 300% for all borrowings. Closed-end investment companies,
on the other hand, are permitted to issue senior securities representing
indebtedness to any lender if the requirement of 300% asset coverage is met. In
addition, closed-end investment companies may issue preferred stock (subject to
various limitations), whereas open-end investment companies generally may not
issue preferred stock. Currently, each Trust has a fundamental investment
restriction providing that it may borrow money in an amount up to 33 1/3% of its
total assets. Adjustable Rate Fund has a fundamental investment restriction
providing that it may borrow money only for temporary or emergency purposes in
an amount up to 10% of the value of its total assets. The Adviser does not
believe this limitation will impair Adjustable Rate Fund's operations.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY. Adjustable Rate Fund
intends to qualify for treatment as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the "Code"), so that it will be
relieved of federal income tax on that part of its investment company taxable
income and net capital gains that is distributed to its shareholders. To qualify
for this treatment, Adjustable Rate Fund must currently meet several
requirements, one of which is that less than 30% of Adjustable Rate Fund's gross
income each taxable year may be derived from the sale or other disposition of
securities, options or futures contracts held for less than three months. No
assurance exists that this requirement will be met under all possible
circumstances, particularly if Adjustable Rate Fund is required to sell recently
acquired portfolio securities because of unexpectedly large net redemptions or
large influxes of cash followed within a short time by significant redemptions
of Adjustable Rate Fund shares.
LITIGATION RISK
On October 20, 1994, a complaint purporting to be a class action was filed
by Herman D. Gordon in the U.S. District Court for the District of Minnesota
against DDJ and EDJ, the Adviser, the
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Distributor, Piper Jaffray Companies Inc. ("Piper") (the holder of all of the
outstanding shares of the Adviser and the Distributor) and certain associated
individuals (the "Gordon Litigation"). The complaint alleges that the defendants
violated the federal securities laws by making materially misleading statements
in prospectuses and other disclosure documents concerning risks associated with
an investment in the Trusts and compliance with the Trusts' investment policies.
Damages are being sought in an unspecified amount. The defendants intend to
defend the Gordon Litigation vigorously.
On April 14, 1995, a complaint purporting to be a class action was filed by
Frank Donio, I.R.A. and others 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"). The complaint 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. The
defendants intend to defend the Donio Litigation vigorously.
PIPER AND THE ADVISER HAVE AGREED TO INDEMNIFY THE COMPANY AGAINST ANY
LOSSES (AS THAT TERM IS DEFINED IN THE INDEMNIFICATION AGREEMENT BETWEEN AND
AMONG PIPER, THE ADVISER AND THE COMPANY ATTACHED HERETO AS APPENDIX E) INCURRED
IN CONNECTION WITH THE GORDON LITIGATION AND THE DONIO LITIGATION (THE
"LITIGATIONS"). THIS MEANS THAT PIPER AND THE ADVISER HAVE AGREED TO BEAR ALL
COSTS AND EXPENSES ASSOCIATED WITH THE LITIGATIONS.
THE ANNUAL MEETINGS
GENERAL
This Joint Proxy Statement/Prospectus is furnished in connection with the
solicitation by the Boards of Directors of the Trusts of proxies to be voted at
the annual meeting of shareholders of each Trust to be held on August 1, 1995,
and any adjournments thereof. The costs of solicitation, including the cost of
preparing, printing and mailing the Notice of Meeting and this Joint Proxy
Statement -- Prospectus, will be paid by the Adviser, and such mailing will take
place on approximately June 14, 1995. Additional solicitation may be made by
letter, telephone or telegraph by officers or employees of the Adviser or the
Distributor, or by dealers and their representatives. In addition, the Trusts
have engaged Shareholder Communications Corporation to assist in the
solicitation of proxies, the cost of which will be borne by the Adviser.
The Trusts' annual reports for the fiscal year ended August 31, 1994 and
semiannual reports for the six months ended February 28, 1995, including
financial statements, were previously mailed to shareholders. These reports are
on file with the Commission, and the financial statements included therein are
hereby incorporated by reference into this Joint Proxy Statement/Prospectus. See
"Available Information." If you have not received a report for your Trust or
would like to receive another copy, please call the Trusts at (800) 866-7778,
and one will be sent by first-class mail within 48 hours.
VOTING; PROXIES
A Proxy may be revoked before the meeting by giving written notice in person
or by mail of revocation to the Secretary of the applicable Trust, by delivery
of a duly executed Proxy bearing a later date or by attending and voting at the
Meeting. A quorum of shareholders is required to take action at the Meeting. A
majority of the shares entitled to vote at the Meeting, represented in person or
by proxy, will constitute a quorum of shareholders at the Meeting.
For purposes of determining the approval of the matters submitted to
shareholders for a vote, in instances where choices are specified by the
shareholders in the Proxy, those Proxies will be voted or the vote will be
withheld in accordance with the shareholder's choice. If no specification is
made in the Proxy, it will be voted for approval of the Merger and each of the
other matters referred to in the
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Notice of Meeting attached hereto. If a shareholder abstains from voting as to
any matter, then the shares held by such shareholder shall be deemed present at
the meeting for purposes of determining a quorum and for purposes of calculating
the vote with respect to such matter, but shall not be deemed to have been voted
in favor of such matter. If a broker returns a "non-vote" proxy, indicating a
lack of authority to vote on such matter, then the shares covered by such
non-vote shall be deemed present at the meeting for purposes of determining a
quorum but shall not be deemed to be represented at the meeting for purposes of
calculating the vote with respect to such matter. Brokers and nominees will not
have discretionary authority to vote shares for which instructions are not
received from the beneficial owner with respect to approval of the proposed
Merger. The details of each proposal to be voted on by the shareholders of each
Trust and the vote required for approval of each proposal are set forth under
the description of each proposal below. So far as the Boards of Directors of the
Trusts are aware, no matters other than those described in this Joint Proxy
Statement/Prospectus will be acted upon at the meeting. Should any other matters
properly come before the meeting calling for a vote of shareholders, it is the
intention of the persons named as proxies in the enclosed Proxy to vote upon
such matters according to their best judgment.
Only shareholders of record on June 14, 1995 (the "Record Date") may vote at
the Meeting or any adjournments thereof. At the close of business on the Record
Date, there were 21,846,582 issued and outstanding common shares of BDJ,
42,433,699 issued and outstanding common shares of CDJ, 47,066,117 issued and
outstanding common shares of DDJ and 28,114,172 issued and outstanding common
shares of EDJ. Each Trust shareholder is entitled to one vote for each share
held. Proposal No. 1 entitles shareholders to appraisal rights under state law.
It is the position of the Commission, however, that these appraisal rights are
preempted by federal law. See "Proposal No. 1 -- Dissenters' Rights." In the
event that sufficient Proxy votes for any of the Trusts in favor of the
proposals set forth in Item 1 of the Notice of Meeting of Shareholders are not
received by August 1, 1995, the persons named as proxies may propose one or more
adjournments of the Meeting to permit further solicitation of Proxies. In
determining whether to adjourn the meeting, the following factors may be
considered: the nature of the proposals that are the subject of the meeting, the
percentage of votes actually cast, the percentage of negative votes actually
cast, the nature of any further solicitation, and the information to be provided
to shareholders with respect to the reasons for the solicitation. Any
adjournment will require the affirmative vote of a majority of those shares
represented at the meeting in person or by Proxy.
No person or entity, to the knowledge of Trust management, held of record or
beneficially more than 5% of the outstanding common shares of any of the Trusts
as of June 14, 1995. In addition, as of such date, the officers and directors of
the Trusts, as a group, beneficially owned less than 1% of the outstanding
common shares of each Trust.
PROPOSAL NO. 1 -- THE MERGER
THE TERMS AND CONDITIONS OF THE MERGER ARE SET FORTH IN THE AGREEMENT AND
PLAN OF MERGER (THE "MERGER AGREEMENT"). SIGNIFICANT PROVISIONS OF THE MERGER
AGREEMENT ARE SUMMARIZED BELOW; HOWEVER, THIS SUMMARY IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE MERGER AGREEMENT, A COPY OF WHICH IS ATTACHED AS
APPENDIX A TO THIS JOINT PROXY STATEMENT/PROSPECTUS.
GENERAL
The Merger Agreement sets forth the terms of the Merger under which each
Trust approving the transaction (individually an "Approving Trust" and
collectively the "Approving Trusts") will merge with and into the Company, with
the Company as the surviving entity. As a result of the Merger, the assets and
liabilities of each Approving Trust will be combined, and the shareholders of
the Approving Trusts will become shareholders of Adjustable Rate Fund, a series
of the Company. In the opinion of the Adviser, the investment objective and
policies of Adjustable Rate Fund are similar to those of the Trusts, as
described below under "Comparison of Investment Objectives and Policies of
Adjustable Rate Fund and the Trusts," and the general portfolio characteristics
of Adjustable Rate Fund after
12
<PAGE>
the Merger will be similar to those of each of the separate Trusts. If the
proposal relating to the Merger Agreement is approved, the Merger will become
effective at the close of business on the date the Articles of Merger are filed
with the Secretary of State of the State of Minnesota (the "Effective Time"),
which is expected to occur on or about September 1, 1995. Following the Merger,
each Approving Trust will terminate its registration as an investment company
under the 1940 Act by filing a Form N-8F with the Commission. Because the Merger
will involve only those Trusts whose shareholders approve the transaction, there
are a number of different possible Trust combinations. In the event only one
Trust approves the transaction, the merger of that Trust with Adjustable Rate
Fund, which is a series of a newly formed corporation without any assets, will
have substantially the same effect as open-ending the approving Trust. If more
than one Trust approves the transaction, the Merger will result in the
combination of assets of those approving Trusts. Unless otherwise indicated, the
discussion below applies to all of the possible combinations.
TERMS OF THE MERGER
If the Merger is approved and the other conditions to closing are satisfied
or waived, at the Effective Time the Approving Trusts will merge with and into
the Company, with the Company as the surviving entity. The articles of
incorporation, bylaws, Investment Advisory Agreement, Rule 12b-1 Plan and
Distribution Agreement of Adjustable Rate Fund described herein, in effect
immediately prior to the Merger, will be those of the surviving corporation. The
Board of Directors of Adjustable Rate Fund, which consists of the same
individuals who serve as directors of the Trusts, will continue as the directors
of the surviving corporation.
At the Effective Time, common shares of an Approving Trust will be converted
into common shares of Adjustable Rate Fund having the same aggregate net asset
value, determined as of the Effective Time. Following the Merger, every
shareholder of an Approving Trust will own common shares of Adjustable Rate Fund
that have an aggregate net asset value immediately after the Effective Time
equal to the aggregate net asset value of the Shareholder's Approving Trust
common shares immediately prior to the Effective Time. See "Description and
Comparison of Trust and Adjustable Rate Fund Shares" for a description of the
rights of such shareholders.
Net asset value per share of common stock of an Approving Trust as of the
Effective Time will be determined by adding the market value of all securities
in the Trust's portfolio and other assets, subtracting liabilities incurred or
accrued, and dividing by the total number shares of common stock then
outstanding. Securities in an Approving Trust's portfolio will be valued at
market value or fair value if market quotations are not readily available,
pursuant to the procedures set forth under "Valuation of Shares." Prior to the
Merger, each Approving Trust will make one or more distributions of all its net
income and net realized capital gains for the current taxable year that have not
previously been distributed. For shareholders participating in their Trust's
dividend reinvestment plan, these distributions will be reinvested in Trust
shares only if they are made prior to the suspension of Trust share trading on
the New York Stock Exchange. (Trading will be suspended for a period of time
prior to the Effective Time.) Otherwise, the distributions will be made in cash.
It is currently estimated that such distributions for BDJ, CDJ, DDJ and EDJ will
be approximately $.45, $.26, $.08 and $.00 per share, respectively. These
distributions will be taxable to all Approving Trust shareholders who are
subject to taxation.
As soon as practicable after the Effective Time, Investors Fiduciary Trust
Company ("IFTC"), the transfer agent for the Trusts and Adjustable Rate Fund,
will send a notice and transmittal form to each record holder of Approving Trust
common shares at the Effective Time advising such holder of the effectiveness of
the Merger and of the procedure for surrendering to IFTC his or her certificates
formerly evidencing common shares of the Approving Trust. APPROVING TRUST
SHAREHOLDERS SHOULD NOT SEND IN THEIR SHARE CERTIFICATES UNTIL THEY RECEIVE THE
LETTER OF TRANSMITTAL FORM AND INSTRUCTIONS FROM IFTC. Ownership of Adjustable
Rate Fund shares by former shareholders of an Approving Trust will be recorded
in book-entry form, and Adjustable Rate Fund will issue confirmations to such
shareholders
13
<PAGE>
setting forth the number and net asset value of Adjustable Rate Fund shares held
by such shareholders. Adjustable Rate Fund will not issue share certificates.
Any share certificates not submitted to IFTC within three months of the
Effective Time will be automatically deemed submitted and then canceled and
recorded in book-entry form.
Under the terms of the Merger Agreement, the Merger is conditioned upon (a)
approval by the shareholders of at least one Trust, as described under "Voting
Information" below, (b) the receipt of an opinion to the effect that the Merger
will qualify as a tax-free reorganization under the Code (which opinion has
already been received), (c) the absence of legal proceedings challenging the
Merger, (d) the receipt from Piper and the Adviser of an agreement to indemnify
the Company against any losses incurred in connection with certain litigations
involving the Trusts (see "Pending Litigation") and (e) the receipt of certain
routine certificates and legal opinions or other conditions set forth in the
Merger Agreement; provided, however, that all of the foregoing conditions,
except conditions (a) and (d), may be waived.
The Merger Agreement may be terminated and the Merger abandoned, whether
before or after approval by the shareholders of one or more of the Trusts, at
any time prior to the Effective Time by any Trust if circumstances should
develop that, in the good faith opinion of such Trust's Board of Directors, make
proceeding with the Merger Agreement not in the best interests of the Trust's
shareholders. In the event that a particular Trust terminates the Merger
Agreement, the Merger Agreement will remain in effect as to the Company and the
other Trusts.
REASONS FOR THE MERGER
The respective Boards of Directors of the Trusts, which consist of the same
individuals, have concluded that the Merger is in the best interests of the
shareholders of their respective Trusts and unanimously recommend that the
shareholders of their respective Trusts vote FOR approval of the Merger.
When each Trust was organized, a closed-end format was chosen as the most
appropriate for achieving such Trust's dual objectives of providing a high level
of current income and returning $10 per share to common shareholders on the
Trust's termination date. In particular, it was believed that the pressures and
constraints to which open-end investment companies are subject as a result of
cash inflows and redemptions would not be consistent with an objective of
returning $10 per share upon termination of each Trust. For the reasons
discussed in the next paragraph, however, it has been determined that none of
the Trusts can be expected to reach this $10 per share objective without
incurring an unacceptable level of risk.
Commencing February 1994, the Federal Reserve Board initiated seven separate
increases to short-term interest rates. This rapid and significant increase in
interest rates caused a corresponding decline in the net asset values of the
Trusts. Market conditions failed to improve and, after conducting an in-depth
review of the portfolio of each Trust using both internal resources and the
independent appraisal of an external consultant, the Adviser concluded that none
of the Trusts can be expected to reach $10 per share at termination without
taking risks that the Adviser deems unacceptable.
In light of the foregoing, the Adviser proposed, as an alternative to
continuing to manage the Trusts subject to the constraints of the term trust
structure, merging each Trust into a newly formed open-end fund. The Merger is
intended to offer the following benefits to shareholders of each Trust:
ELIMINATION OF MARKET DISCOUNT
As noted above, the shares of each Trust are currently trading at a discount
to net asset value. The Merger would effectively eliminate the market discounts
at which each Trust's shares currently trade because Approving Trust
shareholders would receive in the Merger redeemable shares of Adjustable Rate
Fund with a net asset value equal to the net asset value of their Trust shares
on the date of the Merger.
14
<PAGE>
ENHANCED INVESTMENT FLEXIBILITY
The Adviser believes that elimination of the term trust structure would
facilitate its ability to obtain a higher investment return on the Trust's
portfolio securities. The Adviser believes this would be the case despite the
additional limitations on borrowing imposed on Adjustable Rate Fund and the need
for Adjustable Rate Fund to maintain adequate reserves of cash or cash
equivalents in order to meet net redemptions as they arise. See "Risk Factors --
Differences Between Closed- and Open-End Funds."
Under the term trust structure, the Adviser is required to manage the
portfolios to achieve a specified net asset value on a fixed termination date.
Elimination of the term trust structure would, according to the Adviser,
facilitate the Adviser's ability to obtain a higher investment return by
allowing it to purchase and retain longer maturity securities than it could
under the term trust structure. Currently, as a Trust approaches its termination
date, duration is shortened by selling longer maturity securities and purchasing
shorter maturity securities. This is done to lessen risk and volatility as a
Trust approaches its termination date. The shorter duration, however, generally
will also result in a lower yield. By contrast, Adjustable Rate Fund could be
continuously managed to a constant duration benchmark rather than the declining
duration benchmark required by the term trust structure. See "Comparison of
Investment Objectives and Policies of Adjustable Rate Fund and the Trusts --
Duration" below.
FEES AND EXPENSES
While open-end funds are generally more expensive to operate and administer
than closed-end funds, the Adviser has agreed to cap expenses of Adjustable Rate
Fund through August 31, 1996 at .60% of average net assets (the expense ratios
of DDJ and EDJ for the most recent fiscal year, exclusive of interest expense),
provided that shareholders of at least three Trusts approve the Merger. In
addition, Adjustable Rate Fund should, to the extent more than one Trust
approves the Merger, have a significantly larger shareholder base than any one
Trust approving the Merger. Higher aggregate net assets should enable
shareholders to obtain the benefits of economies of scale to the extent that
fixed and certain variable costs can be spread over a larger asset base. These
economies of scale may offset in whole or in part any increases in expenses that
would be associated with Adjustable Rate Fund in the absence of the cap.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Trusts' directors, including the independent directors acting with the
advice of independent legal counsel, evaluated with respect to each Trust the
benefits, risks and costs of the proposed Merger. Among other things, the
directors considered, with respect to each Trust, (a) the potential benefits to
shareholders associated with elimination, through the Merger, of the market
discount at which the Trust shares currently trade; (b) the continuing
appropriateness of the term trust structure in light of the Adviser's view that
each Trust cannot be expected to achieve its objective of returning $10 per
share on its termination date without incurring an unacceptable level of risk;
(c) the potential benefits associated with affording the Adviser greater
flexibility to manage the portfolios by eliminating the term trust structure;
(d) that the interests of Approving Trust shareholders will not be diluted as a
result of the Merger; (e) the effect on each Trust of combining its portfolio
with the portfolios of each other Trust and the effect of such pooling on
overall portfolio quality and the level of dividend income; (f) the increased
risks associated with managing the Trusts to a constant duration rather than, as
is currently the case under the term trust structure, reducing durations as the
Trusts approach their respective termination dates; (g) the relative fees and
expenses of Adjustable Rate Fund as compared to the Trusts; (h) the potential
adverse effects of the litigations against the Trusts to which the Company will
become subject in the event that any Trust approves the Merger and the extent to
which the indemnification of the Company by Piper and the Adviser against the
costs of such litigation ameliorates any such adverse effects (see "Pending
Litigation"); and (i) the benefits and costs associated with alternative
structures such as converting each Trust into a separate open-end investment
company.
15
<PAGE>
Based on consideration of the foregoing and all other factors deemed
relevant by them, the directors of each Trust and the Company unanimously
concluded that the Merger is in the best interests of each Trust and its
shareholders and in the best interests of the Company, that the terms of the
Merger are fair and reasonable, and that the interests of each Trust's
shareholders will not be diluted as a result of the Merger.
FEDERAL INCOME TAX CONSEQUENCES
It is intended that the Merger will be treated as a tax-free reorganization
within the meaning of Section 368(a)(1)(A) of the Code and that, for federal
income tax purposes, no income, gain or loss will be recognized by any
shareholder of the Approving Trusts upon the receipt solely of Adjustable Rate
Fund common shares for Approving Trust common shares pursuant to the Merger.
(Each Approving Trust, however, intends to make one or more distributions, prior
to the Effective Time, of all its net income and net realized capital gains for
the current taxable year not previously distributed, if any, and this
distribution will be taxable to Approving Trust shareholders subject to
taxation. It is currently estimated that such distributions for BDJ, CDJ, DDJ
and EDJ will be approximately $.45, $.26, $.08 and $.00 per share,
respectively.) Adjustable Rate Fund has not asked, nor will it ask, the Internal
Revenue Service to rule upon the tax consequences of the Merger.
The Trusts have received an opinion from Dorsey & Whitney P.L.L.P., counsel
to the Trusts, based upon facts described herein and upon certain
representations made by each Trust and the Adviser, that the federal income tax
consequences of the Merger will be substantially as follows:
(a) The Merger will qualify as a "reorganization" under Section 368(a)
of the Code, and each of the Approving Trusts will qualify as a party to the
reorganization under Section 368(b) of the Code;
(b) Approving Trust shareholders will recognize no income, gain or loss
upon the exchange of Approving Trust common shares for Adjustable Rate Fund
common shares in the Merger. Approving Trust shareholders subject to
taxation will recognize income upon receipt of any net investment income or
net capital gains of an Approving Trust distributed by the Approving Trust
prior to the Effective Time;
(c) The basis of Adjustable Rate Fund common shares received by each
Approving Trust shareholder pursuant to the Merger will be the same as the
basis of the Approving Trust common shares surrendered in exchange therefor;
(d) The holding period of Adjustable Rate Fund common shares received by
each Approving Trust shareholder pursuant to the Merger will include the
period during which the shareholder held the Approving Trust common shares
surrendered in exchange therefor, provided that the Approving Trust common
shares were held as a capital asset at the Effective Time;
(e) Each Approving Trust will recognize no income, gain or loss by
reason of the Merger;
(f) The tax basis of the assets received by Adjustable Rate Fund
pursuant to the Merger will be the same as the basis of those assets in the
hands of the Approving Trust as of the Effective Time;
(g) The holding period of the assets received by Adjustable Rate Fund
pursuant to the Merger will include the period during which such assets were
held by the Approving Trust that previously held the assets; and
(h) Adjustable Rate Fund will succeed to and take into account the
earnings and profits, or deficit in earnings and profits, of each Approving
Trust as of the Effective Time.
The foregoing opinion will be based upon certain representations, including
the representation that the shareholders of each Approving Trust do not have any
plan or intention to sell, exchange or otherwise dispose of a number of
Adjustable Rate Fund common shares received pursuant to the
16
<PAGE>
Merger that would reduce the ownership by such shareholders of each Approving
Trust of Adjustable Rate Fund common shares to a number of shares having a
value, as of the date of the Merger, which is less than 50% of the value of all
of the formerly outstanding Approving Trust common shares held by such Approving
Trust shareholders as of the same date.
If, regardless of the representation described above, shortly after the
Effective Time the shareholders of any Approving Trust sell or otherwise dispose
of a number of Adjustable Rate Fund common shares received pursuant to the
Merger having a value significantly in excess of 50% of the value of the shares
of such Approving Trust held immediately before the Merger, the Merger may be
treated under the Code as a taxable transaction with respect to that Approving
Trust and its shareholders. The Approving Trust shareholders would then be
treated as having received their Adjustable Rate Fund common shares in a taxable
distribution in complete liquidation of the Approving Trust. Shareholders would
recognize taxable gain or loss measured by the difference between their basis
for tax purposes in the Approving Trust shares they had exchanged and the fair
market value of Adjustable Rate Fund common shares they received pursuant to the
Merger. (The gain or loss would be capital gain or loss, assuming that the
shareholders held their Approving Trust shares as capital assets.)
Management of the Trusts and Adjustable Rate Fund intends to take the
position that the Merger qualifies as a tax-free reorganization, as described
above, and to report the consequences of the Merger to shareholders accordingly.
If, after the Effective Time, management of the Trusts and of Adjustable Rate
Fund determines that the Merger should be treated as a taxable transaction with
respect to one or more of the Approving Trusts, it will notify the former
shareholders of such Approving Trust or Approving Trusts of that fact and will
report the consequences of the Merger to them accordingly.
Shareholders of the Approving Trusts should consult their own tax advisors
as to the effect, if any, of the proposed Merger in light of their own facts and
circumstances and also as to any state, local, foreign or other tax consequences
arising out of the proposed Merger.
EXPENSES ASSOCIATED WITH THE MERGER
The Adviser has agreed to bear all of the expenses of the Merger, including
Commission and state registration fees, legal and accounting fees, proxy
solicitation and shareholder meeting expenses, and the costs of printing and
mailing this Joint Proxy Statement/Prospectus. The costs of registering
additional shares of Adjustable Rate Fund for sale after the Merger will be
borne by Adjustable Rate Fund.
17
<PAGE>
FEES AND EXPENSES
The following tables set forth the expenses and fees that the shareholders
of each Trust incurred during the most recent fiscal year and can expect to bear
if the Merger is not approved, and that the shareholders of Adjustable Rate Fund
can expect to bear if each Trust approves the Merger.
FEES AND EXPENSES
<TABLE>
<CAPTION>
ADJUSTABLE
RATE
BDJ CDJ DDJ EDJ FUND
------- ------- ---- ---- ----------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on purchases (as a percentage of offering price)... (1) (1) (1) (1) None(2)
Dividend reinvestment plan fees............................................... None None None None N/A
Exchange fee (3).............................................................. N/A N/A N/A N/A $0
ANNUAL EXPENSES (as a percentage of net assets attributable to common shares)
Management fee (4)............................................................ .50% .50% .50% .50% .32% (5)
Rule 12b-1 fee................................................................ N/A N/A N/A N/A .15%
Other expenses (after voluntary expense reimbursement in the case of
Adjustable Rate Fund)........................................................ .15% .11% .10% .10% .13%
Total annual expenses (after voluntary expense reimbursement in the case of
Adjustable Rate Fund) (6)...................................................... .65% .61% .60% .60% .60%
<FN>
- ------------------------
(1) Shareholders purchasing shares of a Trust in the initial public offering
paid a sales load of 4%. Thereafter, shares have been purchased through
brokers at market price plus a brokerage commission.
(2) No sales charge will be imposed on Adjustable Rate Fund shares acquired
pursuant to the Merger. Subsequent purchases of Adjustable Rate Fund shares
will be subject to a maximum sales load of 1.5%.
(3) There is a $5.00 fee for each exchange in excess of four exchanges per
year. See "Shareholder Services -- Exchange Privilege" in Appendix C.
(4) For BDJ, CDJ, DDJ and EDJ, includes an advisory fee of .35% and an
administration fee of .15%. Adjustable Rate Fund does not pay an
administration fee.
(5) The advisory fee for Adjustable Rate Fund is .35% on the first $500 million
of Adjustable Rate Fund's net assets and .30% on net assets in excess of
$500 million.
(6) The voluntary expense reimbursement for Adjustable Rate Fund may be
discontinued after August 31, 1996. Total annual expenses for BDJ, CDJ, DDJ
and EDJ exclude interest payments on borrowed funds equal to 1.13%, 1.10%,
1.03% and 1.09%, respectively. If these interest payments were included,
the annual expenses for BDJ, CDJ, DDJ and EDJ would be 1.78%, 1.71%, 1.63%
and 1.69%, respectively.
</TABLE>
EXAMPLES Shareholders of the Trusts and Adjustable Rate Fund would pay the
following expenses (excluding sales loads and interest expense) on a $1,000
investment, assuming a 5% annual return and, in the case of Adjustable Rate
Fund, redemption at the end of each time period:
<TABLE>
<CAPTION>
ADJUSTABLE
RATE
BDJ CDJ DDJ EDJ FUND
---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C>
1 year....................................... $ 7 $ 6 $ 6 $ 6 $ 6
3 years...................................... $ 21 $ 20 $ 19 $ 19 $ 19
5 years...................................... $ 36 $ 34 $ 33 $ 33
10 years..................................... $ 81 $ 76 $ 75 $ 75
</TABLE>
18
<PAGE>
Including interest expense for the Trusts and sales loads for the Trusts and
Adjustable Rate Fund, shareholders of the Trusts and Adjustable Rate Fund would
pay the following expenses on a $1,000 investment, assuming a 5% annual return
and, in the case of Adjustable Rate Fund, redemption at the end of each time
period.
<TABLE>
<CAPTION>
ADJUSTABLE
RATE
BDJ CDJ DDJ EDJ FUND
---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C>
1 year....................................... $ 57 $ 57 $ 56 $ 56 $ 21
3 years...................................... $ 94 $ 92 $ 89 $ 91 $ 34
5 years...................................... $133 $129 $125 $128
10 years..................................... $241 $234 $226 $232
</TABLE>
The purpose of the above tables is to assist you in understanding the
various costs and expenses that shareholders of each Trust bear directly and
indirectly, and that shareholders in Adjustable Rate Fund after the Merger can
be expected to bear directly or indirectly. THE EXAMPLES SET FORTH ABOVE SHOULD
NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN.
The information in the above tables relating to the Trusts is based on
actual expenses incurred by such Trusts during the fiscal year ended August 31,
1994. The information in the above tables relating to Adjustable Rate Fund
assumes that all Trusts approve the Merger and reflects the Adviser's
undertaking to reimburse Adjustable Rate Fund, in that event, for the amount, if
any, by which total Adjustable Rate Fund operating expenses for the fiscal year
ending August 31, 1996 exceed .60% of average daily net assets. The Adviser does
not intend to reimburse Adjustable Rate Fund operating expenses if less than
three Trusts approve the Merger. A Pro Forma Combining Schedule of Total Returns
and Expense Ratios, which presents pro forma historical expense ratio
information for all possible Trust combinations, is set forth in the Statement
of Additional Information.
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Trusts as
of February 28, 1995 and as adjusted to give effect to the Merger of all four
Trusts into Adjustable Rate Fund. The pro forma financial information is based
on the assumption that each of the Trusts will approve the Merger. However, as
noted above under "General," only those Trusts that approve the Merger will
participate therein.
<TABLE>
<CAPTION>
ADJUSTABLE
RATE FUND
PRO FORMA
BDJ CDJ DDJ EDJ COMBINED
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Net assets (000's omitted)................... $197,538 $374,820 $409,244 $239,721 $1,221,324
Net asset value per share.................... $ 9.03 $ 8.82 $ 8.68 $ 8.52 $ 8.68
Shares outstanding (000's omitted)........... 21,874 42,482 47,141 28,153 140,685
</TABLE>
Based on the above capitalization table, shareholders holding 1 share of
BDJ, CDJ, DDJ and EDJ would receive 1.040, 1.016, 1 and .982 shares of
Adjustable Rate Fund, respectively, upon effectiveness of the Merger.
DESCRIPTION AND COMPARISON OF TRUST AND ADJUSTABLE RATE FUND SHARES
The Company is an open-end management investment company organized under the
laws of the State of Minnesota on April 10, 1995. Adjustable Rate Fund is a
diversified series of the Company. BDJ, CDJ, DDJ and EDJ are closed-end
management investment companies organized under the laws of the State of
Minnesota on July 25, 1990, May 30, 1991, November 26, 1991 and July 6, 1992,
respectively.
Each Adjustable Rate Fund share to be issued to the Trusts' shareholders
pursuant to the Merger will be duly authorized, validly issued, fully paid and
nonassessable when issued, will be transferable without restriction and will
have no preemptive rights.
19
<PAGE>
The voting rights of Approving Trust shareholders will not change upon
effectiveness of the Merger. Shareholders of Adjustable Rate Fund will be
entitled to one vote for each full share held and fractional votes for
fractional shares held, and will vote in the aggregate and not by class or
series except as otherwise required by law or when the Board of Directors of the
Company determines that a matter to be voted upon affects only the interests of
the shareholders of a particular class or series. Voting rights are not
cumulative except to the extent required by law, so that the holders of more
than 50% of the shares voting in any election of directors of the Company can,
if they so choose, elect all the directors. Adjustable Rate Fund will be the
only outstanding series of the Company immediately after the Merger. As the
Company establishes additional series of common shares, all shareholders of such
series will vote as a group on certain matters, such as the election of
directors. If, however, a matter only affects one series of common shares, each
series will vote separately on such matter.
Each Trust's Bylaws currently require that an annual meeting of shareholders
be held, as do the regulations of the New York Stock Exchange. The Company is
not required to, nor does it currently intend to, hold annual meetings of
shareholders for the election of directors and other business unless and until
such time as less than a majority of the directors holding office have been
elected by the shareholders, at which time the directors then in office will
call a shareholders' meeting for the election of directors. Under certain
circumstances, however, shareholders have the right to call a meeting of
shareholders for the purpose of electing or removing directors. Minnesota
corporation 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 a corporation may demand a regular
meeting of shareholders by written notice given to the chief executive officer
or chief financial officer. The 1940 Act requires a shareholder meeting (a) if
the number of directors elected by the shareholders is less than a majority of
the total number of directors, (b) for all amendments to fundamental investment
policies and restrictions, (c) for all investment advisory contracts and
amendments thereto, and (d) for all Rule 12b-1 distribution plans and amendments
thereto (where such change involves a material increase in Trust expenses). The
1940 Act also requires the directors to call a meeting of shareholders for the
purpose of voting upon the question of removal of any director or directors when
requested in writing to do so by the record holders of not less than 10% of the
outstanding shares. To the extent required by law, the Company will assist in
shareholder communications in such matters. The Board of Directors may, in its
discretion, call annual shareholders' meetings.
Shares representing interests in a particular series of the Company are
entitled to participate in the dividends and distributions declared by the
Company's Board of Directors with respect to such portfolio and in the net
distributable assets of the portfolio on liquidation. Each Adjustable Rate Fund
share will therefore represent an equal interest in the assets of Adjustable
Rate Fund and will be preferred over shares representing interests in any other
series of the Company as to the assets of Adjustable Rate Fund.
The Board of Directors of the Company may, without shareholder approval,
create and issue one or more additional classes of shares within Adjustable Rate
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 series 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 series
incurring such expenses.
20
<PAGE>
HISTORY OF PUBLIC TRADING OF THE TRUSTS' COMMON SHARES
The following table shows the history of public trading of the common shares
of each Trust, by quarter, for the last two fiscal years and for each full
fiscal quarter since the beginning of the current fiscal year, as reported on
the New York Stock Exchange.
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
NET ASSET VALUE MARKET PRICE DISCOUNT PREMIUM
QUARTER ---------------- ------------------ ---------------- ---------------
ENDED HIGH LOW HIGH LOW HIGH LOW HIGH LOW
- -------- ------ ------ ------- ------- ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AMERICAN ADJUSTABLE RATE TERM TRUST 1996
11/30/92 $ 9.730 $ 9.490 $ 10.250 $ 10.000 N/A N/A 5.80% 3.73%
02/28/93 $ 9.510 $ 9.430 $ 10.125 $ 9.750 N/A N/A 6.69% 2.65%
05/31/93 $ 9.530 $ 9.460 $ 9.875 $ 9.625 N/A N/A 4.39% 1.00%
08/31/93 $ 9.600 $ 9.480 $ 9.750 $ 9.500 0.94% 0.42% 2.52% 0.68%
11/30/93 $ 9.620 $ 9.550 $ 9.750 $ 9.375 2.04% 0.73% 1.88% 0.16%
02/28/94 $ 9.660 $ 9.470 $ 9.625 $ 9.250 3.34% 0.16% 0.57% 0.57%
05/31/94 $ 9.370 $ 9.050 $ 9.625 $ 8.250 9.14% 0.32% 2.35% 0.37%
08/31/94 $ 9.050 $ 8.970 $ 8.625 $ 8.375 7.46% 5.24% N/A N/A
11/30/94 $ 9.040 $ 8.910 $ 8.750 $ 8.375 6.63% 4.27% N/A N/A
02/28/95 $ 9.030 $ 8.820 $ 8.625 $ 8.125 8.40% 4.17% N/A N/A
05/31/95 $ 9.150 $ 9.000 $ 8.750 $ 8.500 6.18% 3.85% N/A N/A
AMERICAN ADJUSTABLE RATE TERM TRUST 1997
11/30/92 $ 9.670 $ 9.490 $ 10.125 $ 9.875 N/A N/A 5.37% 3.41%
02/28/93 $ 9.560 $ 9.440 $ 10.000 $ 9.500 0.52% 0.52% 5.60% 2.42%
05/31/93 $ 9.600 $ 9.540 $ 9.750 $ 9.500 0.73% 0.73% 2.20% 0.13%
08/31/93 $ 9.660 $ 9.560 $ 9.750 $ 9.375 1.66% 0.05% 1.35% 0.26%
11/30/93 $ 9.660 $ 9.590 $ 9.750 $ 9.375 0.36% 0.05% 1.46% 0.16%
02/28/94 $ 9.660 $ 9.420 $ 9.625 $ 9.125 3.85% 0.84% N/A N/A
05/31/94 $ 9.300 $ 8.920 $ 9.500 $ 8.000 10.61% 0.90% 1.13% 0.81%
08/31/94 $ 8.920 $ 8.840 $ 8.500 $ 8.125 8.91% 5.37% N/A N/A
11/30/94 $ 8.900 $ 8.670 $ 8.500 $ 7.750 9.38% 3.85% N/A N/A
02/28/95 $ 8.820 $ 8.590 $ 8.250 $ 7.625 11.65% 6.25% N/A N/A
05/31/95 $ 8.940 $ 8.790 $ 8.453 $ 8.250 6.99% 3.74% N/A N/A
AMERICAN ADJUSTABLE RATE TERM TRUST 1998
11/30/92 $ 9.730 $ 9.520 $ 10.000 $ 9.875 N/A N/A 4.17% 1.49%
02/28/93 $ 9.650 $ 9.460 $ 10.000 $ 9.500 N/A N/A 4.28% 1.35%
05/31/93 $ 9.670 $ 9.620 $ 9.750 $ 9.500 1.35% 0.05% 1.35% 0.05%
08/31/93 $ 9.680 $ 9.620 $ 9.750 $ 9.500 0.47% 0.16% 1.35% 0.83%
11/30/93 $ 9.670 $ 9.600 $ 9.750 $ 9.500 1.76% 0.05% 1.46% 0.05%
02/28/94 $ 9.710 $ 9.470 $ 9.625 $ 9.125 5.24% 0.94% 0.26% 0.26%
05/31/94 $ 9.350 $ 8.940 $ 9.250 $ 7.875 12.21% 1.88% N/A N/A
08/31/94 $ 8.930 $ 8.800 $ 8.500 $ 8.000 10.71% 5.15% N/A N/A
11/30/94 $ 8.820 $ 8.500 $ 8.500 $ 7.625 9.67% 3.07% N/A N/A
02/28/95 $ 8.680 $ 8.470 $ 8.500 $ 7.375 13.44% 5.74% N/A N/A
05/31/95 $ 8.770 $ 8.650 $ 8.281 $ 8.000 7.94% 5.39% N/A N/A
AMERICAN ADJUSTABLE RATE TERM TRUST 1999
11/30/92 $ 9.580 $ 9.370 $ 10.250 $ 9.750 N/A N/A 6.27% 3.72%
02/28/93 $ 9.590 $ 9.270 $ 10.125 $ 9.500 N/A N/A 7.87% 0.89%
05/31/93 $ 9.620 $ 9.550 $ 9.750 $ 9.375 1.04% 0.63% 1.67% 0.05%
08/31/93 $ 9.630 $ 9.560 $ 9.625 $ 9.500 1.35% 0.05% 0.68% 0.16%
11/30/93 $ 9.630 $ 9.550 $ 9.625 $ 9.500 1.35% 0.52% 0.05% 0.05%
02/28/94 $ 9.690 $ 9.470 $ 9.625 $ 9.125 5.05% 0.73% 0.68% 0.68%
05/31/94 $ 9.350 $ 8.870 $ 9.375 $ 8.000 10.71% 0.11% N/A N/A
08/31/94 $ 8.860 $ 8.670 $ 8.375 $ 7.875 10.10% 3.85% N/A N/A
11/30/94 $ 8.710 $ 8.390 $ 8.375 $ 7.500 9.12% 2.71% N/A N/A
02/28/95 $ 8.510 $ 8.300 $ 8.000 $ 7.250 11.78% 6.58% N/A N/A
05/31/95 $ 8.570 $ 8.470 $ 8.125 $ 7.875 7.46% 4.64% N/A N/A
</TABLE>
21
<PAGE>
The market prices, net asset values and discounts of the common shares of
the Trusts as of June 8, 1995 were as follows:
<TABLE>
<CAPTION>
BDJ CDJ DDJ EDJ
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Market Price.................................................. $ 8.650 $ 8.500 $ 8.250 $ 8.125
Net Asset Value............................................... $ 9.040 $ 8.940 $ 8.760 $ 8.560
Percentage Discount........................................... 4.59% 4.92% 5.82% 5.08%
</TABLE>
Since February 1994, the shares of each Trust have generally traded at a
discount to net asset value. Prior to that time, the shares of each Trust
generally traded for an amount exceeding net asset value. Each Trust has had a
share repurchase program in place since February 18, 1994, pursuant to which
each Trust may repurchase shares of its common stock in the open market on any
day when the previous day's closing market price per share was at a discount
from net asset value. Under this program, as of March 16, 1995, BDJ, CDJ, DDJ
and EDJ had repurchased a total of 316,400; 709,800; 823,000 and 442,100 shares,
respectively. In addition, the shareholders of each Trust, at a meeting held
August 22, 1994, approved a fundamental policy that allows shareholders to
periodically tender their shares back to the respective Trusts at net asset
value. Pursuant to this policy, each Trust is required to offer shareholders an
annual opportunity to tender between 5% and 25% of such Trust's outstanding
shares. The deadline for participating in the first tender offer, which was an
offer to purchase up to 25% of each Trust's outstanding shares, was October 3,
1994. Shareholders tendered 18%, 15%, 16% and 16%, respectively, of the
outstanding shares of BDJ, CDJ, DDJ and EDJ. The measures described in this
paragraph have only slightly reduced each Trust's discount to net asset value.
