1933 Act Registration No. 33-60515
1940 Act Registration No. 811-07279
As filed with the Securities and Exchange Commission on December 18, 1995
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(Registration No. 33-60515)
Pre-Effective Amendment No.
Post-Effective Amendment No. 2
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
(Registration No. 811-07279)
Amendment No. 3
(Check appropriate box or boxes)
PIPER FUNDS INC. -- II
(Exact Name of Registrant as Specified in Charter)
Piper Jaffray Tower, 222 South 9th Street, Minneapolis, MN 55402
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (6l2) 342-6384
Paul A. Dow
Piper Capital Management Incorporated
Piper Jaffray Tower
222 South 9th Street, Minneapolis, Minnesota 55402
(Name and Address of Agent for Service)
Copy to:
Kathleen L. Prudhomme
Dorsey & Whitney P.L.L.P.
220 South Sixth Street
Minneapolis, Minnesota 55402
_X_ immediately upon filing pursuant to paragraph (b) of rule 485
___ on (specify date) pursuant to paragraph (b) of rule 485
___ 75 days after filing pursuant to paragraph (a) of rule 485, unless
effectiveness is accelerated by the staff of the Securities and Exchange
Commission
___ on (specify date) pursuant to paragraph (a) of rule 485
The Registrant has registered an indefinite number of its common shares pursuant
to Regulation 270.24f-2 under the Investment Company Act of 1940. A Rule 24f-2
Notice for the fiscal year ended August 31, 1996 will be filed on or before
October 31, 1996.
PIPER FUNDS INC. -- II
Registration Statement on Form N-1A
CROSS REFERENCE SHEET
Pursuant to Rule 481(a)
Item No. Prospectus Heading
1. Cover Page................................... Cover Page
2. Synopsis..................................... Introduction; Fund Expenses
3. Financial Highlights......................... Financial Highlights
4. General Description of Registrant............. Introduction; Investment
Objective, Policies and
Risk Factors
5. Management of the Fund....................... Management
6. Capital Stock and Other Securities........... General Information;
Introduction; Dividends and
Distributions; Tax Status
7. Purchase of Securities Being Offered......... Distribution of Fund Shares;
How to Purchase Shares;
Reducing Your Sales Charge;
Special Purchase Plans;
Valuation of Shares;
Shareholder Services
8. Redemption or Repurchase..................... How to Redeem Shares;
Shareholder Services
9. Pending Legal Proceedings.................... General Information
Statement of Additional
Information Heading
10. Cover Page................................... Cover Page
11. Table of Contents............................ Cover Page
12. General Information and History.............. General
Information; Pending Litigation
13. Investment Objectives and Policies........... Investment Objective,
Policies and Restrictions
14. Management of the Fund....................... Directors and Executive
Officers
15. Control Persons and Principal
Holders of Securities...................... Capital Stock and Ownership
of Shares
16. Investment Advisory and Other Services....... Investment Advisory and Other
Services
17. Brokerage Allocation......................... Portfolio Transactions and
Allocation of Brokerage
18. Capital Stock and Other Securities........... Capital Stock and Ownership
of Shares
19. Purchase, Redemption and
Pricing of Securities
Being Purchased............................ Net Asset Value and Public
Offering Price; Performance
Comparisons; Purchase of
Shares; Redemption of Shares
20. Tax Status................................... Taxation
21. Underwriters................................. Investment Advisory and Other
Services; Portfolio
Transactions and Allocation of
Brokerage
22. Calculations of Performance Data............. Performance Comparisons
23. Financial Statements......................... Financial Statements
PROSPECTUS DATED DECEMBER 18, 1995
PIPER FUNDS INC. -- II
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
PIPER JAFFRAY TOWER
222 SOUTH NINTH STREET
MINNEAPOLIS, MINNESOTA 55402-3804
(800) 866-7778 (TOLL FREE)
Adjustable Rate Mortgage Securities Fund (the "Fund") is a diversified series of
Piper Funds Inc. -- II (the "Company"), an open-end management investment
company the shares of which can be offered in more than one series. The Fund is
the only series of the Company currently outstanding. The investment objective
of the Fund is to provide the maximum current income that is consistent with low
volatility of principal. The Fund will seek to achieve that objective by
investing primarily (at least 65% of its total assets under normal market
conditions) in adjustable rate mortgage securities ("ARMS"). ARMS include both
pass-through securities representing interests in adjustable rate mortgage loans
and floating rate collateralized mortgage obligations.
AN INVESTMENT IN THE FUND MAY INVOLVE CERTAIN RISKS, INCLUDING THE LOSS OF
PRINCIPAL. THE MARKET VALUE OF THE SECURITIES IN WHICH THE FUND INVESTS WILL
FLUCTUATE WITH CHANGING INTEREST RATES, AS WILL THE FUND'S NET ASSET VALUE. THE
FUND MAY INVEST IN ILLIQUID SECURITIES, WHICH WILL INVOLVE GREATER RISK THAN
INVESTMENTS IN OTHER SECURITIES AND MAY INCREASE FUND EXPENSES. SEE "INVESTMENT
OBJECTIVE, POLICIES AND RISK FACTORS -- OTHER INVESTMENT TECHNIQUES." THE FUND
INVESTS A SIGNIFICANT PORTION OF ITS ASSETS IN MORTGAGE-RELATED SECURITIES,
WHICH MAY INCLUDE DERIVATIVE MORTGAGE SECURITIES. SEE "INVESTMENT OBJECTIVE,
POLICIES AND RISK FACTORS -ADJUSTABLE RATE MORTGAGE SECURITIES" AND "-- OTHER
ELIGIBLE INVESTMENTS."
This Prospectus concisely describes the information about the Fund that you
should know before investing. Please read it carefully before investing and
retain it for future reference.
A Statement of Additional Information about the Fund dated December 18, 1995 is
available free of charge. Write to the Fund at Piper Jaffray Tower, 222 South
Ninth Street, Minneapolis, Minnesota 55402-3804 or telephone (800) 866-7778
(toll free). The Statement of Additional Information has been filed with the
Securities and Exchange Commission and is incorporated in its entirety by
reference in this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
INTRODUCTION
Adjustable Rate Mortgage Securities Fund (the "Fund") is a diversified series
of Piper Funds Inc. -- II (the "Company"), an open-end management investment
company the shares of which can be offered in more than one series. The Fund
is the only series of the Company currently outstanding. The investment
objective of the Fund is to provide the maximum current income that is
consistent with low volatility of principal. On September 1, 1995, four
closed-end investment companies, American Adjustable Rate Term Trust Inc. --
1996 ("BDJ"), American Adjustable Rate Term Trust Inc. -- 1997 ("CDJ"),
American Adjustable Rate Term Trust Inc. -- 1998 ("DDJ") and American
Adjustable Rate Term Trust Inc. -- 1999 ("EDJ") (collectively, the "Trusts")
merged into the Fund (the "Merger"). Class action lawsuits have been filed in
U.S. District Court against each of the Trusts. The Company may be deemed to
be a successor by merger to the Trusts and, as such, may succeed to their
liabilities, including damages sought in such litigation. However, Piper
Jaffray Companies Inc. and Piper Capital Management Incorporated have agreed
to indemnify the Company against any losses incurred in connection with such
litigation. See "General Information -- Pending Legal Proceedings."