COMPARISON OF INVESTMENT OBJECTIVES AND
POLICIES OF ADJUSTABLE RATE FUND AND THE TRUSTS
INVESTMENT OBJECTIVES
Each Trust's investment objective is to provide a high level of current
income and to return $10 per share to common shareholders on the Trust's
termination date. Adjustable Rate Fund has an investment objective of providing
the maximum current income that is consistent with low volatility of principal.
In seeking to achieve their respective investment objectives, the Trusts and
Adjustable Rate Fund are guided by many similar policies and restrictions that
should be considered by the shareholders of the Trusts. Unless otherwise
specified, the following investment policies and restrictions of the Trusts and
Adjustable Rate Fund may be changed without shareholder approval. The Trusts'
and Adjustable Rate Fund's investment objectives, and investment policies or
restrictions stated as fundamental, may not be changed without a majority vote,
which means the approval of the lesser of (a) a majority of the outstanding
shares, or (b) 67% or more of the shares represented at a meeting of
shareholders at which the holders of more than 50% of the outstanding shares are
represented. Except for the investment policies discussed below regarding
borrowing, if a percentage restriction set forth below is adhered to at the time
of an investment, a later increase or decrease in percentage resulting from
changes in values or assets will not constitute a violation of such restriction.
INVESTMENT POLICIES
The Trusts and Adjustable Rate Fund each seek to achieve their investment
objectives 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 Adjustable
Rate 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 Adjustable Rate Fund's net assets, U.S.
Government Zero Coupon Securities); (c) Asset-Backed Securities; and (d)
Corporate Debt Securities (each as defined below). With respect to the Trusts,
the balance of total assets may be invested in a slightly broader range of
assets, including (i) Zero Coupon Securities (both U.S. Government and non-U.S.
Government);
22
<PAGE>
(ii) Mortgage-Backed Securities other than ARMS; (iii) Asset-Backed Securities;
(iv) Corporate Debt Securities; (v) Canadian Debt Securities; (vi) Foreign
Index-Linked Instruments; and (vii) U.S. Government Securities (each as defined
below); provided, however, that no more than 10% of any Trust's assets may be
invested in any one of the following: taxable Zero Coupon Securities,
Asset-Backed Securities, Canadian Debt Securities, Corporate Debt Securities or
Foreign Index-Linked Instruments.
With respect to Adjustable Rate Fund, at least 85% of 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,
be of a comparable quality as determined by the Adviser. Up to 15% of 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. Adjustable Rate
Fund may not invest in any security rated, as of the date of purchase, lower
than A by Standard & Poor's or Moody's, lower than a rating comparable to A 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 by
Standard & Poor's or Moody's (or below a comparable rating by any other NRSRO)
or, if unrated, is no longer of a quality comparable to a security rated A, as
determined by the Adviser, Adjustable Rate Fund must 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 Trusts are
subject to the same ratings criteria, provided that rated securities in which
the Trusts invest must be rated by Standard & Poor's.
The Trusts and Adjustable Rate Fund may engage in options and financial
futures transactions which relate to the securities in which they invest, 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 (including, with respect to the Trusts
but not Adjustable Rate Fund, the use of mortgage dollar rolls) and may lend
their portfolio securities. The Trusts also may enter into interest rate swaps
and, in connection with their investments in Canadian Debt Securities, may enter
into foreign exchange transactions, currency forward and futures contracts and
foreign currency options. Adjustable Rate Fund may not make such investments.
For temporary defensive purposes, the Trusts and Adjustable Rate 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 (or, in the case of Adjustable
Rate Fund, rated 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 (or,
in the case of Adjustable Rate Fund, rated 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 Trusts' and Adjustable Rate Fund's
respective restrictions on investing in illiquid securities. See "Other
Investment Techniques -- Illiquid Securities" below.
Set forth below is a brief description of the types of securities in which
the Trusts and Adjustable Rate Fund may invest and the investment techniques
they may employ. A more detailed description of these securities and investment
techniques, including the risks thereof, is set forth in Appendix B.
ADJUSTABLE RATE MORTGAGE SECURITIES
Under normal market conditions, each Trust and Adjustable Rate Fund must
invest at least 65% of their total assets in adjustable rate mortgage securities
or ARMS, which are Mortgage-Backed Securities (as defined below) that have
adjustable interest rates which reset at periodic intervals. ARMS include
"pass-through" securities issued or guaranteed by the U.S. Government or one of
its agencies or instrumentalities as well as those issued by originators of and
investors in mortgage loans,
23
<PAGE>
including savings and loan associations, mortgage bankers, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. Pass-through
securities represent ownership interests in underlying pools of adjustable rate
mortgage loans originated by private lenders.
ARMS in which the Trusts and Adjustable Rate Fund may invest also include
collateralized mortgage obligations and multi-class pass-through securities,
which are derivative mortgage securities. Collateralized mortgage obligations
and multi-class pass-through securities (collectively, "CMOs" unless the context
indicates otherwise) may be issued by agencies or instrumentalities of the U.S.
Government or by private organizations. In a CMO, a series of bonds or
certificates is issued in multiple classes or tranches. As discussed below, the
principal and interest on the mortgages underlying a CMO may be allocated among
the CMO's tranches in many ways. 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 Trusts and Adjustable
Rate Fund. See "Other Eligible Investments -- Mortgage-Backed Securities" below.
OTHER ELIGIBLE INVESTMENTS
The balance of the assets of each Trust and Adjustable Rate Fund (35% of
total assets) may be invested in the following types of securities, to the
extent set forth below:
MORTGAGE-BACKED SECURITIES. In addition to ARMS, each Trust and Adjustable
Rate 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 agencies of the U.S.
Government and by private organizations and take the same structure as ARMS,
I.E., pass-through securities and CMOs. The Trusts may invest in any type of
Mortgage-Backed Security, including traditional fixed rate Mortgage-Backed
Securities and more recently developed instruments such as Stripped
Mortgage-Backed Securities and CMOs (described below). Adjustable Rate Fund will
not invest in inverse floating, interest-only, principal-only or Z tranches of
CMOs, or in Stripped Mortgage-Backed Securities. See "Investment Objectives,
Policies and Restrictions -- Mortgage-Backed Securities -- Restrictions on
Investments in Mortgage-Backed Securities" in the Statement of Additional
Information.
- CMOS. As discussed above, investments in ARMS include floating rate CMOs.
The Trusts' investments in Mortgage-Backed Securities other than ARMS may
include any other tranche of a CMO, other than residual interests of CMOs.
Adjustable Rate Fund may also invest in other tranches of CMOs, provided that it
may not invest in inverse floating, interest-only, principal-only or Z tranches
of CMOs or in residual interests of CMOs.
- STRIPPED MORTGAGE-BACKED SECURITIES. The Trusts' investments in
Mortgage-Backed Securities other than ARMS may include Stripped Mortgage-Backed
Securities ("SMBS"), which are derivative multi-class mortgage securities. There
are generally two types of classes of SMBS, one of which (the interest only or
"IO" class) entitles the holders thereof to receive distributions consisting
solely or primarily of all or a portion of the interest on the underlying pool
of mortgage loans or Mortgage-Backed Securities ("Mortgage Assets") and the
other of which (the principal only or "PO" class) entitles the holders thereof
to receive distributions consisting solely or primarily of all or a portion of
the principal of the underlying pool of Mortgage Assets. Adjustable Rate Fund
may not invest in SMBS.
ZERO COUPON SECURITIES. Each Trust may invest up to 35% of its total assets
in Zero Coupon Securities, including tax-exempt municipal Zero Coupon
Securities. However, no Trust may invest more than 10% of its total assets in
taxable Zero Coupon Securities. Adjustable Rate Fund may invest up to 10% of its
net assets in U.S. Government Zero Coupon Securities but may not invest in any
other type of Zero Coupon Security. 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.
24
<PAGE>
CORPORATE DEBT SECURITIES. Adjustable Rate Fund and each Trust may invest
in Corporate Debt Securities, which are debt obligations of U.S. corporations
(other than ARMS or Mortgage-Backed Securities). Each Trust's investment in
these securities is limited to 10% of its total assets. Adjustable Rate Fund has
no such limitation and thus may invest up to 35% of its total assets in
Corporate Debt Securities.
U.S. GOVERNMENT SECURITIES. In addition to U.S. Government ARMS and other
U.S. Government Mortgage-Backed Securities, Adjustable Rate Fund and each Trust
may invest in other securities issued or guaranteed by the U.S. Government or
its agencies or instrumentalities.
ASSET-BACKED SECURITIES. Adjustable Rate Fund and each Trust 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. Each Trust's
investment in these securities is limited to 10% of its total assets. Adjustable
Rate Fund is subject to no such percentage limitation and thus may invest up to
35% of its total assets in Asset-Backed Securities. However, Adjustable Rate
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.
CANADIAN DEBT SECURITIES. Each Trust may invest up to 10% of its total
assets in Canadian Debt Securities. Adjustable Rate Fund may not invest in such
securities.
FOREIGN INDEX LINKED INSTRUMENTS. Each Trust may invest up to 10% of its
total assets in fixed-income securities issued by U.S. issuers and denominated
in U.S. dollars but which return principal and/or pay interest to investors in
amounts which are linked to the level of a particular foreign index ("Foreign
Index Linked Instruments"). Adjustable Rate Fund may not invest in such
securities.
PUT OPTION. ARMS typically have caps, which limit the maximum amount by
which the interest rate may be increased or decreased at periodic intervals or
over the life of the underlying mortgages. To the extent that interest rates
rise faster than the allowable caps on ARMS, such ARMS will behave more like
securities backed by fixed rate mortgages than by adjustable rate mortgage
loans. Consequently, interest rate increases in excess of caps can be expected
to cause ARMS to behave more like traditional debt securities than adjustable
rate securities and accordingly to decline in value to a greater extent than
would be the case in the absence of such caps. In order to hedge against "cap
risk," each Trust purchased put options on four-year U.S. Treasury securities
that are exercisable on or immediately prior to the respective termination dates
of the Trusts. Pursuant to these put options, each Trust will be entitled to a
cash payment from the issuer of the option if, at the termination of such Trust,
interest rates on four year Treasury securities are in excess of the interest
rate specified in the put option. Because Adjustable Rate Fund does not have a
fixed termination date, it will not hold any such put options. Each Approving
Trust will sell its put options prior to the Effective Time of the Merger.
NEW INSTRUMENTS. Adjustable Rate Fund and each Trust expect that,
consistent with their respective investment limitations, they will invest in
those new types of ARMS, other Mortgage-Backed Securities, Asset-Backed
Securities, Zero Coupon Securities, hedging instruments and other securities in
which they may invest that the Adviser believes may assist them in achieving
their objectives. Shareholders will receive written notice in advance of a
significant investment (I.E., in excess of 5% of a Trust's total assets or 5% of
Adjustable Rate Fund's net assets) in such newly developed securities.
OTHER INVESTMENT TECHNIQUES
HEDGING TRANSACTIONS. Both Adjustable Rate Fund and the Trusts may purchase
and sell interest rate caps and floors, enter into options and futures
transactions and make investments in Eurodollar instruments, to the extent
described in Appendix B. The Trusts also may enter into foreign
25
<PAGE>
exchange transactions, currency forward and futures contracts and foreign
currency options in connection with their investments in Canadian Debt
Securities and may enter into interest rate swaps. Adjustable Rate Fund may not
engage in these transactions.
WHEN-ISSUED SECURITIES. Adjustable Rate Fund and the Trusts may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. The Trusts may enter into "mortgage dollar rolls"
whereby a Trust sells securities for delivery in the current month and
simultaneously contracts with the same counterparty to repurchase similar (I.E.,
same type, coupon and maturity) but not identical securities on a specified
future date. A Trust will receive a fee for its agreement to roll over its
purchase commitment. Adjustable Rate Fund will not enter into mortgage dollar
rolls but will purchase securities on a when-issued or forward commitment basis
with the intention of acquiring such securities for its portfolio. Adjustable
Rate Fund may dispose of a commitment prior to settlement, however, if the
Adviser deems it appropriate to do so.
ILLIQUID SECURITIES. As an open-end investment company, Adjustable Rate
Fund may invest up to 15% of its net assets in illiquid securities. Each Trust
may invest up to 10% of its total assets in such securities, excluding certain
hedging instruments, all of which must mature on or before March 31 in the year
of the Trust's termination. Illiquid securities may offer a higher yield than
securities which are more readily marketable, but they may not always be
marketable on advantageous terms.
LENDING OF PORTFOLIO SECURITIES. In order to generate income, Adjustable
Rate Fund and each Trust may lend portfolio securities up to 30% of the value of
their total assets to broker-dealers, banks or other financial borrowers of
securities.
REPURCHASE AGREEMENTS. Adjustable Rate Fund and each Trust may enter into
repurchase agreements pertaining to the securities in which they may invest. A
repurchase agreement involves the purchase by Adjustable Rate Fund or a Trust 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.
BORROWING. Each Trust may borrow money in an amount up to 33 1/3% of its
total assets (including the amount borrowed), less all liabilities other than
the bank or other borrowings. Each Trust may also borrow an additional 5% of its
total assets for temporary defensive purposes without regard to the foregoing
limitation and may also borrow for emergency purposes, for the payment of
dividends, for share repurchases or for the clearance of transactions.
Adjustable Rate Fund may borrow money only for temporary or emergency purposes
in an amount up to 10% of the value of its total assets. Adjustable Rate Fund
will not purchase portfolio securities while outstanding borrowings exceed 5% of
the value of its total assets. Adjustable Rate Fund and each Trust may borrow
from an unrelated financial institution and may also borrow by entering into
reverse repurchase agreements. Under a reverse repurchase agreement, Adjustable
Rate Fund or a Trust sells securities and agrees to repurchase them at a
mutually agreed date and price. Reverse repurchase agreements are considered
borrowings for purpose of Adjustable Rate Fund's and the Trusts' respective
limitations on borrowings. Adjustable Rate Fund and each Trust may mortgage,
pledge or hypothecate their assets to secure permitted borrowings. The policies
set forth in this section are fundamental and may not be changed without a
majority vote of Adjustable Rate Fund's or the respective Trust's shares.
DURATION
As discussed above, the Adviser intends to continuously manage Adjustable
Rate Fund to a constant duration benchmark rather than the declining duration
benchmark required by the term trust structure. The Adviser will attempt to
maintain an average effective duration of one to four years for Adjustable Rate
Fund's portfolio. Effective duration estimates the interest rate risk (price
volatility) of a security, I.E., how much the value of the security is expected
to change with a given change in interest rates. The longer a security's
effective duration, the more sensitive its price is to changes in interest
rates. For example, if interest rates were to increase by 1%, the market value
of a bond with an effective duration of five years would decrease by about 5%,
with all other factors being constant.
26
<PAGE>
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
Adjustable Rate Fund and the Trusts have each adopted certain investment
restrictions, which are set forth in detail in the Statement of Additional
Information under "Investment Objectives, Policies and Restrictions."
Fundamental restrictions of Adjustable Rate Fund and the Trusts which may not be
changed without a majority vote of shareholders include, among others, the
following: (1) No Trust will invest 25% or more of its total assets in the
securities of issuers conducting their principal business activities in the same
industry, provided that this limitation does not apply to securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities.
Notwithstanding the foregoing, each Trust may invest in private mortgage
pass-through securities without regard to this limitation. Adjustable Rate Fund
will not 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 Adjustable Rate 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. Adjustable Rate Fund will determine the industry
classification of Asset-Backed Securities in its portfolio based upon 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) Neither
Adjustable Rate Fund nor any Trust, with respect to 75% of its total assets,
will 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. As a nonfundamental investment restriction
which may be changed at any time without shareholder approval, Adjustable Rate
Fund will not invest more than 5% of its total assets in the securities of
issuers which, with their predecessors, have a record of less than three years'
continuous operation.
PORTFOLIO TURNOVER
Each Trust actively uses trading to benefit from yield disparities among
different issues of securities or otherwise to achieve its investment objectives
and policies. Adjustable Rate Fund will use the same strategy. 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 cash inflows and redemptions
that will result from Adjustable Rate Fund operating as an open-end investment
company may result in increased portfolio turnover when compared to the Trusts.
It is estimated that Adjustable Rate Fund's annual portfolio turnover rate will
not exceed 100%. The method of calculating portfolio turnover rate is set forth
in the Statement of Additional Information under "Investment Objectives,
Policies and Restrictions -- Portfolio Turnover."
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MANAGEMENT OF THE TRUSTS AND ADJUSTABLE RATE FUND
BOARD OF DIRECTORS
The Boards of Directors of the Trusts and the Company, which consist of the
same individuals, have the primary responsibility for overseeing the overall
management of the Trusts and Adjustable Rate Fund and electing their officers.
INVESTMENT ADVISER
The Adviser has been retained under separate Investment Advisory and
Management Agreements (the "Advisory Agreements") to act as the investment
adviser to each Trust and to Adjustable Rate Fund, subject to the authority of
the respective Boards of Directors. The Advisory Agreements have been approved
by the Boards of Directors and shareholders of the respective Trusts and
Adjustable Rate Fund (including, in each case, 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 respective Trust or Adjustable Rate Fund).
In addition to acting as the investment adviser for the Trusts, 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 furnishes investment
advice to various concerns, including pension and profit sharing funds,
corporate trusts and individuals. As of May 31, 1995, the Adviser rendered
investment advice with respect to 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 each Trust and Adjustable Rate Fund with investment
advice and, in general, supervises their management and investment programs. The
Adviser furnishes, at its own expense, all necessary administrative services,
office space, equipment and clerical personnel for servicing the investments of
the Trusts and Adjustable Rate Fund, and investment advisory facilities and
executive and supervisory personnel for managing their investments and effecting
their portfolio transactions. In addition, the Adviser pays the salaries and
fees of all officers and directors of the Trusts who are affiliated persons of
the Adviser, and the Adviser will do the same with respect to Adjustable Rate
Fund.
Under each Trust's Advisory Agreement, the Adviser receives a monthly fee
which is paid at an annual rate of .35% of such Trust's average weekly net
assets. For purposes of the calculation of the fee payable to the Adviser,
average weekly net assets are determined on the basis of the average net assets
of each Trust for each weekly period ending during the month. The net assets for
each weekly period are determined by averaging the net assets on the last day of
such weekly period with the net assets on the last day of the immediately
preceding weekly period.
Under the Advisory Agreement with the Company, the advisory fee will be .35%
on the first $500 million of Adjustable Rate Fund's net assets and .30% on
assets in excess of $500 million. The Trusts' net asset values currently are
determined and published weekly, but the 1940 Act generally requires open-end
funds to value their assets on each business day in order to determine the
current net asset value on the basis of which their shares may be redeemed by
shareholders or purchased by investors. As a result, the advisory fee with
respect to Adjustable Rate Fund will be calculated based on average daily net
assets.
Each Advisory Agreement terminates automatically in the event of its
assignment. In addition, each agreement is terminable at any time, without
penalty, by the Board of Directors of the respective Trust or Adjustable Rate
Fund, as the case may be, or by vote of a majority of the outstanding voting
securities of such Trust or Adjustable Rate Fund on not more than 60 days'
written notice to the Adviser, and by the Adviser on 60 days' written notice to
such Trust or Adjustable Rate Fund. Unless sooner terminated, each 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
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Directors or by a vote of a majority of the outstanding voting securities of the
respective Trust or Adjustable Rate Fund, 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.
The Adviser intends, although not required under the Advisory Agreement, to
reimburse Adjustable Rate Fund for the amount, if any, by which the total
operating and management expenses of such Fund (including the Adviser's
compensation and amounts paid pursuant to the Adjustable Rate Fund's Rule 12b-1
plan (as described below), 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. However, the Adviser will agree to cap
expenses at .60% of average daily net assets only if at least three of the
Trusts approve the proposed Merger. If less than three Trusts approve the
Merger, the Adviser will not agree to limit expenses to .60% of average daily
net assets. In addition, even if three or more Trusts approve the Merger, the
Adviser's limitation on expenses 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, Adjustable Rate 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 Advisory
Agreement provides that the Adviser must make any expense reimbursements to
Adjustable Rate 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 Rule 12b-1 plan. The Adviser does not believe that the laws of any other
state in which Adjustable Rate Fund's shares may be offered for sale contain
expense reimbursement requirements.
PORTFOLIO MANAGEMENT
Michael P. Jansen and Thomas S. McGlinch have been primarily responsible for
the management of each Trust's portfolio since February 10, 1995 and October 24,
1994, respectively, and they also will be primarily responsible for the
management of Adjustable Rate 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.
ADMINISTRATION AGREEMENT
The Adviser also acts as each Trust's administrator pursuant to an
Administration Agreement between the Adviser and such Trust. Under each
Administration Agreement, the Adviser is required to manage the respective
Trust's business affairs, supervise its overall day-to-day operations (other
than providing investment advice) and provide other administrative services.
For the services rendered to the Trusts and related expenses borne by the
Adviser in its capacity as the Trusts' administrator and not paid by the Trusts,
each Trust currently pays the Adviser an administrative fee, calculated and paid
monthly, at an annual rate of .15% of such Trust's average
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weekly net assets. Adjustable Rate Fund will not enter into an Administration
Agreement with the Adviser. The Adviser will continue to provide the services it
currently provides under the Administration Agreement, without additional
compensation.
PLAN OF DISTRIBUTION
An open-end investment company, unlike a closed-end investment company, is
permitted to finance the distribution of its shares by adopting a plan of
distribution pursuant to Rule 12b-1 under the 1940 Act. Rule 12b-1(b) under the
1940 Act provides that any payments made by any mutual funds in connection with
financing the distribution of their shares may only be made pursuant to a
written plan describing all aspects of the proposed financing of distribution
and also requires that all agreements with any person relating to the
implementation of the plan must be in writing. The Company's Board of Directors
(including a majority of the Directors who are not interested persons of the
Company and have no direct or indirect financial interest in the operation of
the Distribution Plan or in any agreements related to the Plan) and the
Company's sole shareholder have approved a Distribution Plan adopted in
accordance with Rule 12b-1 and the Company has entered into an Underwriting and
Distribution Agreement with the Distributor pursuant to the Plan.
Pursuant to the provisions of the Distribution Plan, Adjustable Rate Fund
will pay a monthly service fee to the Distributor at an annual rate of .15% of
such 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 Adjustable Rate Fund shareholder
accounts and the costs incurred in connection therewith (the "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 Adjustable Rate Fund and provide information on shareholders' investments.
The Distributor will use 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
Adjustable Rate 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 Adjustable Rate 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 Adjustable Rate Fund attributable to shares sold by the
investment executive. These payments will be made with respect to shares
acquired in the Merger.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Investors Fiduciary Trust Company ("IFTC"), 127 West Tenth Street, Kansas
City, Missouri 64104, (800) 874-6205, will serve as Adjustable Rate Fund's
custodian, dividend disbursing agent, transfer agent, registrar and accounting
agent. IFTC also serves in these capacities for each Trust.
SHARE PURCHASE, EXCHANGE AND REDEMPTION PROCEDURES
SHARE PURCHASES
GENERAL. The Trusts' common shares currently trade on the New York and
Chicago Stock Exchanges. Shares of Adjustable Rate Fund will be offered to the
public on a continuous basis and will not be listed on any stock exchange.
Common Shares of the Trusts may only be purchased through a broker. Following
the Merger, Adjustable Rate Fund 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
Adjustable Rate Fund and the Trusts.
PURCHASE PRICE. Shares of the Trusts may be purchased at their current
market price (which may be higher or lower than their current net asset value)
plus a brokerage commission. Following the
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Merger, shares of Adjustable Rate Fund will be available for purchase at the net
asset value per share next calculated after receipt of an order by an investor's
investment executive, plus a maximum front end 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 will be 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 .2% contingent deferred sales charge will be
imposed in the event of a redemption transaction occurring within 24 months
following such a purchase. There is no front end or contingent deferred sales
charge for shares acquired as a result of the Merger. Additional information on
sales charges on Adjustable Rate Fund shares, ways in which investors may
qualify for a reduced sales charge, and information on special purchase plans is
set forth in Appendix C.
Adjustable Rate Fund will generally require a minimum initial investment of
$250. This minimum initial investment is waived for the Merger. There is no
minimum for subsequent investments.
REDEMPTIONS
Shares of the Trusts may be sold through broker-dealers on any business day.
A commission is generally charged for each sale. After the Merger, shares of
Adjustable Rate Fund will be redeemable, in whole or in part, on any business
day at the net asset value next calculated after the receipt of redemption
instructions in good form by an investor's investment executive. No fee or other
charge is imposed on the redemption of Adjustable Rate Fund shares, except that,
as mentioned above, a contingent deferred sales charge will be imposed upon the
redemption of certain shares initially purchased without a sales charge. No
contingent deferred sales charge will be imposed on sales of shares acquired as
a result of the Merger.
Adjustable Rate Fund reserves the right to redeem an account at any time the
net asset value of that account falls below $200 as the result of a redemption
or exchange request. Shareholders 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.
Additional information regarding redemption procedures, contingent deferred
sales charges and the payment of redemption procedures is set forth in Appendix
C.
EXCHANGES
Shareholders of Adjustable Rate Fund will be able to exchange their shares
for shares of any other mutual fund managed by the Adviser that is open to new
investors. However, the exchange privilege may not be available to shareholders
who hold their Adjustable Rate Fund shares through a broker-dealer other than
the Distributor. Exchanges will be permitted only if there is a valid dealer
agreement between your broker-dealer and the Distributor for the fund into which
the exhange will be made. All exchanges will be subject to the eligibility of
share purchases in an investor's state as well as the minimum investment
requirements and any other applicable terms in the prospectus of the fund being
acquired. Exchanges will be 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 Adjustable
Rate Fund shares received in the Merger will be permitted without payment of an
additional sales charge. Additional information regarding exchange procedures is
set forth in Appendix C.
OTHER SHAREHOLDER SERVICES
Adjustable Rate Fund shareholders will have other shareholder services
available, such as an automatic monthly investment program, a systematic
withdrawal plan, telephone transaction privileges, the ability to reinvest
shares within 30 days of a redemption without payment of an additional sales
charge, and the ability to direct that income dividends and capital gains
distributions on Adjustable Rate Fund shares be invested in any other mutual
fund managed by the Adviser (other than a money market fund) that is offered in
the shareholder's state. However, as with the exchange privilege, the ability to
direct that distributions be invested in another mutual fund may not be
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available to shareholders who hold their Adjustable Rate Fund shares through a
broker-dealer other than the Distributor. Additional information regarding these
shareholder services is set forth in Appendix C.
VALUATION OF SHARES
The Trusts currently calculate the net asset values of their shares on a
weekly basis as of the primary closing time on the New York Stock Exchange (the
"Exchange") (currently 4:00 p.m. New York time). Adjustable Rate Fund will
compute its net asset value on each day the Exchange is open for business,
provided that the net asset value need not be determined for Adjustable Rate
Fund 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 calculation is made as of the regular close of the Exchange after
Adjustable Rate Fund has declared any applicable dividends.
The net asset value per share for each Trust and for Adjustable Rate Fund is
determined by dividing the value of the securities owned by the Trust or Fund
plus any cash and other assets (including interest accrued and dividends
declared but not collected) less all liabilities by the number of Trust or Fund
shares outstanding. For the purposes of determining the aggregate net assets of
the Trusts or Adjustable Rate 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 a Trust or the Fund
for which market prices are not readily available will be valued at their fair
value in accordance with such procedures.
DIVIDENDS, DISTRIBUTIONS AND TAXES
It is the practice of each Trust to distribute monthly dividends from its
net investment income. Each Trust attempts to maintain a level rate of monthly
distributions based on what the Adviser believes the Trust's annualized average
net investment income will be. Each Trust may at times pay out more or less than
the entire amount of net investment income in any particular period in order to
permit the Trust to maintain this stable level of distributions. Any such amount
retained by a Trust is available to stabilize future distributions. As a result,
the distributions paid by a Trust for any particular period may be more or less
than the amount of net investment income earned by the Trust during such period.
Monthly distributions may also include amounts attributable to net short-term
capital gains if necessary to maintain a stable level of distributions. This may
result in a portion of the monthly distributions constituting a return of
capital to the extent the Trust subsequently realizes capital loss. Net
short-term capital gains not previously distributed and net long-term gains, if
any, will be distributed at least once annually.
The net investment income of Adjustable Rate Fund will be declared as
dividends daily and paid monthly. Net realized capital gains, if any, will be
distributed at least once annually. Each daily dividend will be payable to
Adjustable Rate 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. Adjustable
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Rate 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, Adjustable Rate Fund dividends can be expected to vary from
month to month.
Shareholders of each Trust may elect to participate in a dividend
reinvestment plan and have dividends and capital gains distributions reinvested
automatically in shares of such Trust. Reinvestments under the Trusts' dividend
reinvestment plans are made at market price plus brokerage commissions, which
may be more or less than a Trust's net asset value per share.
All net investment income dividends and net realized capital gains
distributions for Adjustable Rate Fund will be payable in additional shares of
Adjustable Rate Fund at net asset value unless a shareholder notifies his or her
investment executive of an election to receive cash. Shareholders may elect
either to receive income dividends in cash and capital gains in additional
Adjustable Rate Fund shares at net asset value, or to receive both income
dividends and capital gains in cash. Adjustable Rate Fund shareholders also may
direct that income dividends and capital gains distributions be invested in
another mutual fund managed by the Adviser, provided the fund is open to new
investors and is offered in the shareholder's state. Any such investment will be
made at net asset value and will not be subject to a minimum investment amount,
except that the shareholder 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. The taxable status of income
dividends and/ or net capital gains distributions is not affected by whether
they are reinvested or paid in cash.
Each Trust has qualified as a regulated investment company under Subchapter
M of the Code and has not been subject to federal income tax on taxable income
and capital gains which have been distributed to shareholders, and Adjustable
Rate Fund intends to so qualify as well. If Adjustable Rate Fund so qualifies,
it will not be liable for federal income taxes to the extent it distributes its
taxable income to shareholders.
Distributions by Adjustable Rate Fund generally will be taxable to
shareholders, whether received in cash or additional shares of the Fund (or, at
the option of the shareholder, 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 Adjustable Rate
Fund. Adjustable Rate 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 Adjustable Rate Fund shares if, as is normally the case, the shares
are capital assets in the shareholder's hands. This capital gain or loss will be
long-term if the shares have been held for more than one year.
The foregoing relates to federal income taxation as in effect as of the date
of this Joint Proxy Statement/Prospectus. For a more detailed discussion of the
federal income tax consequences of investing in shares of Adjustable Rate Fund,
see "Taxation" in the Statement of Additional Information. Shareholders should
also check the consequences of their local and state tax laws.
SURRENDER OF APPROVING TRUST SHARE CERTIFICATES
As soon as practicable after the Effective Time, IFTC, the transfer agent
for the Trusts and Adjustable Rate Fund, will send a notice and transmittal form
to each record holder at the Effective Time of Approving Trust common shares
advising such holder of the effectiveness of the Merger and of the procedure for
surrendering to IFTC his or her certificates formerly evidencing common shares
of the Approving Trust. APPROVING TRUST SHAREHOLDERS SHOULD NOT SEND IN THEIR
SHARE CERTIFICATES UNTIL THEY RECEIVE THE LETTER OF TRANSMITTAL FORM AND
INSTRUCTIONS FROM IFTC. Ownership of Adjustable Rate Fund shares by former
shareholders of an Approving Trust will be recorded electronically, and
Adjustable Rate Fund will issue confirmations to such shareholders setting forth
the number and net asset value
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of Adjustable Rate Fund shares held by such shareholders. Adjustable Rate Fund
will not issue share certificates. Any share certificates not submitted to IFTC
within three months of the Effective Time will be automatically deemed submitted
and then canceled and recorded in book-entry form.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
The Adviser selects brokers and futures commission merchants to use for the
Trusts' and Adjustable Rate 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 sale of shares of any fund managed by the Adviser may
also be considered a factor if the Adviser is satisfied that a Trust or the Fund
would receive from that broker the most favorable price and execution then
available for a transaction. Portfolio transactions for the Trusts or Adjustable
Rate Fund may be effected through the Distributor on a securities exchange in
compliance with Section 17(e) of the 1940 Act. For more information, see
"Portfolio Transactions and Allocation of Brokerage" in the Statement of
Additional Information.
PENDING LITIGATION
On October 20, 1994, Herman D. Gordon filed a complaint purporting to be a
class action 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"). The
complaint (No. 3-94-CV-1377) alleges that the defendants violated certain
federal securities laws by making materially misleading statements in
prospectuses and other disclosures concerning risks associated with an
investment in the Trusts and compliance with the Trusts' investment policies.
Damages are being sought in an unspecified amount. The defendants intend to
defend the Gordon Litigation vigorously.
On April 14, 1995, Frank Donio, I.R.A. and other plaintiffs filed a
complaint purporting to be a class action 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").
The complaint 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. The defendants intend to defend the Donio Litigation vigorously.
In the event that the shareholders of any of the Trusts approve the Merger,
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 the
Litigations. Piper and the Adviser have agreed, pursuant to an indemnification
agreement between and among Piper, the Adviser and the Company (the
"Indemnification Agreement"), to indemnify the Company against any losses
incurred in connection with such Litigations. A copy of the Indemnification
Agreement is attached as Appendix E to this Joint Proxy Statement/Prospectus.
In addition to the complaints against the Trusts described above, complaints
have also been filed in federal and state court against the Adviser and the
Distributor relating to several other investment companies for which the Adviser
acts or has acted as investment adviser or subadviser. These lawsuits do not
involve the Trusts. The Adviser and Distributor do not believe that the lawsuits
will have a material adverse effect upon their ability to perform under their
agreements with the Trusts or Adjustable Rate Fund, and they intend to defend
the lawsuits vigorously.
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DISSENTERS' RIGHTS
Pursuant to Sections 302A.471 and 302A.473 of the Minnesota Business
Corporation Act (the "MBCA Sections"), record holders of shares of the Trusts on
June 14, 1995 are entitled to assert dissenters' rights in connection with the
Merger and obtain payment of the "fair value" of their shares, provided that
such shareholders comply with the requirements of the MBCA Sections.
NOTWITHSTANDING THE PROVISIONS OF THE MBCA SECTIONS, THE DIVISION OF INVESTMENT
MANAGEMENT OF THE COMMISSION HAS TAKEN THE POSITION THAT ADHERENCE TO STATE
APPRAISAL PROCEDURES BY A REGISTERED INVESTMENT COMPANY ISSUING REDEEMABLE
SECURITIES WOULD CONSTITUTE A VIOLATION OF RULE 22C-1 UNDER THE 1940 ACT. THIS
RULE PROVIDES THAT NO OPEN-END INVESTMENT COMPANY MAY REDEEM ITS SHARES OTHER
THAN AT NET ASSET VALUE NEXT COMPUTED AFTER RECEIPT OF A TENDER OF SUCH SECURITY
FOR REDEMPTION. IT IS THE VIEW OF THE DIVISION OF INVESTMENT MANAGEMENT THAT
RULE 22C-1 SUPERSEDES APPRAISAL PROVISIONS IN STATE STATUTES.
In the interests of ensuring equal valuation of all interests in the Trusts,
the Company will determine dissenters' rights in accordance with the Division
interpretation. Accordingly, in the event that any shareholder elects to
exercise dissenters' rights under Minnesota law, the Company intends to submit
this question to a court of competent jurisdiction. In such event, a dissenting
shareholder would not receive any payment until disposition of any such court
proceeding. It should be emphasized that Trust shareholders may sell their
shares in the open market prior to the Effective Time, provided that it is
expected that trading of shares will be suspended for a period of time prior to
the Effective Time. In addition, shareholders will be able to redeem Adjustable
Rate Fund shares immediately after the Effective Time at their net asset value.
A summary of the statutory procedures to be followed by Trust shareholders
electing to exercise their dissenters' rights, along with copies of the relevant
MBCA Sections, is set forth in Appendix D. Shareholders who wish to assert their
dissenters' rights or who wish to preserve the right to do so should review the
MBCA Sections carefully, since failure to comply with the procedures set forth
in the MBCA Sections will result in the loss of such dissenters' rights.
VOTE REQUIRED
Approval of the Merger by a Trust requires the affirmative vote of the
holders of at least two-thirds of such Trust's outstanding common shares. Unless
otherwise instructed, the proxies will vote for the Merger. If the shareholders
of any Trust do not approve the proposed Merger, or the Merger is not
consummated for any other reason, then such Trusts will continue their current
operations.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors has determined that the transactions contemplated by
the Merger Agreement would be in the best interests of each of the Trusts and
their respective shareholders and that the interests of the existing
shareholders of each of the Trusts would not be diluted as a result of the
Merger. Accordingly, the Board of Directors recommends that shareholders of each
of the Trusts vote FOR the proposed Merger.
PROPOSAL NO. 2 -- ELECTION OF DIRECTORS
Shareholders of each Trust are being asked to elect Directors in case their
Trust does not participate in the Merger and remains a separate entity. If their
Trust participates in the Merger, such shareholders will become shareholders of
Adjustable Rate Fund, a series of the Company. The Directors of the Company are
the same individuals listed below for election as Directors of the Trusts.
The Bylaws of each Trust provide that the shareholders have the power to fix
the number of Directors. The Directors recommend that the size of the Board of
Directors of each Trust be maintained at six.
It is intended that the enclosed Proxy will be voted for the election of the
six persons named below as Directors of each Trust unless such authority has
been withheld in the Proxy. The term of office of
35
<PAGE>
each person elected will be until the next annual meeting of shareholders or
until his or her successor is duly elected and shall qualify (or, if a Trust
participates in the Merger, until the earlier Effective Time of the Merger).
Pertinent information regarding each nominee for the past five years is set
forth following his or her name below. Each of the nominees also serves as a
Director of each of the other closed-end and open-end investment companies
managed by the Adviser (except that Mr. Bennett does not serve as a Director of
Piper Global Funds Inc.). Each of the nominees, other than Mr. Latimer and Ms.
Emmerich, has served as a Director of the Trusts since each Trust commenced
operations. Mr. Latimer has served as a Director of BDJ and CDJ since October
23, 1991 and as a Director of DDJ and EDJ since their commencement of
operations. Ms. Emmerich has served as a Director of each Trust since May 18,
1993.
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
- ----------------- --- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
David T. Bennett 54 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 68 President of Dyer Management Company, a private management company, since January 1, 1991; prior
thereto, Mr. Dyer 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 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.
William H. Ellis* 53 President of Piper Jaffray Companies Inc. and Piper Jaffray Inc. since September 1982 and Chief
Operating Officer of the same two companies since August 1983; Director and Chairman of the Board
of the Adviser since October 1985 and President of the Adviser since December 1994.
Karol D. Emmerich 46 President of The Paraclete Group, a consultant to nonprofit and other organizations, since May 1993;
prior thereto, Ms. Emmerich was Vice President and Treasurer of Dayton Hudson Corporation from 1980
to May 1993 and Chief Accounting Officer from 1989 to May 1993. Ms. Emmerich also serves on the
board of directors of a number of privately held and nonprofit corporations.
Luella G. 58 Ms. Goldberg serves on the board of directors of Northwestern National Life Insurance Company (since
Goldberg 1976), The ReliaStar Financial Corp. (since 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 Minnesota Orchestral Association and the University of Minnesota
Foundation. 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.
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
- ----------------- --- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
George Latimer 59 Director, Special Actions Office, Office of the Secretary, Department of Housing and Urban
Development since 1993; prior thereto, Mr. Latimer had been Dean of Hamline Law School, St. Paul,
Minnesota, since 1990. Mr. Latimer also serves on the board of directors of Digital Biometrics,
Inc. and Payless Cashways, Inc.
<FN>
- ------------------------
*Mr. Ellis is deemed an "interested person" (as defined by the 1940 Act) of the
Trusts because of his positions with the Adviser and/or its affiliates.
</TABLE>
Except as indicated above, the Directors of the Trusts are not directors of
any other "reporting companies." As of June 14, 1995, the officers and Directors
of each Trust as a group beneficially owned less than 1% of the outstanding
shares of each Trust.
The Board of Directors of each Trust has established an Audit Committee,
currently consisting of Mr. Dyer, Ms. Emmerich and Ms. Goldberg, who serves as
its chairperson. The Audit Committee met two times during the fiscal year ended
August 31, 1994. The functions to be performed by the Audit Committee are to
recommend annually to the Board a firm of independent certified public
accountants to audit the books and records of the Trusts for the ensuing year;
to monitor that firm's performance; to review with the firm the scope and
results of each audit and determine the need, if any, to extend audit
procedures; to confer with the firm and representatives of the Trusts on matters
concerning the Trusts' financial statements and reports, including the
appropriateness of its accounting practices and of its financial controls and
procedures; to evaluate the independence of the firm; to review procedures to
safeguard portfolio securities; to review the purchase by the Trusts from the
firm of non-audit services; to review all fees paid to the firm; and to
facilitate communications between the firm and the Trusts' officers and
Directors.
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. Since the formation of these committees on November 1,
1994, the Committee of the Independent Directors has met four times and the
Derivatives Subcommittee has met twice. 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: (i) to oversee practices,
policies and procedures of the Adviser in connection with the use of
derivatives; (ii) to receive periodic reports from management and independent
accountants; and (iii) to report periodically to the Committee of the
Independent Directors and the Board of Directors.
The Trusts do not have nominating or compensation committees.
During the fiscal year ended August 31, 1994, there were nine meetings of
the Board of Directors of each Trust. All Directors attended at least 75% of
those meetings of the Board of Directors and committees of which they were
members that were held while they were serving on the Board of Directors or on
such committee.
No compensation is paid by the Trusts to any Directors who are officers or
employees of the Adviser or any of its affiliates. The Trusts, together with all
closed-end investment companies managed by the Adviser, pay each of the other
Directors an aggregate quarterly retainer of $5,000, which is allocated among
the Trusts and such other investment companies on the basis of each company's
net
37
<PAGE>
assets. In addition, each Trust pays each such Director a fee for each in-person
meeting of the Board of Directors he or she attends. Such fee is based on the
net asset value of the Trust and ranges from $250 (for net assets of less than
$200 million) to $1,500 (for net assets of $5 billion or more). Members of the
Audit Committee who are not affiliated with the Adviser receive $1,000 per
meeting attended ($2,000 for the chairperson of such Committee), with such fee
being allocated among all closed-end and open-end 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 Committee currently
receive no additional compensation. Directors are reimbursed for expenses
incurred in connection with attending meetings.
The following table sets forth the aggregate compensation received by each
Director from each Trust during the fiscal year ended August 31, 1994, as well
as the total compensation received by each Director from the Trusts and all
other 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, who is an officer of the Adviser and the Distributor, did not receive any
such compensation and is not included in the table. No executive officer of the
Trusts received compensation from the Trusts during the fiscal year ended August
31, 1994.
<TABLE>
<CAPTION>
PENSION OR
AGGREGATE COMPENSATION RETIREMENT TOTAL
FROM THE TRUSTS BENEFITS ACCRUED ESTIMATED ANNUAL COMPENSATION
------------------------------------------ AS PART BENEFITS UPON FROM FUND
DIRECTOR BDJ CDJ DDJ EDJ OF FUND EXPENSE RETIREMENT COMPLEX*
- ------------------------------- --------- --------- --------- --------- ------------------ ---------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
David T. Bennett............... $ 2,943 $ 2,943 $ 3,943 $ 2,943 None None $ 57,500
Jaye F. Dyer................... $ 2,996 $ 2,996 $ 3,996 $ 2,996 None None $ 68,250
Karol D. Emmerich.............. $ 2,996 $ 2,996 $ 3,996 $ 2,996 None None $ 68,250
Luella G. Goldberg............. $ 3,049 $ 3,049 $ 4,049 $ 3,049 None None $ 71,250
George Latimer................. $ 2,943 $ 2,943 $ 3,943 $ 2,943 None None $ 65,250
<FN>
- ------------------------
*Consists of 26 open-end and closed-end investment companies managed by the
Adviser or an affiliate of the Adviser, including the Trusts. Each director
included in the table, other than Mr. Bennett, serves on the board of each such
open-end and closed-end investment company. Mr. Bennett serves on the board of
24 of such open-end and closed-end investment companies.
</TABLE>
VOTE REQUIRED
The vote of a majority of shares of each Trust represented at the meeting,
provided at least a quorum (a majority of the outstanding shares) is represented
in person or by Proxy, is sufficient for the election of the above nominees.
Unless otherwise instructed, the proxies will vote for the above seven nominees.
In the event any of the above nominees are not candidates for election at the
meeting, the proxies will vote for such other persons as the Board of Directors
may designate. Nothing currently indicates that such a situation will arise.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends that shareholders of each Trust vote FOR
the election as Directors of the six nominees named in this Joint Proxy
Statement/Prospectus.
PROPOSAL NO. 3 -- RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS
The 1940 Act provides that every registered investment company shall be
audited at least once each year by independent public accountants selected by a
majority of the directors of the investment company who are not interested
persons of the investment company or its investment adviser. The 1940 Act
requires that the selection be submitted for ratification or rejection by the
shareholders at their next annual meeting following such selection.
The Directors, including a majority who are not interested persons of the
Adviser or the Trusts, have selected KPMG Peat Marwick LLP to be each Trust's
independent public accountants for the fiscal year ending August 31, 1995. KPMG
Peat Marwick LLP has no direct or material indirect
38
<PAGE>
financial interest in the Trusts or in the Adviser, other than receipt of fees
for services to the Trusts. KPMG Peat Marwick LLP also serves as the independent
public accountants for each of the other investment companies managed by the
Adviser. KPMG Peat Marwick LLP has been the independent public accountants for
each Trust since each commenced operations.
Representatives of KPMG Peat Marwick LLP are expected to be present at the
meeting. Such representatives will be given the opportunity to make a statement
to the shareholders if they desire to do so and are expected to be available to
respond to any questions that may be raised at the meeting.
VOTE REQUIRED
The affirmative vote of at least a majority of the shares present, in person
or by proxy, at the Meeting is required for ratification of the selection of
KPMG Peat Marwick LLP as each Trust's independent accountants. Unless otherwise
instructed, the proxies will vote for the ratification of the selection of KPMG
Peat Marwick LLP as each Trust's independent public accountants.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends that shareholders of each Trust vote FOR
the ratification of the selection of KPMG Peat Marwick LLP as independent
accountants for such Trust.
PROPOSALS FOR THE NEXT ANNUAL MEETING
Any proposal by a shareholder to be considered for presentation at the next
Annual Meeting must be received at the Trusts' offices, Piper Jaffray Tower, 222
South Ninth Street, Minneapolis, Minnesota 55402, no later than February 14,
1996. Each Trust approving Proposal One, however, will be merged into Adjustable
Rate Fund. It is unlikely that Adjustable Rate Fund will hold a 1996
shareholders' meeting.
LEGAL MATTERS
Certain legal matters in connection with the common shares of Adjustable
Rate Fund to be issued pursuant to the Merger will be passed upon by Dorsey &
Whitney P.L.L.P., Minneapolis, Minnesota.
FINANCIAL STATEMENTS AND EXPERTS
The audited statements of assets and liabilities, including the schedules of
investments in securities, of BDJ, CDJ, DDJ and EDJ 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 fiscal years in the two-year
period then ended, and the financial highlights, have been incorporated by
reference into this Joint Proxy Statement/Prospectus in reliance on the report
of KPMG Peat Marwick LLP, independent auditors for each of the Trusts, given on
the authority of such firm as experts in accounting and auditing. In addition,
the unaudited financial statements of BDJ, CDJ, DDJ and EDJ for the six-month
period ended February 28, 1995, as included in the Trusts' semi-annual report,
are incorporated herein by reference.
AVAILABLE INFORMATION
Each Trust is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and the 1940 Act, and in accordance therewith
is required to file reports, proxy statements and other information with the
Commission. Any such reports, proxy statements and other information can be
inspected and copied at the public reference facilities of the Commission, Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Midwest Regional Office, Suite 1400, Citicorp Center, 500 West
Madison Street, Chicago, Illinois 60661-2511. Copies of such materials can be
obtained from the Public Reference Branch, Office of Consumer Affairs and
Information Services of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. The common shares of the Trusts are listed on
the New York Stock Exchange, and such reports, proxy statements and other
information concerning the Trusts can also
39
<PAGE>
be inspected at the offices of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005, and at the Chicago Stock Exchange, One Financial Plaza,
440 S. LaSalle Street, Chicago, Illinois 60605.
Adjustable Rate Fund has filed with the Commission a registration statement
on Form N-14 (referred to herein, together with all amendments and exhibits, as
the "Registration Statement") under the Securities Act of 1933, as amended,
relating to Adjustable Rate Fund shares to be issued pursuant to the Merger.
This Joint Proxy Statement/Prospectus and the related Statement of Additional
Information do not contain all of the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information with respect to
Adjustable Rate Fund shares to be issued pursuant to the Merger, reference is
hereby made to the Registration Statement. Statements contained in the Joint
Proxy Statement/Prospectus and the related Statement of Additional Information
as to the content of any contract or any other document referred to are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document included as an Appendix hereto or filed as an exhibit
to the Registration Statement.
Based on Trust records and other information, the Trusts believe that all
SEC filing requirements applicable to their Directors, officers, Adviser and
companies affiliated with the Adviser, pursuant to Section 16(a) of the
Securities Exchange Act of 1934, as amended, with respect to the Trusts' fiscal
year ending August 31, 1994, were satisfied.
The information in this Joint Proxy Statement/Prospectus concerning
Adjustable Rate Fund has been furnished by Adjustable Rate Fund, and the
information concerning each of the Trusts has been furnished by such Trust. This
Joint Proxy Statement/Prospectus constitutes a prospectus of Adjust-able Rate
Fund with respect to Adjustable Rate Fund shares issued pursuant to the Merger.
OTHER MATTERS
At the time of the preparation of this Joint Proxy Statement/Prospectus,
management has not been informed of any matters that will be presented for
action at the Meeting other than the proposals specifically set forth in the
Notice of Meeting. If other matters are properly presented to the Meeting for
action, it is intended that the persons named in the Proxy will vote or refrain
from voting in accordance with their best judgment on such matters.
By Order of the Board of Directors
David Evans Rosedahl
SECRETARY
June 14, 1995
40
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") is made as of this 6th
day of June, 1995, by and among 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") (BDJ, CDJ, DDJ and EDJ are sometimes referred to
herein collectively as the "Trusts" or individually as a "Trust"), and Piper
Funds Inc. -- II (hereinafter referred to as the "Company"), each of which is a
Minnesota corporation.
This Agreement is intended to be and is adopted as a plan of reorganization
pursuant to Section 368(a)(1) of the Internal Revenue Code of 1986, as amended
(the "Code").
WITNESSETH:
WHEREAS, the Company is an open-end management investment company registered
with the Securities and Exchange Commission (the "SEC") under the Investment
Company Act of 1940, as amended (the "1940 Act");
WHEREAS, the Company may offer its common shares in multiple series, each of
which represents a separate and distinct portfolio of assets and liabilities;
WHEREAS, certain of the authorized shares of the Company have been
designated as Series A common shares, which are the shares of Adjustable Rate
Mortgage Securities Fund ("Adjustable Rate Fund") (such shares sometimes are
hereinafter referred to as "Adjustable Rate Fund common shares");
WHEREAS, each of the Trusts is a registered, closed-end management
investment company registered with the SEC under the 1940 Act;
WHEREAS, the Boards of Directors of the Company and each of the Trusts have
determined that it is advisable and in the best interests of their respective
corporations and shareholders to merge into a single corporation by merging each
Trust into the Company, whereupon the common shares of each Trust shall be
converted into the Company's Adjustable Rate Fund common shares;
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
1. THE MERGER
1.1 Subject to the terms and conditions herein set forth and on the basis
of the representations and warranties contained herein, the Company and each
Trust agrees that each Trust shall be merged with and into the Company
(hereinafter, the "Merger") as of the effective time provided for in Section
3.01 (the "Effective Time"). The Merger shall be conducted in accordance with
Minnesota Statutes Section 302A.601, Subd. 1. The Company shall be the surviving
corporation and shall be governed by the laws of the State of Minnesota. The
terms and conditions of the Merger and the mode of carrying the same into effect
are as herein set forth in this Agreement.
1.2 The Articles of Incorporation of the Company, as in effect at the
Effective Time, shall continue to be the articles of incorporation of the
surviving corporation until amended in accordance with the provisions thereof
and applicable law.
1.3 The Bylaws of the Company, as in effect at the Effective Time, shall
continue to be the Bylaws of the surviving corporation until amended in
accordance with the provisions thereof and applicable law.
1.4 The directors of the Company shall continue in office for their current
terms and until their successors are elected and qualified, or until their
death, resignation or removal.
A-1
<PAGE>
1.5 The officers of the Company shall remain the officers of the Company at
the Effective Time and shall serve at the pleasure of the Board of Directors of
the Company.
1.6 The Investment Advisory Agreement, Rule 12b-1 Plan and Distribution
Agreement of the Company relating to Adjustable Rate Fund, as in effect at the
Effective Time, shall continue to be the Investment Advisory Agreement, Rule
12b-1 Plan and Distribution Agreement of the surviving corporation until amended
in accordance with the provisions thereof.
1.7 KPMG Peat Marwick LLP shall continue as auditors to report upon the
financial condition of the surviving corporation.
2. VALUATION; ISSUANCE OF ADJUSTABLE RATE FUND SHARES
2.1 At the Effective Time, each common share of a Trust issued and
outstanding shall be converted by reason of the Merger and without any action on
the part of the holders thereof into the Company's Adjustable Rate Fund common
shares. The manner and basis of converting the issued and outstanding common
shares of each Trust into Adjustable Rate Fund common shares shall be as
follows:
(a) Immediately prior to the Effective Time, each Trust will make a
distribution to its shareholders, in cash, of all its net income and net
realized capital gains for the current taxable year that have not previously
been distributed.
(b) At the Effective Time, common shares of each Trust will be converted
into Adjustable Rate Fund common shares having the same aggregate net asset
value, determined as of the Effective Time.
(c) Net asset value per common share of a Trust as of the Effective Time
will be determined by adding the market value of all securities in such
Trust's portfolio and other assets, subtracting liabilities incurred or
accrued, and dividing by the total number of common shares then outstanding.
Such calculation shall be made using the valuation procedures set forth in
the Joint Proxy Statement/ Prospectus of the Trusts and the Company (the
"Joint Proxy Statement/Prospectus") under the caption "Proposal No. 1 --
Valuation of Shares."
2.2 As soon as practicable after the Effective Time, Investors Fiduciary
Trust Company ("IFTC"), the transfer agent for the Trusts and the Company, will
send a notice and transmittal form to each record holder of a Trust's common
shares at the Effective Time advising such holder of the effectiveness of the
Merger and of the procedure for surrendering to IFTC his or her certificates
formerly evidencing common shares of such Trust. Ownership of Adjustable Rate
Fund shares by former shareholders of a Trust will be recorded in book-entry
form, and Adjustable Rate Fund will issue confirmations to such shareholders
setting forth the number and net asset value of Adjustable Rate Fund common
shares held by such shareholders. Fractional shares of Adjustable Rate Fund will
be carried to the third decimal place. Adjustable Rate Fund will not issue share
certificates. Any stock certificates not submitted to IFTC within three months
of the Effective Time will be automatically deemed submitted and then canceled
and recorded in book-entry form.
2.3 Each of the Adjustable Rate Fund common shares issued and outstanding
at the Effective Time shall remain issued and outstanding and unaltered by the
terms of this Agreement.
3. EFFECTIVE TIME OF THE MERGER
3.1 After the adoption of this Agreement by the vote of the requisite
number of holders of shares of one or more of the Trusts, the Merger shall
become effective at the close of business on the date the Articles of Merger are
filed with the Secretary of State of Minnesota (the "Effective Time").
3.2 At the Effective Time, the separate existence of each Trust shall
cease, each Trust shall be merged with and into the Company as the surviving
corporation, all of the property, assets, rights, privileges, powers, franchises
and immunities of each Trust and the Company shall vest in the surviving
corporation, and all of the debts, liabilities, duties and obligations of each
Trust and the Company shall become the debts, liabilities, and obligations of
the surviving corporation.
A-2
<PAGE>
4. REPRESENTATIONS, WARRANTIES AND COVENANTS
4.1 Each Trust represents, warrants and covenants to the Company, as to
itself, as follows:
(a) Such Trust is duly organized, validly existing and in good standing
under the laws of the State of Minnesota and is qualified as a foreign
corporation in each state in which it does business except where failure to
do so would not materially and adversely affect its financial condition or
the conduct of its business.
(b) Such Trust has full power and authority to carry on its business as
it is presently being conducted and to enter into this Agreement and the
Merger contemplated hereby.
(c) Such Trust is a closed-end diversified management investment company
registered under the 1940 Act, and such registration is in full force and
effect.
(d) Such Trust is not in violation, and the execution, delivery and
performance of this Agreement will not result in a violation, of its
Articles of Incorporation, as amended, or Bylaws, as amended, or of any
material agreement, indenture, instrument, contract, lease or other
undertaking to which such Trust is a party or by which it is bound.
(e) Other than as set forth in the Joint Proxy Statement/Prospectus
under "Proposal No. 1 -- Pending Litigation," no material litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or, to such Trust's knowledge,
threatened against such Trust or any of its properties or assets. Such Trust
is not a party to or subject to the provisions of any order, injunction,
decree or judgment of any court or governmental body which materially and
adversely affects its business or its ability to consummate the transactions
herein contemplated.
(f) The audited financial statements of such Trust at August 31, 1994
and for the period then ended and the unaudited financial statements of such
Trust at February 28, 1995 and for the period then ended have been prepared
in accordance with generally accepted accounting principles consistently
applied, and present fairly, in all material respects, the financial
position of such Trust as of such respective dates thereof, and there are no
known material liabilities (contingent or otherwise) of the Trust as of such
respective dates not disclosed therein.
(g) Such Trust has filed, or has obtained extensions to file, with
immaterial exceptions, all federal, state and local tax returns which are
required to be filed by it, and has paid or has obtained extensions to pay,
all federal, state and local taxes shown or to be shown on such returns to
be due and all assessments received by it. All of its tax liabilities, to
the extent material, have been adequately provided for on its books, and, to
its best knowledge, no tax deficiency or liability has been asserted against
it and no question with respect thereto has been raised by the Internal
Revenue Service or by any state or local tax authority for taxes in excess
of those already paid.
(h) For each taxable year of its operation, such Trust has met the
requirements of Subchapter M of the Code for qualification and treatment as
a regulated investment company, and the Trust intends to meet the
requirements of Subchapter M of the Code for qualification and treatment as
a regulated investment company for its final, partial taxable year.
(i) The authorized capital of such Trust consists of 1,000,000,000
common shares, par value $.01 per share. All issued and outstanding shares
of such Trust are, and at the Effective Time will be, duly and validly
issued and outstanding, fully paid and non-assessable. All of the issued and
outstanding shares of such Trust will, at the Effective Time, be held by the
persons and in the amounts set forth in the records of the Trust. Such Trust
does not have outstanding any options, warrants or other rights to subscribe
for or purchase any of such Trust's shares, and there is not outstanding any
security convertible into any of the Trust's shares.
(j) The execution, delivery and performance of this Agreement will have
been duly authorized prior to the Effective Time by all necessary action on
the part of such Trust's Board of
A-3
<PAGE>
Directors, and, subject to the approval of the Trust's shareholders, this
Agreement will constitute a valid and binding obligation of the Trust,
enforceable in accordance with its terms, subject, as to enforcement, to
bankruptcy, insolvency, merger, moratorium, fraudulent conveyance and other
laws relating to or affecting creditors' rights and to the application of
equitable principles in any proceeding, whether at law or in equity.
(k) All information pertaining to such Trust and included in the
Registration Statement referred to in Section 5.5 (or supplied by such Trust
for inclusion in said Registration Statement), on the effective date of said
Registration Statement and up to and including the Effective Time, will not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which such statements are made,
not misleading (other than as may timely be remedied by further appropriate
disclosure).
(l) Immediately prior to the Effective Time, such Trust will have good,
marketable and unencumbered title to its cash, securities and other assets.
(m) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by such Trust of the
transactions contemplated by the Agreement, except such as may be required
under the Securities Act of 1933, as amended (the "1933 Act"), the
Securities Exchange Act of 1934, as amended (the "1934 Act"), the 1940 Act,
the rules and regulations thereunder, or state securities laws.
4.2 The Company represents, warrants and covenants to each Trust as
follows:
(a) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Minnesota.
(b) The Company has full power and authority to enter into this
Agreement and the Merger contemplated hereby.
(c) The Company is an open-end management investment company, and its
registration with the Commission as an investment company under the 1940
Act, and the registration of Adjustable Rate Fund common shares to be issued
in connection with the Merger under the 1933 Act, is or will be, at or
before the Effective Time, in full force and effect.
(d) At or before the Effective Time, Adjustable Rate Fund common shares
to be issued in connection with the Merger will be registered in all
jurisdictions in which they will be required to be registered under the
state securities laws and any other laws, and said registrations, including
any periodic reports or supplemental filings, will be complete and current,
and all fees required to be paid will have been paid, and the Company will
be in good standing, will not be subject to any stop orders, and will be
fully qualified to sell its common shares issued in connection with the
Merger in any state in which its shares will have been registered.
(e) The Company is not in violation, and the execution, delivery and
performance of this Agreement will not result in a violation, of any
provision of its Articles of Incorporation or Bylaws or of any material
agreement, indenture, instrument, contract, lease or other undertaking to
which the Company is a party or by which it is bound.
(f) No material litigation or administrative proceeding or investigation
of or before any court or governmental body is presently pending or, to the
Company's knowledge, threatened against the Company or any of its properties
or assets. The Company is not a party to or subject to the provisions of any
order, injunction, decree or judgment of any court or governmental body
which materially and adversely affects its business or its ability to
consummate the transactions herein contemplated.
(g) Adjustable Rate Fund intends to meet the requirements of Subchapter
M of the Code for qualification and treatment as a regulated investment
company in the current and future years.
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(h) At the Effective Time, the Adjustable Rate Fund common shares to be
issued in connection with the Merger will have been duly authorized and,
when so issued, will be duly and validly issued, fully paid and
non-assessable.
(i) The authorized capital of the Company consists of 100,000,000,000
common shares, par value $.01 per share, of which 10,000,000,000 shares have
been designated as Series A common shares. There are no issued and
outstanding shares of the Company, the Company does not have outstanding any
options, warrants or other rights to subscribe for or purchase any of the
Company's common shares, and there is not outstanding any security
convertible into any of the Company's common shares.
(j) At the Effective Time, the Company will have good and marketable
title to its cash, securities and other assets, if any.
(k) The execution, delivery and performance of this Agreement will have
been duly authorized prior to the Effective Time by all necessary action, if
any, on the part of the Board of Directors of the Company, as issuer of the
Adjustable Rate Fund common shares, and its shareholders and this Agreement
will constitute a valid and binding obligation of the Company enforceable in
accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, merger, moratorium, fraudulent conveyance and other laws
relating to or affecting creditors' rights and to the application of
equitable principles in any proceeding, whether at law or in equity.
(l) The Registration Statement referred to in Section 5.5, on its
effective date and up to and including the Effective Time, will (i) conform
in all material respects to the applicable requirements of the 1933 Act, the
1934 Act, and the 1940 Act and the rules and regulations of the Commission
thereunder, and (ii) not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which such
statements were made, not misleading (other than as may timely be remedied
by further appropriate disclosure); provided, however, that the
representations and warranties in clause (ii) of this paragraph shall not
apply to statements in (or omissions from) the Registration Statement made
in reliance upon and in conformity with information furnished by the
respective Trust for use therein.
5. FURTHER COVENANTS OF THE COMPANY AND THE TRUSTS
5.1 Each Trust will operate its business in the ordinary course between the
date hereof and the Effective Time, it being understood that such ordinary
course of business will include the declaration and payment of customary
dividends and distributions, and any other distributions that may be advisable
(which may include distributions prior to the Effective Time of net income
and/or net realized capital gains not previously distributed).
5.2 Each Trust will call a meeting of its shareholders to consider and act
upon this Agreement and to take all other action necessary to obtain approval of
the transactions contemplated herein.
5.3 Each Trust will assist the Company in obtaining such information as the
Company reasonably requests concerning the beneficial ownership of the Trust's
common shares.
5.4 Subject to the provisions of this Agreement, the Company and each Trust
will take, or cause to be taken, all actions, and do or cause to be done, all
things reasonably necessary, proper or advisable to consummate and make
effective the transactions contemplated by this Agreement.
5.5 Each Trust will provide the Company with information reasonably
necessary with respect to such Trust for the preparation of the Registration
Statement on Form N-14 of the Company (the "Registration Statement"), in
compliance with the 1933 Act, the 1934 Act and the 1940 Act.
5.6 The Company agrees to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the 1934 Act, the 1940
Act and such of the state blue sky or securities laws as may be necessary in
order to conduct its operations after the Effective Time.
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6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUSTS
The obligation of each Trust to consummate the transactions provided for
herein shall be subject, at its election, to the performance by the Company of
all the obligations to be performed by it hereunder at or before the Effective
Time, and, in addition thereto, the following further conditions (any of which
may be waived by a Trust, in its sole and absolute discretion):
6.1 All representations and warranties of the Company contained in this
Agreement shall be true and correct as of the date hereof and, except as they
may be affected by the transactions contemplated by this Agreement, as of the
Effective Time with the same force and effect as if made at such time.
6.2 The Company shall have delivered to the Trusts a certificate executed
in its name by its President or Vice President and its Treasurer or Assistant
Treasurer, in a form reasonably satisfactory to each Trust and dated as of the
date of the Closing, to the effect that the representations and warranties of
the Company made in this Agreement are true and correct at the Effective Time,
except as they may be affected by the transactions contemplated by this
Agreement and as to such other matters as the Trust shall reasonably request.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY
The obligations of the Company to complete the transactions provided for
herein with respect to a particular Trust shall be subject, at its election, to
the performance by the applicable Trust of all of the obligations to be
performed by it hereunder at or before the Effective Time and, in addition
thereto, the following conditions (any of which may be waived by the Company as
to a particular Trust, in its sole and absolute discretion):
7.1 All representations and warranties of each Trust contained in this
Agreement shall be true and correct as of the date hereof and, except as they
may be affected by the transactions contemplated by this Agreement, as of the
Effective Time with the same force and effect as if made at such time;
7.2 Each Trust shall have delivered to the Company a certificate executed
in its name by its President or Vice President and its Treasurer or Assistant
Treasurer, in form and substance satisfactory to the Company and dated as of the
date of the Closing, to the effect that the representations and warranties such
Trust made in this Agreement are true and correct at and as of the Effective
Time, except as they may be affected by the transactions contemplated by this
Agreement, and as to such other matters as the Company shall reasonably request.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE TRUSTS
The following shall constitute further conditions precedent to the
consummation of the Merger between the Company and any particular Trust;
provided, however, that any of the following conditions may be waived by the
Company and any Trust except for the conditions set forth in Sections 8.1 and
8.4:
8.1 The Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of the holders of the outstanding shares of the
Trust in accordance with the provisions of its Articles of Incorporation and
Bylaws and applicable law, and certified copies of the resolutions evidencing
such approval shall have been delivered to the Company. Notwithstanding the
foregoing, in the event that the shareholder approval required by this paragraph
8.1 is not obtained with respect to any Trust (a "Non-Approving Trust") but is
obtained with respect to one or more of the other Trusts (an "Approving Trust"),
the conditions set forth in this paragraph 8.1 shall be satisfied as to the
Approving Trust or Trusts and (assuming satisfaction of the other conditions
herein) the Approving Trust or Trusts shall consummate the transactions
contemplated hereby as if the Non-Approving Trust or Trusts were not "Trusts"
hereunder.
8.2 The Company's investment adviser shall have paid or agreed to pay the
costs incurred by the Company and each Trust in connection with the Merger,
including the fees and expenses associated
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with the preparation and filing of the Registration Statement referred to in
Section 5.5 above, and the expenses of printing and mailing the Joint Proxy
Statement/Prospectus, soliciting proxies and holding the shareholders meeting
required to approve the transactions contemplated by this Agreement.
8.3 As of the Effective Time, no action, suit, injunction or other
proceeding shall be threatened or pending before any court or governmental
agency in which it is sought to restrain or prohibit, or obtain damages or other
relief in connection with, this Agreement or the transactions contemplated
herein.
8.4 Adjustable Rate Fund shall have received from Piper Jaffray Companies
Inc. and Piper Capital Management Incorporated an indemnification agreement
substantially in the form set forth as Appendix E to the Joint Proxy
Statement/Prospectus.
8.5 All consents of other parties and all other consents, orders and
permits of federal, state and local regulatory authorities deemed necessary by
the Company or the Trusts to permit consummation, in all material respects, of
the transactions contemplated hereby shall have been obtained, except where
failure to obtain any such consent, order or permit would not involve a risk of
a material adverse effect on the assets or properties of the Company or the
Trusts, provided that any party hereto may for itself waive any of such
conditions;
8.6 The Registration Statement shall have become effective under the 1933
Act, and no stop orders suspending the effectiveness thereof shall have been
issued and, to the best knowledge of the parties hereto, no investigation or
proceeding for that purpose shall have been instituted or be pending, threatened
or contemplated under the 1933 Act; and
8.7 The parties shall have received the opinion of Dorsey & Whitney
P.L.L.P. addressed to each Trust, based in part on certain representations to be
furnished by the Trusts, the Company, and their investment adviser,
substantially to the effect that:
(a) The Merger will qualify as a "reorganization" under Section 368(a)
of the Code, and each of the Trusts will qualify as a party to the
reorganization under Section 368(b) of the Code;
(b) Trust shareholders will recognize no income, gain or loss upon the
exchange of Trust common shares for Adjustable Rate Fund common shares in
the Merger. Trust shareholders subject to taxation will recognize income
upon receipt of any net investment income or net capital gains of a Trust
distributed by the Trust prior to the Effective Time;
(c) The basis of Adjustable Rate Fund common shares received by each
shareholder of a Trust pursuant to the Merger will be the same as the basis
of the common shares of such Trust surrendered in exchange therefor;
(d) The holding period of Adjustable Rate Fund common shares received by
each shareholder of a Trust pursuant to the Merger will include the period
during which the shareholder held the common shares of such Trust
surrendered in exchange therefor, provided that such common shares were held
as a capital asset at the Effective Time;
(e) Each Trust will recognize no income, gain or loss by reason of the
Merger;
(f) The tax basis of the assets received by Adjustable Rate Fund
pursuant to the Merger will be the same as the basis of those assets in the
hands of the Trust as of the Effective Time;
(g) The holding period of the assets received by Adjustable Rate Fund
pursuant to the Merger will include the period during which such assets were
held by the Trust that previously held the assets; and
(h) Adjustable Rate Fund will succeed to and take into account the
earnings and profits, or deficit in earnings and profits, of each Trust as
of the Effective Time.
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9. FURTHER ASSURANCES
From time to time on and after the Effective Date, each party hereto agrees
that it will execute and deliver or cause to be executed and delivered all such
further assignments, assurances or other instruments, and shall take or cause to
be taken all such further actions, as may be necessary or desirable to complete
the Merger and the other transactions contemplated by this Agreement.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Company and each Trust agree that neither the Company nor such
Trust has made any representation, warranty or covenant not set forth herein and
that this Agreement constitutes the entire agreement between the parties.
10.2 The representations and warranties contained in this Agreement or in
any document delivered pursuant hereto or in connection herewith shall survive
the consummation of the transactions contemplated hereunder.
11. TERMINATION
This Agreement and the transactions contemplated hereby may be terminated
and abandoned by any party by resolution of the party's Board of Directors, at
any time prior to the Effective Time, if circumstances should develop that, in
the good faith opinion of such Board, make proceeding with the Agreement not in
the best interest of the applicable party's shareholders. In the event that a
particular Trust terminates this Agreement, the Agreement will remain in effect
as to the Company and the other Trusts.
12. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as
may be mutually agreed upon in writing by the authorized officers of any of the
Trusts and the Company; provided, however, that following the meeting of a
particular Trust's shareholders called by such Trust pursuant to Section 5.2 of
this Agreement, no such amendment may have the effect of changing the provisions
for determining the number of Adjustable Rate Fund common shares to be issued to
such Trust's shareholders under this Agreement to the detriment of such
shareholders without their further approval.
13. NOTICES
Any notice, report, statement or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be deemed duly given
if delivered or mailed by registered mail, postage prepaid, addressed to the
Company or the Trusts, Piper Jaffray Tower, 222 South Ninth Street, Minneapolis,
Minnesota 55402, Attention: President (with copies to Dorsey & Whitney P.L.L.P.,
220 South Sixth Street, Minneapolis, Minnesota 55402, Attention: Kathleen L.
Prudhomme, and Gordon, Altman, Butowsky, Weitzen, Shalov & Wein, 114 West 47th
Street, New York, New York, 10036, Attention: Stuart Strauss).
14. HEADINGS; COUNTERPARTS; ASSIGNMENT; LIMITATION OF LIABILITY; MISCELLANEOUS
14.1 The Article and Section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.2 This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original and all of which together shall constitute one
and the same agreement.
14.3 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the prior written consent of the other party. Nothing herein
expressed or implied is intended or shall be construed to confer upon or give
any person, firm or corporation, other than the parties hereto and their
respective successors and assigns, any rights or remedies under or by reason of
this Agreement.
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14.4 The validity, interpretation and effect of this Agreement shall be
governed exclusively by the laws of the State of Minnesota, without giving
effect to the principles of conflict of laws thereof.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed by its President or Vice President.
AMERICAN ADJUSTABLE RATE TERM TRUST
INC. -- 1996
By: /s/ William H. Ellis
-----------------------------------
PRESIDENT
AMERICAN ADJUSTABLE RATE TERM TRUST
INC. -- 1997
By: /s/ William H. Ellis
-----------------------------------
PRESIDENT
AMERICAN ADJUSTABLE RATE TERM TRUST
INC. -- 1998
By: /s/ William H. Ellis
-----------------------------------
PRESIDENT
AMERICAN ADJUSTABLE RATE TERM TRUST
INC. -- 1999
By: /s/ William H. Ellis
-----------------------------------
PRESIDENT
PIPER FUNDS INC. -- II
By: /s/ Paul A. Dow
-----------------------------------
PRESIDENT
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APPENDIX B
INVESTMENTS, INVESTMENT TECHNIQUES AND RISKS
The types of securities in which the Trusts and Adjustable Rate Fund may
invest and the investment techniques they may employ are described briefly in
the Joint Proxy Statement/Prospectus under "Proposal No. 1 -- Comparison of
Investment Objectives and Policies of Adjustable Rate Fund and the Trusts." A
more detailed description of these securities and investment techniques,
including the risks thereof, is set forth below.