THE INVESTMENT ADVISER
The Fund is managed by Piper Capital Management Incorporated (the "Adviser"), a
wholly owned subsidiary of Piper Jaffray Companies Inc. The Fund pays the
Adviser a fee for managing its investment portfolio. The fee for the Fund is
paid at an annual rate of .35% on the first $500 million of average daily net
assets and .30% on average daily net assets in excess of $500 million. See
"Management -- Investment Adviser."
THE DISTRIBUTOR
Piper Jaffray Inc. ("Piper Jaffray" or the "Distributor"), a wholly owned
subsidiary of Piper Jaffray Companies Inc. and an affiliate of the Adviser,
serves as Distributor of the Fund's shares.
RISK FACTORS TO CONSIDER
An investment in the Fund is subject to certain risks, as set forth in detail
under "Investment Objective, Policies and Risk Factors." As with other mutual
funds, there can be no assurance that the Fund will achieve its objective. The
Fund is subject to interest rate risk (the risk that rising interest rates will
make bonds issued at lower interest rates worth less). As a result, the value of
the Fund's shares will vary. The Fund is also subject to credit risk (the risk
that a bond issuer will fail to make timely payments of interest or principal)
to the extent it invests in non-U.S. Government securities. The Fund may engage
in the following investment practices which involve certain special risks: the
use of repurchase agreements, the lending of portfolio securities, borrowing
from banks and through reverse repurchase agreements (but only for temporary or
emergency purposes in an amount up to 10% of the value of its total assets), the
use of hedging techniques, including interest rate transactions, options,
futures contracts, options on futures contracts and investments in Eurodollar
instruments, and the purchase or sale of securities on a "when-issued" or
"forward commitment" basis. These techniques may increase the volatility of the
Fund's net asset value.
OFFERING PRICE
Shares of the Fund are offered to the public at the next determined net asset
value after receipt of an order by a shareholder's Piper Jaffray Investment
Executive or other broker-dealer plus a maximum sales charge of 1.50% of the
offering price (1.52% of the net asset value) on purchases of less than
$100,000. The sales charge is reduced on a graduated scale on purchases of
$100,000 or more. In connection with purchases of $500,000 or more, there is no
initial sales charge; however, a .20% contingent deferred sales charge will be
imposed in the event of a redemption transaction occurring within 24 months
following such a purchase. See "How to Purchase Shares -- Purchase Price" and
"-- Purchases of $500,000 or More."
MINIMUM INITIAL AND SUBSEQUENT INVESTMENTS
The minimum initial investment for the Fund is $250. There is no minimum for
subsequent investments. The Distributor, in its discretion, may waive the
minimum. See "How to Purchase Shares -- Minimum Investments."
EXCHANGES
You may exchange your Fund shares for shares of any other mutual fund managed by
the Adviser (except Hercules Funds Inc.) which is open to new investors and
eligible for sale in your state of residence, provided that, if you hold your
Fund shares through a broker-dealer other than the Distributor, the exchange
privilege may not be available. Exchanges will be permitted only if there is a
valid sales agreement between your broker-dealer and the Distributor for the
fund into which the exchange will be made. All exchanges are subject to the
minimum investment requirements and other applicable terms set forth in the
prospectus of the fund whose shares you acquire. Exchanges are made on the basis
of the net asset values of the funds involved, except that investors exchanging
into a fund which has a higher sales charge must pay the difference. However,
exchanges of Fund shares which were received in the Merger will be permitted
without payment of an additional sales charge. You may make four exchanges per
year without payment of a service charge. Thereafter, there is a $5 service
charge for each exchange. See "Shareholder Services -- Exchange Privilege."
REDEMPTION PRICE
Shares of the Fund may be redeemed at any time at their net asset value next
determined after a redemption request is received by your Piper Jaffray
Investment Executive or other broker-dealer. A contingent deferred sales charge
will be imposed upon the redemption of certain shares initially purchased
without a sales charge. See "How to Redeem Shares -- Contingent Deferred Shares
Charge." The Fund reserves the right, upon 30 days written notice, to redeem an
account if the net asset value of the shares falls below $200. See "How to
Redeem Shares -- Involuntary Redemption."
SHAREHOLDER INQUIRIES
Any questions or communications regarding a shareholder account should be
directed to your Piper Jaffray Investment Executive or, in the case of shares
held through another broker-dealer, to Investors Fiduciary Trust Company
("IFTC") at (800) 874-6205. General inquiries regarding the Fund should be
directed to the Fund at the telephone number set forth on the cover page of this
Prospectus.
FUND EXPENSES
<TABLE>
<CAPTION>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of the offering price) 1.50%
Exchange Fee* $ 0
ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets)
Management Fee .35%
Rule 12b-1 Fee .15%
Other Expenses (after voluntary expense reimbursement)** .10%
Total Fund Operating Expenses (after voluntary expense reimbursement)** .60%
</TABLE>
* There is a $5.00 fee for each exchange in excess of four exchanges per
year. See "Shareholder Services -- Exchange Privilege."
** See the discussion below for an explanation of voluntary expense
reimbursements.
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming 5% annual
return and redemption at the end of each time period:
1 year $21 3 years $34
The purpose of the above Fund Expenses table is to assist you in understanding
the various costs and expenses that investors in the Fund will bear directly or
indirectly. THE EXAMPLE CONTAINED IN THE TABLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN.
The Adviser intends, although not required under the Advisory Agreement, to
reimburse the Fund for the amount, if any, by which the Total Fund Operating
Expenses of the Fund (excluding interest, taxes, brokerage fees and commissions,
and extraordinary expenses) for the fiscal year ending August 31, 1996, exceed
.60% of average net assets. The Adviser's limitation on expenses is voluntary
and may be revised or terminated at any time after fiscal year end. The Adviser
may or may not assume additional expenses of the Fund from time to time, in its
discretion, while retaining the ability to be reimbursed by the Fund for
expenses assumed during a fiscal year prior to the end of such year. The
foregoing policy will have the effect of lowering the Fund's overall expense
ratio and increasing yield to investors when such amounts are assumed or the
inverse when such amounts are reimbursed. It is estimated that, absent any
voluntary expense reimbursements, the Fund will have Other Expenses as a
percentage of average net assets (adjusted to an annual basis) of approximately
.23% for the fiscal year ending August 31, 1996, resulting in Total Fund
Operating Expenses of .73%. For additional information, including a more
complete explanation of management and Rule 12b-1 fees, see "Management --
Investment Adviser" and "Distribution of Fund Shares."