ADJUSTABLE RATE MORTGAGE SECURITIES
Under normal market conditions, each Trust and Adjustable Rate Fund must
invest at least 65% of their 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 Trusts and Adjustable Rate
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 "Types of Credit Support" below.
CMOS AND MULTICLASS PASS-THROUGH SECURITIES. ARMS in which the Trusts and
Adjustable Rate Fund may invest also include collateralized mortgage obligations
and multiclass pass-through securities, which are derivative mortgage
securities. Collateralized mortgage obligations are debt instruments issued by
special purpose entities which are secured by pools of mortgage loans or other
Mortgage-
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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.
Adjustable Rate Fund may not invest in inverse floating, interest-only,
principal-only or Z tranches of CMOs. See "Other Eligible Investments --
Mortgage-Backed Securities" below.
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 Trusts and
Adjustable Rate 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.
TYPES OF CREDIT SUPPORT. To lessen the effect of failures by mortgagors to
make payments on underlying mortgages, ARMS and other Mortgage-Backed Securities
may contain elements of credit support. Such credit support falls into two
categories: (a) liquidity protection and (b) protection against losses resulting
from ultimate default by an obligor on the underlying assets. Liquidity
protection refers to the provision of advances, generally by the entity
administering the pool of assets, to ensure that the pass-through of payments
due on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default enhances the likelihood of ultimate payment of
the obligations on at least a portion of the assets in the pool. Such protection
may be provided through guarantees, insurance policies or letters of credit
obtained by the issuer or sponsor from third parties, through various means of
structuring the transaction or through a combination of such approaches. The
Trusts and Adjustable Rate Fund do not pay any additional fees for such credit
support, although the existence of credit support may increase the price of a
security.
The ratings of securities for which third-party credit enhancement provides
liquidity protection or protection against losses from default are generally
dependent upon the continued creditworthiness of the enhancement provider. The
ratings of such securities could be downgraded in the event of deterioration in
the creditworthiness of the credit enhancement provider even in cases where the
delinquency and loss experience on the underlying pool of assets is better than
expected.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of "reserve
funds" (where cash or investments, sometimes funded from a portion of the
payments on the underlying assets, are held in reserve against future losses)
and "over-collateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceed those required to make payment on the
securities and pay any servicing or other fees). The degree of credit support
provided for each issue is generally based on historical information with
respect to the level of credit risk
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associated with the underlying assets. Other information which may be considered
includes demographic factors, loan underwriting practices and general market and
economic conditions. Delinquency or loss in excess of that which is anticipated
(and in excess of the degree of credit support provided) will adversely affect
the return on an investment in such a security by decreasing the yield and value
of such security.
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. For both the Trusts and Adjustable Rate Fund, 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
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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 assets of each Trust and Adjustable Rate Fund (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, each Trust and Adjustable Rate 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
Trusts may invest in any type of Mortgage-Backed Security, including traditional
fixed rate Mortgage-Backed Securities and more recently developed instruments
such as Stripped Mortgage-Backed Securities and CMOs. Adjustable Rate Fund will
not invest in inverse floating, interest-only, principal-only or Z tranches of
CMOs, or in Stripped Mortgage-Backed Securities. The Trusts may also invest in
Mortgage-Backed Securities backed by fixed rate mortgages and, in conjunction
therewith, pursuant to an interest rate swap, exchange its right to receive
payments at fixed rates of interest for floating rate payments. The intended net
effect of the transaction would be the creation of a security with the economic
characteristics of an adjustable rate mortgage security. Such "synthetic ARMS"
are not considered as ARMS for purposes of the requirement that at least 65% of
total assets be invested in ARMS.
- CMOS. As discussed above, investments in ARMS include floating rate CMOs.
The Trusts' investments in Mortgage-Backed Securities other than ARMS may
include any other tranche of a CMO, other than residual interests of CMOs.
Adjustable Rate Fund may also invest in other tranches of CMOs, provided that it
may not invest in inverse floating, interest-only, principal-only or Z tranches
of CMOs or in residual interests of CMOs.
The principal and interest on the mortgages underlying a CMO may be
allocated among the CMO's several tranches in many ways. For example, certain
tranches may have variable or floating interest rates, and others may provide
only the principal or interest feature of the underlying security (interest-only
("IO") or principal-only ("PO") tranches). 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, which may include inverse floaters, IOs, POs and Z tranches,
discussed below, market prices and yields generally may be more volatile than
for other CMO tranches. Adjustable Rate Fund may not invest in inverse floaters,
IOs, POs or Z tranches.
An inverse floater is a CMO tranche with a coupon rate that moves inversely
to a designated index, such as LIBOR or COFI (Cost of Funds Index). Like most
other fixed-income securities, the value of inverse floaters will decrease as
interest rates increase and increase as interest rates decrease. Inverse
floaters, however, may exhibit greater price volatility with changes in interest
rates than the majority of mortgage pass-through securities or CMOs. Coupon
rates on inverse floaters typically change at a multiple of the change in the
relevant index rate. Thus, any rise in the index rate (as a consequence of an
increase in interest rates) causes a correspondingly greater drop in the coupon
rate of an inverse floater, while any drop in the index rate causes a
correspondingly greater increase in the coupon of an inverse floater. Some
inverse floaters also exhibit extreme sensitivity to changes in prepayments.
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Z tranches of CMOs defer interest and principal payments until one or more
other classes of the CMO have been paid in full. Interest accretes on the Z
tranche, being added to principal, and is compounded through the accretion
period. After the other classes have been paid in full, interest payments begin
and continue through maturity. Z tranches have characteristics similar to zero
coupon bonds. See "Zero Coupon Securities" below. Like a zero coupon bond,
during its accretion period a Z tranche has the advantage of eliminating the
risk of reinvesting interest payments at lower rates during a period of
declining market interest rates. At the same time, however, and also like a zero
coupon bond, the market value of a Z tranche can be expected to fluctuate more
widely with changes in market interest rates than would the market value of a
tranche which pays interest currently. In addition, changes in prepayment rates
on the underlying mortgage loans will affect the accretion period of a Z tranche
and, therefore, also are likely to influence its market value.
- STRIPPED MORTGAGE-BACKED SECURITIES. The Trusts' investments in
Mortgage-Backed Securities other than ARMS may include Stripped Mortgage-Backed
Securities ("SMBS"), which are derivative multi-class mortgage securities.
Adjustable Rate Fund may not invest in SMBS. SMBS may be issued by agencies or
instrumentalities of the U.S. Government or by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
bankers, commercial banks, investment banks and special purpose subsidiaries of
the foregoing.
There are generally two types of classes of SMBS, one of which (the interest
only or "IO" class) entitles the holders thereof to receive distributions
consisting solely or primarily of all or a portion of the interest on the
underlying pool of mortgage loans or Mortgage-Backed Securities ("Mortgage
Assets") and the other of which (the principal only or "PO" class) entitles the
holders thereof to receive distributions consisting solely or primarily of all
or a portion of the principal of the underlying pool of Mortgage Assets. IOs and
POs issued by the U.S. Government or its agencies and instrumentalities may be
determined to be liquid pursuant to procedures adopted by the Board of
Directors. Otherwise, each Trust will treat IOs and POs as liquid and subject to
its restriction on investments in illiquid securities. See "Special Investment
Methods -- Illiquid Securities" below.
The cash flows and yields on IO and PO classes are extremely sensitive to
the rate of principal payments (including prepayments) on the related underlying
Mortgage Assets. For example, a rapid or slow rate of principal payments will
have a material adverse effect on the yield to maturity of IOs or POs,
respectively. If the underlying Mortgage Assets experience greater than
anticipated prepayments of principal, an investor in an IO class may incur
substantial losses, even if the IO class is rated AAA. Conversely, if the
underlying Mortgage Assets experience slower than anticipated prepayments of
principal, the yield on a PO class will be affected more severely than would be
the case with a traditional Mortgage-Backed Security.
Under the Internal Revenue Code, each Trust will be required to accrue a
portion of the original issue discount on a PO as income during each year even
though such Trust receives no cash distribution on the security during the year.
- RISKS OF MORTGAGE-BACKED SECURITIES. Mortgage-Backed Securities (other
than ARMS) are subject generally to the same risks as ARMS; however, such other
Mortgage-Backed Securities can be expected to be affected to a greater extent
than ARMS by fluctuating interest rates and prepayments and to have different
yield characteristics, due to the fact that fixed rate rather than adjustable
rate mortgages underlie such securities. Generally, prepayments on fixed rate
mortgages will increase during a period of falling interest rates and decrease
during a period of rising interest rates. Accordingly, amounts available for
reinvestment are likely to be greater during a period of declining interest
rates than during a period of rising interest rates, and the yield on the
securities in which such amounts are reinvested is likely to be lower than the
yield on the securities that were prepaid or the yield that could be achieved if
such amounts were reinvested during a period of rising interest rates. If
Adjustable Rate Fund or a Trust purchases Mortgage-Backed Securities at a
premium, a prepayment rate that is faster than expected will reduce both the
market value and the yield to maturity from that which was anticipated, while a
prepayment rate that is slower than expected will have the opposite effect of
increasing yield to maturity and market value. Conversely, if Adjustable Rate
Fund or a Trust
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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.
Investments in derivative Mortgage-Backed Securities such as certain classes
of CMOs and Stripped Mortgage-Backed Securities, as discussed above, may involve
risks in addition to those found in other Mortgage-Backed Securities. The market
experience of 1994 has shown that certain derivative mortgage securities may be
highly sensitive to changes in interest and prepayment rates and, as a result,
the prices of such securities may be highly volatile. In addition, such market
experience has shown that during periods of rising interest rates, the market
for certain derivative mortgage securities may become more unstable and such
securities may become more difficult to sell as market makers either choose not
to repurchase such securities or offer prices, based on current market
conditions, which are unacceptable to Adjustable Rate Fund or a Trust. As
discussed above, Adjustable Rate Fund may not invest in inverse floating, IO, PO
or Z tranches of CMOs or Stripped Mortgage-Backed Securities.
ZERO COUPON SECURITIES. Each Trust may invest up to 35% of its total assets
in Zero Coupon Securities (but no more than 10% of its total assets in taxable
Zero Coupon Securities). Adjustable Rate Fund may invest up to 10% of its net
assets in U.S. Government Zero Coupon Securities. 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. Accordingly, the Trusts invested in such instruments to facilitate
their ability to return $10 per common share upon termination.
U.S. Government Zero Coupon Securities are issued by the U.S. Treasury
through its STRIPS program and constitute direct obligations of the U.S.
Government. Adjustable Rate Fund may invest up to 10% of its net assets in such
securities. Each Trust may also invest in such securities, subject to the
limitation that no more than 10% of a Trust's total assets may be invested in
taxable Zero Coupon Securities. Each Trust also may invest in receipts or
certificates issued by banks and brokerage firms which separate the principal
portions from the coupon portions of U.S. Treasury bonds and notes and sell them
separately, and in other Zero Coupon Securities issued by private issuers (again
subject to the limitation that no more than 10% of a Trust's total assets may be
invested in taxable Zero Coupon Securities).
The Trusts' investments in Zero Coupon Securities include municipal Zero
Coupon Securities issued by a variety of tax-exempt issuers such as state and
local governments and their agencies and instrumentalities. Because accreted
income on municipal Zero Coupon Securities is generally not taxable to holders,
municipal Zero Coupon Securities have lower yields than other Zero Coupon
Securities. The accreted income on such securities is not taxable to the Trust
holding such securities (except that a portion of the income on the security
will be taxable if the yield at which the security was acquired is greater than
the yield at original issuance); however, when distributed to shareholders, the
accreted income is taxed in the same manner as other distributions. Municipal
Zero Coupon Securities can be an appropriate investment for the Trusts because
any accreted income from municipal Zero Coupon Securities which is not
distributed will increase the net value of the Trusts' shares, in furtherance of
the investment objective of returning $10 per share upon termination. Adjustable
Rate Fund may not invest in municipal Zero Coupon Securities.
- 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
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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 Code. Because such income may not be matched by
a corresponding cash distribution to the Trust or Fund, the Trust or Fund may be
required to borrow money or dispose of other securities to be able to make
distributions to shareholders.
CORPORATE DEBT SECURITIES. Adjustable Rate Fund and each Trust may invest
in Corporate Debt Securities, which are debt obligations of U.S. corporations
(other than ARMS or Mortgage-Backed Securities). Each Trust's investments in
these securities is limited to 10% of its total assets. Adjustable Rate Fund has
no such limitation and thus may invest up to 35% of its total assets in
Corporate Debt 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.
Adjustable Rate Fund and each Trust 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.
U.S. GOVERNMENT SECURITIES. In addition to U.S. Government ARMS and other
U.S. Government Mortgage-Backed Securities, Adjustable Rate Fund and each Trust
may invest in other securities issued or guaranteed by the U.S. Government or
its agencies or instrumentalities. Such 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; and others, such as those issued by the
Student Loan Marketing Association, only by the credit of the agency or
instrumentality. 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.
ASSET-BACKED SECURITIES. Adjustable Rate Fund and each Trust 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. Each Trust's
investments in these securities is limited to 10% of its total assets.
Adjustable Rate Fund is subject to no such percentage limitation and thus may
invest up to 35% of its total assets in Asset-Backed Securities. However,
Adjustable Rate 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.
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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.
CANADIAN DEBT SECURITIES. Each Trust may invest up to 10% of its total
assets in Canadian Debt Securities. Adjustable Rate Fund may not invest in such
securities. Canadian Debt Securities are debt securities issued by Canadian
corporations or issued or guaranteed by the Canadian federal government,
Canadian provincial governments and political subdivisions, agencies or
instrumentalities thereof. Investing in Canadian Debt Securities involves
considerations and possible risks not typically associated with investing in
U.S. securities, including possible application of Canadian tax laws (including
possible future withholding taxes), potential difficulties in enforcing
contractual obligations, changes in governmental administrations or economic or
monetary policy (in this country or Canada) or changed circumstances in dealing
between the United States and Canada. Canadian brokerage commissions may be
higher than those in the United States, and Canadian securities markets may be
less liquid, more volatile and less subject to governmental supervision than
those in the United States. The value of an investment denominated in Canadian
dollars could be adversely affected by a decline in the value of the Canadian
dollar relative to the U.S. dollar.
FOREIGN INDEX LINKED INSTRUMENTS. Each Trust may invest up to 10% of its
total assets in fixed-income securities issued by U.S. issuers and denominated
in U.S. dollars but which return principal and/or pay interest to investors in
amounts which are linked to the level of a particular foreign index ("Foreign
Index Linked Instruments"). Adjustable Rate Fund may not invest in such
securities. Foreign Index Linked Instruments present certain risks not
applicable to other securities in which the Trusts invest. Foreign Index Linked
Instruments may offer higher yields than comparable securities linked to purely
domestic indices but also may be more volatile. Foreign Index Linked Instruments
are relatively recent innovations for which the market has not yet been fully
developed and, accordingly, they typically are less liquid than comparable
securities linked to purely domestic indices. In addition, the value of Foreign
Index Linked Instruments will be affected by fluctuations in foreign exchange
rates or in foreign interest rates, factors which do not typically bear on the
values of ARMS or most other securities in which the Trusts invest. If the
Adviser is incorrect in its prediction as to the movements in the direction of
particular foreign currencies or foreign interest rates, the return realized by
a Trust on a Foreign Index Linked Instrument may be lower than if the Trust had
invested in a similarly rated domestic security. The skills needed to predict
foreign currency and foreign interest rates are different from those needed to
select domestic portfolio securities. Foreign currency gains and losses with
respect to Foreign Index Linked Instruments may affect the amount and timing of
income recognized by a Trust.
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OTHER INVESTMENT TECHNIQUES
A detailed description of the investment techniques that may be used by
Adjustable Rate Fund and the Trusts, and the risks thereof, is set forth below.
For purposes of this section, Adjustable Rate Fund and the Trusts are sometimes
referred to individually as a "Fund."
HEDGING TRANSACTIONS. Both Adjustable Rate Fund and the Trusts may enter
into certain interest rate, options and futures transactions, as described below
and may make investments in Eurodollar instruments for hedging purposes. The
Trusts also may enter into foreign exchange transactions, currency forward and
futures contracts and foreign currency options in connection with their
investments in Canadian Debt Securities. Adjustable Rate Fund may not engage in
such transactions.
- INTEREST RATE TRANSACTIONS. To preserve a return or spread on a
particular investment or portion of its portfolio, to create synthetic
adjustable rate mortgage securities or for other non-speculative purposes,
Adjustable Rate Fund and each Trust may purchase or sell interest rate caps and
floors. In addition, each Trust may enter into interest rate swaps. Adjustable
Rate Fund may not enter into interest rate swaps. Neither Adjustable Rate Fund
nor any Trust intends to use interest rate transactions for speculative
purposes. Interest rate swaps involve the exchange by a Trust with another party
of their respective commitments to pay or receive interest, E.G., an exchange of
floating rate payments for fixed rate payments. The purchase of an interest rate
cap entitles the purchaser, to the extent a specified index exceeds a
predetermined interest rate, to receive payments of interest on a
contractually-based principal amount from the party selling such interest rate
cap. The purchase of an interest rate floor entitles the purchaser, to the
extent a specified index falls below a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount from the party
selling such interest rate floor.
Adjustable Rate Fund and each Trust may enter into interest rate caps and
floors, and each Trust may enter into interest rate swaps, on either an
asset-based or liability-based basis, depending on whether it is hedging its
assets or its liabilities, and the Trusts usually enter into interest rate swaps
on a net basis, I.E., the two payment streams are netted out, with the Trust
receiving or paying, as the case may be, only the net amount of the two
payments. The net amount of the excess, if any, of a Trust's obligations over
its entitlements with respect to each interest rate swap will be accrued on a
daily basis, and an amount of cash or high quality liquid securities having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the Trust's custodian. If a Trust enters
into an interest rate swap on other than a net basis, the Trust would maintain a
segregated account in the full amount accrued on a daily basis of the Trust's
obligations with respect to the swap. To the extent Adjustable Rate Fund or any
Trust 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 or Trust's obligations with respect to any caps or floors. The Trusts
will not enter into any interest rate 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, in the case of the Trusts, or at least A by Standard &
Poor's or Moody's or comparably rated by any other NRSRO, in the case of
Adjustable Rate Fund. 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 or Trust will have contractual remedies pursuant to
the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. The Adviser has determined that, as a result, the swap
market has become relatively liquid. Caps and floors are more recent innovations
for which standardized documentation has not yet been developed and,
accordingly, they are less liquid than swaps.
There is no limit on the amount of interest rate swap transactions that may
be entered into by any Trust. These transactions do not involve the delivery of
securities or other underlying assets or principal. Accordingly, the risk of
loss with respect to interest rate swaps is limited to the net amount
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of interest payments that a Trust is contractually obligated to make. If the
other party to an interest rate swap defaults, the Trust's risk of loss consists
of the net amount of interest payments that the Trust contractually is entitled
to receive. The aggregate purchase price of caps and floors held by either
Adjustable Rate Fund or any Trust may not exceed 5% of such Fund's or Trust's
total assets. Adjustable Rate Fund and the Trusts may sell (I.E., write) caps
and floors without limitation, subject to the segregated account requirement
described above.
- OPTIONS TRANSACTIONS. Adjustable Rate Fund and the Trusts may write
(I.E., sell) covered put and call options with respect to the securities in
which they may invest. A put option is sometimes referred to as a "standby
commitment," and a call is sometimes referred to as a "reverse standby
commitment." By writing a call option, a 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, a 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. The
Trusts and Adjustable Rate Fund may not write puts if, as a result, more than
50% of their 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. A Fund receives premiums from writing call or put
options, which it retains whether or not the options are exercised. By writing a
call option, a 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 Trusts may write call options that are not covered for cross-hedging
purposes. A call option written for cross-hedging purposes is designed to
provide a hedge against a decline in the value of another security that a Trust
owns or has the right to acquire. Options written for cross-hedging purposes
involve the risk of imperfect correlation between price changes in the security
on which the option is written and price changes in the security in the Trust's
portfolio. Adjustable Rate Fund does not write uncovered call options for
cross-hedging purposes.
Both Adjustable Rate Fund and the Trusts 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 a 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 a
Fund is limited to the premium paid for, and transaction costs paid in
connection with, the put plus the initial excess, if any, of the market price of
the underlying security over the exercise price. However, if the market price of
such security increases, the profit the Fund realizes on the sale of the
security will be reduced by the premium paid for the put option less any amount
for which the put is sold.
Both Adjustable Rate Fund and the Trusts also may purchase call options
solely for the purpose of hedging against an increase in prices of securities
that a 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, a 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.
Both Adjustable Rate Fund and the Trusts may purchase and write
exchange-traded put and call options and over-the-counter ("OTC") put and call
options in negotiated transactions with the writers of the options, since
options on many of the portfolio securities held by Adjustable Rate Fund and the
Trusts are not traded on an exchange. Adjustable Rate Fund and the Trusts will
purchase OTC options only from investment dealers and other financial
institutions (such as commercial banks or savings and loan associations) deemed
creditworthy by the Adviser.
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OTC options are two-party contracts with price and terms negotiated between
buyer and seller. In contrast, exchange-traded options are third-party contracts
with standardized strike prices and expiration dates, and are purchased from a
clearing corporation. Exchange-traded options have a continuous liquid market,
while OTC options may not. The staff of the Commission has taken the position
that purchased OTC options and the assets used to "cover" written OTC options
are illiquid securities, provided the entire amount of assets used to cover OTC
options written by a Fund will not be treated as illiquid in certain
circumstances, as set forth in the Statement of Additional Information. Both
Adjustable Rate Fund and the Trusts will treat OTC options, to the extent set
forth in the Statement of Additional Information, as subject to their respective
limitations on investments in illiquid securities. See "Illiquid Securities"
below.
For further information concerning the characteristics and risks of options
transactions, see "Investment Objectives, Policies and Restrictions -- Options"
in the Statement of Additional Information.
- FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. Both Adjustable Rate
Fund and the Trusts 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 Adjustable Rate Fund or the Trusts
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 Adjustable Rate Fund and the Trusts 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 a Fund is to
hedge against fluctuations in the value of the Fund's portfolio without actually
buying or selling securities. For example, if a 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. Adjustable Rate Fund and the Trusts will engage
in such transactions only for hedging purposes, on either an asset-based or a
liability-based basis, in each case in accordance with the rules and regulations
of the Commodity Futures Trading Commission. See Appendix B to the Statement of
Additional Information.
Adjustable Rate Fund and the Trusts 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. Adjustable Rate Fund and the
Trusts may use such options on futures contracts in connection with their
hedging strategies in lieu of purchasing and writing options directly on the
underlying securities or purchasing and selling the underlying futures
contracts.
There are risks in using futures contracts and options on futures contracts
as hedging devices. The primary risks associated with the use of futures
contracts and options thereon are (a) the prices of futures contracts and
options may not correlate perfectly with the market value of the underlying
security held by a Fund, and (b) the possible lack of a liquid secondary market
for a futures contract
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and the resulting inability to close a futures position prior to its maturity
date. The risk that a Fund will be unable to close out a futures position will
be minimized by entering into such transactions on a national exchange with an
active and liquid secondary market.
Additional information with respect to futures contracts and options on
futures contracts is set forth in Appendix B to the Statement of Additional
Information.
The effective use of futures contracts, options on futures contracts and the
other hedging techniques discussed above is dependent upon the Adviser's
judgment regarding interest rate movements and other economic factors. To the
extent this judgment is incorrect, a Fund will be in a worse position than if
such hedging techniques had not been used.
- EURODOLLAR INSTRUMENTS. Adjustable Rate Fund and the Trusts 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. Adjustable Rate Fund and the Trusts use 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.
FOREIGN CURRENCY TRANSACTIONS RELATING TO CANADIAN DEBT SECURITIES. As
noted above, each Trust may invest up to 10% of its assets in securities
denominated in Canadian dollars. The Trusts may engage in foreign currency
exchange transactions to protect them against uncertainty in the level of the
rate of exchange between the Canadian and U.S. dollars. The Trusts may engage in
such transactions in connection with the purchase and sale of portfolio
securities ("transaction hedging") and to protect the value of specific
portfolio positions ("position hedging"). Adjustable Rate Fund may not engage in
such transactions.
Each Trust may engage in "transaction hedging" to protect against a change
in the exchange rate between the date on which the Trust contracts to purchase
or sell the security and the settlement date, or to "lock in" the U.S. dollar
equivalent of a dividend or interest payment in Canadian dollars. For that
purpose, the Trusts may purchase or sell Canadian dollars on a spot (or cash)
basis at the prevailing spot rate in connection with the settlement of
transactions in portfolio securities denominated in Canadian dollars. If
conditions warrant, the Trusts may also enter into contracts to purchase or sell
Canadian dollars at a future date ("forward contracts") and may purchase and
sell Canadian dollars or futures contracts as a hedge against changes in
Canadian dollars or exchange rates between the trade and settlement dates on
particular transactions and not for speculation. A foreign currency forward
contract is a negotiated agreement to exchange currency at a future time at a
rate or rates that may be higher or lower than the spot rate. Foreign currency
futures contracts are standardized exchange-traded contracts and have margin
requirements. For transaction hedging purposes, the Trusts may also purchase
exchange-listed and over-the-counter call and put options on Canadian dollars or
futures contracts thereon. A put option on a futures contract gives a Trust the
right to assume a short position in the futures contract until expiration of the
option. A put option on currency gives a Trust the right to sell a currency at
an exercise price until the expiration of the option. A call option on a futures
contract gives a Trust the right to assume a long position in the futures
contract until the expiration of the option. A call option on currency gives a
Trust the right to purchase a currency at the exercise price until the
expiration of the option.
The Trusts may engage in "position hedging" to protect against a decline in
the value relative to the U.S. dollar in their securities denominated in
Canadian dollars (or an increase in the value of the Canadian dollar for
securities which a Trust intends to buy, when it holds cash reserves and short-
term investments). For position hedging purposes, the Trusts may purchase or
sell Canadian dollar futures contracts and forward contracts and may purchase
put or call options on Canadian dollars or on futures contracts thereon on
exchanges or over-the-counter markets. In connection with position hedging, the
Trusts may also purchase or sell Canadian dollars on a spot basis.
B-12
<PAGE>
The precise matching of the amounts of foreign currency exchange
transactions and the value of the portfolio securities involved generally will
not be possible since the future value of such securities in foreign currencies
will change as a consequence of market movements in the value of these
securities between the dates the currency exchange transactions are entered into
and the dates they mature.
It is impossible to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, it may be necessary for a Trust to purchase additional Canadian
dollars on the spot market (and bear the expenses of such purchase) if the
market value of the security or securities being hedged is less than the amount
of Canadian dollars the Trust is obligated to deliver and if a decision is made
to sell the security or securities and make delivery of the Canadian dollars.
Conversely, it may be necessary to sell on the spot market some of the Canadian
dollars received upon the sale of the portfolio security or securities if the
market value of such security or securities exceeds the amount of Canadian
dollars the Trust is obligated to deliver.
Hedging transactions involve costs and may result in losses. The Trusts may
write covered call options on Canadian dollars to offset some of such costs. The
Trusts may engage in over-the-counter transactions only when appropriate
exchange-traded transactions are unavailable and when, in the opinion of the
Adviser, the pricing mechanism and liquidity are satisfactory and the
participants are responsible parties likely to meet their contractual
obligations. A Trust's ability to engage in hedging and related option
transactions may be limited by tax considerations.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which a Trust owns or intends to purchase or
sell. They simply establish a rate of exchange which one can achieve at some
future point in time. Additionally, although these techniques tend to minimize
the risk of loss due to a decline in the value of the hedged currency, they tend
to limit any potential gain which might result from the increase in the value of
such currency.
A forward foreign currency exchange contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract as agreed by the parties, at a
price set at the time of the contract. In the case of a cancelable forward
contract, the holder has the unilateral right to cancel the contract at maturity
by paying a specified fee. The contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades. A foreign currency futures
contract is a standardized contract for the future delivery of a specified
amount of a foreign currency at a future date at a price set at the time of the
contract. Foreign currency futures contracts traded in the United States are
designated by and traded on exchanges regulated by the Commodity Futures Trading
Commission (the "CFTC"), such as the New York Mercantile Exchange. The Trusts
would enter into foreign currency futures contracts solely for hedging or other
appropriate risk management purposes as defined in CFTC regulations.
Forward foreign currency exchange contracts differ from foreign currency
futures contracts in certain respects. For example, the maturity date of a
forward contract may be any fixed number of days from the date of the contract
agreed upon by the parties, rather than a predetermined date in any given month.
Forward contracts may be in any amounts agreed upon by the parties rather than
predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required. A forward
contract generally requires no margin or other deposit.
At the maturity of a foreign or futures contract, a Trust may either accept
or make delivery of the currency specified in the contract, or at or prior to
maturity enter into a closing transaction involving the purchase or sale of an
offsetting contract. Closing transactions with respect to forward contracts are
effected with the currency trader who is a party to the original forward
contract. Closing transactions with respect to futures contracts are effected on
a commodities exchange; a clearing corporation associated with the exchange
assumes responsibility for closing out such contracts.
B-13
<PAGE>
Positions in foreign currency futures contracts may be closed out only on an
exchange or board of trade which provides a secondary market in such contracts.
Although the Trusts intend to purchase or sell foreign currency futures
contracts only on exchanges or boards of trade where there appears to be an
active secondary market, there is no assurance that a secondary market on an
exchange or board of trade will exist for any particular contract or at any
particular time. In such event, it may not be possible to close a futures
position and, in the event of adverse price movements, a Trust would continue to
be required to make daily cash payments of variation margin.
Options on foreign currencies operate similarly to options on securities and
are traded primarily in the over-the-counter market, although options on foreign
currencies have recently been listed on several exchanges. Options traded in the
over-the-counter market are illiquid, and it may not be possible for a Trust to
dispose of an option it has purchased or terminate its obligations under an
option it has written at a time when the Adviser believes it would be
advantageous to do so. Options on foreign currencies are affected by all of
those factors which influence foreign exchange rates and investments generally.
The value of a foreign currency option is dependent upon the value of the
foreign currency and the U.S. dollar and may have no relationship to the
investment merits of a foreign debt security. Because foreign currency
transactions occurring in the interbank market involve substantially larger
amounts than those that may be involved in the use of foreign currency options,
investors may be disadvantaged by having to deal in an odd lot market (generally
consisting of transactions of less than $1 million) for the underlying foreign
currencies at prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies, and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (less than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global, around-the-clock market. To
the extent the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the options markets.
Although foreign exchange dealers do not charge a fee for currency
conversion, they do realize a profit based on the difference (the "spread")
between prices at which they are buying and selling various currencies. Thus, a
dealer may offer to sell a foreign currency to a Trust at one rate, while
offering a lesser rate of exchange should the Trust desire to resell that
currency to the dealer.
WHEN-ISSUED SECURITIES. Adjustable Rate Fund and the Trusts 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. ARM Fund and the Trusts do not accrue
income with respect to when-issued or forward commitment securities prior to
their stated delivery date. Pending delivery of the securities, ARM Fund and
each Trust maintain in a segregated account cash or liquid high-grade debt
obligations in an amount sufficient to meet their purchase commitments.
Adjustable Rate Fund and the Trusts likewise segregate securities they sell on a
forward commitment basis.
The purchase of securities on a when-issued or forward commitment basis
exposes Adjustable Rate Fund and the Trusts 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.
ILLIQUID SECURITIES. Adjustable Rate Fund may invest up to 15% of its net
assets in illiquid securities. Each Trust may invest up to 10% of its total
assets in such securities, excluding certain
B-14
<PAGE>
hedging instruments, all of which must mature on or before March 31 in the year
of the Trust's termination. Illiquid securities may offer a higher yield than
securities which are more readily marketable, but they may not always be
marketable on advantageous terms.
The sale of illiquid securities often requires more time and results in
higher brokerage charges or dealer discounts than does the sale of securities
eligible for trading on national securities exchanges or in the over-the-counter
markets. A Fund may be restricted in its ability to sell such securities at a
time when the Adviser deems it advisable to do so. In addition, in order to meet
redemption requests, a Fund may have to sell other assets, rather than such
illiquid securities, at a time which is not advantageous.
"Restricted securities" are securities which were originally sold in private
placements and which have not been registered under the Securities Act of 1933
(the "1933 Act"). Such securities generally have been considered illiquid, since
they may be resold only subject to statutory restrictions and delays or if
registered under the 1933 Act. In 1990, however, the SEC adopted Rule 144A under
the 1933 Act, which provides a safe harbor exemption from the registration
requirements of the 1933 Act for resales of restricted securities to "qualified
institutional buyers," as defined in the rule. The result of this rule has been
the development of a more liquid and efficient institutional resale market for
restricted securities. Thus, restricted securities are no longer necessarily
illiquid. Adjustable Rate Fund and the Trusts are not subject to any limitation
on their 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 respective Fund or by
the Adviser subject to the oversight of and pursuant to procedures adopted by
the Board of Directors. See "Investment Objectives, Policies and Restrictions --
Illiquid Securities" in the Statement of Additional Information. Similar
determinations may be made with respect to commercial paper issued in reliance
upon the so-called "private placement" exemption from registration under Section
4(2) of the 1933 Act and with respect to IO and PO classes of Mortgage-Backed
Securities issued by the U.S. Government or its agencies and instrumentalities.
(Adjustable Rate Fund will not invest in IO or PO classes of Mortgage-Backed
Securities.) Investing in Rule 144A securities could have the effect of
increasing the level of illiquidity of Adjustable Rate Fund or a Trust 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, Adjustable
Rate Fund and each Trust may lend portfolio securities up to 30% of the value of
their 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, Adjustable Rate Fund and the Trusts 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 respective Fund's Board of Directors and will receive
collateral in the form of cash, U.S. Government Securities or other high-grade
debt obligations equal to at least 100% of the value of the securities loaned.
The value of the collateral and of the securities loaned is marked to market on
a daily basis. During the time portfolio securities are on loan, the borrower
pays the respective 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 a 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. Adjustable Rate Fund and each Trust may enter into
repurchase agreements pertaining to the securities in which they may invest. A
repurchase agreement involves the purchase by a Fund of securities with the
condition that after a stated period of time the original seller (a member bank
of the Federal Reserve System or a recognized securities dealer) will buy back
the same securities ("collateral") at a predetermined price or yield. Repurchase
agreements involve certain risks not associated with direct investments in
securities. In the event the original seller defaults on its obligation to
repurchase, as a result of its bankruptcy or otherwise, the respective Fund
B-15
<PAGE>
will seek to sell the collateral, which action could involve costs or delays. In
such case, the Fund's ability to dispose of the collateral to recover such
investment may be restricted or delayed. While collateral will at all times be
maintained in an amount equal to the repurchase price under the agreement
(including accrued interest due thereunder), to the extent proceeds from the
sale of collateral were less than the repurchase price, a Fund would suffer a
loss. In the event of a seller's bankruptcy, a Fund might be delayed in, or
prevented from, selling the collateral to the Fund's benefit. Repurchase
agreements maturing in more than seven days are considered illiquid and subject
to Adjustable Rate Fund's and the Trusts' respective restrictions on investing
in illiquid securities. See "Illiquid Securities" above.
BORROWING. Each Trust may borrow money in an amount up to 33 1/3% of its
total assets (including the amount borrowed), less all liabilities other than
bank or other borrowings. Each Trust may also borrow an additional 5% of its
total assets for temporary defensive purposes without regard to the foregoing
limitation and may also borrow for emergency purposes, for the payment of
dividends, for share repurchases or for the clearance of transactions. Each
Trust may borrow from a financial institution unrelated to the Trust and may
also borrow by entering into reverse repurchase agreements with the same parties
with whom it may enter into repurchase agreements (as discussed above).
Borrowing by a Trust creates an opportunity for increased net income, but at
the same time creates special risk considerations. For example, leveraging may
exaggerate changes in the net asset value of the Trust shares and in the yield
on the Trust's portfolio. Although the principal of such borrowings will be
fixed, the Trust's assets may change in value during the time the borrowing is
outstanding. Borrowings will create interest expense for the Trust which can
exceed the income from the assets retained. To the extent income derived from
securities purchased with borrowed funds exceeds the interest the Trust will
have to pay, the Trust's net income will be greater than if borrowings were not
used. Conversely, if the income from the assets retained with borrowed funds is
not sufficient to cover the cost of borrowing, the net income of the Trust will
be less than if borrowing were not used and, therefore, the amount available for
distribution to shareholders as dividends will be reduced.
Adjustable Rate Fund may borrow money only for temporary or emergency
purposes in an amount up to 10% of the value of its total assets. Adjustable
Rate 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
Adjustable Rate Fund on borrowed funds would decrease the net earnings of the
Fund. Adjustable Rate Fund will not purchase portfolio securities while
outstanding borrowings exceed 5% of the value of the Fund's total assets.
Adjustable Rate Fund and each Trust may mortgage, pledge or hypothecate its
assets to secure permitted borrowings. The policies set forth in this section
are fundamental and may not be changed without a majority vote of the respective
Fund's shares.
Under a reverse repurchase agreement, a 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 Adjustable
Rate Fund's and the Trusts' respective limitations on borrowing.
B-16
<PAGE>
APPENDIX C
SHAREHOLDER GUIDE TO INVESTING
HOW TO PURCHASE SHARES
GENERAL
Adjustable Rate 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 Adjustable Rate
Fund. The Distributor reserves the right to reject any purchase order. You
should be aware that, because Adjustable Rate Fund does not issue stock
certificates, Adjustable Rate 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 Adjustable Rate 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 Securities Act of 1933, as amended.
The Distributor will make certain payments to its investment executives and
to other broker-dealers in connection with their sales of Adjustable Rate Fund
shares. See "Proposal No. 1 -- Management of the Trusts and Adjustable Rate Fund
- -- Plan of Distribution" in the Joint Proxy Statement/Prospectus. 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
Adjustable Rate 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 .2% 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>
FEES AS A
PERCENTAGE OF
AMOUNT OF TRANSACTION 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>
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<PAGE>
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 the Special Purchase Plans section of "Reducing Your
Sales Charge."
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 Adjustable Rate 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.
C-2
<PAGE>
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. AND ITS SUBSIDIARIES
Piper Jaffray Companies Inc. and its subsidiaries may buy shares of
Adjustable Rate Fund without incurring a sales charge. The following persons
associated with such entities also may buy Adjustable Rate 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 Adjustable Rate 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 Adjustable Rate 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 Adjustable Rate 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 Adjustable Rate Fund during such quarter without
incurring a sales charge.