FINANCIAL HIGHLIGHTS
The following financial highlights show per share data for a share of capital
stock outstanding throughout each period and selected information for each
period for American Adjustable Rate Term Trust Inc. -- 1998 ("DDJ"). For
financial reporting purposes, DDJ is considered the surviving entity of the
closed-end investment companies that merged into the Fund on September 1, 1995.
These financial highlights have been audited by KPMG Peat Marwick LLP,
independent auditors, and should be read in conjunction with the financial
statements of the Fund contained in its Annual Report. An Annual Report is
available without charge by contacting the Fund at 800-866-7778 (toll free). In
addition to financial statements, the Annual Report contains further information
about the performance of the Fund.
<TABLE>
<CAPTION>
PERIOD FROM
FISCAL YEAR ENDED AUGUST 31, 1/30/92* TO
1995 1994 1993 8/31/92
<S> <C> <C> <C> <C>
PER SHARE DATA
Net asset value, beginning of period $ 8.82 9.67 9.74 9.58
Operations:
Net investment income 0.51 0.60 0.69 0.43
Net realized and unrealized gains (losses)
on investments (0.05) (0.89) (0.10) 0.08
Total from operations 0.46 (0.29) 0.59 0.51
Distributions to shareholders:
From net investment income (0.58) (0.56) (0.66) (0.35)
Net asset value, end of period $ 8.70 8.82 9.67 9.74
SELECTED INFORMATION
Total return** 5.43% (3.18%) 6.24% 5.49%
Net assets at end of period (in millions) $ 409 500 551 555
Ratio of expenses to average weekly net
assets 0.63% 0.60% 0.58% 0.58%***
Ratio of net investment income to average
weekly net assets 5.62% 6.39% 7.25% 7.70%***
Portfolio turnover rate (excluding
short-term securities) 36% 39% 39% 41%
Amount of borrowings outstanding at end of
period (in millions)+ $ -- 145 145 145
Average amount of borrowings outstanding
during the period (in millions) $ 57 145 149 90
Average number of shares outstanding during
the period (in millions) 49 57 57 48
Average per-share amount of borrowings
outstanding during the period $ 1.19 2.55 2.62 1.82
</TABLE>
* Commencement of operations of American Adjustable Rate Term Trust Inc. --
1998.
** Total return is based on the change in net asset value during the period,
assumes reinvestment of distributions at net asset value and does not
reflect a sales charge.
*** Adjusted to an annual basis.
+ American Adjustable Rate Term Trust Inc. -- 1998 was a closed-end
investment management company and was permitted to enter into borrowings
for other than temporary or emergency purposes. The Fund may borrow only
for temporary or emergency purposes.
INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS
The Fund's investment objective is to provide the maximum current income that is
consistent with low volatility of principal. This investment objective cannot be
changed without shareholder approval. The investment policies and techniques
employed in pursuit of the Fund's objective may be changed without shareholder
approval, unless otherwise noted. In view of the risks inherent in all
investments in securities, there is no assurance that the Fund will achieve its
objective.
The Fund seeks to achieve its investment objective by investing primarily (at
least 65% of total assets under normal market conditions) in a portfolio of
Mortgage-Backed Securities (as defined herein) having adjustable interest rates
which reset at periodic intervals ("adjustable rate mortgage securities" or
"ARMS"). ARMS include both pass-through securities representing interests in
adjustable rate mortgage loans and floating rate collateralized mortgage
obligations. The balance of the Fund's assets (up to 35% of total assets) may be
invested in (a) Mortgage-Backed Securities (other than ARMS), (b) U.S.
Government Securities (including, with respect to 10% of the Fund's net assets,
U.S. Government zero-coupon securities); (c) Asset-Backed Securities; and (d)
Corporate Debt Securities (each as defined below). At least 85% of the Fund's
total assets (other than U.S. Government Securities) must be rated, as of the
date of purchase, AA or better by Standard & Poor's Ratings Group ("Standard &
Poor's"), Aa or better by Moody's Investors Service, Inc. ("Moody's"),
comparably rated by any other nationally recognized statistical rating
organization ("NRSRO") or, if unrated, of a comparable quality as determined by
the Adviser. Up to 15% of the Fund's total assets may be invested in securities
rated, as of the date of purchase, A by Standard & Poor's or Moody's, comparably
rated by any other NRSRO or, if unrated, of comparable quality as determined by
the Adviser. The Fund may not invest in any security rated, as of the date of
purchase, lower than A by Standard & Poor's or Moody's (or below a comparable
rating by any other NRSRO) or, if unrated, of a quality lower than A as
determined by the Adviser. In the event that a security is downgraded to a
rating below A or, if unrated, is no longer of a quality comparable to a
security rated A, as determined by the Adviser, the Fund will sell such a
security as promptly as possible. For a discussion of Standard & Poor's and
Moody's ratings, see Appendix A to the Statement of Additional Information.
The Fund may engage in options and financial futures transactions which relate
to the securities in which it invests, may purchase and sell interest rate caps
and floors, may make investments in Eurodollar instruments for hedging purposes,
may purchase or sell securities on a when-issued or forward commitment basis and
may lend its portfolio securities.
For temporary defensive purposes, the Fund may invest without limitation in cash
or in high quality debt securities with remaining maturities of one year or
less. Such securities may include (a) commercial paper rated A-1+ by Standard &
Poor's, P-1 by Moody's or comparably rated by any other NRSRO; (b) certificates
of deposit, time deposits and bankers' acceptances with any bank the unsecured
commercial paper of which is rated A-1+ by Standard & Poor's, P-1 by Moody's or
comparably rated by any other NRSRO (or, in the case of the principal bank in a
bank holding company, the unsecured commercial paper of the bank holding
company); and (c) U.S. Government Securities. Time deposits maturing in more
than seven days are considered illiquid and subject to the Fund's limitation on
investments in illiquid securities. See "Other Investment Techniques -- Illiquid
Securities" below.