C-3
<PAGE>
- Custodial accounts under Section 403(b) of the Code (known as
tax-sheltered annuities) also may buy shares of Adjustable Rate Fund
without incurring a sales charge.
HOW TO REDEEM SHARES
NORMAL REDEMPTION
You may redeem all or a portion of your shares on any day that Adjustable
Rate Fund values its shares. (Please refer to "Proposal No. 1 -- Share Purchase,
Exchange and Redemption Procedures -- Redemptions" in the Joint Proxy
Statement/Prospectus for more information.) Your shares will be redeemed at the
net asset value next calculated after the receipt of your instructions in good
form by your Piper Jaffray investment executive or other broker-dealer as
explained below.
PIPER JAFFRAY INC. ACCOUNTS. To redeem your shares, please contact your
Piper Jaffray investment executive with an oral request to redeem your shares.
OTHER BROKER-DEALER ACCOUNTS. To redeem your shares, you may either contact
your broker-dealer with an oral request or send a written request directly to
the Funds' transfer agent, IFTC. This request should contain the dollar amount
or number of shares to be redeemed, your Fund account number and either a social
security or tax identification number (as applicable). You should sign your
request in exactly the same way the account is registered. If there is more than
one owner of the shares, all owners must sign. A signature guarantee is required
for redemptions over $25,000. Please contact IFTC or refer to "Redemption of
Shares" in the Statement of Additional Information for more details.
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 .2% 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.
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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
Adjustable Rate 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 Adjustable Rate
Fund shares or shares of 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 Adjustable Rate 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
dealer 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,
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except that investors exchanging into a fund which has a higher sales charge
generally must pay the difference. However, exchanges of Adjustable Rate Fund
shares received in the Merger will be permitted without payment of an additional
sales charge.
If you hold your Adjustable Rate 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 dealer 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 $5.00 service charge for each exchange. The Company
reserves the right to change or discontinue the exchange privilege, or any
aspect of the privilege, upon 60 days' written notice.
TELEPHONE TRANSACTION PRIVILEGES
PIPER JAFFRAY INC. ACCOUNTS. If you hold your shares in a Piper Jaffray
account, you may telephone your investment executive to execute any transaction
or to apply for many shareholder services. In some cases, you may be required to
complete a written application.
OTHER BROKER-DEALER ACCOUNTS. If you hold your shares in an account with
your broker-dealer or at IFTC, you may authorize telephone privileges by
completing the Account Application and Services Form. Please contact your
broker-dealer or IFTC (800/874-6025) for an application or for more details.
Adjustable Rate 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
Adjustable Rate Fund employs such procedures, it will not be liable for
following instructions communicated by telephone that it reasonably believes to
be genuine. If the Fund fails to employ such procedures, it may be liable for
any losses due to unauthorized or fraudulent telephone transactions. It may be
difficult to reach the Fund by telephone during periods when market or economic
conditions lead to an unusually large volume of telephone requests. If you
cannot reach the Fund by telephone, you should contact your broker-dealer or
issue written instructions to IFTC at the address set forth herein. See
"Proposal No. 1 -- Management of the Trusts and Adjustable Rate Fund -- Transfer
Agent and Dividend Disbursing Agent." Adjustable Rate 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 from
Adjustable Rate Fund 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 Adjustable Rate 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 dealer
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
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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 Adjustable Rate 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 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 Adjustable Rate 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. Adjustable Rate Fund is required to supply
annual and semiannual reports that list securities held by the Fund and include
the current financial statements of the Fund.
HOUSEHOLDING. If you have multiple accounts with Piper Jaffray, you may
receive some of the above information in combined mailings. This will not only
help to reduce Fund expenses, it will help the environment by saving paper.
Please contact your Piper Jaffray investment executive for more information.
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APPENDIX D
DISSENTING SHAREHOLDERS' RIGHTS OF APPRAISAL
Shareholders who elect to exercise dissenters' rights must satisfy each of
the following conditions: (a) dissenting holders must file with the Company,
before the vote on the Merger is taken, written notice of their intention to
demand payment of the fair value of their shares (this written notice must be in
addition to and separate from any proxy or vote against the Merger -- voting
against or failing to vote for the Merger will not constitute such a notice);
and (b) dissenting holders must not vote in favor of the Merger (a failure to
vote will satisfy this requirement, but a vote in favor of the Merger, by proxy
or in person, will constitute a waiver of dissenters' rights and will nullify
any previously filed written notice of intent to demand payment). Shareholders
who fail to comply with either of these conditions will have no dissenters'
rights with respect to their shares.
SHAREHOLDERS SHOULD BE AWARE THAT THE DIVISION OF INVESTMENT MANAGEMENT OF
THE COMMISSION HAS TAKEN THE POSITION THAT ADHERENCE TO STATE APPRAISAL
PROCEDURES BY A REGISTERED INVESTMENT COMPANY ISSUING REDEEMABLE SECURITIES
WOULD CONSTITUTE A VIOLATION OF RULE 22C-1 UNDER THE 1940 ACT. THIS RULE
PROVIDES THAT NO OPEN-END INVESTMENT COMPANY MAY REDEEM ITS SHARES OTHER THAN AT
NET ASSET VALUE NEXT COMPUTED AFTER RECEIPT OF A TENDER OF SUCH SECURITY FOR
REDEMPTION. IT IS THE VIEW OF THE DIVISION OF INVESTMENT MANAGEMENT THAT RULE
22C-1 SUPERSEDES APPRAISAL PROVISIONS IN STATE STATUTES. IN THE INTERESTS OF
ENSURING EQUAL VALUATION OF ALL INTERESTS IN THE TRUSTS, THE COMPANY WILL
DETERMINE DISSENTERS' RIGHTS IN ACCORDANCE WITH THE DIVISION INTERPRETATION.
ACCORDINGLY, IN THE EVENT THAT ANY SHAREHOLDER ELECTS TO EXERCISE DISSENTERS'
RIGHTS UNDER MINNESOTA LAW, THE COMPANY INTENDS TO SUBMIT THIS QUESTION TO A
COURT OF COMPETENT JURISDICTION.
All written notices should be addressed to: Piper Funds Inc. -- II, Piper
Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402, Attention:
Corporate Secretary, and should be executed by, or with the consent of, the
holder of record. The notice must identify the shareholder and indicate the
intention of such shareholder to demand payment of fair value of his or her
shares. In the notice the shareholder's name should be stated as it appears on
his or her stock certificates, if any, or in the manner in which his or her
shares are registered. A beneficial owner of shares who is not the registered
owner may assert dissenters' rights as to shares held on such person's behalf,
provided that such beneficial owner submits a written consent of the registered
owner to the Company at or before the time such rights are asserted.
A Trust shareholder may not assert dissenters' rights as to less than all of
the shares registered in such shareholder's name, except in the situation in
which certain shares are beneficially owned by another person but registered in
such shareholder's name. If a shareholder wishes to dissent with respect to
shares beneficially owned by another person, such shareholder must dissent with
respect to all of such shares and disclose the name and address of the
beneficial owner on whose behalf the holder is dissenting.
After a vote approving the Merger, and assuming the Merger is consummated,
the Company must give written notice that the Merger has been approved to each
shareholder who filed a written notice of intent to demand payment for such
shareholder's shares and who did not vote in favor of the Merger. This notice
sent by the Company shall specify the address to which a demand for payment and
stock certificates, if any, must be sent by such shareholder in order to obtain
payment and shall include a form for demanding payment to be completed by the
shareholder. In order to receive the fair value of his or her shares, a
dissenting shareholder must, within 30 days after the date of such notice, send
such holder's share certificates, if any, together with certain information
concerning such shareholder's shares, on the form supplied by the Company. After
a valid demand for payment and the related certificates, if any, are received,
the Company must remit to each dissenting shareholder who has complied with the
above-referenced requirements the amount it deems to be the fair value of that
shareholder's shares, plus interest from the fifth day after the effective date
of the Merger to the date of such payment, together with a brief description of
the method used to reach such estimate and certain updated interim financial
data of the Company, if available.
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If a dissenting shareholder believes that the amount remitted by the Company
is less than the fair value of such shareholder's shares, plus interest, the
shareholder may give written notice to the Company of his own estimate of fair
value of his Trust shares within 30 days after the mailing date of the
remittance and demand payment of the difference. If the shareholder fails to
give written notice of such estimate and demand for the difference with the
30-day time period, the shareholder will be entitled only to the amount
remitted.
If the Trust and the dissenting shareholder are unable to settle the
shareholder's demand within 60 days, the Company shall file in court a petition
requesting that the court determine the fair value of the shares, plus interest.
All shareholders whose demands are not settled within the applicable 60-day
settlement periods shall be made parties to this proceeding. The court, after
determining that the shareholder has complied with all statutory requirements,
may use any valuation method or combination of methods it deems appropriate,
whether or not used by the Company or the dissenting shareholder, or may appoint
appraisers to determine the fair value of the shares. The court's determination
is binding on all shareholders of the Trusts, and the court must enter judgment
for any amount by which the court determines fair value exceeds the amount
remitted to the shareholders by the Company.
The costs and expenses of such a proceeding, including the expenses and
compensation of any appraisers, will be assessed against the Company unless the
court, in its discretion, determines that the dissenting shareholder's action in
demanding supplemental payment was arbitrary, vexatious, or not in good faith,
in which event the court may assess all or a part of such costs against the
shareholder. Fees and expenses of counsel for the dissenting shareholder may be
awarded by the court out of the amount, if any, awarded to such shareholder.
The following sections of the Minnesota Business Corporation Act set forth
the rights of dissenting shareholders and the procedures to be followed for
asserting dissentors' rights:
302A.471. RIGHTS OF DISSENTING SHAREHOLDERS
SUBDIVISION 1. ACTIONS CREATING RIGHTS. A shareholder of a corporation may
dissent from, and obtain payment for the fair value of the shareholder's shares
in the event of, any of the following corporate actions:
(a) An amendment of the articles that materially and adversely affects
the rights or preferences of the shares of the dissenting shareholder in
that it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the
redemption of the shares, including a provision respecting a sinking fund
for the redemption or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of the
shares to acquire shares, securities other than shares, or rights to
purchase shares or securities other than shares;
(4) excludes or limits the right of a shareholder to vote on a
matter, or to cumulate votes, except as the right may be excluded or
limited through the authorization or issuance of securities of an
existing or new class or series with similar or different voting rights;
except that an amendment to the articles of an issuing public corporation
that provides that section 302A.671 does not apply to a control share
acquisition does not give rise to the right to obtain payment under this
section;
(b) A sale, lease, transfer, or other disposition of all or
substantially all of the property and assets of the corporation, but not
including a transaction permitted without shareholder approval in section
302A.661, subdivision 1, or a disposition in dissolution described in
section 302A.725, subdivision 2, or a disposition pursuant to an order of a
court, or a disposition for cash on terms
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requiring that all or substantially all of the net proceeds of disposition
be distributed to the shareholders in accordance with their respective
interests within one year after the date of disposition;
(c) A plan of merger, whether under this chapter or under chapter 322B,
to which the corporation is a party, except as provided in subdivision 3;
(d) A plan of exchange, whether under this chapter or under chapter
322B, to which the corporation is a party as the corporation whose shares
will be acquired by the acquiring corporation, if the shares of the
shareholder are entitled to be voted on the plan; or
(e) Any other corporate action taken pursuant to a shareholder vote with
respect to which the articles, the bylaws, or a resolution approved by the
board directs that dissenting shareholders may obtain payment for their
shares.
SUBD. 2. BENEFICIAL OWNERS. (a) A shareholder shall not assert dissenters'
rights as to less than all of the shares registered in the name of the
shareholder, unless the shareholder dissents with respect to all the shares that
are beneficially owned by another person but registered in the name of the
shareholder and discloses the name and address of each beneficial owner on whose
behalf the shareholder dissents. In that event, the rights of the dissenter
shall be determined as if the shares as to which the shareholder has dissented
and the other shares were registered in the names of different shareholders.
(b) The beneficial owner of shares who is not the shareholder may assert
dissenters' rights with respect to shares held on behalf of the beneficial
owner, and shall be treated as a dissenting shareholder under the terms of this
section and section 302A.473, if the beneficial owner submits to the corporation
at the time of or before the assertion of the rights a written consent of the
shareholder.
SUBD. 3. RIGHTS NOT TO APPLY. Unless the articles, the bylaws, or a
resolution approved by the board otherwise provide, the right to obtain payment
under this section does not apply to a shareholder of the surviving corporation
in a merger, if the shares of the shareholder are not entitled to be voted on
the merger.
SUBD. 4. OTHER RIGHTS. The shareholders of a corporation who have a right
under this section to obtain payment for their shares do not have a right at law
or in equity to have a corporate action described in subdivision 1 set aside or
rescinded, except when the corporate action is fraudulent with regard to the
complaining shareholder or the corporation.
302A.473. PROCEDURES FOR ASSERTING DISSENTERS' RIGHTS
SUBDIVISION 1. DEFINITIONS. (a) For purposes of this section, the terms
defined in this subdivision have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action referred to in section 302A.471, subdivison 1 or the
successor by merger of that issuer.
(c) "Fair value of the shares" means the value of the shares of a
corporation immediately before the effective date of the corporate action
referred to in section 302A.471, subdivision 1.
(d) "Interest" means interest commencing five days after the effective date
of the corporate action referred to in section 302A.471, subdivision 1, up to
and including the date of payment, calculated at the rate provided in section
549.09 for interest on verdicts and judgments.
SUBD. 2. NOTICE OF ACTION. If a corporation calls a shareholder meeting at
which any action described in section 302A.471, subdivision 1 is to be voted
upon, the notice of the meeting shall inform each shareholder of the right to
dissent and shall include a copy of section 302A.471 and this section and a
brief description of the procedure to be followed under these sections.
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SUBD. 3. NOTICE OF DISSENT. If the proposed action must be approved by the
shareholders, a shareholder who wishes to exercise dissenters' rights must file
with the corporation before the vote on the proposed action a written notice of
intent to demand the fair value of the shares owned by the shareholder and must
not vote the shares in favor of the proposed action.
SUBD. 4. NOTICE OF PROCEDURE; DEPOSIT OF SHARES. (a) After the proposed
action has been approved by the board and, if necessary, the shareholders, the
corporation shall send to all shareholders who have complied with subdivision 3
and to all shareholders entitled to dissent if no shareholder vote was required,
a notice that contains:
(1) The address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertificated shares that will
apply after the demand for payment is received;
(3) A form to be used to certify the date on which the shareholder, or
the beneficial owner on whose behalf the shareholder dissents, acquired the
shares or an interest in them and to demand payment; and
(4) A copy of section 302A.471 and this section and a brief description
of the procedures to be followed under these sections.
(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply with
any restrictions on transfer of uncertificated shares within 30 days after the
notice required by paragraph (a) was given, but the dissenter retains all other
rights of a shareholder until the proposed action takes effect.
SUBD. 5. PAYMENT; RETURN OF SHARES. (a) After the corporate action takes
effect, or after the corporation receives a valid demand for payment, whichever
is later, the corporation shall remit to each dissenting shareholder who has
complied with subdivisions 3 and 4 the amount the corporation estimates to be
the fair value of the shares, plus interest, accompanied by:
(1) The corporation's closing balance sheet and statement of income for
a fiscal year ending not more than 16 months before the effective date of
the corporate action, together with the latest available interim financial
statements;
(2) An estimate by the corporation of the fair value of the shares and a
brief description of the method used to reach the estimate; and
(3) A copy of section 302A.471 and this section, and a brief description
of the procedure to be followed in demanding supplemental payment.
(b) The corporation may withhold the remittance described in paragraph (a)
from a person who was not a shareholder on the date the action dissented from
was first announced to the public or who is dissenting on behalf of a person who
was not a beneficial owner on that date. If the dissenter has complied with
subdivisions 3 and 4, the corporation shall forward to the dissenter the
materials described in paragraph (a), a statement of the reason for withholding
the remittance, and an offer to pay to the dissenter the amount listed in the
materials if the dissenter agrees to accept that amount in full satisfaction.
The dissenter may decline the offer and demand payment under subdivision 6.
Failure to do so entitles the dissenter only to the amount offered. If the
dissenter makes demand, subdivisions 7 and 8 apply.
(c) If the corporation fails to remit payment within 60 days of the deposit
of certificates or the imposition of transfer restrictions on uncertificated
shares, it shall return all deposited certificates and cancel all transfer
restrictions. However, the corporation may again give notice under subdivision 4
and require deposit or restrict transfer at a later time.
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SUBD. 6. SUPPLEMENTAL PAYMENT; DEMAND. If a dissenter believes that the
amount remitted under subdivision 5 is less than the fair value of the shares
plus interest, the dissenter may give written notice to the corporation of the
dissenter's own estimate of the fair value of the shares, plus interest, within
30 days after the corporation mails the remittance under subdivision 5, and
demand payment of the difference. Otherwise, a dissenter is entitled only to the
amount remitted by the corporation.
SUBD. 7. PETITION; DETERMINATION. If the corporation receives a demand
under subdivision 6, it shall, within 60 days after receiving the demand, either
pay to the dissenter the amount demanded or agreed to by the dissenter after
discussion with the corporation or file in court a petition requesting that the
court determine the fair value of the shares, plus interest. The petition shall
be filed in the county in which the registered office of the corporation is
located, except that a surviving foreign corporation that receives a demand
relating to the shares of a constituent domestic corporation shall file the
petition in the county in this state in which the last registered office of the
constituent corporation was located. The petition shall name as parties all
dissenters who have demanded payment under subdivision 6 and who have not
reached agreement with the corporation. The corporation shall, after filing the
petition, serve all parties with a summons and copy of the petition under the
rules of civil procedure. Nonresidents of this state may be served by registered
or certified mail or by publication as provided by law. Except as otherwise
provided, the rules of civil procedure apply to this proceeding. The
jurisdiction of the court is plenary and exclusive. The court may appoint
appraisers, with powers and authorities the court deems proper, to receive
evidence on and recommend the amount of the fair value of the shares. The court
shall determine whether the shareholder or shareholders in question have fully
complied with the requirements of this section, and shall determine the fair
value of the shares, taking into account any and all factors the court finds
relevant, computed by any method or combination of methods that the court, in
its discretion, sees fit to use, whether or not used by the corporation or by a
dissenter. The fair value of the shares as determined by the court is binding on
all shareholders, wherever located. A dissenter is entitled to judgement in cash
for the amount by which the fair value of the shares as determined by the court,
plus interest, exceeds the amount, if any, remitted under subdivision 5, but
shall not be liable to the corporation for the amount, if any, by which the
amount, if any, remitted to the dissenter under subdivision 5 exceeds the fair
value of the shares as determined by the court, plus interest.
SUBD. 8. COSTS; FEES AND EXPENSES. (a) The court shall determine the costs
and expenses of a proceeding under subdivision 7, including the reasonable
expenses and compensation of any appraisers appointed by the court, and shall
assess those costs and expenses against the corporation, except that the court
may assess part or all of those costs and expenses against a dissenter whose
action in demanding payment under subdivision 6 is found to be arbitrary,
vexatious, or not in good faith.
(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses of
any experts or attorneys as the court deems equitable. These fees and expenses
may also be assessed against a person who has acted arbitrarily, vexatiously, or
not in good faith in bringing the proceeding, and may be awarded to a party
injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an attorney
for the dissenters out of the amount awarded to the dissenters, if any.
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APPENDIX E
INDEMNIFICATION AGREEMENT
INDEMNIFICATION AGREEMENT dated as of June 6, 1995 by and among Piper
Jaffray Companies Inc., a Delaware corporation, Piper Capital Management
Incorporated, a Delaware corporation (the "Indemnifying Parties") and Piper
Funds Inc. -- II, a Minnesota corporation ("Piper Funds").
WHEREAS, the parties hereto desire to provide for certain indemnification by
the Indemnifying Parties, as described in this Agreement;
NOW, THEREFORE, in consideration of the premises and mutual agreements
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:
1. INDEMNIFICATION. From and after the Effective Time (as such term is
defined in the Agreement and Plan of Merger by and among Jaffray Funds and
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")
(BDJ, CDJ, DDJ and EDJ are sometimes referred to herein collectively as the
"Trusts" or individually as a "Trust") dated June 6, 1995 (the "Merger
Agreement")), the Indemnifying Parties shall jointly and severally defend,
indemnify and hold harmless Piper Funds and each of Piper Funds' predecessors
and successors (whether by merger or otherwise) (all of the foregoing,
collectively, the "Indemnified Parties") from and against any and all Losses (as
defined in Section 2 below) incurred or sustained by such Indemnified Parties
arising from or in connection with the Litigation (as defined in Section 2
below).
2. DEFINITIONS. As used herein: (i) "Losses" means all losses, claims,
payments (including, without limitation, indemnification payments), expenses
(including, without limitation, attorneys' fees and disbursements), penalties,
fines, fees, damages, liabilities (including, without limitation, amounts paid
in settlement of or otherwise in connection with any claim, litigation,
arbitration or mediation) and costs (including, without limitation, interest
that may be imposed in connection with any of the foregoing and court costs);
and (ii) "Litigation" means the legal proceedings GORDON V. AMERICAN ADJUSTABLE
RATE TERM TRUST 1998 ET AL., and DONIO I.R.A. V. AMERICAN ADJUSTABLE RATE TRUST
1996 ET AL., currently pending in the United States District Court for the
District of Minnesota and any actions, suits, proceedings, appeals,
arbitrations, investigations, compromises, assessments or judgments,
negotiations or settlements of any nature whatsoever arising from, relating to
or in connection with the subject matter thereof that involve any one or more of
the Trusts.
3. NOTICES; RIGHT TO DEFEND. If any legal proceeding shall be instituted
or any claim or demand made against any of the Indemnified Parties in respect of
which the Indemnifying Parties may be liable under this Agreement, then one or
more of such Indemnified Parties, reasonably promptly after obtaining knowledge
thereof, will give written notice thereof to the Indemnifying Parties in
reasonable detail (unless the Indemnifying Parties have knowledge thereof, in
which case no such notice is necessary); PROVIDED, HOWEVER, that the failure to
give prompt notice shall not relieve the Indemnifying Parties of any liability
hereunder, except to the extent the Indemnifying Parties are prejudiced by such
failure. The Indemnifying Parties shall have the right (without prejudice to the
right of each of the Indemnified Parties to participate at its own expense
through counsel of its own choosing) to defend such proceeding, claim or demand
at the Indemnifying Parties' expense and through counsel of their own choosing
which is reasonably acceptable to the Indemnified Parties if the Indemnifying
Parties give notice of their intention to do so, not later than ten (10) days
following their receipt of notice of such proceeding, claim or demand from the
relevant Indemnified Parties or, if the Indemnifying Parties had knowledge
thereof, not later than ten (10) days following the date on which the
Indemnifying Parties first had such knowledge (or such shorter time period as is
required so that the interests of the Indemnified Parties would not be
prejudiced as a result of their failure to have received such notice from the
Indemnifying Parties); PROVIDED, HOWEVER, that if the defendants in any action
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<PAGE>
shall include one or more Indemnifying Parties and one or more Indemnified
Parties and one or more of such Indemnified Parties shall have reasonably
concluded that counsel selected by the Indemnifying Parties may have a potential
conflict of interest, whether because of the availability of different or
additional defenses to such Indemnified Parties or otherwise, such Indemnified
Parties shall have the right to select separate counsel to participate in the
defense of such action on their behalf, at the expense of the Indemnifying
Parties. The Indemnifying Parties shall not have the power to bind any
Indemnified Party without such Indemnified Party's prior written consent, which
shall not be unreasonably withheld or delayed, with respect to any settlement
pursuant to which anything is required other than the payment of money and then
only to the extent that the Indemnifying Parties shall make full payment of such
money. If the Indemnifying Parties do not so choose to defend any such
proceeding, claim or demand asserted by a third party for which one or more
Indemnified Parties would be entitled to indemnification hereunder, then each
such Indemnified Party shall be entitled to recover from the Indemnifying
Parties, on a monthly basis, all of such Indemnified Party's attorneys' fees and
disbursements and other costs and expenses of litigation of any nature
whatsoever incurred in the defense of such proceeding, claim or demand. If any
one or more of the Indemnifying Parties assume the defense of any such
proceeding, claim or demand, the Indemnifying Parties will hold such Indemnified
Parties harmless from and against any and all damages arising out of any
settlement approved by the Indemnifying Parties or any judgment in connection
with such proceeding, claim or demand. Notwithstanding the assumption of the
defense of any proceeding, claim or demand by the Indemnifying Parties pursuant
to this Agreement, each Indemnified Party shall have the right to approve the
terms of any settlement of a proceeding, claim or demand (which approval shall
not be unreasonably withheld or delayed). Notwithstanding anything to the
contrary contained herein, the Indemnifying Parties will not be liable for any
settlement of a proceeding, claim or demand effected without their prior written
consent; PROVIDED, HOWEVER, that such consent shall not be unreasonably withheld
or delayed.
4. COOPERATION; EXPENSES. The Indemnified Parties and the Indemnifying
Parties shall cooperate in furnishing evidence and testimony and in any other
manner that the other may reasonably request, including, without limitation, by
executing and delivering promptly to the other all such further instruments and
documents as may be reasonably requested by such other parties at any time in
order to carry out fully the intent, and to accomplish the purposes, of the
transactions referred to in this Agreement. Each Indemnified Party shall be
entitled to reimbursement for out-of-pocket expenses reasonably incurred by it
in connection with such cooperation. Except as otherwise specified in this
Agreement, each party shall bear its own fees and expenses incurred pursuant to
this Agreement.
5. REPRESENTATIONS AND WARRANTIES. Each of the parties hereto represents
and warrants to the other parties hereto as follows:
(a) It is a corporation duly organized and validly existing and in good
standing under the laws of the State of Delaware (in the case of each of the
Indemnifying Parties) and Minnesota (in the case of Piper Funds). It has all
necessary corporate power and authority and has taken all corporate action
necessary to enter into this Agreement, to consummate the transactions
contemplated hereby and to perform its obligations hereunder.
(b) This Agreement has been duly executed and delivered by it and is a
legal, valid and binding obligation of it, enforceable against it in
accordance with its terms, except as such enforceability may be limited by
(i) the effect of bankruptcy, insolvency, reorganization, moratorium,
marshalling or other similar laws now or hereafter in effect relating to or
affecting the rights and remedies of creditors generally and (ii) general
principles of equity, whether such enforceability is considered in a
proceeding in equity or at law.
(c) Neither the execution and delivery by it of this Agreement nor the
performance by it of its obligations hereunder will: (i) with or without the
giving of notice or the passage of time, or both, violate, or be in conflict
with, or permit the termination of, or constitute a default under, or cause
the acceleration of the maturity of, any agreement, debt or obligation of
any nature of it or to which it is a party or bound; (ii) require the
consent of any party to any agreement, instrument
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<PAGE>
or commitment to which it is a party or to which it or its properties is
bound; or (iii) violate any statute or law or any judgment, decree, order,
regulation or rule of any court, regulatory authority or other governmental
agency or authority to which it is subject.
(d) No consent, approval or authorization of, or declaration, filing or
registration with, any regulatory authority or other governmental agency or
authority is required to be made or obtained by it in connection with the
execution, delivery and performance of this Agreement, the performance by it
of its obligations hereunder or the consummation of the transactions
contemplated hereby.
6. MISCELLANEOUS.
(a) CHOICE OF LAW. This Agreement shall be governed and interpreted,
and all rights and obligations of the parties hereunder, shall be governed
and determined, in accordance with the laws of the State of Minnesota,
without regard to its conflict of laws rules.
(b) NOTICES. Except as otherwise specifically provided in this
Agreement, all notices, requests, demands, waivers, consents, approvals,
invoices or other communications to either party hereunder shall be in
writing and shall be deemed to have been duly given if delivered personally
to such party or sent to such party by Federal Express, DHL or other
reputable overnight courier service, telegram or telex, or by registered or
certified mail, postage prepaid, to the following addresses:
If to the Indemnifying Parties:
222 South Ninth Street
Minneapolis, MN 55402
Attn: William H. Ellis
With a copy to:
David Evans Rosedahl
Piper Jaffray Companies Inc.
222 South Ninth Street
Minneapolis, MN 55402
If to Piper Funds:
222 South Ninth Street
Minneapolis, MN 55402
Attn: William H. Ellis
With a copy to:
David Evans Rosedahl
Piper Jaffray Companies Inc.
222 South Ninth Street
Minneapolis, MN 55402
or to such other address as the addressee may have specified in notice duly
given to the sender as provided herein. Such notice, request, demand,
waiver, consent, approval, invoice or other communications will be deemed to
have been given as of the date so delivered, telegraphed, telexed, or five
(5) days after so mailed.
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<PAGE>
(c) SEVERABILITY. Any provision of this Agreement that may be
prohibited or unenforceable in law or equity in any jurisdiction shall, as
to such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions thereof. Any
such prohibition or unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in any other jurisdiction.
To the extent permitted by law, the parties hereby waive any provision of
law that renders any provision of this Agreement prohibited or unenforceable
in any respect. In addition, in the event of any such prohibition or
unenforceability, the parties agree that it is their intention and agreement
that any such provision which is held or determined to be prohibited or
unenforceable, as written, in any jurisdiction shall nonetheless be in force
and binding to the fullest extent permitted by law of such jurisdiction as
though such provision had been written in such a manner and to such an
extent as to be enforceable therein under the circumstances.
(d) ENTIRE AGREEMENT; AMENDMENTS. This Agreement states the entire
agreement reached between the parties hereto with respect to the subject
matter hereof and may not be amended or modified except by written
instrument duly executed by the parties hereto. Any and all previous
agreements and understandings between the parties regarding the subject
matter hereof, whether written or oral, are superseded by this Agreement.
(e) HEADINGS; CONSTRUCTION. All section headings contained in this
Agreement are for convenience of reference only, do not form a part of this
Agreement and shall not affect in any way the meaning or interpretation of
this Agreement.
(f) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and each party hereto may execute any such counterpart, each of
which when executed and delivered shall be deemed to be an original and all
of which counterparts taken together shall constitute but one and the same
instrument. It shall not be necessary in making proof of this Agreement or
any counterpart hereof to account for any of the other counterparts.
(g) SURVIVAL. The indemnity obligations of the parties pursuant to
this Agreement shall survive forever the execution and delivery of this
Agreement and the consummation of the transactions contemplated by the
Merger Agreement.
(h) BINDING EFFECT. This Agreement and the rights and interests
granted herein shall be binding upon, and shall inure to the benefit of, the
parties hereto and their respective successors (whether by merger or
otherwise) and assigns.
(i) NO WAIVER. No failure or delay by any party hereto to insist upon
the strict performance of any term, condition, covenant or agreement
contained in this Agreement or to exercise any right, power or remedy
hereunder or consequent upon a breach hereof shall constitute a waiver of
any such term, condition, covenant, agreement, right, power or remedy or of
any such breach, or preclude such party from exercising any such right,
power or remedy at any later time or times.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed and delivered on the day and year first above written.
PIPER JAFFRAY COMPANIES INC.
By: /s/ William H. Ellis
-----------------------------------
PRESIDENT AND CHIEF OPERATING
OFFICER
PIPER CAPITAL MANAGEMENT INCORPORATED
By: /s/ William H. Ellis
-----------------------------------
PRESIDENT AND CHAIRMAN OF THE BOARD
PIPER FUNDS INC. -- II
By: /s/ Paul A. Dow
-----------------------------------
PRESIDENT
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<PAGE>
PART B
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
A SERIES OF PIPER FUNDS INC. -- II
STATEMENT OF ADDITIONAL INFORMATION
June 14, 1995
This Statement of Additional Information relates to the common shares of
Adjustable Rate Mortgage Securities Fund ("Adjustable Rate Fund" or the "Fund")
to be issued by Piper Funds Inc. -- II (the "Company") pursuant to an Agreement
and Plan of Merger, dated as of June 6, 1995 (the "Agreement") by and
between the Company and 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") (BDJ, CDJ, DDJ and EDJ are sometimes referred to herein
collectively as the "Trusts" or individually as a "Trust"). This Statement of
Additional Information does not constitute a prospectus, but should be read in
conjunction with the Joint Proxy Statement/Prospectus, dated June 14, 1995.
This Statement of Additional Information does not include all information that
a shareholder should consider before voting on the proposals contained in the
Joint Proxy Statement/Prospectus, and shareholders should obtain and read the
Joint Proxy Statement/Prospectus prior to voting. A copy of the Joint Proxy
Statement/Prospectus may be obtained without charge by mailing a written
request to the Fund or to any Trust at Piper Jaffray Tower, 222 South Ninth
Street, Minneapolis, Minnesota 55402-3804, or by calling (800) 866-7778.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Objectives, Policies and Restrictions ..................... 2
Directors and Executive Officers ..................................... 11
Investment Advisory and Other Services ............................... 12
Portfolio Transactions and Allocation of Brokerage ................... 16
Capital Stock and Ownership of Shares ................................ 18
Net Asset Value and Public Offering Price ............................ 18
Calculation of Performance Data ...................................... 18
Purchase of Shares ................................................... 20
Redemption of Shares ................................................. 20
Taxation ............................................................. 22
General Information .................................................. 24
Pending Litigation ................................................... 25
Unaudited Combining 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
</TABLE>
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
Each Trust is a closed-end investment company, and each Trust's investment
objective is to provide a high level of current income and to return $10 per
share to common shareholders on its termination date. Adjustable Rate Fund,
the only outstanding series of the Company, an open-end investment company, has
an investment objective of providing the maximum current income that is
consistent with low volatility of principal. Adjustable Rate Fund and the
Company have no prior history. The investment objectives and policies of
Adjustable Rate Fund and each Trust are set forth in the Joint Proxy
Statement/Prospectus. Certain additional investment information is set forth
below.
REPURCHASE AGREEMENTS
Adjustable Rate Fund and each Trust may enter into repurchase agreements
pertaining to the securities in which they may invest. The custodian of
Adjustable Rate Fund and each Trust 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), Adjustable Rate Fund or
each Trust will promptly receive additional collateral (so that 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 (the "SEC") 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.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
Adjustable Rate Fund and each Trust may purchase securities offered on a
"when-issued" basis and may purchase or sell securities on a "forward
commitment" basis. When Adjustable Rate Fund or any Trust purchases securities
on a when-issued or forward commitment basis, it will maintain in a segregated
account with its custodian cash or liquid high-grade debt obligations having an
aggregate value equal to the amount of such purchase commitments until payment
is made; such Fund or Trust will likewise segregate securities it sells on a
forward commitment basis.
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<PAGE>
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 SEC
exempting such issuers from the provisions of the Investment Company Act of
1940, as amended (the "1940 Act"). Until recently, the staff of the Division
of Investment Management of the SEC had taken the position that such issuers
were investment companies pursuant to Section 3 of the 1940 Act and that,
accordingly, an investment by an investment company (such as Adjustable Rate
Fund) in the securities of such issuers was subject to limitations imposed by
Section 12 of the 1940 Act. However, in reliance on an SEC staff
interpretation, Adjustable Rate 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 Adjustable Rate Fund and each
Trust 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.
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<PAGE>
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
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<PAGE>
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.
RESTRICTIONS ON INVESTMENTS IN MORTGAGE-BACKED SECURITIES. As set forth in
the Joint Proxy Statement/Prospectus, Adjustable Rate 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, Adjustable Rate 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:
1. AVERAGE LIFE TEST. The mortgage derivative product has an expected
weighted average life greater than 10.0 years.
2. AVERAGE LIFE SENSITIVITY TEST. The expected weighted average life of
the mortgage derivative product:
a. Extends by more than 4.0 years, assuming an immediate and sustained
parallel shift in the yield curve of plus 300 basis points, or
b. Shortens by more than 6.0 years, assuming an immediate and
sustained parallel shift in the yield curve of minus 300 basis points.
3. 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 Joint Proxy Statement/Prospectus, Adjustable Rate Fund
and each Trust may write covered put and call options with respect to the
securities in which they 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. Adjustable Rate
Fund and each Trust receive premiums from writing call or put options, which
they retain whether or not the option is exercised. The Trusts and Adjustable
Rate Fund will write only covered options. This means that so long as any Trust
or 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). A Trust or the Fund will be
considered covered with respect to a put option it writes if, so long as it is
obligated as the writer of a put option, it deposits and maintains with its
custodian cash, U.S. Government securities or other liquid high-grade debt
obligations having a value equal to or greater than the exercise price of the
option.
A Trust or Adjustable Rate 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. Such Trust or 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 a Trust or Adjustable Rate 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 a Trust or
the Fund purchases put options on underlying securities it owns.
The writing by Adjustable Rate Fund or any Trust 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
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<PAGE>
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
Adjustable Rate Fund or any Trust may write may be affected by options written
by other investment companies managed by and other investment advisory clients
of the Adviser. An exchange may order the liquidation of positions found to be
in excess of these limits, and it may impose certain other sanctions.
OVER-THE-COUNTER OPTIONS. Adjustable Rate Fund and each Trust may purchase
and write over-the-counter ("OTC") put and call options in negotiated
transactions. The staff of the SEC has previously taken the position that the
value of purchased OTC options and the assets used as "cover" for written OTC
options are illiquid securities and, as such, are to be included in the
calculation of Adjustable Rate Fund's 15% limitation and each Trust's 10%
limitation on illiquid securities. However, the staff has eased its position
somewhat in certain limited circumstances. Adjustable Rate Fund and each Trust
will attempt to enter into contracts with certain dealers with which they write
OTC options. Each such contract will provide that Adjustable Rate Fund or the
respective Trust has the absolute right to repurchase the options it writes at
any time at a repurchase price which represents the fair market value, as
determined in good faith through negotiation between the parties, but which in
no event will exceed a price determined pursuant to a formula contained in the
contract. Although the specific details of such formula may vary among
contracts, the formula will generally be based upon a multiple of the premium
received by Adjustable Rate Fund and each Trust for writing the option, plus
the amount, if any, of the option's intrinsic value. The formula will also
include a factor to account for the difference between the price of the
security and the strike price of the option if the option is written out-of-the
- -money. With respect to each OTC option for which such a contract is entered
into, Adjustable Rate Fund and each Trust will count as illiquid only the
initial formula price minus the option's intrinsic value.
Adjustable Rate Fund and each Trust will enter into such contracts only with
primary U.S. Government securities dealers recognized by the Federal Reserve
Bank of New York. Moreover, such primary dealers will be subject to the same
standards as are imposed upon dealers with which Adjustable Rate Fund and the
Trusts enter into repurchase agreements.
ILLIQUID SECURITIES
As set forth in the Joint Proxy Statement/Prospectus, Adjustable Rate Fund
and each Trust may invest in Rule 144A securities, commercial paper issued
pursuant to Rule 4(2) under the Securities Act of 1933, as amended, and, with
respect to the Trusts only, interest-only and principal-only classes of
Mortgage-Backed Securities issued by the U.S. Government or its agencies or
instrumentalities, and treat such securities as liquid when they have been
determined to be liquid by the Board of Directors or by the Adviser subject
to the oversight of and pursuant to procedures
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<PAGE>
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. For purposes of calculating portfolio turnover, the maturity of
investment purchases and sales related to dollar roll transactions of any
Trust is considered to be less than 12 months. See "Comparison of Investment
Objectives and Policies of Adjustable Rate Fund and the Trusts--Portfolio
Turnover" in the Joint Proxy Statement/Prospectus.
INVESTMENT RESTRICTIONS
In addition to the investment objectives and policies set forth in the
Joint Proxy Statement/Prospectus, Adjustable Rate Fund and the Trusts are
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 Adjustable Rate Fund or any Trust's outstanding
shares. "Majority," as used in the Joint Proxy Statement/Prospectus and in this
Statement of Additional Information, means the lesser of (a) 67% of Adjustable
Rate Fund's or any Trust'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 Adjustable Rate Fund's or any Trust's outstanding
shares. All other investment policies or practices are considered by Adjustable
Rate Fund or the Trusts not to be fundamental and, accordingly, may be changed
without shareholder approval.
Currently, no Trust may:
(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
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<PAGE>
securities issued or guaranteed by the United States 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 the
same industry, provided that this limitation does not apply to securities
issued or guaranteed by the United States Government or its agencies or
instrumentalities. Notwithstanding the foregoing, each Trust may invest in
private mortgage pass-through securities without regard to this limitation.
(3) Issue senior securities in the form of indebtedness or borrow money
(including on margin if marginable securities are owned), other than for
the temporary purposes permitted by the 1940 Act, in excess of 33-1/3% of
each Trust's total assets (including the proceeds of such senior
securities issued and money borrowed) or pledge its assets other than to
secure such issuances or borrowings or in connection with, to the extent
permitted under the 1940 Act, hedging transactions, reverse repurchase
agreements, when-issued and forward commitment transactions and similar
investment strategies. The Trusts' collateral arrangements with respect to
options, futures contracts, and options on futures contracts and collateral
requirements with respect to initial and variation margin are not considered
by the Trusts to be the issuance of a senior security.
(4) Pledge, hypothecate, mortgage or otherwise encumber its assets,
except to secure issuances or borrowings permitted by restriction (3) above
(collateral arrangements with respect to reverse repurchase agreements or to
margin for futures contracts and options are not deemed to be pledges or
other encumbrances for purposes of this restriction).
(5) Make loans of money or property to any person, except through loans of
portfolio securities, the purchase of debt obligations in which any Trust may
invest consistently with such Trust's investment objectives and policies, or
the acquisition of securities subject to repurchase agreements.
(6) Underwrite the securities of other issuers, except to the extent
that in connection with the disposition of portfolio securities or the sale
of its own shares of capital stock the Trust may be deemed to be an
underwriter.
(7) Invest for the purpose of exercising control over management of any
company.
(8) Purchase real estate or interests therein other than ARMS, other
Mortgage-Backed Securities, and similar instruments.
(9) Purchase or sell commodities or commodity contracts except for hedging
purposes.
-8-
<PAGE>
(10) Make any short sales of securities.
Following the Merger, Adjustable Rate 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. For purposes of these restrictions, the government
of any country (other than the U.S.), including its governmental
subdivisions, is each considered a single issuer.
(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 Adjustable Rate 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. Interest paid on
borrowed funds will decrease the net earnings of the Fund. The Fund will not
purchase portfolio securities while outstanding borrowing exceeds 5% of the
value of the Fund's total assets. The Fund will not borrow money 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.
-9-
<PAGE>
(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 #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 or guaranteed by the U.S. Government or its agencies or
instrumentalities 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.
Following the Merger, as nonfundamental investment restrictions that may be
changed at any time without shareholder approval, Adjustable Rate Fund will not:
(1) Invest in warrants.
(2) Invest more than 5% of the value of its total assets in the
securities of any issuers which, with their predecessors, have a record of
less than three years' continuous operation. (Securities of such issuers
will not be deemed to fall within this limitation if they are guaranteed by
an entity in continuous operation for more than three years. The value of
all securities issued or guaranteed by such guarantor and owned by the Fund
shall not exceed 10% of the value of the total assets of the Fund.)
(3) Make short sales of securities.
(4) 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.
(5) 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.
(6) Invest for the purpose of exercising control or management.
(7) 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.
(8) Purchase the securities of other investment companies except as part
of a merger, consolidation or acquisition of assets.
-10-
<PAGE>
(9) Invest in real estate limited partnerships.
(10) Invest in the securities of foreign issuers.
(11) Invest more than 15% of its net assets in illiquid securities.
Any investment restriction or limitation referred to above or in the Joint
Proxy Statement/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 executive officers of Adjustable Rate Fund are given below. The names,
addresses and principal occupations of the directors of Adjustable Rate Fund are
set forth in the Joint Proxy Statement/Prospectus under "Proposal No. 2 --
Election of Directors."
<TABLE>
<CAPTION>
NAME, ADDRESS POSITION(S) HELD PRINCIPAL OCCUPATION(S)
AND AGE WITH REGISTRANT DURING PAST 5 YEARS
- -------------- ----------------- -----------------------
<S> <C> <C>
Paul A. Dow (44) President Senior Vice President of the Adviser
Piper Jaffray Tower since February 1989 and Chief Investment
222 South Ninth Street Officer of the Adviser since December
Minneapolis, MN 55402 1989.
Michael P. Jansen (35) Senior Vice Senior Vice President of the Adviser
Piper Jaffray Tower President since October 1993, prior to which he had
222 South Ninth Street been a Managing Director of the Distributor
Minneapolis, MN 55402 since 1987. Executive Vice President and
Director of Piper Mortgage Acceptance
Corporation, a wholly owned subsidiary of
Piper Jaffray Companies Inc., since 1991
and an Executive Vice President and Director
of Premier Acceptance Corporation, a wholly
owned subsidiary of Piper Jaffray Companies
Inc., from 1988 to October 1994.
Robert H. Nelson (31) Senior Vice Senior Vice President of the Adviser since
Piper Jaffray Tower President November 1993, prior to which he had
222 South Ninth Street been a Vice President of the Adviser since
Minneapolis, MN 55402 November 1991 and an employee of the
Adviser since 1988.
</TABLE>
-11-
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS POSITION(S) HELD PRINCIPAL OCCUPATION(S)
AND AGE WITH REGISTRANT DURING PAST 5 YEARS
- -------------- ---------------- -----------------------
<S> <C> <C>
Amy K. Johnson (29) Vice President Vice President of the Adviser since
Piper Jaffray Tower November 1994 and an employee of the
222 South Ninth Street Adviser since 1992. Prior to joining the
Minneapolis, MN 55402 Adviser, she was an audit senior with
KPMG Peat Marwick LLP, where she was
employed from 1990 to 1992.
Thomas S. McGlinch (38) Vice President Vice President of the Adviser since
Piper Jaffray Tower 1992, prior to which he had been an
222 South Ninth Street institutional trader for the Distributor
Minneapolis, MN 55402 during 1992 and a specialty products
trader for FBS Investment Services, Inc.
from 1988 to January 1992.
David E. Rosedahl (48) Secretary Secretary and a Director of the
Piper Jaffray Tower Adviser since October 1985, a
222 South Ninth Street Managing Director of the Distributor since
Minneapolis, MN 55402 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 (44) Treasurer Managing Director of the Distributor since
Piper Jaffray Tower November 1986 and of Piper Jaffray
222 South Ninth Street Companies Inc. since November 1987,
Minneapolis, MN 55402 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.
</TABLE>
As of June 14, 1995, the officers and Directors of Adjustable Rate Fund as a
group beneficially owned less than 1% of the outstanding shares of Adjustable
Rate Fund. The officers of Adjustable Rate Fund receive no remuneration from
Adjustable Rate Fund or 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 that total assets reach $5 billion or
more.) In the event the Company offers additional series of its shares
(i.e., funds in addition to Adjustable Rate Fund), these fees will be allocated
among all of the series on the basis of each series' total assets. In addition,
members of the Audit Committee not affiliated with the Adviser receive $1,000
for each Audit Committee meeting attended ($2,000 with respect to the
chairperson of the Committee), with such fee being allocated among all
closed-end and open-end investment companies managed by the Adviser on the basis
of relative net asset values. Members of the Committee of Independent Directors
and the Derivatives Subcommittee currently receive no additional compensation
from the Company. Directors are reimbursed for expenses incurred in connection
with attending meetings.
INVESTMENT ADVISORY AND OTHER SERVICES
The investment adviser for Adjustable Rate Fund is Piper Capital Management
Incorporated (the "Adviser"). Its affiliate, Piper Jaffray Inc. (the
"Distributor"), acts as
-12-
<PAGE>
the distributor for the Fund. 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 has been retained under an Investment Advisory and Management
Agreement (the "Advisory Agreement") to act as the investment adviser to
Adjustable Rate Fund, subject to the authority of the Board of Directors.
Under the Advisory Agreement, the Adviser provides Adjustable Rate Fund with
advice and assistance in the selection and disposition of Adjustable Rate Fund's
investments. All investment decisions are subject to review by the Board of
Directors of the Company. The Adviser is obligated to pay the salaries and fees
of any affiliates of the Adviser serving as officers or directors of the
Company.
The same security may be suitable for Adjustable Rate Fund and/or other series
of the Company or other funds or private accounts managed by the Adviser or its
affiliates. If and when two or more funds or accounts simultaneously
purchase or sell the same security, the transactions will be allocated as to
price and amount in accordance with arrangements equitable to each fund or
account. The simultaneous purchase or sale of the same securities by Adjustable
Rate Fund and other series of the Company or other funds or accounts may have a
detrimental effect on Adjustable Rate 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.
EXPENSES
The expenses of Adjustable Rate 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
Adjustable Rate 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 Advisory
Agreement. Any general
-13-
<PAGE>
expenses of the Company that are not readily identifiable as belonging to a
particular series of the Company will be allocated among the series based
upon the relative net assets of the series at the time such expenses were
incurred.
DISTRIBUTION PLAN
Rule 12b-1(b) under the 1940 Act provides that any payments made by an
open-end investment company such as the Company 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
Adjustable Rate 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
Adjustable Rate Fund and who have no direct or indirect interest in the
operation of the plan or in the agreements related to the plan, cast in person
at a meeting called for the purpose of voting on such plan or agreement.
Rule 12b-1(b)(3) requires that the plan or agreement provide, in substance:
(a) that it shall continue in effect for a period of more than one year
from the date of its execution or adoption only so long as such continuance
is specifically approved at least annually in the manner described in
paragraph (b)(2) of Rule 12b-1;
(b) that any person authorized to direct the disposition of monies paid
or payable by Adjustable Rate Fund pursuant to the plan or any related
agreement shall provide to Adjustable Rate Fund's Board of Directors, and the
directors shall review, at least quarterly, a written report of the amounts so
expended and the purposes for which such expenditures were made; and
(c) in the case of a plan, that it may be terminated at any time by a vote
of a majority of the members of the Board of Directors of Adjustable Rate Fund
who are not interested persons of Adjustable Rate 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 Adjustable Rate 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.
-14-
<PAGE>
Rule 12b-1(c) provides that Adjustable Rate Fund may rely upon Rule 12b-1(b)
only if the selection and nomination of Adjustable Rate Fund's disinterested
directors are committed to the discretion of such disinterested directors.
Rule 12b-1(e) provides that Adjustable Rate 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 Adjustable Rate Fund and its shareholders. The Board
of Directors has concluded that there is a reasonable likelihood that the
Distribution Plan will benefit Adjustable Rate Fund and its shareholders.
Pursuant to the provisions of the Distribution Plan, Adjustable Rate Fund will
pay to the Distributor a monthly service fee equal, on an annual basis, to .15%
of such Fund's average daily net assets in connection with the servicing of the
Fund's shareholder accounts. For additional information on Adjustable Rate
Fund's Distribution Plan, see "Proposal No. 1--Management of the Trusts and
Adjustable Rate Fund--Plan of Distribution" in the Joint Proxy
Statement/Prospectus."
UNDERWRITING AND DISTRIBUTION AGREEMENT
Pursuant to the Underwriting and Distribution Agreement, the Distributor
has agreed to act as the principal underwriter for Adjustable Rate 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 Adjustable Rate Fund shares set
forth in the Joint Proxy Statement/Prospectus.
-15-
<PAGE>
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 Adjustable Rate 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 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
-16-
<PAGE>
research staffs of many different securities firms prior to making investment
decisions for Adjustable Rate 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 Adjustable Rate 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 stocks; 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 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 Adjustable Rate 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 Adjustable Rate 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, Adjustable Rate Fund will pay higher than the
lowest commission rates available. Adjustable Rate Fund will not purchase at a
higher price or sell at a lower price in connection with transactions effected
with a dealer, acting as principal, who furnishes research services to the
Adviser than would be the case if no weight were given by the Adviser to the
dealer's furnishing of such services.
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 commodities
exchanges, it is the policy of Adjustable Rate 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
-17-
<PAGE>
most favored comparable unaffiliated customers. While Adjustable Rate 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.
CAPITAL STOCK AND OWNERSHIP OF SHARES
Adjustable Rate Fund shares of common stock have a par value of $.01 per share
and have equal rights to share in dividends and assets. The shares possess no
preemptive or conversion rights. Cumulative voting is not authorized. This
means that the holders of more than 50% of the shares voting for the election
of directors can elect 100% of the directors if they choose to do so, and in
such event the holders of the remaining shares will be unable to elect any
directors. As of June 14, 1995, there were no shares of Adjustable Rate Fund
outstanding.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the public offering price of Adjustable Rate Fund
shares is summarized in the Joint Proxy Statement/Prospectus in the text
following the headings "Valuation of Shares" and in Appendix B entitled
"Shareholder Guide to Investing--How to Purchase Shares." The net asset value
of Adjustable Rate Fund's shares is determined on each day on which the New York
Stock Exchange is open, provided that the net asset value need not be determined
on days when no Adjustable Rate 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.
CALCULATION OF PERFORMANCE DATA
Advertisements and other sales literature for Adjustable Rate Fund may refer
to "average annual total return," "cumulative total return" and "yield." The
Adviser may waive or pay certain expenses of Adjustable Rate 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 Adjustable Rate Fund since no shares were outstanding as of the date of the
Joint Proxy Statement/Prospectus and 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:
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<PAGE>
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end of the
period of a hypothetical $1,000 payment made at
the beginning of such period.
This calculation deducts the maximum sales charge from the initial
hypothetical $1,000 investment, assumes all dividends and capital gains
distributions are reinvested at net asset value on the appropriate
reinvestment dates as described in the Joint Proxy Statement/Prospectus, and
includes all recurring fees, such as investment advisory and management fees,
charged to all shareholder accounts.
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:
(ERV-P)
CTR = ----- 100
P
Where: CTR = Cumulative total return;
ERV = ending redeemable value at the end of the period
of a hypothetical $1,000 payment made at the
beginning of such period; and
P = initial payment of $1,000.
This calculation assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as
described in the Joint Proxy Statement/Prospectus and includes all recurring
fees, such as investment advisory and management fees, charged to all
shareholder accounts.
Yield is computed by dividing the net investment income per share (as
defined under SEC 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:
6
YIELD = 2[(a-b + 1) - 1]
---
cd
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
-19-
<PAGE>
d = the maximum offering price per share on the last
day of the period.
PURCHASE OF SHARES
An investor in Adjustable Rate Fund 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 of Intent, 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 the New York Stock Exchange is restricted,
(c) when an emergency exists, as a result of which disposal by Adjustable Rate
Fund of securities owned by them is not reasonably practicable, or it is not
reasonably practicable for Adjustable Rate Fund fairly to determine the value
of their net assets, or (d) during any other period when the SEC, by order, so
permits, provided that applicable rules and regulations of the SEC shall
govern as to whether the conditions prescribed in (b) or (c) exist.
Shareholders who purchased Adjustable Rate Fund shares through a broker-dealer
other than the Distributor may also redeem such shares either by oral request to
such broker-dealer or by written request to IFTC at the address set forth in the
Joint Proxy Statement/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 account number, and give either a social
security or tax identification number. The request should be
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<PAGE>
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 Adjustable Rate 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 Adjustable Rate 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 Adjustable Rate 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, Adjustable Rate
-21-
<PAGE>
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 a shareholder's account, particularly in
the event of a market decline. As with other redemptions, a redemption to
make a withdrawal payment is a sale for federal income tax purposes.
Payments made pursuant to a Systematic Withdrawal Plan cannot be considered
as actual yield or income since part of such payments may be a return of
capital.
The maintenance of a Systematic Withdrawal Plan for Adjustable Rate Fund
concurrent with purchases of additional shares of that 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 Adjustable Rate 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 a 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
Adjustable Rate 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, Adjustable Rate
Fund must, among other things, receive at least 90% of its gross income each
year from dividends, interest, gains from the sale or other disposition of
securities and certain other types of income, including income from options and
futures contracts.
The Code also forbids a regulated investment company from earning 30% or
more of its gross income from the sale or other disposition of securities
held less than three months. This restriction may limit the extent to which
Adjustable Rate Fund may purchase futures contracts and options. To the extent
Adjustable Rate 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 Adjustable Rate Fund can buy or sell futures
contracts and options may be limited by this requirement.
-22-
<PAGE>
If for any taxable year Adjustable Rate 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 shareholders of Adjustable Rate Fund as
ordinary dividends to the extent of current or accumulated earnings and profits
of Adjustable Rate Fund.
Adjustable Rate 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, Adjustable Rate Fund generally must declare dividends by the
end of a calendar year representing 98% of Adjustable Rate Fund's ordinary
income for the calendar year and 98% of 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 Adjustable Rate 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 Adjustable Rate 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 Adjustable Rate 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, Adjustable
Rate 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 Adjustable Rate Fund's taxable
year. All or part of any loss realized by Adjustable Rate Fund on any closing of
a futures contract may be deferred until all of the offsetting positions of
Adjustable Rate Fund with respect to the futures contract are closed.
Ordinarily, distributions and redemption proceeds earned by an Adjustable Rate
Fund shareholder are not subject to withholding of federal income tax. However,
31% of an Adjustable Rate Fund shareholder's distributions and redemption
proceeds must be withheld if the shareholder fails to supply Adjustable Rate
Fund or its agents with such shareholder's taxpayer identification number or if
the Adjustable Rate Fund shareholder who is otherwise exempt from withholding
fails to properly document such shareholder's status as an exempt recipient.
Adjustable Rate Fund may make investments that produce income that is not
matched by a corresponding distribution to the Fund, such as investments in
obligations
-23-
<PAGE>
having original issue discount, such as zero coupon securities, or market
discount (if Adjustable Rate 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 Adjustable Rate 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 Adjustable Rate 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 Adjustable Rate Fund generally
will be disallowed to the extent that a shareholder acquires or contracts to
acquire shares of Adjustable Rate Fund within 30 days before or after such sale
or exchange. In addition, if a shareholder disposes of shares within 90 days of
acquiring such shares and purchases other shares of the Company or of 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, as amended, or the
Securities Exchange Act of 1934, as amended, 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.
-24-
<PAGE>
PENDING LITIGATION
Complaints have been filed in federal court relating to one open-end and
six 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
reached an agreement-in-principle on a proposed settlement and are negotiating
the terms of a definitive settlement agreement. If approved by the Court and a
sufficiently large percentage of the class, a definitive settlement agreement
consistent with the terms of the agreement-in-principle 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 Inc. and the
Adviser and would not be an obligation of the Institutional Government Income
Portfolio or Piper Funds Inc.
Four additional complaints, which are based on claims similar to those
asserted in the first complaint, have been brought relating to 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 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. 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. The complaint, which purports
to be a class action, alleges that the defendants violated the federal
securities laws by making materially misleading statements in prospectuses and
other disclosure documents.
-25-
<PAGE>
A 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. The 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 disclosure documents and by breaching their fiduciary
duties.
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.
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 filed as a putative class action in the same court on November
4, 1994 was consolidated with the first complaint on December 13, 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 Intermediated Mortgage Fund. A
complaint 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.
-26-
<PAGE>
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.
-27-
<PAGE>
UNAUDITED COMBINING FINANCIAL STATEMENTS
FOR THE MERGER OF
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
INTO
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
A SERIES OF PIPER FUNDS INC. II
FEBRUARY 28, 1995
The accompanying unaudited pro forma combining statement of
assets and liabilities, including the schedule of investments in securities,
and the statement of operations reflect the accounts of the 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) (BDJ, CDJ,
DDJ and EDJ are collectively referred to herein as the "Trusts") as of and
for the twelve-month period ended February 28, 1995. These statements have
been derived from the semi-annual report of the Trusts as of February 28,
1995 and the underlying accounting records used in calculating net asset
values for the twelve-month period ended February 28, 1995. Under the
proposed plan of reorganization, shares of the Trusts would be exchanged for
shares of Adjustable Rate Mortgage Securities Fund (Adjustable Rate Fund), a
newly created series of Piper Funds Inc. II.
The pro forma combining statements have been prepared assuming that
all four Trusts are merged into Adjustable Rate Fund. However, it is possible
that one or more of the Trusts will not approve the merger, in which case the
resulting Adjustable Rate Fund will be comprised of only those Trusts that
approve the merger. In addition, the pro forma combining statements have been
prepared based upon the proposed fee and expense structure of Adjustable Rate
Fund, including the overall cap on expenses of 0.60% of total net assets, which
requires that at least three of the Trusts merge into Adjustable Rate Fund.
The statements do not reflect the effects of proposed differing investment
objectives and policies of the Trusts and Adjustable Rate Fund, including, but
not limited to, the ability to borrow, enter into "mortgage dollar rolls" and
invest in municipal zero-coupon securities.
F-1
<PAGE>
PIPER FUNDS INC. II -- ADJUSTABLE RATE MORTGAGE SECURITIES FUND
(ADJUSTABLE RATE FUND)
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
FEBRUARY 28, 1995
<TABLE>
<CAPTION>
AMERICAN AMERICAN AMERICAN AMERICAN PIPER FUNDS INC. II
ADJUSTABLE ADJUSTABLE ADJUSTABLE ADJUSTABLE ADJUSTABLE RATE FUND
RATE TERM RATE TERM RATE TERM RATE TERM PRO FORMA
TRUST 1996 TRUST 1997 TRUST 1998 TRUST 1999 COMBINED
----------- ----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Assets:
Investments in securities, at market value*
including repurchase agreements of $27,747,000;
$46,476,000; $32,816,000; $17,032,000
and $124,071,000, respectively $ 221,204,945 452,005,820 460,488,418 267,022,964 1,400,722,147
Investments in put options (cost: $1,528,800;
$2,575,600; $2,613,500; $2,010,000 and
$8,727,900, respectively) 30,412 440,335 1,049,577 1,323,278 2,843,602
Cash in bank on demand deposit 53,806 50,802 185,826 145,470 435,904
Accrued interest receivable 1,583,689 2,552,686 3,179,373 2,573,348 9,889,096
Receivable for investment securities sold -- 10,772,536 9,608,323 5,024,719 25,405,578
----------- ----------- ----------- ----------- -------------
Total assets 222,872,852 465,822,179 474,511,517 276,089,779 1,439,296,327
----------- ----------- ----------- ----------- -------------
Liabilities:
Reverse repurchase agreements payable 25,000,000 90,000,000 65,000,000 36,000,000 216,000,000
Accrued investment management fee 52,649 99,539 108,753 63,524 324,465
Accrued administrative fee 22,564 42,660 46,608 27,225 139,057
Accrued interest 115,218 788,541 55,521 236,641 1,195,921
Payable for federal excise taxes 96,670 -- -- -- 96,670
Other accrued expenses 47,383 71,137 56,408 41,415 216,343
----------- ----------- ----------- ----------- -------------
Total liabilities 25,334,484 91,001,877 65,267,290 36,368,805 217,972,456
----------- ----------- ----------- ----------- -------------
Net assets applicable to outstanding capital stock $ 197,538,368 374,820,302 409,244,227 239,720,974 1,221,323,871
----------- ----------- ----------- ----------- -------------
----------- ----------- ----------- ----------- -------------
Represented by:
Capital stock and additional paid-in capital (note 2),
outstanding, 21,874,282; 42,481,599; 47,141,017
28,152,572 and 139,649,470 shares, respectively $ 212,450,652 413,903,595 461,065,033 276,181,172 1,363,600,452
Undistributed net investment income 11,434,011 12,200,609 6,890,639 1,516,163 32,041,422
Accumulated net realized loss from investments (21,174,651) (42,707,902) (47,636,669) (32,634,607) (144,153,829)
Unrealized depreciation of investments (5,171,644) (8,576,000) (11,074,776) (5,341,754) (30,164,174)
----------- ----------- ----------- ----------- -------------
Total representing net assets applicable to
outstanding capital stock $ 197,538,368 374,820,302 409,244,227 239,720,974 1,221,323,871
----------- ----------- ----------- ----------- -------------
----------- ----------- ----------- ----------- -------------
Net asset value per share of outstanding capital stock $ 9.03 8.82 8.68 8.52 8.68
----------- ----------- ----------- ----------- -------------
----------- ----------- ----------- ----------- -------------
* Investments in securities, at identified cost $ 224,878,201 458,446,555 469,999,271 271,677,996 1,425,002,023
----------- ----------- ----------- ----------- -------------
----------- ----------- ----------- ----------- -------------
</TABLE>
See accompanying Notes to Pro Forma Combining Financial Statements.
F-2
<PAGE>
PIPER FUNDS INC. II -- ADJUSTABLE RATE MORTGAGE SECURITIES FUND
(ADJUSTABLE RATE FUND)
PRO FORMA COMBINING STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE TWELVE-MONTH PERIOD ENDED FEBRUARY 28, 1995
<TABLE>
<CAPTION>
AMERICAN AMERICAN AMERICAN AMERICAN PIPER FUNDS INC. II
ADJUSTABLE ADJUSTABLE ADJUSTABLE ADJUSTABLE PRO FORMA ADJUSTABLE RATE FUND
RATE TERM RATE TERM RATE TERM RATE TERM ADJUSTMENTS PRO FORMA
TRUST 1996 TRUST 1997 TRUST 1998 TRUST 1999 (NOTE 3) COMBINED
----------- ----------- ----------- ----------- ------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Investment Income $ 14,903,791 28,043,501 29,975,593 18,287,027 91,209,912
----------- ----------- ----------- ----------- ------------------
Expenses:
Investment management fee 791,308 1,471,050 1,631,225 957,386 (414,723) (a) 4,436,246
Administrative fee 339,132 630,451 693,281 405,281 (2,068,145) (b) 0
Distribution fee 0 0 0 0 2,068,145 (c) 2,068,145
Custodian, accounting and transfer
agent fees 169,031 231,578 252,923 174,050 (129,874) (d) 697,708
Audit and legal fees 35,041 34,081 34,501 30,626 (84,249) (d) 50,000
Directors' fees 16,166 17,666 22,165 17,665 (48,662) (d) 25,000
Registration fees 32,340 48,410 40,650 24,260 29,340 (d) 175,000
Shareholder reports 87,747 154,855 137,996 79,706 460,304
Federal excise tax expense 94,880 0 0 0 (94,880) (e) 0
Other expenses 1,064 71,888 12,156 4,358 90,006
----------- ----------- ----------- ----------- ------------------
Total expenses 1,567,249 2,659,979 2,824,897 1,693,332 8,002,409
----------- ----------- ----------- ----------- ------------------
Net investment income 13,336,542 25,383,522 27,150,696 16,593,695 83,207,503
----------- ----------- ----------- ----------- ------------------
Realized and unrealized gains
(losses) on investments:
Net realized loss on investments (13,945,577) (26,338,861) (29,948,858) (23,162,705) (93,396,001)
Net realized gain (loss) on
interest rate swap
transactions 527,325 (2,873,457) (11,344,913) (9,252,406) (22,943,451)
Net realized gain (loss) on
closed futures contracts 2,299,263 2,325,744 2,316,133 1,996,084 8,937,224
----------- ----------- ----------- ----------- ------------------
Net realized loss on
investments (11,118,989) (26,886,574) (38,977,638) (30,419,027) (107,402,228)
Net change in unrealized
appreciation or depreciation
of investments (4,760,526) (7,028,291) (6,670,421) (2,005,566) (20,464,804)
----------- ----------- ----------- ----------- ------------------
Net loss on investments (15,879,515) (33,914,865) (45,648,059) (32,424,593) (127,867,032)
----------- ----------- ----------- ----------- ------------------
Net decrease in net assets
resulting from operations $ (2,542,973) (8,531,343) (18,497,363) (15,830,898) (44,659,529)
----------- ----------- ----------- ----------- ------------------
----------- ----------- ----------- ----------- ------------------
</TABLE>
See accompanying Notes to Pro Forma Combining Financial Statements.
F-3
<PAGE>
PIPER FUNDS INC. II
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
NOTES TO PRO FORMA COMBINING FINANCIAL STATEMENTS
(UNAUDITED AT FEBRUARY 28, 1995)
(1) BASIS OF COMBINATION
The accompanying unaudited pro forma combining statement of assets and
liabilities, including the schedule of investments in securities, and the
statement of operations reflect the accounts of the Trusts, as of and for
the twelve-month period ended February 28, 1995. These statements have been
derived from the semi-annual report of the Trusts as of February 28, 1995
and the underlying accounting records used in calculating net asset values
for the twelve-month period ended February 28, 1995.
The pro forma combining statements have been prepared assuming that all
four Trusts are merged into Adjustable Rate Mortgage Securities Fund
(Adjustable Rate Fund). However, it is possible that one or more of the
Trusts will not approve the merger. The accompanying Pro Forma Combining
Schedule of Total Return and Expense Ratios presents combining pro forma
total return and expense ratio information for historical periods under
all possible combination scenarois. In addition, the pro forma combining
statements have been prepared based upon the proposed fee and expense
structure of Adjustable Rate Fund, including the overall cap on expenses
of 0.60% of total net assets, which requires that at least three of the
Trusts merge into Adjustable Rate Fund.
The pro forma combining financial statements give effect to the proposed
transfer of the assets and liabilities of the Trusts in exchange for shares
of Adjustable Rate Fund under generally accepted accounting principles. The
historical cost of the investments in securities will be carried forward to
Adjustable Rate Fund as the reorganization will be accounted for as a
tax-free transaction.
The pro forma combining financial statements and accompanying schedules
should be read in conjunction with the historical financial statements of
the Trusts and the notes thereto incorporated by reference in the
Statement of Additional Information.
(2) CAPITAL SHARES
The pro forma combining statement of assets and liabilities assumes the
issuance of shares of Adjustable Rate Fund if the reorganization had taken
place on February 28, 1995 and is based on the net asset value of DDJ, the
surviving entity for accounting purposes. The pro forma number of shares
outstanding consists of 22,754,527; 43,175,710; 47,141,017 and 27,613,561
shares assumed to be issued to shareholders of BDJ, CDJ, DDJ and EDJ,
respectively.
(3) PRO FORMA ADJUSTMENTS
(a) INVESTMENT MANAGEMENT FEE - The investment management fee has been adjusted
to reflect the fee structure of Adjustable Rate Fund. Each of the four
Trusts pays a per annum rate of 0.35% of average weekly net assets to Piper
Capital (the Adviser). The investment management agreement of Adjustable
Rate Fund provides for a management fee of 0.35% on the first $500 million
of average daily net assets and 0.30% on average daily net assets in
excess of $500 million.
(b) ADMINISTRATIVE FEE - Each of the four Trusts pays a per annum fee of 0.15%
of average weekly net assets to Piper Capital (the administrator) for
certain recordkeeping, regulatory and reporting expenses. Adjustable Rate
Fund will not incur an administrative fee.
(c) DISTRIBUTION FEE - As an open-end fund, Adjustable Rate Fund will pay to
distributors of fund shares a fee at an annual rate of 0.15% of average
daily net assets pursuant to a distribution plan adopted in accordance with
Rule 12b-1 of the Investment Company Act of 1940.
F-4
<PAGE>
(d) OTHER FEES AND EXPENSES - The pro forma adjustments to custodian,
accounting, transfer agent, legal and auditing, registration and directors
fees reflect the estimated differences resulting from the single surviving
entity having a greater level of net assets and number of shareholders, the
open-end structure of Adjustable Rate Fund, savings due to economies of
scale and decreases in certain expenses duplicated between the four Trusts.
(E) FEDERAL EXCISE TAX EXPENSE - BDJ paid excise taxes on income retained in
the fiscal year ended August 31, 1994. Adjustable Rate Fund intends to
distribute substantially all its net investment income and not incur
excise taxes.
(4) INVESTMENT OBJECTIVES AND POLICIES
These statements do not reflect the effects of the proposed differing
investment objectives and policies of the Trusts and Adjustable Rate Fund,
including, but not limited to, the ability to borrow, enter into "mortgage
dollar rolls" and invest in zero-coupon municipal securities.