Certain securities in which the Fund invests and certain investment techniques
used by the Fund could be considered "derivative instruments." The term
"derivatives" has been used to identify a variety of financial instruments;
there is no discrete class of instruments that is covered by the term. A
"derivative" is commonly defined as a financial instrument whose value is based
upon, or derived from, an underlying index, reference rate (e.g., interest rates
or currency exchange rates), security, commodity, or other asset. Securities in
which the Fund invests that could be considered derivatives include
mortgage-related securities and asset-backed securities, which derive their
value from underlying pools of mortgages and assets, respectively. In addition,
interest rate caps and floors, options on securities, futures contracts, options
on futures contracts and when-issued securities transactions are derivative
contracts. These derivative securities and contracts involve varying degrees and
types of risk, as set forth below under "Adjustable Rate Mortgage Securities,"
"Other Eligible Investments -- Mortgage-Backed Securities" and "-- Asset-Backed
Securities," and "Other Investment Techniques."
RISK FACTORS
The Fund is subject to certain risks which could result in volatility of
principal. As with other mutual funds, there can be no assurance that the Fund
will achieve its objective. The Fund is subject to interest rate risk, which is
the potential for a decline in bond prices due to rising interest rates. In
general, bond prices vary inversely with interest rates. When interest rates
rise, bond prices generally fall. Conversely, when interest rates fall, bond
prices generally rise. Although the ARMS in the Fund's portfolio should
generally be more resistant to price swings than other debt securities because
the interest rates of ARMS move with market interest rates, the adjustable rate
feature of ARMS will not eliminate price fluctuations. See "Adjustable Rate
Mortgage Securities -- Interest Rate Risk" below. The Fund's investments in ARMS
and other Mortgage-Backed Securities are also subject to prepayment risk. See
"Adjustable Rate Mortgage Securities -- Prepayment Risk." In addition, the Fund
is subject to credit risk to the extent it invests in non-U.S. Government
securities. Credit risk, also known as default risk, is the possibility that a
bond issuer will fail to make timely payments of interest or principal. These
and other risks of the Fund's investments are described in detail below.
The Fund also may engage in investment practices which involve certain special
risks. These practices include the use of repurchase agreements, the lending of
portfolio securities, borrowing from banks and through reverse repurchase
agreements (but only for temporary or emergency purposes in an amount up to 10%
of the value of the Fund's total assets), the use of hedging techniques,
including interest rate transactions, options, futures contracts, options on
futures contracts and investments in Eurodollar instruments, and the purchase or
sale of securities on a "when-issued" or "forward commitment" basis. See "Other
Investment Techniques" below. The use of these techniques may increase the
volatility of the Fund's net asset value.
ADJUSTABLE RATE MORTGAGE SECURITIES
Under normal market conditions, the Fund must invest at least 65% of its total
assets in adjustable rate mortgage securities or ARMS, which include the types
of securities discussed below.
U.S. Government Mortgage Pass-through Securities. ARMS include "pass-through"
securities issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities ("U.S. Government Pass-Throughs"). Pass-through securities
constituting ARMS represent ownership interests in underlying pools of
adjustable rate mortgage loans originated by private lenders. Such securities
differ from conventional debt securities, which provide for periodic payment of
interest in fixed amounts (usually semi-annually) and principal payments at
maturity or on specified call dates, in that pass-through securities provide for
monthly payments that are a pass-through of the monthly interest and principal
payments (including any prepayments) made by the individual borrowers on the
pooled mortgage loans, net of any fees paid to the guarantor of such securities
and the servicers of the underlying mortgage loans.
The U.S. Government Pass-Throughs in which the Fund may invest are issued or
guaranteed by the Government National Mortgage Association ("GNMA"), the Federal
National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage
Corporation ("FHLMC"). Each of GNMA, FNMA and FHLMC guarantee timely
distributions of interest to securities holders. GNMA and FNMA also guarantee
timely distribution of scheduled principal. FHLMC generally guarantees only
ultimate collection of principal on the underlying loans, which collection may
take up to one year. GNMA is a wholly owned corporate instrumentality of the
U.S. Government within the Department of Housing and Urban Development and its
guarantee is backed by the full faith and credit of the U.S. Government. FNMA
and FHLMC are federally chartered corporations and their respective guarantees
are not backed by the full faith and credit of the U.S. Government.
The mortgages underlying ARMS issued by GNMA are fully guaranteed by the Federal
Housing Administration ("FHA") or the Veterans Administration ("VA"). The
mortgages underlying ARMS issued by FNMA or FHLMC may be backed by conventional
adjustable rate mortgages not guaranteed by FHA or VA.
Private Mortgage Pass-through Securities. Private Mortgage Pass-Through
Securities ("Private Pass-Throughs") are structured similarly to the GNMA, FNMA
and FHLMC mortgage pass-through securities described above and are issued by
originators of and investors in mortgage loans, including savings and loan
associations, mortgage bankers, commercial banks, investment banks and special
purpose subsidiaries of the foregoing. Private Pass-Throughs constituting ARMS
are backed by a pool of conventional adjustable rate mortgage loans. Since
Private Pass-Throughs are not guaranteed by an entity having the credit status
of GNMA, FNMA or FHLMC, such securities generally are structured with one or
more types of credit enhancement. See "Investment Objective, Policies and
Restrictions -- Mortgage-Backed Securities -- Credit Support" in the Statement
of Additional Information.
CMOs and Multiclass Pass-Through Securities. ARMS in which the Fund may invest
also include adjustable rate tranches of collateralized mortgage obligations and
multiclass pass-through securities. Collateralized mortgage obligations are debt
instruments issued by special purpose entities which are secured by pools of
mortgage loans or other Mortgage-Backed Securities. Multiclass pass-through
securities are equity interests in a trust composed of mortgage loans or other
Mortgage-Backed Securities. Payments of principal and interest on underlying
collateral provide the funds to pay debt service on the collateralized mortgage
obligation or make scheduled distributions on the multiclass pass-through
security. Collateralized mortgage obligations and multiclass pass-through
securities (collectively, "CMOs" unless the context indicates otherwise) may be
issued by agencies or instrumentalities of the U.S. Government or by private
organizations.
In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of CMO, often referred to as a "tranche," is issued at a specified coupon
rate and has a stated maturity or final distribution date. Principal prepayments
on collateral underlying a CMO may cause it to be retired substantially earlier
than the stated maturities or final distribution dates.
The principal and interest on the mortgages underlying a CMO may be allocated
among the CMO's tranches in many ways. See "Other Eligible Investments --
Mortgage-Backed Securities -- CMOs," below. One or more tranches of a CMO may
have coupon rates which reset periodically at a specified increment over an
index such as the London Interbank Offered Rate ("LIBOR"). These adjustable rate
tranches, known as "floating rate CMOs," are considered ARMS by the Fund.
Floating rate CMOs may be backed by fixed rate or adjustable rate mortgages; to
date, fixed rate mortgages have been more commonly utilized for this purpose.
Floating rate CMOs are typically issued with lifetime caps on the coupon rate
thereon. These caps, similar to the caps on adjustable rate mortgages, represent
a ceiling beyond which the coupon rate on a floating rate CMO may not be
increased regardless of increases in the interest rate index to which the
floating rate CMO is geared, which may cause the security to be valued at a
greater discount than if the security was not subject to a ceiling.