F-5
<PAGE>
<TABLE>
<CAPTION>
PIPER FUNDS INC. II -- ADJUSTABLE RATE MORTGAGE SECURITIES FUND (ADJUSTABLE
RATE FUND)
PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED) AMERICAN AMERICAN AMERICAN
FEBRUARY 28, 1995 ADJUSTABLE RATE ADJUSTABLE RATE ADJUSTABLE RATE
PRINCIPAL TERM TRUST 1996 TERM TRUST 1997 TERM TRUST 1998
NAME OF ISSUER AMOUNT MARKET VALUE (a) MARKET VALUE (a) MARKET VALUE (a)
- ---------------------------------------------------------- -------------- ------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
(Percentages of each pro forma combined market value by
investment category relate to total pro forma
combined net assets)
Mortgage-Backed Securities (86.5%):
U.S. Agency Adjustable-Rate Mortgages (44.0%):
FHLMC, 5.94%, 4/01/22 1,050,711 -- 1,065,484 --
FHLMC, 5.96%, 1/01/21 6,236,161 -- -- 6,261,106
FHLMC, 6.00%, 1/01/24 1,679,507 1,679,507 -- --
FHLMC, 6.00%, 1/01/24 2,522,527 -- 2,522,527 --
FHLMC, 6.00%, 5/01/17 3,778,140 -- -- 3,791,401
FHLMC, 6.07%, 9/01/23 1,619,298 1,601,081 -- --
FHLMC, 6.07%, 9/01/23 1,619,298 -- 1,601,081 --
FHLMC, 6.10%, 10/01/23 1,684,822 -- 1,695,352 --
FHLMC, 6.10%, 10/01/23 3,369,644 -- -- 3,390,704
FHLMC, 6.12%, 8/01/23 7,140,906 -- -- 7,123,054
FHLMC, 6.24%, 1/01/24 1,890,572 1,904,751 -- --
FHLMC, 6.24%, 1/01/24 4,145,150 -- 4,176,238 --
FHLMC, 6.28%, 7/01/23 5,900,016 -- -- --
FHLMC, 6.30%, 6/01/22 29,434,791 -- -- --
FHLMC, 6.34%, 8/01/19 2,013,726 -- 2,038,898 --
FHLMC, 6.37%, 7/01/23 7,543,059 7,651,490 -- --
FHLMC, 6.50%, 8/01/20 10,918,192 11,054,669 -- --
FHLMC, 6.52%, 4/01/23 4,599,168 -- -- --
FHLMC, 6.86%, 6/01/21 4,735,260 -- 4,868,416 --
FHLMC, 6.88%, 6/01/21 2,711,992 2,774,693 -- --
FHLMC, 6.93%, 5/01/19 2,244,192 2,279,246 -- --
FHLMC, 7.04%, 10/01/18 7,158,192 7,274,513 -- --
FHLMC, 7.05%, 2/01/22 12,510,519 -- -- 12,655,172
FHLMC, 7.10%, 5/01/20 2,485,069 -- 2,545,208 --
FHLMC, 7.13%, 11/01/16 3,702,454 -- -- 3,732,518
FHLMC, 7.14%, 2/01/22 17,026,683 -- -- 17,420,340
FHLMC, 7.24%, 9/01/22 5,906,203 -- -- --
FHLMC, 7.25%, 11/01/16 10,395,903 10,493,313 -- --
FHLMC, 7.27%, 11/01/22 10,835,163 -- -- --
FHLMC, 7.30%, 1/01/19 209,536 -- 214,118 --
FHLMC, 7.37%, 10/01/19 2,744,581 2,815,337 -- --
FHLMC, 7.41%, 10/01/22 2,976,706 3,039,961 -- --
FHLMC, 7.41%, 10/01/22 5,953,412 -- 6,079,922 --
FHLMC, 7.41%, 6/01/18 2,243,436 2,285,500 -- --
FNMA, 4.01%, 3/01/24 4,505,705 -- 4,432,487 --
FNMA, 5.96%, 2/01/24 8,857,861 -- 8,780,355 --
FNMA, 5.96%, 2/01/24 8,857,861 -- -- --
FNMA, 6.01%, 12/01/23 3,897,917 -- 3,934,441 --
FNMA, 6.03%, 12/01/23 3,794,163 3,749,088 -- --
FNMA, 6.03%, 12/01/23 1,686,295 -- -- 1,666,261
FNMA, 6.07%, 8/01/23 2,305,412 2,339,993 -- --
FNMA, 6.08%, 12/01/23 3,813,400 -- 3,856,301 --
FNMA, 6.10%, 2/01/24 4,328,577 -- -- 4,312,344
<CAPTION>
PIPER FUNDS INC. II -- ADJUSTABLE RATE MORTGAGE SECURITIES FUND (ADJUSTABLE
RATE FUND) PIPER FUNDS INC II
PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED) AMERICAN ADJUSTABLE RATE FUND
FEBRUARY 28, 1995 ADJUSTABLE RATE PRO FORMA
TERM TRUST 1999 COMBINED
NAME OF ISSUER MARKET VALUE (a) MARKET VALUE (a)
- ---------------------------------------------------------- ------------------- -------------------
(Percentages of each pro forma combined market value by
investment category relate to total pro forma
combined net assets)
<S> <C> <C>
Mortgage-Backed Securities (86.5%):
U.S. Agency Adjustable-Rate Mortgages (44.0%):
FHLMC, 5.94%, 4/01/22 -- 1,065,484
FHLMC, 5.96%, 1/01/21 -- 6,261,106
FHLMC, 6.00%, 1/01/24 -- 1,679,507
FHLMC, 6.00%, 1/01/24 -- 2,522,527
FHLMC, 6.00%, 5/01/17 -- 3,791,401
FHLMC, 6.07%, 9/01/23 -- 1,601,081
FHLMC, 6.07%, 9/01/23 -- 1,601,081
FHLMC, 6.10%, 10/01/23 -- 1,695,352
FHLMC, 6.10%, 10/01/23 -- 3,390,704
FHLMC, 6.12%, 8/01/23 -- 7,123,054
FHLMC, 6.24%, 1/01/24 -- 1,904,751
FHLMC, 6.24%, 1/01/24 -- 4,176,238
FHLMC, 6.28%, 7/01/23 5,984,829 5,984,829
FHLMC, 6.30%, 6/01/22 29,986,694 29,986,694
FHLMC, 6.34%, 8/01/19 -- 2,038,898
FHLMC, 6.37%, 7/01/23 -- 7,651,490
FHLMC, 6.50%, 8/01/20 -- 11,054,669
FHLMC, 6.52%, 4/01/23 4,665,258 4,665,258
FHLMC, 6.86%, 6/01/21 -- 4,868,416
FHLMC, 6.88%, 6/01/21 -- 2,774,693
FHLMC, 6.93%, 5/01/19 -- 2,279,246
FHLMC, 7.04%, 10/01/18 -- 7,274,513
FHLMC, 7.05%, 2/01/22 -- 12,655,172
FHLMC, 7.10%, 5/01/20 -- 2,545,208
FHLMC, 7.13%, 11/01/16 -- 3,732,518
FHLMC, 7.14%, 2/01/22 -- 17,420,340
FHLMC, 7.24%, 9/01/22 6,016,944 6,016,944
FHLMC, 7.25%, 11/01/16 -- 10,493,313
FHLMC, 7.27%, 11/01/22 11,068,796 11,068,796
FHLMC, 7.30%, 1/01/19 -- 214,118
FHLMC, 7.37%, 10/01/19 -- 2,815,337
FHLMC, 7.41%, 10/01/22 -- 3,039,961
FHLMC, 7.41%, 10/01/22 -- 6,079,922
FHLMC, 7.41%, 6/01/18 -- 2,285,500
FNMA, 4.01%, 3/01/24 -- 4,432,487
FNMA, 5.96%, 2/01/24 -- 8,780,355
FNMA, 5.96%, 2/01/24 8,780,355 8,780,355
FNMA, 6.01%, 12/01/23 -- 3,934,441
FNMA, 6.03%, 12/01/23 -- 3,749,088
FNMA, 6.03%, 12/01/23 -- 1,666,261
FNMA, 6.07%, 8/01/23 -- 2,339,993
FNMA, 6.08%, 12/01/23 -- 3,856,301
FNMA, 6.10%, 2/01/24 -- 4,312,344
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
PIPER FUNDS INC. II -- ADJUSTABLE RATE MORTGAGE SECURITIES FUND (ADJUSTABLE
RATE FUND)
PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED) AMERICAN AMERICAN AMERICAN
FEBRUARY 28, 1995 ADJUSTABLE RATE ADJUSTABLE RATE ADJUSTABLE RATE
PRINCIPAL TERM TRUST 1996 TERM TRUST 1997 TERM TRUST 1998
NAME OF ISSUER AMOUNT MARKET VALUE (a) MARKET VALUE (a) MARKET VALUE (a)
- ------------------------------------------------------------ ------------- ------------------ ------------------- ------------------
<S> <C> <C> <C> <C>
FNMA, 6.12%, 1/01/24 3,593,808 -- 3,631,974 --
FNMA, 6.13%, 7/01/23 4,987,106 -- 5,050,691 --
FNMA, 6.21%, 11/01/22 3,504,049 -- -- --
FNMA, 6.28%, 5/01/21 7,408,603 -- 7,552,107 --
FNMA, 6.49%, 7/01/17 1,945,441 1,929,625 -- --
FNMA, 6.62%, 1/01/20 3,252,843 -- 3,252,843 --
FNMA, 6.69%, 11/01/17 10,572,300 -- -- 10,691,238
FNMA, 6.71%, 1/01/20 2,185,878 2,236,415 -- --
FNMA, 6.73%, 11/01/20 5,272,421 -- -- 5,236,147
FNMA, 6.73%, 11/01/21 7,893,764 -- -- 8,012,170
FNMA, 6.78%, 12/01/20 8,316,137 -- 8,430,484 --
FNMA, 6.78%, 4/01/18 5,218,850 5,287,321 -- --
FNMA, 6.78%, 4/01/18 8,744,722 -- 8,859,452 --
FNMA, 6.83%, 11/01/20 5,837,002 -- 5,917,261 --
FNMA, 6.93%, 9/01/17 4,086,944 -- -- 4,145,673
FNMA, 6.96%, 1/01/28 2,507,498 2,549,023 -- --
FNMA, 6.96%, 1/01/28 1,355,888 -- 1,378,341 --
FNMA, 6.97%, 5/01/18 1,635,526 -- 1,656,984 --
FNMA, 6.97%, 5/01/18 6,371,737 -- -- 6,455,334
FNMA, 6.98%, 3/01/28 10,724,485 -- 10,871,947 --
FNMA, 6.99%, 1/01/29 3,856,473 -- 3,909,499 --
FNMA, 7.01%, 10/01/20 3,773,294 -- -- 3,615,268
FNMA, 7.04%, 7/01/17 6,700,593 -- -- 6,784,350
FNMA, 7.07%, 5/01/27 1,847,177 1,881,239 -- --
FNMA, 7.07%, 8/01/27 9,372,030 -- 9,506,706 --
FNMA, 7.15%, 7/01/19 4,570,437 -- -- 4,687,532
FNMA, 7.32%, 8/01/21 3,956,202 -- 4,017,998 --
FNMA, 7.53%, 1/01/18 2,137,600 -- 2,180,352 --
FNMA, 7.93%, 7/01/19 2,910,727 -- -- 2,933,922
GNMA II, 4.50%, 4/20/24 739,542 -- 685,926 --
GNMA II, 4.50%, 5/20/24 5,025,168 -- 4,761,347 --
GNMA II, 4.50%, 6/20/24 4,292,885 -- 4,067,509 --
GNMA II, 4.50%, 4/20/24 6,189,564 -- -- 5,740,821
GNMA II, 4.50%, 5/20/24 3,854,407 -- -- 3,652,050
GNMA II, 5.50%, 12/20/23 9,147,443 -- 8,735,808 --
GNMA II, 6.00%, 4/20/22 7,229,997 -- -- 7,166,734
GNMA II, 6.00%, 5/20/21 4,909,887 4,897,612 -- --
GNMA II, 6.00%, 5/20/22 3,222,573 -- -- 3,194,375
GNMA II, 6.00%, 6/20/22 8,907,032 -- -- 8,851,363
GNMA II, 6.00%, 7/20/22 8,641,928 -- -- 8,539,262
GNMA II, 6.00%, 7/20/23 6,661,894 -- -- --
GNMA II, 6.00%, 8/20/21 7,807,772 -- 7,798,012 --
GNMA II, 6.00%, 9/20/22 2,549,517 -- -- --
GNMA II, 6.13%, 10/20/21 7,708,113 -- 7,606,906 --
GNMA II, 6.50%, 10/20/23 4,613,352 -- 4,590,285 --
GNMA II, 6.50%, 10/20/23 9,226,707 -- -- 9,180,573
GNMA II, 6.50%, 11/20/23 4,599,503 -- 4,576,506 --
GNMA II, 6.50%, 6/20/22 1,213,992 -- 1,227,650 --
<CAPTION>
PIPER FUNDS INC. II -- ADJUSTABLE RATE MORTGAGE SECURITIES FUND (ADJUSTABLE
RATE FUND) PIPER FUNDS INC. II
PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED) AMERICAN ADJUSTABLE RATE FUND
FEBRUARY 28, 1995 ADJUSTABLE RATE PRO FORMA
TERM TRUST 1999 COMBINED
NAME OF ISSUER MARKET VALUE (a) MARKET VALUE (a)
- ---------------------------------------------------------- ------------------- -------------------
<S> <C> <C>
FNMA, 6.12%, 1/01/24 -- 3,631,974
FNMA, 6.13%, 7/01/23 -- 5,050,691
FNMA, 6.21%, 11/01/22 3,545,677 3,545,677
FNMA, 6.28%, 5/01/21 -- 7,552,107
FNMA, 6.49%, 7/01/17 -- 1,929,625
FNMA, 6.62%, 1/01/20 -- 3,252,843
FNMA, 6.69%, 11/01/17 -- 10,691,238
FNMA, 6.71%, 1/01/20 -- 2,236,415
FNMA, 6.73%, 11/01/20 -- 5,236,147
FNMA, 6.73%, 11/01/21 -- 8,012,170
FNMA, 6.78%, 12/01/20 -- 8,430,484
FNMA, 6.78%, 4/01/18 -- 5,287,321
FNMA, 6.78%, 4/01/18 -- 8,859,452
FNMA, 6.83%, 11/01/20 -- 5,917,261
FNMA, 6.93%, 9/01/17 -- 4,145,673
FNMA, 6.96%, 1/01/28 -- 2,549,023
FNMA, 6.96%, 1/01/28 -- 1,378,341
FNMA, 6.97%, 5/01/18 -- 1,656,984
FNMA, 6.97%, 5/01/18 -- 6,455,334
FNMA, 6.98%, 3/01/28 -- 10,871,947
FNMA, 6.99%, 1/01/29 -- 3,909,499
FNMA, 7.01%, 10/01/20 -- 3,615,268
FNMA, 7.04%, 7/01/17 -- 6,784,350
FNMA, 7.07%, 5/01/27 -- 1,881,239
FNMA, 7.07%, 8/01/27 -- 9,506,706
FNMA, 7.15%, 7/01/19 -- 4,687,532
FNMA, 7.32%, 8/01/21 -- 4,017,998
FNMA, 7.53%, 1/01/18 -- 2,180,352
FNMA, 7.93%, 7/01/19 -- 2,933,922
GNMA II, 4.50%, 4/20/24 -- 685,926
GNMA II, 4.50%, 5/20/24 -- 4,761,347
GNMA II, 4.50%, 6/20/24 -- 4,067,509
GNMA II, 4.50%, 4/20/24 -- 5,740,821
GNMA II, 4.50%, 5/20/24 -- 3,652,050
GNMA II, 5.50%, 12/20/23 -- 8,735,808
GNMA II, 6.00%, 4/20/22 -- 7,166,734
GNMA II, 6.00%, 5/20/21 -- 4,897,612
GNMA II, 6.00%, 5/20/22 -- 3,194,375
GNMA II, 6.00%, 6/20/22 -- 8,851,363
GNMA II, 6.00%, 7/20/22 -- 8,539,262
GNMA II, 6.00%, 7/20/23 6,549,441 6,549,441
GNMA II, 6.00%, 8/20/21 -- 7,798,012
GNMA II, 6.00%, 9/20/22 2,519,229 2,519,229
GNMA II, 6.13%, 10/20/21 -- 7,606,906
GNMA II, 6.50%, 10/20/23 -- 4,590,285
GNMA II, 6.50%, 10/20/23 -- 9,180,573
GNMA II, 6.50%, 11/20/23 -- 4,576,506
GNMA II, 6.50%, 6/20/22 -- 1,227,650
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
PIPER FUNDS INC. II -- ADJUSTABLE RATE MORTGAGE SECURITIES FUND (ADJUSTABLE
RATE FUND)
PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED) AMERICAN AMERICAN
FEBRUARY 28, 1995 ADJUSTABLE RATE ADJUSTABLE RATE
PRINCIPAL TERM TRUST 1996 TERM TRUST 1997
NAME OF ISSUER AMOUNT MARKET VALUE (a) MARKET VALUE (a)
- -------------------------------------------------------------------------------- -------------- ------------------ -----------------
<S> <C> <C> <C>
GNMA II, 6.50%, 7/20/22 8,338,926 -- --
GNMA II, 6.50%, 7/20/22 4,169,463 -- --
GNMA II, 6.50%, 9/20/22 3,781,360 -- --
GNMA II, 6.63%, 11/20/21 4,017,589 -- 4,050,212
GNMA II, 6.75%, 6/20/23 1,730,580 -- 1,737,069
GNMA II, 6.75%, 6/20/23 8,652,899 -- --
GNMA II, 6.75%, 6/20/23 5,628,874 -- --
GNMA II, 7.00%, 8/20/23 5,105,190 5,143,479 --
GNMA II, 7.00%, 8/20/23 9,556,745 -- --
------------------ -----------------
84,867,856 173,864,697
------------------ -----------------
Collateralized Mortgage Obligations and Other
Mortgage-Backed Securities (b) (42.5%):
U.S. Agency Adjustable Rate (1.3%):
FHLMC, 7.00%, Series 1249, Class A, LIBOR, 4/15/22 15,144,357 15,115,885 --
------------------ -----------------
Private Adjustable Rate (41.2%)
California Federal, Series 1987-F, Class A2, 6.73%, 7/01/17 5,629,518 -- --
Citicorp Mortgage Securities, Series 1991-14, Class M, 6.48%, 9/25/21 5,879,874 5,802,701 --
Columbia Savings and Loan, Series 1987-1, Class A, 7.36%, 12/01/17 396,157 396,977 --
Columbia Savings and Loan, Series 1987-1, Class A, 7.36%, 12/01/17 594,234 -- --
Donaldson, Lufkin and Jenrette, Series 1991-3, Class A1, 6.79%, 3/20/21 7,948,462 -- --
Donaldson, Lufkin and Jenrette, Series 1992-12, Class A1, 6.94%, 12/25/22 6,779,144 -- --
Donaldson, Lufkin and Jenrette, Series 1992-6, Class A3, 6.71%, 7/25/22 3,512,459 -- --
Donaldson, Lufkin and Jenrette, Series 1992-MF3, Class A3, 7.70%, 5/25/22 17,000,000 -- 17,265,625
Donaldson, Lufkin and Jenrette, Series 1992-MF3, Class A3, 7.70%, 5/25/22 5,000,000 -- --
Donaldson, Lufkin and Jenrette, Series 1992-MF3, Class A3, 7.70%, 5/25/22 10,000,000 -- --
Donaldson, Lufkin and Jenrette, Series 1992-MF3, Class A3, 7.70%, 5/25/22 6,000,000 6,093,750 --
First Federal of Rochester, Series 1988-SE1, Class A, 7.17%, 10/25/18 3,122,188 -- 3,091,942
First Federal of Rochester, Series 1988-SE1, Class A, 7.17%, 10/25/18 6,634,649 -- --
First Federal of Rochester, Series 1988-SE1, Class A, 7.17%, 10/25/18 10,572,510 -- --
Glendale Federal Savings, 6.37%, 8/01/28 6,740,191 -- --
Glendale Federal Savings, Series 1989-5, Class A, 6.78%, 4/01/29 19,295,932 -- 19,155,265
Greenwich Capital Acceptance, Series 1992-LB5, Class A3, 6.89%, 7/25/22 12,883,000 -- 12,432,095
Meridian Asset Acceptance Corporation, Series 1991-1, Class A1, 6.47%, 4/27/20 2,400,677 2,367,668 --
Meridian Asset Acceptance Corporation, Series 1991-1, Class A1, 6.47%, 4/27/20 5,404,404 -- --
Merrill Lynch Mortgage Investors, 5.24%, 3/01/18 3,740,036 -- --
Merrill Lynch Mortgage Investors, 6.66%, 6/15/17 25,000,000 -- --
Merrill Lynch Mortgage Investors, 7.13%, 1/25/19 1,155,110 -- --
Merrill Lynch Mortgage Investors, Series 1988-M, Class A, 6.76%, 10/01/18 3,386,628 -- 3,360,009
Merrill Lynch Mortgage Investors, Series 1992-E, Class A3, 6.66%, 9/15/17 5,000,000 -- --
Merrill Lynch Mortgage Investors, Series 1992-H, Class A1-2, 7.69%, 1/25/23 4,392,791 -- --
Merrill Lynch Mortgage Investors, Series 1993-B, Class A3, 6.71%, 12/15/17 13,650,000 -- --
Merrill Lynch Mortgage Investors, Series 1993-C, Class A4, 6.81%, 3/15/18 7,000,000 -- 6,816,250
Merrill Lynch Mortgage Investors, Series 1993-D, Class A1-2, 5.69%, 10/25/23 2,000,000 1,924,380 --
Merrill Lynch Mortgage Investors, Series 1993-D, Class A1-2, 5.69%, 10/25/23 6,000,000 -- 5,773,140
<CAPTION>
PIPER FUNDS INC. II -- ADJUSTABLE RATE MORTGAGE SECURITIES FUND (ADJUSTABLE
RATE FUND) PIPER FUNDS INC. II
PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED) AMERICAN AMERICAN ADJUSTABLE RATE FUND
FEBRUARY 28, 1995 ADJUSTABLE RATE ADJUSTABLE RATE PRO FORMA
TERM TRUST 1998 TERM TRUST 1999 COMBINED
NAME OF ISSUER MARKET VALUE (a) MARKET VALUE (a) MARKET VALUE (a)
- ---------------------------------------------------------------------------- ------------------ ----------------- -----------------
GNMA II, 6.50%, 7/20/22 8,380,621 -- 8,380,621
GNMA II, 6.50%, 7/20/22 -- 4,190,310 4,190,310
GNMA II, 6.50%, 9/20/22 -- 3,800,267 3,800,267
GNMA II, 6.63%, 11/20/21 -- -- 4,050,212
GNMA II, 6.75%, 6/20/23 -- -- 1,737,069
GNMA II, 6.75%, 6/20/23 8,685,347 -- 8,685,347
GNMA II, 6.75%, 6/20/23 -- 5,649,982 5,649,982
GNMA II, 7.00%, 8/20/23 -- -- 5,143,479
GNMA II, 7.00%, 8/20/23 9,628,421 -- 9,628,421
------------------ ----------------- ------------------
185,934,101 92,757,782 537,424,436
------------------ ----------------- ------------------
Collateralized Mortgage Obligations and Other
Mortgage-Backed Securities (b) (42.5%):
U.S. Agency Adjustable Rate (1.3%):
FHLMC, 7.00%, Series 1249, Class A, LIBOR, 4/15/22 -- -- 15,115,885
Private Adjustable Rate (41.2%)
California Federal, Series 1987-F, Class A2, 6.73%, 7/01/17 -- 5,531,002 5,531,002
Citicorp Mortgage Securities, Series 1991-14, Class M, 6.48%, 9/25/21 -- -- 5,802,701
Columbia Savings and Loan, Series 1987-1, Class A, 7.36%, 12/01/17 -- -- 396,977
Columbia Savings and Loan, Series 1987-1, Class A, 7.36%, 12/01/17 595,464 -- 595,464
Donaldson, Lufkin and Jenrette, Series 1991-3, Class A1, 6.79%, 3/20/21 -- 8,013,043 8,013,043
Donaldson, Lufkin and Jenrette, Series 1992-12, Class A1, 6.94%, 12/25/22 -- 6,815,158 6,815,158
Donaldson, Lufkin and Jenrette, Series 1992-6, Class A3, 6.71%, 7/25/22 -- 3,497,092 3,497,092
Donaldson, Lufkin and Jenrette, Series 1992-MF3, Class A3, 7.70%, 5/25/22 -- -- 17,265,625
Donaldson, Lufkin and Jenrette, Series 1992-MF3, Class A3, 7.70%, 5/25/22 5,078,125 -- 5,078,125
Donaldson, Lufkin and Jenrette, Series 1992-MF3, Class A3, 7.70%, 5/25/22 -- 10,156,250 10,156,250
Donaldson, Lufkin and Jenrette, Series 1992-MF3, Class A3, 7.70%, 5/25/22 -- -- 6,093,750
First Federal of Rochester, Series 1988-SE1, Class A, 7.17%, 10/25/18 -- -- 3,091,942
First Federal of Rochester, Series 1988-SE1, Class A, 7.17%, 10/25/18 6,570,376 -- 6,570,376
First Federal of Rochester, Series 1988-SE1, Class A, 7.17%, 10/25/18 -- 10,470,088 10,470,088
Glendale Federal Savings, 6.37%, 8/01/28 6,651,726 -- 6,651,726
Glendale Federal Savings, Series 1989-5, Class A, 6.78%, 4/01/29 -- -- 19,155,265
Greenwich Capital Acceptance, Series 1992-LB5, Class A3, 6.89%, 7/25/22 -- -- 12,432,095
Meridian Asset Acceptance Corporation, Series 1991-1, Class A1, 6.47%, 4/27/20 -- -- 2,367,668
Meridian Asset Acceptance Corporation, Series 1991-1, Class A1, 6.47%, 4/27/20 5,330,094 -- 5,330,094
Merrill Lynch Mortgage Investors, 5.24%, 3/01/18 3,524,984 -- 3,524,984
Merrill Lynch Mortgage Investors, 6.66%, 6/15/17 24,926,750 -- 24,926,750
Merrill Lynch Mortgage Investors, 7.13%, 1/25/19 1,145,003 -- 1,145,003
Merrill Lynch Mortgage Investors, Series 1988-M, Class A, 6.76%, 10/01/18 -- -- 3,360,009
Merrill Lynch Mortgage Investors, Series 1992-E, Class A3, 6.66%, 9/15/17 -- 4,983,750 4,983,750
Merrill Lynch Mortgage Investors, Series 1992-H, Class A1-2, 7.69%, 1/25/23 -- 4,399,511 4,399,511
Merrill Lynch Mortgage Investors, Series 1993-B, Class A3, 6.71%, 12/15/17 -- 13,649,864 13,649,864
Merrill Lynch Mortgage Investors, Series 1993-C, Class A4, 6.81%, 3/15/18 -- -- 6,816,250
Merrill Lynch Mortgage Investors, Series 1993-D, Class A1-2, 5.69%, 10/25/23 -- -- 1,924,380
Merrill Lynch Mortgage Investors, Series 1993-D, Class A1-2, 5.69%, 10/25/23 -- -- 5,773,140
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
PIPER FUNDS INC. II -- ADJUSTABLE RATE MORTGAGE SECURITIES FUND (ADJUSTABLE
RATE FUND)
PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED) AMERICAN AMERICAN
FEBRUARY 28, 1995 ADJUSTABLE ADJUSTABLE
RATE RATE
TERM TRUST TERM TRUST
1996 1997
NAME OF ISSUER PRINCIPAL MARKET MARKET
AMOUNT VALUE (a) VALUE (a)
- ------------------------------------------------------------------------------------------- ------------ ------------- -------------
<S> <C> <C> <C>
Merrill Lynch Mortgage Investors, Series 1993-D, Class A1-2, 5.69%, 10/25/23 6,000,000 -- --
Merrill Lynch Mortgage Investors, Series 1993-D, Class A1-2, 5.69%, 10/25/23 4,000,000 -- --
Merrill Lynch Mortgage Investors, Series 1993-E, Class A4, 6.81%, 6/15/18 6,500,000 -- --
Merrill Lynch Mortgage Investors, Series 1993-H, Class A1-2, 6.00%, 10/25/23 2,320,000 2,228,105 --
Merrill Lynch Mortgage Investors, Series 1993-H, Class A1-2, 6.00%, 10/25/23 6,523,000 -- 6,264,624
Merrill Lynch Mortgage Investors, Series 1993-H, Class A1-2, 6.00%, 10/25/23 7,340,000 -- --
Merrill Lynch Mortgage Investors, Series 1993-H, Class A1-2, 6.00%, 10/25/23 3,640,000 -- --
Paine Webber Mortgage Acceptance Corporation, Series 1993-10, Class M1, 6.00%, 11/25/23 13,226,235 13,160,104 --
Paine Webber Mortgage Acceptance Corporation, Series 1993-11, Class M1, 6.35%, 12/01/23 2,890,709 -- 2,878,063
Paine Webber Mortgage Acceptance Corporation, Series 1993-11, Class M1, 6.35%, 12/01/23 2,951,731 -- --
Paine Webber Mortgage Acceptance Corporation, Series 1993-11, Class M1, 6.35%, 12/01/23 1,475,865 -- --
Paine Webber Mortgage Acceptance Corporation, Series 1993-8, Class M1, 7.01%, 8/25/23 6,771,161 -- --
Paine Webber Mortgage Acceptance Corporation, Series 1993-8, Class M1, 7.01%, 8/25/23 6,771,161 -- --
Paine Webber Mortgage Acceptance Corporation, Series 1993-8, Class M2, 7.01%, 8/25/23 5,115,940 4,860,143 --
PaineWebber Mortgage Acceptance, 6.30%, 4/25/23 2,720,913 -- --
Prudential Home Mortgage, Series 1991-9, Class A1, 7.19%, 7/25/21 7,220,737 -- 7,286,518
Prudential Home Mortgage, Series 1991-9, Class A1, 7.19%, 7/25/21 7,220,653 -- --
Residential Funding Corporation, 7.19%, 3/25/22 12,752,859 -- --
Residential Funding Corporation, Series 1992-S25, Class A, 6.63%, 7/25/22 5,054,286 5,065,254 --
Residential Funding Corporation, Series 1992-S25, Class A, 6.63%, 7/25/22 12,635,715 -- 12,663,134
Residential Funding Corporation, Series 1992-S25, Class A, 6.63%, 7/25/22 12,635,715 -- --
Residential Funding Corporation, Series 1992-S25, Class A, 6.63%, 7/25/22 3,689,629 -- --
Residential Funding Corporation, Series Series 1993-S8, Class A, 7.54%, 2/25/23 5,651,338 5,722,601 --
Residential Funding Corporation, Series Series 1993-S8, Class A, 7.54%, 2/25/23 8,477,007 -- 8,583,902
Residential Funding Corporation, Series Series 1993-S8, Class A, 7.54%, 2/25/23 8,477,007 -- --
Residential Funding Corporation, Series Series 1993-S8, Class A, 7.54%, 2/25/23 5,651,338 -- --
Resolution Trust Corporation, 5.68%, 9/25/19 8,094,806 -- --
Resolution Trust Corporation, 6.85%, 5/25/28 3,793,198 -- --
Resolution Trust Corporation, Series 1991-10, Class A1, 7.23%, 5/25/21 5,604,194 -- 5,574,267
Resolution Trust Corporation, Series 1991-2, Class B, 6.74%, 4/25/21 5,000,000 -- 4,997,000
Resolution Trust Corporation, Series 1991-8, Class A-1, 7.39%, 12/25/20 12,625,787 -- 12,955,241
Resolution Trust Corporation, Series 1992-4, Class B2, 6.78%, 7/25/28 15,000,601 -- 14,871,690
Resolution Trust Corporation, Series 1992-4, Class B2, 6.78%, 7/25/28 10,000,401 -- --
Resolution Trust Corporation, Series 1992-4, Class B2, 6.78%, 7/25/28 3,000,120 -- --
Resolution Trust Corporation, Series 1992-6, Class B3, 5.88%, 1/25/26 10,002,236 -- --
Resolution Trust Corporation, Series 1992-6, Class B3, 7.06%, 1/25/26 13,342,983 -- --
Resolution Trust Corporation, Series 1992-9, Class A6, 7.39%, 7/25/20 2,053,453 -- 2,004,684
Ryland Mortgage Securities, Series 1991-B1, Class 1, 6.70%, 3/25/20 1,770,646 1,784,756 --
Ryland Mortgage Securities, Series 1991-B1, Class 1, 6.70%, 3/25/20 6,843,105 -- 6,897,636
Ryland Mortgage Securities, Series 1991-B1, Class 1, 6.70%, 3/25/20 5,663,259 -- --
Salomon Brothers Mortgage, Series 1987-2, Class A, 7.04%, 12/25/16 3,122,465 3,044,403 --
Salomon Brothers Mortgage, Series 1988-3, Class A, 5.61%, 6/25/17 751,830 732,094 --
Salomon Brothers Mortgage, Series 1992-5, Class A1, 7.74%, 11/25/22 3,348,845 -- --
Sears Mortgage Securities, 6.32%, 9/25/21 16,149,816 -- --
Sears Mortgage Securities, Series 1992-12, Class A1, 6.52%, 7/25/22 5,940,407 -- --
------------- -------------
53,182,936 152,871,085
------------- -------------
Total Mortgage-Backed Securities
(combined cost: $ 1,084,445,154) 153,166,677 326,735,782
------------- -------------
<CAPTION>
PIPER FUNDS INC. II -- ADJUSTABLE RATE MORTGAGE SECURITIES FUND (ADJUSTABLE
RATE FUND)
PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED) AMERICAN AMERICAN
FEBRUARY 28, 1995 ADJUSTABLE ADJUSTABLE PIPER FUNDS INC. II
RATE RATE ADJUSTABLE RATE FUND
TERM TRUST TERM TRUST PRO FORMA
1998 1999 COMBINED
NAME OF ISSUER MARKET MARKET MARKET
VALUE (a) VALUE (a) VALUE (a)
- ---------------------------------------------------------------------------------------- ------------ ------------ --------------
Merrill Lynch Mortgage Investors, Series 1993-D, Class A1-2, 5.69%, 10/25/23 5,773,140 -- 5,773,140
Merrill Lynch Mortgage Investors, Series 1993-D, Class A1-2, 5.69%, 10/25/23 -- 3,848,760 3,848,760
Merrill Lynch Mortgage Investors, Series 1993-E, Class A4, 6.81%, 6/15/18 -- 6,326,320 6,326,320
Merrill Lynch Mortgage Investors, Series 1993-H, Class A1-2, 6.00%, 10/25/23 -- -- 2,228,105
Merrill Lynch Mortgage Investors, Series 1993-H, Class A1-2, 6.00%, 10/25/23 -- -- 6,264,624
Merrill Lynch Mortgage Investors, Series 1993-H, Class A1-2, 6.00%, 10/25/23 7,049,263 -- 7,049,263
Merrill Lynch Mortgage Investors, Series 1993-H, Class A1-2, 6.00%, 10/25/23 -- 3,495,820 3,495,820
Paine Webber Mortgage Acceptance Corporation, Series 1993-10, Class M1, 6.00%, 11/25/23 -- -- 13,160,104
Paine Webber Mortgage Acceptance Corporation, Series 1993-11, Class M1, 6.35%, 12/01/23 -- -- 2,878,063
Paine Webber Mortgage Acceptance Corporation, Series 1993-11, Class M1, 6.35%, 12/01/23 2,938,817 -- 2,938,817
Paine Webber Mortgage Acceptance Corporation, Series 1993-11, Class M1, 6.35%, 12/01/23 -- 1,469,408 1,469,408
Paine Webber Mortgage Acceptance Corporation, Series 1993-8, Class M1, 7.01%, 8/25/23 6,720,377 -- 6,720,377
Paine Webber Mortgage Acceptance Corporation, Series 1993-8, Class M1, 7.01%, 8/25/23 -- 6,720,377 6,720,377
Paine Webber Mortgage Acceptance Corporation, Series 1993-8, Class M2, 7.01%, 8/25/23 -- -- 4,860,143
PaineWebber Mortgage Acceptance, 6.30%, 4/25/23 2,666,494 -- 2,666,494
Prudential Home Mortgage, Series 1991-9, Class A1, 7.19%, 7/25/21 -- -- 7,286,518
Prudential Home Mortgage, Series 1991-9, Class A1, 7.19%, 7/25/21 7,286,434 -- 7,286,434
Residential Funding Corporation, 7.19%, 3/25/22 12,799,407 -- 12,799,407
Residential Funding Corporation, Series 1992-S25, Class A, 6.63%, 7/25/22 -- -- 5,065,254
Residential Funding Corporation, Series 1992-S25, Class A, 6.63%, 7/25/22 -- -- 12,663,134
Residential Funding Corporation, Series 1992-S25, Class A, 6.63%, 7/25/22 12,663,134 -- 12,663,134
Residential Funding Corporation, Series 1992-S25, Class A, 6.63%, 7/25/22 -- 3,697,635 3,697,635
Residential Funding Corporation, Series Series 1993-S8, Class A, 7.54%, 2/25/23 -- -- 5,722,601
Residential Funding Corporation, Series Series 1993-S8, Class A, 7.54%, 2/25/23 -- -- 8,583,902
Residential Funding Corporation, Series Series 1993-S8, Class A, 7.54%, 2/25/23 8,583,902 -- 8,583,902
Residential Funding Corporation, Series Series 1993-S8, Class A, 7.54%, 2/25/23 -- 5,722,601 5,722,601
Resolution Trust Corporation, 5.68%, 9/25/19 8,013,858 -- 8,013,858
Resolution Trust Corporation, 6.85%, 5/25/28 3,770,325 -- 3,770,325
Resolution Trust Corporation, Series 1991-10, Class A1, 7.23%, 5/25/21 -- -- 5,574,267
Resolution Trust Corporation, Series 1991-2, Class B, 6.74%, 4/25/21 -- -- 4,997,000
Resolution Trust Corporation, Series 1991-8, Class A-1, 7.39%, 12/25/20 -- -- 12,955,241
Resolution Trust Corporation, Series 1992-4, Class B2, 6.78%, 7/25/28 -- -- 14,871,690
Resolution Trust Corporation, Series 1992-4, Class B2, 6.78%, 7/25/28 9,914,460 -- 9,914,460
Resolution Trust Corporation, Series 1992-4, Class B2, 6.78%, 7/25/28 -- 2,974,338 2,974,338
Resolution Trust Corporation, Series 1992-6, Class B3, 5.88%, 1/25/26 -- 9,852,202 9,852,202
Resolution Trust Corporation, Series 1992-6, Class B3, 7.06%, 1/25/26 13,142,838 -- 13,142,838
Resolution Trust Corporation, Series 1992-9, Class A6, 7.39%, 7/25/20 -- -- 2,004,684
Ryland Mortgage Securities, Series 1991-B1, Class 1, 6.70%, 3/25/20 -- -- 1,784,756
Ryland Mortgage Securities, Series 1991-B1, Class 1, 6.70%, 3/25/20 -- -- 6,897,636
Ryland Mortgage Securities, Series 1991-B1, Class 1, 6.70%, 3/25/20 5,708,389 -- 5,708,389
Salomon Brothers Mortgage, Series 1987-2, Class A, 7.04%, 12/25/16 -- -- 3,044,403
Salomon Brothers Mortgage, Series 1988-3, Class A, 5.61%, 6/25/17 -- -- 732,094
Salomon Brothers Mortgage, Series 1992-5, Class A1, 7.74%, 11/25/22 -- 3,323,729 3,323,729
Sears Mortgage Securities, 6.32%, 9/25/21 15,685,508 -- 15,685,508
Sears Mortgage Securities, Series 1992-12, Class A1, 6.52%, 7/25/22 -- 5,769,620 5,769,620
------------ ------------ --------------
176,538,868 120,716,568 503,309,457
------------ ------------ --------------
Total Mortgage-Backed Securities
(combined cost: $ 1,084,445,154) 362,472,969 213,474,350 1,055,849,778
------------ ------------ --------------
</TABLE>
F-9
<PAGE>
PIPER FUNDS INC. II -- ADJUSTABLE RATE MORTGAGE SECURITIES FUND (ADJUSTABLE
RATE FUND)
PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED)
FEBRUARY 28, 1995
<TABLE>
<CAPTION>
AMERICAN AMERICAN
ADJUSTABLE RATE ADJUSTABLE RATE
PRINCIPAL TERM TRUST 1996 TERM TRUST 1997
NAME OF ISSUER AMOUNT MARKET VALUE (a) MARKET VALUE (a)
- ----------------------------------------------------------- --------------- ------------------ ------------------
<S> <C> <C> <C>
Municipal Zero-Coupon Securities (c) (18.1%):
Alabama State Public School and College,
6.73%, 11/01/96 725,000 662,469 --
Alief, Texas, School District, 4.24%, 2/15/97 760,000 690,650 --
Allegheny County, Pennsylvania, 4.69%, 2/15/98 2,000,000 -- --
Amarillo, Texas, School District, 5.44%, 2/01/99 4,300,000 -- --
Arlington, Texas, Independent School District,
6.10%-6.78%, 2/15/96 680,000 649,400 --
Austin, Texas, Public Parking, 5.72%-6.03%,
9/01/97 5,000,000 -- 4,443,750
Bellevue, Washington Convention Ctr Auth
Prerefunded-B, 6.05%, 12/01/96 290,000 266,800 --
Bellevue, Washington Convention Ctr Auth
Prerefunded-B, 6.24%, 12/01/97 285,000 -- 248,663
Bellevue, Washington Convention Ctr Auth
Unrefunded Bal-B, 6.05%, 12/01/96 710,000 651,425 --
Bellevue, Washington Convention Ctr Auth
Unrefunded Bal-B, 6.24%, 12/01/97 1,085,000 -- 939,881
Bismark, North Dakota, Hospital Revenue,
6.19%, 5/01/97 2,530,000 -- 2,289,650
Blue Ridge, Texas, Utility District, 6.09%, 4/01/97 440,000 -- 399,850
Boulder, Colorado, School District, 6.26%, 12/15/97 4,000,000 -- 3,530,000
Boulder, Larimer and Weld County, South Dakota,
School District, 5.58%, 12/15/98 4,000,000 -- --
Brazoria County, Texas, General Obligation,
5.54%, 9/01/99 500,000 -- --
Brazoria County, Texas, General Obligation,
5.59%, 9/01/00 925,000 -- --
Calallen, Texas, School District, 5.88%, 2/15/98 1,485,000 -- 1,282,669
California State, 4.62%, 4/25/96 12,000,000 11,340,360 --
California State, 4.62%, 4/25/96 519,863 491,283 --
California State, 4.68%, 7/25/95 690,000 678,960 --
California, General Obligation, Various Purpose,
5.72%, 3/01/98 3,655,000 -- --
California, General Obligation, Various Purpose,
5.72%, 9/01/98 3,655,000 -- --
California, General Obligation, Various Purpose,
5.93%, 3/01/99 3,155,000 -- --
Cambria, Pennsylvania, School District,
6.39%, 8/15/97 1,030,000 -- 912,838
Chelan County, Washington, Public Utilities
District, 5.88%, 7/01/98 1,370,000 -- --
Chelan County, Washington, Public Utilities
District, 5.98%, 7/01/99 2,735,000 -- --
Chelan County, Washington, Public Utilities
District, 6.09%, 7/01/00 235,000 -- --
Clairton, Pennsylvania, School District,
6.83%, 11/01/96 1,035,000 949,613 --
Collin County, Texas, Community College District,
5.98%, 8/15/98 4,475,000 -- --
Connecticut, State College, Capital Appreciation,
5.27%, 12/15/97 985,000 -- --
Cook and Will County, Illinois, Series A,
5.63%, 12/01/99 2,390,000 -- --
Copperas Cove, Texas, School District,
5.52%, 6/01/99 920,000 -- --
Corpus Christi, Texas, General Improvement
Refunding Bonds, 5.59%, 11/01/98 40,000 -- --
Corpus Christi, Texas, General Improvement
Refunding Bonds, 5.59%, 11/01/98 4,185,000 -- --
Corpus Christi, Texas, Series A, 6.78%, 11/01/96 615,000 567,338 --
Corpus Christi, Texas, Series A, 6.78%, 11/01/96 120,000 111,150 --
Cypress-Fairbanks, Texas, School District,
5.40%, 2/01/99 1,850,000 -- --
Cypress-Fairbanks, Texas, School District,
5.49%, 2/01/00 2,215,000 -- --
Cypress-Fairbanks, Texas, School District,
5.58%, 2/01/00 1,000,000 -- --
Cypress-Fairbanks, Texas, School District,
5.82%-5.93%, 2/01/98 8,340,000 -- 7,203,675
Dallas County, Texas, Road Improvement
Refunding Bonds, 6.19%, 8/15/98 3,085,000 -- --
District of Columbia, General Obligation,
5.57%, 6/01/99 7,000,000 -- --
District of Columbia, General Obligation,
5.71%, 6/01/00 6,900,000 -- --
<CAPTION>
PIPER FUNDS INC. II -- ADJUSTABLE RATE MORTGAGE SECURITIES FUND (ADJUSTABLE
RATE FUND) PIPER FUNDS INC.II
PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED) AMERICAN AMERICAN ADJUSTABLE RATE FUND
FEBRUARY 28, 1995 ADJUSTABLE RATE ADJUSTABLE RATE PRO FORMA
TERM TRUST 1998 TERM TRUST 1999 COMBINED
NAME OF ISSUER MARKET VALUE (a) MARKET VALUE (a) MARKET VALUE (a)
- ----------------------------------------------------------- ------------------ ------------------ -------------------
<S> <C> <C> <C>
Municipal Zero-Coupon Securities (c)(18.1%):
Alabama State Public School and College,
6.73%, 11/01/96 -- -- 662,469
Alief, Texas, School District, 4.24%, 2/15/97 -- -- 690,650
Allegheny County, Pennsylvania, 4.69%, 2/15/98 1,905,000 -- 1,905,000
Amarillo, Texas, School District, 5.44%, 2/01/99 -- 3,504,500 3,504,500
Arlington, Texas, Independent School District,
6.10%-6.78%, 2/15/96 -- -- 649,400
Austin, Texas, Public Parking, 5.72%-6.03%,
9/01/97 -- -- 4,443,750
Bellevue, Washington Convention Ctr Auth
Prerefunded-B, 6.05%, 12/01/96 -- -- 266,800
Bellevue, Washington Convention Ctr Auth
Prerefunded-B, 6.24%, 12/01/97 -- -- 248,663
Bellevue, Washington Convention Ctr Auth
Unrefunded Bal-B, 6.05%, 12/01/96 -- -- 651,425
Bellevue, Washington Convention Ctr Auth
Unrefunded Bal-B, 6.24%, 12/01/97 -- -- 939,881
Bismark, North Dakota, Hospital Revenue,
6.19%, 5/01/97 -- -- 2,289,650
Blue Ridge, Texas, Utility District, 6.09%, 4/01/97 -- -- 399,850
Boulder, Colorado, School District, 6.26%, 12/15/97 -- -- 3,530,000
Boulder, Larimer and Weld County, South Dakota,
School District, 5.58%, 12/15/98 3,305,000 -- 3,305,000