How Interest Rates Are Set. The interest rates on ARMS are reset at periodic
intervals (generally one year or less) to an increment over some predetermined
interest rate index. There are two main categories of indices: those based on
U.S. Treasury securities and those derived from a calculated measure such as a
cost of funds index or a moving average of mortgage rates. Commonly utilized
indices include the one-year and five-year constant maturity Treasury note
rates, the three-month Treasury bill rate, the 180-day Treasury bill rate, rates
on longer-term Treasury securities, the 11th District Federal Home Loan Bank
Cost of Funds Index, the National Median Cost of Funds, the one-month or
three-month LIBOR, the prime rate of a specific bank, or commercial paper rates.
Some indices, such as the one-year constant maturity Treasury note rate, closely
mirror changes in market interest rate levels. Others, such as the 11th District
Home Loan Bank Cost of Funds Index (often related to ARMS issued by FNMA), tend
to lag changes in market rate levels and tend to be somewhat less volatile. The
Adviser seeks to diversify investments in ARMS among a variety of indices and
reset periods to reduce the exposure to the risk of interest rate fluctuations.
In selecting a type of ARMS for investment, the Adviser also considers the
liquidity of the market for such ARMS.
The underlying adjustable rate mortgages which back ARMS will frequently have
caps and floors which limit the maximum amount by which the loan rate to the
residential borrower may change up or down (a) per reset or adjustment interval
and (b) over the life of the loan. Some residential adjustable rate mortgage
loans restrict periodic adjustments by limiting changes in the borrower's
monthly principal and interest payments rather than limiting interest rate
changes. These payment caps may result in negative amortization, i.e., increase
in the balance of the mortgage loan. Floating rate CMOs are generally backed by
fixed rate mortgages and generally have lifetime caps on the coupon rate
thereon.
Interest Rate Risk. The values of ARMS, like other debt securities, generally
vary inversely with changes in market interest rates (increasing in value during
periods of declining interest rates and decreasing in value during periods of
increasing interest rates); however, the values of ARMS should generally be more
resistant to price swings than other debt securities because the interest rates
of ARMS move with market interest rates. The adjustable rate feature of ARMS
will not, however, eliminate fluctuations in the prices of ARMS, particularly
during periods of extreme fluctuations in interest rates. Also, since many
adjustable rate mortgages only reset on an annual basis, it can be expected that
the prices of ARMS will fluctuate to the extent changes in prevailing interest
rates are not immediately reflected in the interest rates payable on the
underlying adjustable rate mortgages.
Prepayment Risk. ARMS, like other Mortgage-Backed Securities, differ from
conventional bonds in that principal is paid back over the life of the ARMS
rather than at maturity. As a result, the holder of the ARMS receives monthly
scheduled payments of principal and interest, and may receive unscheduled
principal payments representing prepayments on the underlying mortgages. When
the holder reinvests the payments and any unscheduled prepayments of principal
it receives, it may receive a rate of interest which is lower than the rate on
the existing ARMS. For this reason, ARMS are less effective than longer-term
debt securities as a means of "locking in" long-term interest rates.
ARMS, while having less risk of price decline during periods of rapidly rising
rates than other investments of comparable maturities, will have less potential
for capital appreciation due to the likelihood of increased prepayments of
mortgages as interest rates decline. In addition, to the extent ARMS are
purchased at a premium, mortgage foreclosures and unscheduled principal
prepayments will result in a loss of some or all of the premium paid. On the
other hand, if ARMS are purchased at a discount, both a scheduled payment of
principal and an unscheduled prepayment of principal will increase current and
total returns and will accelerate the recognition of income which, when
distributed to shareholders, will be taxable as ordinary income.
OTHER ELIGIBLE INVESTMENTS
The balance of the Fund's assets (35% of total assets) may be invested in the
following types of securities to the extent set forth below.
Mortgage-Backed Securities.
* General. In addition to ARMS, the Fund may invest in other types of
Mortgage-Backed Securities. Mortgage-Backed Securities are securities which
represent interests in or are collateralized by mortgages. Such securities
are issued by GNMA, FNMA, FHLMC and by private organizations and take the
same structure as ARMS, i.e., pass-through securities and CMOs. The Fund
will not invest in inverse floating, interest-only, principal-only or Z
tranches of CMOs, in residual interests of CMOs, or in stripped
Mortgage-Backed Securities.
* CMOs. As discussed above, investments in ARMS include floating rate CMOs.
The Fund's investments in Mortgage-Backed Securities other than ARMS may
include certain other tranches of CMOs. The principal and interest on the
mortgages underlying a CMO may be allocated among the CMO's several
tranches in many ways. For example, certain tranches may have variable or
floating interest rates and others may provide only the principal or
interest feature of the underlying security. Generally, the purpose of the
allocation of the cash flow of a CMO to the various tranches is to obtain a
more predictable cash flow to certain of the individual tranches than
exists with the underlying collateral of the CMO. As a general rule, the
more predictable the cash flow is on a CMO tranche, the lower the
anticipated yield will be on that tranche at the time of issuance relative
to prevailing market yields on mortgage-related securities. As part of the
process of creating more predictable cash flows on most of the tranches of
CMOs, one or more tranches generally must be created that absorb most of
the volatility in the cash flows on the underlying mortgage loans. As a
result of the uncertainty of the cash flows of these tranches, market
prices and yields may be more volatile than for other CMO tranches. As
noted above, the Fund will not invest in inverse floating, interest-only,
principal-only or Z tranches of CMOs, which can be among the more volatile
CMO tranches.
* Risks of Mortgage-Backed Securities. Mortgage-Backed Securities (other than
ARMS) are subject generally to the same risks as ARMS; however, such other
Mortgage-Backed Securities can be expected to be affected to a greater
extent than ARMS by fluctuating interest rates and prepayments and to have
different yield characteristics, due to the fact that fixed rate rather
than adjustable rate mortgages underlie such securities. Generally,
prepayments on fixed rate mortgages will increase during a period of
falling interest rates and decrease during a period of rising interest
rates. Accordingly, amounts available for reinvestment are likely to be
greater during a period of declining interest rates than during a period of
rising interest rates, and the yield on the securities in which such
amounts are reinvested is likely to be lower than the yield on the
securities that were prepaid or the yield that could be achieved if such
amounts were reinvested during a period of rising interest rates. If the
Fund purchases Mortgage-Backed Securities at a premium, a prepayment rate
that is faster than expected will reduce both the market value and the
yield to maturity from that which was anticipated, while a prepayment rate
that is slower than expected will have the opposite effect of increasing
yield to maturity and market value. Conversely, if the Fund purchases
Mortgage-Backed Securities at a discount, faster than expected prepayments
will increase, while slower than expected prepayments will reduce, yield to
maturity and market value. Mortgage-Backed Securities may decrease in value
as a result of increases in interest rates and may benefit less than other
fixed income securities from declining interest rates because of the risk
of prepayment.