Brazoria County, Texas, General Obligation,
5.54%, 9/01/99 -- 394,375 394,375
Brazoria County, Texas, General Obligation,
5.59%, 9/01/00 -- 690,281 690,281
Calallen, Texas, School District, 5.88%, 2/15/98 -- -- 1,282,669
California State, 4.62%, 4/25/96 -- -- 11,340,360
California State, 4.62%, 4/25/96 -- -- 491,283
California State, 4.68%, 7/25/95 -- -- 678,960
California, General Obligation, Various Purpose,
5.72%, 3/01/98 3,129,594 -- 3,129,594
California, General Obligation, Various Purpose,
5.72%, 9/01/98 3,051,925 -- 3,051,925
California, General Obligation, Various Purpose,
5.93%, 3/01/99 2,551,606 -- 2,551,606
Cambria, Pennsylvania, School District,
6.39%, 8/15/97 -- -- 912,838
Chelan County, Washington, Public Utilities
District, 5.88%, 7/01/98 1,155,938 -- 1,155,938
Chelan County, Washington, Public Utilities
District, 5.98%, 7/01/99 -- 2,184,581 2,184,581
Chelan County, Washington, Public Utilities
District, 6.09%, 7/01/00 -- 176,838 176,838
Clairton, Pennsylvania, School District,
6.83%, 11/01/96 -- -- 949,613
Collin County, Texas, Community College District,
5.98%, 8/15/98 3,753,406 -- 3,753,406
Connecticut, State College, Capital Appreciation,
5.27%, 12/15/97 858,181 -- 858,181
Cook and Will County, Illinois, Series A,
5.63%, 12/01/99 -- 1,852,250 1,852,250
Copperas Cove, Texas, School District,
5.52%, 6/01/99 -- 733,700 733,700
Corpus Christi, Texas, General Improvement
Refunding Bonds, 5.59%, 11/01/98 33,400 -- 33,400
Corpus Christi, Texas, General Improvement
Refunding Bonds, 5.59%, 11/01/98 3,473,550 -- 3,473,550
Corpus Christi, Texas, Series A, 6.78%, 11/01/96 -- -- 567,338
Corpus Christi, Texas, Series A, 6.78%, 11/01/96 -- -- 111,150
Cypress-Fairbanks, Texas, School District,
5.40%, 2/01/99 -- 1,510,063 1,510,063
Cypress-Fairbanks, Texas, School District,
5.49%, 2/01/00 -- 1,708,319 1,708,319
Cypress-Fairbanks, Texas, School District,
5.58%, 2/01/00 -- 770,000 770,000
Cypress-Fairbanks, Texas, School District,
5.82%-5.93%, 2/01/98 -- -- 7,203,675
Dallas County, Texas, Road Improvement
Refunding Bonds, 6.19%, 8/15/98 2,602,969 -- 2,602,969
District of Columbia, General Obligation,
5.57%, 6/01/99 -- 5,486,250 5,486,250
District of Columbia, General Obligation,
5.71%, 6/01/00 -- 5,123,250 5,123,250
</TABLE>
F-10
<PAGE>
PIPER FUNDS INC. II -- ADJUSTABLE RATE MORTGAGE SECURITIES FUND (ADJUSTABLE
RATE FUND)
PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED)
FEBRUARY 28, 1995
<TABLE>
<CAPTION>
AMERICAN AMERICAN
ADJUSTABLE RATE ADJUSTABLE RATE
PRINCIPAL TERM TRUST 1996 TERM TRUST 1997
NAME OF ISSUER AMOUNT MARKET VALUE (a) MARKET VALUE (a)
- ----------------------------------------------------------- --------------- ------------------ ------------------
<S> <C> <C> <C>
Eastern Camden, New Jersey, School District,
5.88%, 9/01/97 500,000 -- 442,500
Eastern Illinois University Facility, 5.67%, 10/01/96 1,055,000 985,106 --
Grand Prairie, Texas, Independent School District,
5.93%, 2/15/98 1,150,000 -- --
Harris County, Texas, Toll Road Refunding Bonds,
6.09%, 8/15/98 845,000 -- --
Idaho Falls, Idaho, General Obligation and Electric
Refunding Bonds, 5.63%, 4/01/98 1,500,000 -- --
Illinois Educational Facility, 6.07%, 7/01/96 5,550,000 5,223,938 --
Illinois State College Savers, 5.93%, 8/01/98 890,000 -- 744,263
Illinios State Sales Tax Revenue, 6.38%, 6/15/96 500,000 471,875 --
Intermountain Power Authority, 3.10%, 7/01/97 470,000 -- 478,813
Irving, Texas, School District, 6.31%, 2/15/97 960,000 -- 871,200
Kansas City, Kansas Utility Systems Revenue,
6.24%, 9/01/97 2,215,000 -- 1,968,581
Kansas City, Kansas Utility Systems Revenue,
6.26%, 9/01/97 4,305,000 -- 3,836,831
Kentucky Development Finance Authority,
5.60%-6.08%, 11/01/97 1,980,000 -- 1,732,500
Kentucky Turnpike Revenue, 3.95%, 7/01/97 1,000,000 -- 1,057,500
Lake County, Illinois, General Obligation Forest
Preservation District, 6.09%, 12/01/98 1,000,000 -- --
Larimer, Weld and Boulder County, Colorado,
School District, 5.50%, 12/15/98 3,260,000 -- --
Lewisburg, Pennsylvania, School District, 6.29%, 8/15/97 500,000 -- 444,375
Louisiana College Savers, General Obligation,
5.99%, 7/01/97 4,000,000 -- 3,580,000
Lubbock, Texas, Electric Power, 6.29%, 4/15/97 700,000 -- 635,250
Lubbock, Texas, Electric Power, 6.29%, 4/15/97 660,000 -- 598,950
Maricopa County, Arizona, School District, 5.47%, 7/01/97 1,010,000 -- 900,163
Maricopa County, Arizona, School District, 5.47%, 1/01/98 540,000 -- --
Maricopa County, Arizona, School District, 5.47%, 7/01/98 3,340,000 -- --
Maricopa County, Arizona, School District, 5.60%, 1/01/98 1,225,000 -- --
Maricopa County, Arizona, School District, 5.60%, 7/01/98 4,190,000 -- --
Maricopa County, Arizona, School District, 5.78%, 7/01/99 5,620,000 -- --
Maricopa County, Arizona, School District, 6.38%, 7/01/96 3,050,000 2,863,188 --
Maricopa County, Arizona, School District, 6.74%, 1/01/99 1,225,000 -- --
Massachussetts, General Obligation, 5.96%, 6/01/98 2,095,000 -- 1,775,513
Massachussetts, General Obligation, 5.98%, 6/01/98 10,250,000 -- 8,686,875
McHenry County, Illinois, Conservation District,
5.88%, 2/01/98 1,580,000 -- 1,360,775
Mesa, Arizona, General Obligation, 6.01%, 7/01/96 1,845,000 1,729,688 --
Mesquite, Texas, School District, 5.57%, 8/15/98 2,665,000 -- --
Mesquite, Texas, School District, 5.63%, 8/15/99 1,605,000 -- --
Mesquite, Texas, School District, 5.73%, 8/15/99 1,000,000 -- --
Metropolitan Pier and Exposition Authority, Illinois,
State Revenue, 5.67%, 6/15/99 4,005,000 -- --
Metropolitan Pier and Exposition Authority, Illinois,
State Revenue, 5.69%, 12/15/99 3,870,000 -- --
Michigan Municipal Bond Authority, 6.09%, 5/15/97 1,500,000 -- 1,338,750
North East, Texas, Independent School District,
5.98%, 2/01/99 1,000,000 -- --
North Lawrence, Indiana, School Building Refunding,
Capital Appreciation, 5.62%, 1/01/98 580,000 -- --
North Lawrence, Indiana, School Building Refunding,
Capital Appreciation, 5.62%, 7/01/98 580,000 -- --
North Lawrence, Indiana, School Building Refunding,
Capital Appreciation, 5.88%, 1/01/99 580,000 -- --
North Lawrence, Indiana, School Building Refunding,
Capital Appreciation, 5.88%, 7/01/99 580,000 -- --
North Montgomery, Indiana, School Bond, 5.82%, 1/01/97 525,000 -- 478,406
North Montgomery, Indiana, School Bond, 5.82%, 7/01/97 525,000 -- 464,622
North Montgomery, Indiana, School Bond, 5.94%, 1/01/98 525,000 -- 452,156
North Montgomery, Indiana, School Bond, 5.98%, 7/01/98 525,000 -- 439,688
North Slope Boro, Alaska, 5.58%, 6/30/99 4,710,000 -- --
<CAPTION>
PIPER FUNDS INC. II -- ADJUSTABLE RATE MORTGAGE SECURITIES FUND (ADJUSTABLE
RATE FUND) PIPER FUNDS INC. II
PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED) AMERICAN AMERICAN ADJUSTABLE RATE FUND
FEBRUARY 28, 1995 ADJUSTABLE RATE ADJUSTABLE RATE PRO FORMA
TERM TRUST 1998 TERM TRUST 1999 COMBINED
NAME OF ISSUER MARKET VALUE (a) MARKET VALUE (a) MARKET VALUE (a)
- ----------------------------------------------------------- ------------------ ------------------ -------------------
<S> <C> <C> <C>
Eastern Camden, New Jersey, School District,
5.88%, 9/01/97 -- -- 442,500
Eastern Illinois University Facility, 5.67%, 10/01/96 -- -- 985,106
Grand Prairie, Texas, Independent School District,
5.93%, 2/15/98 993,313 -- 993,313
Harris County, Texas, Toll Road Refunding Bonds,
6.09%, 8/15/98 708,744 -- 708,744
Idaho Falls, Idaho, General Obligation and Electric
Refunding Bonds, 5.63%, 4/01/98 1,286,250 -- 1,286,250
Illinois Educational Facility, 6.07%, 7/01/96 -- -- 5,223,938
Illinois State College Savers, 5.93%, 8/01/98 -- -- 744,263
Illinios State Sales Tax Revenue, 6.38%, 6/15/96 -- -- 471,875
Intermountain Power Authority, 3.10%, 7/01/97 -- -- 478,813
Irving, Texas, School District, 6.31%, 2/15/97 -- -- 871,200
Kansas City, Kansas Utility Systems Revenue,
6.24%, 9/01/97 -- -- 1,968,581
Kansas City, Kansas Utility Systems Revenue,
6.26%, 9/01/97 -- -- 3,836,831
Kentucky Development Finance Authority,
5.60%-6.08%, 11/01/97 -- -- 1,732,500
Kentucky Turnpike Revenue, 3.95%, 7/01/97 -- -- 1,057,500
Lake County, Illinois, General Obligation Forest
Preservation District, 6.09%, 12/01/98 823,750 -- 823,750
Larimer, Weld and Boulder County, Colorado,
School District, 5.50%, 12/15/98 2,709,875 -- 2,709,875
Lewisburg, Pennsylvania, School District, 6.29%, 8/15/97 -- -- 444,375
Louisiana College Savers, General Obligation,
5.99%, 7/01/97 -- -- 3,580,000
Lubbock, Texas, Electric Power, 6.29%, 4/15/97 -- -- 635,250
Lubbock, Texas, Electric Power, 6.29%, 4/15/97 -- -- 598,950
Maricopa County, Arizona, School District, 5.47%, 7/01/97 -- -- 900,163
Maricopa County, Arizona, School District, 5.47%, 1/01/98 467,775 -- 467,775
Maricopa County, Arizona, School District, 5.47%, 7/01/98 2,818,125 -- 2,818,125
Maricopa County, Arizona, School District, 5.60%, 1/01/98 1,061,156 -- 1,061,156
Maricopa County, Arizona, School District, 5.60%, 7/01/98 3,535,313 -- 3,535,313
Maricopa County, Arizona, School District, 5.78%, 7/01/99 4,474,925 -- 4,474,925
Maricopa County, Arizona, School District, 6.38%, 7/01/96 -- -- 2,863,188
Maricopa County, Arizona, School District, 6.74%, 1/01/99 1,001,435 -- 1,001,435
Massachussetts, General Obligation, 5.96%, 6/01/98 -- -- 1,775,513
Massachussetts, General Obligation, 5.98%, 6/01/98 -- -- 8,686,875
McHenry County, Illinois, Conservation District,
5.88%, 2/01/98 -- -- 1,360,775
Mesa, Arizona, General Obligation, 6.01%, 7/01/96 -- -- 1,729,688
Mesquite, Texas, School District, 5.57%, 8/15/98 2,228,606 -- 2,228,606
Mesquite, Texas, School District, 5.63%, 8/15/99 -- 1,265,944 1,265,944
Mesquite, Texas, School District, 5.73%, 8/15/99 788,750 -- 788,750
Metropolitan Pier and Exposition Authority, Illinois,
State Revenue, 5.67%, 6/15/99 -- 3,204,000 3,204,000
Metropolitan Pier and Exposition Authority, Illinois,
State Revenue, 5.69%, 12/15/99 -- 3,013,763 3,013,763
Michigan Municipal Bond Authority, 6.09%, 5/15/97 -- -- 1,338,750
North East, Texas, Independent School District,
5.98%, 2/01/99 817,500 -- 817,500
North Lawrence, Indiana, School Building Refunding,
Capital Appreciation, 5.62%, 1/01/98 498,800 -- 498,800
North Lawrence, Indiana, School Building Refunding,
Capital Appreciation, 5.62%, 7/01/98 485,750 -- 485,750
North Lawrence, Indiana, School Building Refunding,
Capital Appreciation, 5.88%, 1/01/99 469,800 -- 469,800
North Lawrence, Indiana, School Building Refunding,
Capital Appreciation, 5.88%, 7/01/99 457,475 -- 457,475
North Montgomery, Indiana, School Bond, 5.82%, 1/01/97 -- -- 478,406
North Montgomery, Indiana, School Bond, 5.82%, 7/01/97 -- -- 464,622
North Montgomery, Indiana, School Bond, 5.94%, 1/01/98 -- -- 452,156
North Montgomery, Indiana, School Bond, 5.98%, 7/01/98 -- -- 439,688
North Slope Boro, Alaska, 5.58%, 6/30/99 -- 3,673,800 3,673,800
</TABLE>
F-11
<PAGE>
PIPER FUNDS INC. II -- ADJUSTABLE RATE MORTGAGE SECURITIES FUND (ADJUSTABLE
RATE FUND)
PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED)
FEBRUARY 28, 1995
<TABLE>
<CAPTION>
AMERICAN AMERICAN
ADJUSTABLE RATE ADJUSTABLE RATE
PRINCIPAL TERM TRUST 1996 TERM TRUST 1997
NAME OF ISSUER AMOUNT MARKET VALUE (a) MARKET VALUE (a)
- ----------------------------------------------------------- --------------- ------------------ ------------------
<S> <C> <C> <C>
North Slope Boro, Alaska, 5.88%, 6/30/98 5,000,000 -- 4,162,500
North Slope Boro, Alaska, 6.39%, 6/30/97 7,000,000 -- 6,177,500
North Slope Boro, Alaska, Series I,
5.76%-6.68%, 6/30/96 9,800,000 9,163,000 --
Oklahoma City, Oklahoma, Water and Sewer,
5.83%, 7/01/97 1,000,000 -- 898,750
Orleans Parish, Louisiana, School Board,
4.10%-4.33%, 2/1/95-8/01/96 400,000 426,000 --
Phoenix, Arizona, Excise Tax Parking Revenue,
6.22%, 7/01/96 1,000,000 940,000 --
Pleasanton, California, School District,
5.78%, 8/01/98 1,000,000 -- --
Rosemont, Illinois, Various Purpose, 6.22%, 12/01/97 1,510,000 -- 1,311,813
Rosemont, Illinois, Various Purpose, 6.22%, 12/01/97 1,160,000 -- 1,007,750
Salt Lake County, Utah, Water Conservation District,
5.83%, 10/01/98 1,300,000 -- --
Shreveport, Louisianna, Water and Sewer,
6.03%, 12/01/98 5,880,000 -- --
Sioux City, Iowa, Hospital Revenue, 2.93%, 1/01/97 11,510,000 -- 11,697,038
State of Texas, Veterans' Land General Obligation,
5.76%, 6/01/98 1,000,000 -- --
Tarrant County, Texas, Junior College District,
6.08%, 2/15/98 1,750,000 -- --
Texas State General Obligation, 5.68%, 10/01/00 1,655,000 -- --
Tomball, Texas, Hospital Authority Revenue,
6.09%, 7/01/99 1,000,000 -- --
University of Illinois Auxillary Facility,
6.01%, 4/01/96 1,140,000 1,085,850 --
Utah Associated Municipal Power System, 5.57%, 7/01/98 2,765,000 -- --
Vermont State College Savers, General Obligation,
5.57%, 10/15/96 370,000 343,175 --
Will County, Illinois, School District, 5.57%, 12/15/98 1,800,000 -- --
------------ ------------
Total Municipal Zero-Coupon Securities
(combined cost: $ 216,485,869) 40,291,268 78,794,038
------------ ------------
Short-Term Securities (10.2%):
Repurchase agreement with Goldman in
a joint trading account, 6.10% acquired on
02/28/95 and due 03/01/95 with accrued
interest of $4,702 (collateralized by
U.S. government agency obligations) 27,747,000 27,747,000 --
Repurchase agreement with Morgan Stanley in
a joint trading account, 5.97% acquired on
02/28/95 and due 03/01/95 with accrued
interest of $7,707 (collateralized by
U.S. government agency obligations) 46,476,000 -- 46,476,000
Repurchase agreement with Goldman in
a joint trading account, 6.10% acquired on
02/28/95 and due 03/01/95 with accrued
interest of $5,560 (collateralized by
U.S. government agency obligations) 32,816,000 -- --
<CAPTION>
PIPER FUNDS INC. II -- ADJUSTABLE RATE MORTGAGE SECURITIES FUND (ADJUSTABLE
RATE FUND)
PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED) PIPER FUNDS INC. II
FEBRUARY 28, 1995 AMERICAN AMERICAN ADJUSTABLE RATE FUND
ADJUSTABLE RATE ADJUSTABLE RATE PRO FORMA
TERM TRUST 1998 TERM TRUST 1999 COMBINED
NAME OF ISSUER MARKET VALUE (a) MARKET VALUE (a) MARKET VALUE (a)
- ----------------------------------------------------------- ------------------ ------------------ -------------------
<S> <C> <C> <C>
North Slope Boro, Alaska, 5.88%, 6/30/98 -- -- 4,162,500
North Slope Boro, Alaska, 6.39%, 6/30/97 -- -- 6,177,500
North Slope Boro, Alaska, Series I,
5.76%-6.68%, 6/30/96 -- -- 9,163,000
Oklahoma City, Oklahoma, Water and Sewer,
5.83%, 7/01/97 -- -- 898,750
Orleans Parish, Louisiana, School Board,
4.10%-4.33%, 2/1/95-8/01/96 -- -- 426,000
Phoenix, Arizona, Excise Tax Parking Revenue,
6.22%, 7/01/96 -- -- 940,000
Pleasanton, California, School District,
5.78%, 8/01/98 848,750 -- 848,750
Rosemont, Illinois, Various Purpose, 6.22%, 12/01/97 -- -- 1,311,813
Rosemont, Illinois, Various Purpose, 6.22%, 12/01/97 -- -- 1,007,750
Salt Lake County, Utah, Water Conservation District,
5.83%, 10/01/98 1,090,375 -- 1,090,375
Shreveport, Louisianna, Water and Sewer,
6.03%, 12/01/98 4,821,600 -- 4,821,600
Sioux City, Iowa, Hospital Revenue, 2.93%, 1/01/97 -- -- 11,697,038
State of Texas, Veterans' Land General Obligation,
5.76%, 6/01/98 855,000 -- 855,000
Tarrant County, Texas, Junior College District,
6.08%, 2/15/98 1,502,813 -- 1,502,813
Texas State General Obligation, 5.68%, 10/01/00 -- 1,224,700 1,224,700
Tomball, Texas, Hospital Authority Revenue,
6.09%, 7/01/99 800,000 -- 800,000
University of Illinois Auxillary Facility,
6.01%, 4/01/96 -- -- 1,085,850
Utah Associated Municipal Power System, 5.57%, 7/01/98 2,350,250 -- 2,350,250
Vermont State College Savers, General Obligation,
5.57%, 10/15/96 -- -- 343,175
Will County, Illinois, School District, 5.57%, 12/15/98 1,482,750 -- 1,482,750
------------ ------------ ------------
Total Municipal Zero-Coupon Securities
(combined cost: $ 216,485,869) 65,199,449 36,516,614 220,801,369
------------ ------------ ------------
Short-Term Securities (10.2%):
Repurchase agreement with Goldman in
a joint trading account, 6.10% acquired on
02/28/95 and due 03/01/95 with accrued
interest of $4,702 (collateralized by
U.S. government agency obligations) -- -- 27,747,000
Repurchase agreement with Morgan Stanley in
a joint trading account, 5.97% acquired on
02/28/95 and due 03/01/95 with accrued
interest of $7,707 (collateralized by
U.S. government agency obligations) -- -- 46,476,000
Repurchase agreement with Goldman in
a joint trading account, 6.10% acquired on
02/28/95 and due 03/01/95 with accrued
interest of $5,560 (collateralized by
U.S. government agency obligations) 32,816,000 -- 32,816,000
</TABLE>
F-12
<PAGE>
PIPER FUNDS INC. II -- ADJUSTABLE RATE MORTGAGE SECURITIES FUND (ADJUSTABLE
RATE FUND)
PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED)
FEBRUARY 28, 1995
<TABLE>
<CAPTION>
AMERICAN AMERICAN
ADJUSTABLE RATE ADJUSTABLE RATE
PRINCIPAL TERM TRUST 1996 TERM TRUST 1997
NAME OF ISSUER AMOUNT MARKET VALUE (a) MARKET VALUE (a)
- ----------------------------------------------------------- --------------- ------------------ ------------------
<S> <C> <C> <C>
Repurchase agreement with Goldman in
a joint trading account, 6.10% acquired on
02/28/95 and due 03/01/95 with accrued
interest of $2,886 (collateralized by
U.S. government agency obligations) 17,032,000 -- --
------------ ------------
Total Short-Term Securities
(combined cost: $ 124,071,000) 27,747,000 46,476,000
------------ ------------
Total Investments in Securities
(combined cost: $ 1,425,002,023)(d) 221,204,945 452,005,820
------------ ------------
------------ ------------
Notes to Pro Forma Investments in Securities:
(a) See historical financial statements and
footnotes thereto of each of the Trusts
regarding valuation of securities.
(b) Descriptions of certain indices are as follows:
LIBOR - London InterBank Offered Rate
COFI (11th District) - Cost of Funds Index of
the Federal Reserve's 11th District
(c) For zero-coupon investments, the interest rate
shown is the effective yield on the date of
purchase.
(d) On February 28, 1995, for federal income tax
purposes, the combined pro forma cost of
investments in securities, including the put
options shown in the pro forma combining
statement of assets and liabilities,
approximated $1,433,729,923. The aggregate
gross unrealized appreciation and depreciation
of investments in securities based on this
cost were as follows: Gross appreciation 465,593 2,550,712
Gross depreciation (5,637,237) (11,126,712)
------------ ------------
Net depreciation (5,171,644) (8,576,000)
------------ ------------
------------ ------------
<CAPTION>
PIPER FUNDS INC. II -- ADJUSTABLE RATE MORTGAGE SECURITIES FUND (ADJUSTABLE
RATE FUND)
PRO FORMA COMBINING SCHEDULE OF INVESTMENTS (UNAUDITED) PIPER FUNDS INC. II
FEBRUARY 28, 1995 AMERICAN AMERICAN ADJUSTABLE RATE FUND
ADJUSTABLE RATE ADJUSTABLE RATE PRO FORMA
TERM TRUST 1998 TERM TRUST 1999 COMBINED
NAME OF ISSUER MARKET VALUE (a) MARKET VALUE (a) MARKET VALUE (a)
- ----------------------------------------------------------- ------------------ ------------------ -------------------
<S> <C> <C> <C>
Repurchase agreement with Goldman in
a joint trading account, 6.10% acquired on
02/28/95 and due 03/01/95 with accrued
interest of $2,886 (collateralized by
U.S. government agency obligations) -- 17,032,000 17,032,000
------------ ------------ ------------
Total Short-Term Securities
(combined cost: $ 124,071,000) 32,816,000 17,032,000 124,071,000
------------ ------------ ------------
Total Investments in Securities
(combined cost: $ 1,425,002,023)(d) 460,488,418 267,022,964 1,400,722,147
------------ ------------ ------------
------------ ------------ ------------
Notes to Pro Forma Investments in Securities:
(a) See historical financial statements and
footnotes thereto of each of the Trusts
regarding valuation of securities.
(b) Descriptions of certain indices are as follows:
LIBOR - London InterBank Offered Rate
COFI (11th District) - Cost of Funds Index of
the Federal Reserve's 11th District
(c) For zero-coupon investments, the interest rate
shown is the effective yield on the date of
purchase.
(d) On February 28, 1995, for federal income tax
purposes, the combined pro forma cost of
investments in securities, including the put
options shown in the pro forma combining
statement of assets and liabilities,
approximated $1,433,729,923. The aggregate
gross unrealized appreciation and depreciation
of investments in securities based on this
cost were as follows: Gross appreciation 1,305,568 427,964 4,749,837
Gross depreciation (12,380,344) (5,769,718) (34,914,011)
------------ ------------ ------------
Net depreciation (11,074,776) (5,341,754) (30,164,174)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-13
<PAGE>
PIPER FUNDS INC. II - ADJUSTABLE RATE MORTGAGE SECURITIES FUND (ADJUSTABLE RATE
FUND)
PRO FORMA COMBINING SCHEDULE OF TOTAL RETURNS AND EXPENSE RATIOS (UNAUDITED)
As discussed in footnote 1 to the Pro Forma Combining Financial Statements, it
is possible that one or more of the Trusts will not approve the merger, in which
case the resulting Adjustable Rate Fund will be comprised only of those Trusts
that approve the merger. Presented below is combining pro forma total return
and expense ratio information for historical periods under all possible
combination scenarios.
<TABLE>
<CAPTION>
Fiscal Year Ended August 31,
Six Months --------------------------------------------
Ended
February 28, 1995 1994 1993 1992 1991
----------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SCENARIO 1 - BDJ, CDJ, DDJ & EDJ
Total Return (a) 1.53% -2.68% 6.28% 9.67% 9.63% (c)
Expense Ratio (b) 0.61% 0.58% 0.55% 0.57% 0.62% (c)
SCENARIO 2 - CDJ, DDJ & EDJ
Total Return (a) 1.43% -2.99% 6.49% 9.45% 1.04% (d)
Expense Ratio (b) 0.59% 0.57% 0.55% 0.57% 0.60% (d)
SCENARIO 3 - BDJ, DDJ & EDJ
Total Return (a) 1.39% -2.78% 6.04% 10.21% 9.55% (c)
Expense Ratio (b) 0.61% 0.58% 0.55% 0.57% 0.64% (c)
SCENARIO 4 - BDJ, CDJ & EDJ
Total Return (a) 1.62% -2.44% 6.27% 9.26% 9.63% (c)
Expense Ratio (b) 0.64% 0.59% 0.55% 0.60% 0.62% (c)
SCENARIO 5 - BDJ, CDJ & DDJ
Total Return (a) 1.67% -2.45% 6.24% 9.67% 9.63% (c)
Expense Ratio (b) 0.62% 0.58% 0.56% 0.57% 0.62% (c)
SCENARIO 6 - DDJ & EDJ
Total Return (a) 1.17% -3.32% 6.28% 5.49% (e) N/A
Expense Ratio (b) 0.59% 0.58% 0.56% 0.58% (e) N/A
SCENARIO 7 - CDJ & EDJ
Total Return (a) 1.47% -2.46% 6.63% 8.97% 1.04% (d)
Expense Ratio (b) 0.62% 0.59% 0.56% 0.60% 0.60% (d)
SCENARIO 8 - CDJ & DDJ
Total Return (a) 1.56% -2.82% 6.50% 9.45% 1.04% (d)
Expense Ratio (b) 0.60% 0.58% 0.55% 0.57% 0.60% (d)
SCENARIO 9 - BDJ & EDJ
Total Return (a) 1.43% -2.47% 5.60% 9.58% 9.55% (c)
Expense Ratio (b) 0.67% 0.61% 0.58% 0.62% 0.64% (c)
SCENARIO 10 - BDJ & DDJ
Total Return (a) 1.55% -2.47% 5.93% 10.21% 9.55% (c)
Expense Ratio (b) 0.63% 0.60% 0.57% 0.57% 0.64% (c)
SCENARIO 11- BDJ & CDJ
Total Return (a) 1.89% -1.95% 6.21% 9.26% 9.63% (c)
Expense Ratio (b) 0.67% 0.60% 0.57% 0.60% 0.62% (c)
</TABLE>
F-14
<PAGE>
<TABLE>
<CAPTION>
Six Months Fiscal Year Ended August 31,
Ended --------------------------------------------
February 28, 1995 1994 1993 1992 1991
----------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SCENARIO 12-BDJ
Total Return(a) 2.03% -1.06% 5.18% 9.58% 9.55% (c)
Expense Ratio(b) 0.75% 0.65% 0.61% 0.62% 0.64% (c)
SCENARIO 13-CDJ
Total Return(a) 1.80% -2.46% 6.73% 8.97% 1.04% (d)
Expense Ratio(b) 0.65% 0.61% 0.58% 0.60% 0.60% (d)
SCENARIO 14-DDJ
Total Return(a) 1.30% -3.18% 6.24% 5.49% (e) N/A
Expense Ratio(b) 0.59% 0.60% 0.58% 0.58% (e) N/A
SCENARIO 15-EDJ
Total Return(a) 0.93% -3.61% 6.05% (f) N/A N/A
Expense Ratio(b) 0.61% 0.60% 0.57% (f) N/A N/A
<FN>
(a) Total return is based on the change in net asset value during the period,
assumes reinvestment of distributions at actual reinvestment prices and
does not reflect a sales charge. The combining pro forma total returns were
computed assuming the applicable Trusts had been combined since their
respective inceptions and reflect the revised investment management fee
structure of Adjustable Rate Fund as described in note 3(a) to the Pro
Forma Combining Financial Statements.
(b) Represents the ratio of expenses to average weekly net assets.
The combining pro forma expense ratios were computed assuming the
applicable Trusts had been combined since their respective inceptions and
reflects the revised investment management fee structure of Adjustable Rate
Fund as described in note 3(a) to the Pro Forma Combining Financial
Statements. The expense ratios do not reflect the Adviser's undertaking to
limit total Adjustable Rate Fund operating expenses to 0.60% of average
daily net assets through August 31, 1996 if at least three of the Trusts
approve the merger. Expense ratios are annualized where the combined entity
would have been in existence for a partial period.
(c) The period from September 27, 1990 (commencement of BDJ operations) to
August 31, 1991.
(d) The period from July 24, 1991 (commencement of CDJ operations) to August
31, 1991.
(e) The period from January 30, 1992 (commencement of DDJ operations) to August
31, 1992.
(f) The period from September 24, 1992 (commencement of EDJ operations) to
August 31, 1993.
</TABLE>
F-15
<PAGE>
APPENDIX A
CORPORATE BOND AND
COMMERCIAL PAPER RATINGS
COMMERCIAL PAPER RATINGS
STANDARD & POOR'S RATINGS GROUP. 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, as amended, 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 RATINGS GROUP. 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.
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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, 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.
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APPENDIX B
INTEREST RATE FUTURES CONTRACTS AND RELATED OPTIONS
INTEREST RATE FUTURES CONTRACTS
Adjustable Rate Fund and each Trust 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 Adjustable Rate Fund or any Trust 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
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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 Adjustable
Rate Fund or any Trust, 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 Adjustable
Rate Fund or a Trust owns long-term bonds and interest rates are expected to
increase, the Fund or Trust 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
or Trust'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 or Trust's futures contracts would increase at
approximately the same rate, thereby keeping the net asset value of the Fund
or the Trust from declining as much as it otherwise would have. Of course,
since the value of the securities in the Fund's or the Trust's portfolio will
far exceed the value of the futures contracts sold by the Fund or Trust, 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 Adjustable Rate Fund's or a
Trust'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 or Trust
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 or Trust's cash
could then be used to buy long-term bonds on the cash market. Adjustable Rate
Fund or any Trust 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 or Trust to react more quickly to anticipated changes in
market conditions or interest rates.
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OPTIONS ON INTEREST RATE FUTURES CONTRACTS
Adjustable Rate Fund and the Trusts 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. Adjustable Rate Fund and the Trusts
will pay premiums 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 Adjustable Rate Fund or any Trust. In
connection with the writing of options on interest rate futures contracts,
Adjustable Rate Fund and the Trusts will make initial margin deposits and make
or receive maintenance margin payments that reflect changes in the market value
of such options. Premiums received from the writing of an option are included
in initial margin deposits.
PURCHASE OF PUT OPTIONS ON FUTURES CONTRACTS. Adjustable Rate Fund and the
Trusts 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, each of Adjustable Rate Fund and
the Trusts will seek to realize a profit to offset the loss in value of its
portfolio securities.
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PURCHASE OF CALL OPTIONS ON FUTURES CONTRACTS. Adjustable Rate Fund and the
Trusts 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. Adjustable Rate Fund or a Trust 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 or Trust is holding cash. The
Fund or Trust 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 or
Trust's cash can be used to buy long-term securities.
WRITING CALL OPTIONS ON FUTURES CONTRACTS. Adjustable Rate Fund and the
Trusts 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 Adjustable Rate Fund or a Trust 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 or Trust's portfolio securities.
WRITING PUT OPTIONS ON FUTURES CONTRACTS. Adjustable Rate Fund and the Trusts
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 or Trust will retain the full amount of the option
premium. Such amount can then be used by the Fund or Trust 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
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market may also cause temporary price distortions. Because of possible price
distortion in the futures market and because of imperfect correlation between
movements in securities and movements in the prices of futures contracts,
even a correct forecast of general market trends may not result in a
successful hedging transaction over a very short period. Another risk arises
because of imperfect correlation between movements in the value of the
futures contracts and movements in the value of securities subject to the
hedge.
Successful use of futures contracts by Adjustable Rate Fund or a Trust is
subject to the ability of the Adviser to predict correctly movements in the
direction of interest rates. If the Fund or Trust 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 or Trust 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 or Trust
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
or Trust may have to sell securities at a time when it may be disadvantageous
to do so.
LIQUIDITY OF FUTURES CONTRACTS. Adjustable Rate Fund or a Trust 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
or Trust. The Fund or Trust 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 or Trust, and the Fund or Trust
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
Adjustable Rate Fund and the Trusts intend to enter into futures contracts only
on exchanges or boards of trade where there appears to be an active secondary
market, there can be 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
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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,
Adjustable Rate Fund or a Trust 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 Adjustable Rate Fund and the Trusts because the
maximum amount at risk is the premium paid for the options (plus transactions
costs). The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of a Fund's or Trust's
portfolio assets. By writing a call option, Adjustable Rate Fund or a Trust
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 or Trust becomes obligated to
purchase a futures contract, which may have a value lower than the exercise
price. Thus, the loss incurred by the Fund or Trust in writing options on
futures contracts may exceed the amount of the premium received.
The effective use of options strategies is dependent, among other things,
on the Fund's or Trust's ability to terminate option positions at a time
when the Adviser deems it desirable to do so. Although Adjustable Rate Fund
and the Trusts will enter into option positions only if the Adviser believes
that a liquid secondary market exists for such options, there is no assurance
that Adjustable Rate Fund or any Trust will be able to effect closing
transactions at any particular time or at an acceptable price. Adjustable Rate
Fund's and the Trusts' transactions involving options on futures contracts will
be conducted only on recognized exchanges. Adjustable Rate Fund's and the
Trusts' purchases and sales 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 or Trust's portfolio securities.
REGULATORY MATTERS
To the extent required to comply with applicable Securities and Exchange
Commission releases and staff positions, when entering into futures
contracts, Adjustable Rate Fund and the Trusts each 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
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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, Adjustable
Rate Fund and the Trusts will file such notices and meet the requirements of
Rule 4.5, or such other requirements as the CFTC or its staff may from time to
time issue, in order to render registration as a commodity pool operator
unnecessary.
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