U.S. Government Securities. In addition to U.S. Government ARMS and other U.S.
Government Mortgage-Backed Securities, the Fund may invest in other securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, including up to 10% of its net assets in U.S. Government
zero-coupon securities. U.S. Government Securities include a variety of Treasury
securities, which differ in their interest rates, maturities and times of
issuance. Treasury bills have maturities of one year or less, Treasury notes
have maturities of one to ten years, and Treasury bonds generally have
maturities of greater than ten years. Some obligations issued or guaranteed by
U.S. Government agencies or instrumentalities, for example, GNMA pass-through
certificates, are supported by the full faith and credit of the U.S. Treasury;
others, such as those of the Federal Home Loan Banks, by the right of the issuer
to borrow from the Treasury; others, such as those issued by FNMA, by the
discretionary authority of the U.S. Government to purchase certain obligations
of the agency or instrumentality; finally, obligations of other agencies or
instrumentalities are backed only by the credit of the agency or instrumentality
issuing the obligations. While the U.S. Government provides financial support to
such U.S. Government-sponsored agencies and instrumentalities, no assurance can
be given that it will always do so since it is not so obligated by law.
* U.S. Government Zero-Coupon Securities. The Fund may invest up to 10% of
its net assets in zero-coupon securities which are issued by the U.S.
Treasury through its STRIPS program and constitute direct obligations of
the U.S. Government. Zero-coupon securities are debt obligations which do
not entitle the holder to any periodic payments of interest prior to
maturity; rather, they offer the right to receive a fixed cash payment at
maturity but without any payments before that date. As a result,
zero-coupon securities are issued and traded at a discount from their face
amounts. Through investment in zero-coupon securities, an investor is able
to in effect lock in a return of principal to the extent such instruments
are held to maturity.
* Risks of Zero-Coupon Securities. Zero-coupon securities do not entitle the
holder to any periodic payments of interest prior to maturity and therefore
are issued and trade at a discount from their face or par value. The
discount, in the absence of financial difficulties of the issuer, decreases
as the final maturity of the security approaches. Zero-coupon securities
can be sold prior to their due date in the secondary market at the then
prevailing market value, which depends primarily on the time remaining to
maturity, prevailing levels of interest rates and the perceived credit
quality of the issuer. The market prices of zero-coupon securities are more
volatile than the market prices of securities of comparable quality and
similar maturity that pay interest periodically and may respond to a
greater degree to fluctuations in interest rates than do such
non-zero-coupon securities. Although holders of zero-coupon securities do
not receive periodic payments of interest, income accretes on such
securities and is subject to the distribution requirements of the Internal
Revenue Code of 1986, as amended. Because such income may not be matched by
a corresponding cash distribution to the Fund, the Fund may be required to
borrow money or dispose of other securities to be able to make
distributions to shareholders.
Asset-Backed Securities. The Fund may invest in Asset-Backed Securities, which
are securities that directly or indirectly represent a participation in or are
secured by and payable from a pool of assets representing the obligations of a
number of different parties. The Fund will only invest in Asset-Backed
Securities rated, as of the date of purchase, AAA by Standard & Poor's, Aaa by
Moody's, comparably rated by any other NRSRO or, if unrated, of comparable
quality as determined by the Adviser.
The securitization techniques used to develop Mortgage-Backed Securities are now
being applied to a broad range of assets. Through the use of trusts and special
purpose corporations, various types of assets, primarily automobile and credit
card receivables, are being securitized in pass-through structures similar to
the mortgage pass-through structures described above or in a pay-through
structure similar to the CMO structure.
In general, the collateral supporting Asset-Backed Securities is of shorter
maturity than mortgage loans and is less likely to experience substantial
prepayments. As with Mortgage-Backed Securities, Asset-Backed Securities are
often backed by a pool of assets representing the obligations of a number of
different parties and use similar credit enhancement techniques.
Asset-Backed Securities do not have the benefit of the same security interest in
the related collateral as do Mortgage-Backed Securities. Credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers of automobile receivables permit the
servicers to retain possession of the underlying obligations. If the servicer
were to sell these obligations to another party, there is a risk that the
purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have a
perfected security interest in all of the obligations backing such receivables.
Therefore, there is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
Corporate Debt Securities. The Fund may invest in Corporate Debt Securities,
which are debt obligations of U.S. corporations (other than ARMS or
Mortgage-Backed Securities). The values of Corporate Debt Securities typically
will fluctuate in response to general economic conditions, to changes in
interest rates and, to a greater extent than the values of ARMS or
Mortgage-Backed Securities, to business conditions affecting the specific
industries in which the issuers are engaged. Corporate Debt Securities will
typically decrease in value as a result of increases in interest rates. The Fund
may invest in certain types of Corporate Debt Securities that have been issued
with original issue discount or market discount. An investment in such
securities poses certain economic risks and may have certain adverse cash flow
consequences to the investor.
New Instruments. The Fund expects that, consistent with its investment
limitations, it will invest in those new types of ARMS, other Mortgage-Backed
Securities, U.S. Government Securities, Asset-Backed Securities, hedging
instruments and other securities in which it may invest that the Adviser
believes may assist the Fund in achieving its objective. Shareholders will
receive written notice in advance of a significant investment, i.e., in excess
of 5% of the Fund's net assets, in such newly developed securities.
OTHER INVESTMENT TECHNIQUES
Hedging Transactions. The Fund may enter into certain interest rate, options
and futures transactions and may make investments in Eurodollar instruments
for hedging purposes as described below.
* Interest Rate Transactions. The Fund may purchase or sell interest rate
caps and floors to preserve a return or spread on a particular investment
or portion of its portfolio or for other non-speculative purposes. The
aggregate purchase price of caps and floors held by the Fund may not exceed
5% of the Fund's total assets. The Fund may sell, i.e., write, caps and
floors without limitation, subject to the segregated account requirement
described below. The Fund does not intend to use these transactions for
speculative purposes. The purchase of an interest rate cap entitles the
purchaser, to the extent a specified index exceeds a predetermined interest
rate, to receive payments of interest on a contractually-based principal
amount from the party selling such interest rate cap. The purchase of an
interest rate floor entitles the purchaser, to the extent a specified index
falls below a predetermined interest rate, to receive payments of interest
on a contractually-based principal amount from the party selling such
interest rate floor.
The Fund may enter into interest rate caps and floors on either an
asset-based or liability-based basis, depending on whether it is hedging
its assets or its liabilities. To the extent the Fund sells, i.e., writes,
caps and floors, it will maintain in a segregated account cash or high
quality liquid debt securities having an aggregate net asset value at least
equal to the full amount, accrued on a daily basis, of the Fund's
obligations with respect to any caps or floors. The Fund will not enter
into any interest rate cap or floor transaction unless the unsecured senior
debt or the claims-paying ability of the other party thereto is rated at
least A by Standard & Poor's or Moody's or is comparably rated by any other
NRSRO. The Adviser will monitor the creditworthiness of contra-parties on
an ongoing basis. If there is a default by the other party to such a
transaction, the Fund will have contractual remedies pursuant to the
agreements related to the transaction. Interest rate caps and floors are
somewhat recent innovations for which standardized documentation has not
yet been developed and, accordingly, they are less liquid than many other
investments.
* Options Transactions. The Fund may write, i.e., sell, covered put and call
options with respect to the securities in which it may invest. A put option
is sometimes referred to as a "standby commitment" and a call option is
sometimes referred to as a "reverse standby commitment." By writing a call
option, the Fund becomes obligated during the term of the option to deliver
the securities underlying the option upon payment of the exercise price if
the option is exercised. By writing a put option, the Fund becomes
obligated during the term of the option to purchase the securities
underlying the option at the exercise price if the option is exercised. In
connection with writing put options, the Fund will deposit and maintain in
a segregated account with its custodian cash, U.S. Government securities or
other liquid high-grade debt obligations having a value equal to or greater
than the exercise price of the option. The Fund may not write puts if, as a
result, more than 50% of its assets would be required to be segregated.
The principal reason for writing call or put options is to obtain, through
the receipt of premiums, a greater return than would be realized on the
underlying securities alone. The Fund receives premiums from writing call
or put options, which it retains whether or not the options are exercised.
By writing a call option, the Fund might lose the potential for gain on the
underlying security while the option is open, and by writing a put option
the Fund might become obligated to purchase the underlying security for
more than its current market price upon exercise.
The Fund may purchase put options, solely for hedging purposes, in order to
protect portfolio holdings in an underlying security against a substantial
decline in the market value of such holdings ("protective puts"). Such
protection is provided during the life of the put because the Fund may sell
the underlying security at the put exercise price, regardless of a decline
in the underlying security's market price. Any loss to the Fund is limited
to the premium and transaction costs paid for the put plus the initial
excess, if any, of the market price of the underlying security over the
exercise price. However, if the market price of such security increases,
the profit the Fund realizes on the sale of the security will be reduced by
the premium paid for the put option less any amount for which the put is
sold.
The Fund also may purchase call options solely for the purpose of hedging
against an increase in prices of securities that the Fund ultimately wants
to buy. Such protection is provided during the life of the call options
because the Fund may buy the underlying security at the call exercise price
regardless of any increase in the underlying security's market price. In
order for a call option to be profitable, the market price of the
underlying security must rise sufficiently above the exercise price to
cover the premium and transaction costs. By using call options in this
manner, the Fund will reduce any profit it might have realized had it
bought the underlying security at the time it purchased the call option by
the premium paid for the call option and by transaction costs. The
aggregate premiums paid on all put and call options purchased by the Fund,
including options on futures contracts, may not exceed 20% of the Fund's
net assets.
The Fund will purchase and write only exchange-traded put and call options.
For further information concerning the characteristics and risks of options
transactions, see "Investment Objective, Policies and Restrictions --
Options" in the Statement of Additional Information.
* Futures Contracts and Options on Futures Contracts. The Fund may enter into
contracts for the purchase or sale for future delivery of fixed-income
securities or contracts based on financial indices including any index of
securities in which the Fund may invest ("futures contracts"). A "sale" of
a futures contract means the acquisition of a contractual obligation to
deliver the securities called for by the contract at a specified price on a
specified date. The purchaser of a futures contract on an index agrees to
take or make delivery of an amount of cash equal to the difference between
a specified dollar multiple of the value of the index on the expiration
date of the contract ("current contract value") and the price at which the
contract was originally struck. No physical delivery of the fixed-income
securities underlying the index is made. The futures contracts in which the
Fund may invest have been developed by and are traded on national commodity
exchanges.
The purpose of the acquisition or sale of a futures contract by the Fund is
to hedge against fluctuations in the value of the Fund's portfolio without
actually buying or selling securities. For example, if the Fund owns
long-term debt securities and interest rates are expected to increase, the
Fund might sell futures contracts. If interest rates did increase, the
value of the debt securities in the Fund's portfolio would decline, but the
value of the Fund's futures contracts would increase at approximately the
same rate, thereby keeping the net asset value of the Fund from declining
as much as it otherwise would have. If, on the other hand, the Fund held
cash reserves and short-term investments pending anticipated investment in
long-term obligations and interest rates were expected to decline, the Fund
might purchase futures contracts for U.S. Government securities. Since the
behavior of such contracts would generally be similar to that of long-term
securities, the Fund could take advantage of the anticipated rise in the
value of long-term securities without actually buying them until the market
had stabilized. At that time, the Fund could accept delivery under the
futures contracts or the futures contracts could be liquidated and the
Fund's reserves could then be used to buy long-term securities in the cash
market. The Fund will engage in such transactions only for hedging
purposes, on either an asset-based or a liability-based basis, in each case
in accordance with the rules and regulations of the Commodity Futures
Trading Commission. See Appendix B to the Statement of Additional
Information.
The Fund may purchase and sell put and call options on futures contracts
and enter into closing transactions with respect to such options to
terminate existing positions. The Fund may use such options on futures
contracts in connection with its hedging strategies in lieu of purchasing
and writing options directly on the underlying securities or purchasing and
selling the underlying futures contracts.
The Fund's aggregate margin deposits in connection with futures contracts
and options thereon may not exceed 5% of the Fund's total assets.
Additional information with respect to futures contracts and options on
futures contracts is set forth in Appendix B to the Statement of Additional
Information.
There are risks in using futures contracts and options on futures contracts
as hedging devices. The primary risks associated with the use of futures
contracts and options thereon are (a) the prices of futures contracts and
options may not correlate perfectly with the market value of the underlying
security held by the Fund, and (b) the possible lack of a liquid secondary
market for a futures contract and the resulting inability to close a
futures position prior to its maturity date. The risk that the Fund will be
unable to close out a futures position will be minimized by entering into
such transactions on a national exchange with an active and liquid
secondary market.
The effective use of futures contracts, options on futures contracts and
the other hedging techniques discussed above is dependent upon the
Adviser's judgment regarding interest rate movements and other economic
factors. To the extent this judgment is incorrect, the Fund will be in a
worse position than if such hedging techniques had not been used.
* Eurodollar Instruments. The Fund may make investments in Eurodollar
instruments for hedging purposes only. Eurodollar instruments are
essentially U.S. dollar denominated futures contracts or options thereon
that are linked to LIBOR. Eurodollar futures contracts enable purchasers to
obtain a fixed rate for the lending of funds and sellers to obtain a fixed
rate for borrowings. The Fund uses Eurodollar futures contracts and options
thereon to hedge against changes in LIBOR, to which many short-term
borrowings and floating rate securities are linked. Eurodollar instruments
are subject to the same limitations and risks as other futures contracts
and options thereon.
When-Issued Securities. The Fund may purchase securities on a "when-issued"
basis and may purchase or sell securities on a "forward commitment" basis. When
such transactions are negotiated, the price is fixed at the time the commitment
is made, but delivery and payment for the securities take place at a later date.
The Fund does not accrue income with respect to when-issued or forward
commitment securities prior to their stated delivery date. Pending delivery of
the securities, the Fund maintains in a segregated account cash or liquid
high-grade debt obligations in an amount sufficient to meet its purchase
commitments. The Fund likewise segregates securities it sells on a forward
commitment basis. The Fund will purchase securities on a when-issued or forward
commitment basis with the intention of acquiring such securities for its
portfolio. The Fund may dispose of a commitment prior to settlement, however, if
the Adviser deems it appropriate to do so.
The purchase of securities on a when-issued or forward commitment basis exposes
the Fund to risk because the securities may decrease in value prior to their
delivery. Purchasing securities on a when-issued or forward commitment basis
involves the additional risk that the return available in the market when the
delivery takes place will be higher than that obtained in the transaction
itself. The purchase of securities on a when-issued or forward commitment basis
while remaining substantially fully invested increases the amount of the Fund's
assets that are subject to market risk to an amount that is greater than the
Fund's net asset value, which could result in increased volatility of the price
of the Fund's shares.
Illiquid Securities. The Fund may invest up to 15% of its net assets in illiquid
securities. Illiquid securities may offer a higher yield than securities which
are more readily marketable, but they may not always be marketable on
advantageous terms. The sale of illiquid securities often requires more time and
results in higher brokerage charges or dealer discounts than does the sale of
securities eligible for trading on national securities exchanges or in the
over-the-counter markets. The Fund may be restricted in its ability to sell such
securities at a time when the Adviser deems it advisable to do so. In addition,
in order to meet redemption requests, the Fund may have to sell other assets,
rather than such illiquid securities, at a time which is not advantageous.
"Restricted securities" are securities which were originally sold in private
placements and which have not been registered under the Securities Act of 1933
(the "1933 Act"). Such securities generally have been considered illiquid, since
they may be resold only subject to statutory restrictions and delays or if
registered under the 1933 Act. In 1990, however, the SEC adopted Rule 144A under
the 1933 Act, which provides a safe harbor exemption from the registration
requirements of the 1933 Act for resales of restricted securities to "qualified
institutional buyers," as defined in the rule. The result of this rule has been
the development of a more liquid and efficient institutional resale market for
restricted securities. Thus, restricted securities are no longer necessarily
illiquid. The Fund is not subject to any limitation on its ability to invest in
securities simply because such securities are restricted. These securities will
be treated as liquid when they have been determined to be liquid by the Board of
Directors of the Fund or by the Adviser subject to the oversight of and pursuant
to procedures adopted by the Board of Directors. See "Investment Objective,
Policies and Restrictions -- Illiquid Securities" in the Statement of Additional
Information. Similar determinations may be made with respect to commercial paper
issued in reliance upon the so-called "private placement" exemption from
registration under Section 4(2) of the 1933 Act. Investing in Rule 144A
securities could have the effect of increasing the level of illiquidity of the
Fund to the extent that qualified institutional buyers become, for a time,
uninterested in purchasing these securities.
Lending of Portfolio Securities. In order to generate income, the Fund may lend
portfolio securities representing up to 30% of the value of its total assets to
broker-dealers, banks or other financial borrowers of securities. As with other
extensions of credit, there are risks of delay in recovery or even loss of
rights in the collateral should the borrower of the securities fail financially.
However, the Fund will only enter into loan arrangements with broker-dealers,
banks or other institutions which the Adviser has determined are creditworthy
under guidelines established by the Board of Directors and will receive
collateral in the form of cash, U.S. Government securities or other high-grade
debt obligations equal to at least 100% of the value of the securities loaned.
The value of the collateral and of the securities loaned is marked to market on
a daily basis. During the time portfolio securities are on loan, the borrower
pays the Fund an amount equivalent to any interest paid on the securities and
the Fund may invest the cash collateral and earn income or may receive an agreed
upon amount of interest income from the borrower. However, the amounts received
by the Fund may be reduced by finders' fees paid to broker-dealers. Collateral
(including any securities purchased with cash collateral) will be maintained by
the Fund's custodian in a segregated account.
Repurchase Agreements. The Fund may enter into repurchase agreements pertaining
to the securities in which it may invest. A repurchase agreement involves the
purchase by the Fund of securities with the condition that after a stated period
of time the original seller (a member bank of the Federal Reserve System or a
recognized securities dealer) will buy back the same securities ("collateral")
at a predetermined price or yield. Repurchase agreements involve certain risks
not associated with direct investments in securities. In the event the original
seller defaults on its obligation to repurchase, as a result of its bankruptcy
or otherwise, the Fund will seek to sell the collateral, which action could
involve costs or delays. In such case, the Fund's ability to dispose of the
collateral to recover such investment may be restricted or delayed. While
collateral will at all times be maintained in an amount equal to the repurchase
price under the agreement (including accrued interest due thereunder), to the
extent proceeds from the sale of collateral were less than the repurchase price,
the Fund would suffer a loss. In the event of a seller's bankruptcy, the Fund
might be delayed in, or prevented from, selling the collateral to the Fund's
benefit. Repurchase agreements maturing in more than seven days are considered
illiquid and subject to the Fund's restriction on investing in illiquid
securities. See "Illiquid Securities" above.
Borrowing. The Fund may borrow money only for temporary or emergency purposes in
an amount up to 10% of the value of its total assets. The Fund may borrow from a
financial institution unrelated to the Fund or by entering into reverse
repurchase agreements with the same parties with whom it may enter into
repurchase agreements (as discussed above). Interest paid by the Fund on
borrowed funds would decrease the net earnings of the Fund. The Fund will not
purchase portfolio securities while outstanding borrowings exceed 5% of the
value of the Fund's total assets. The Fund may mortgage, pledge or hypothecate
its assets to secure permitted borrowings. The policies set forth in this
paragraph are fundamental and may not be changed without a majority vote of the
Fund's shares.
Under a reverse repurchase agreement, the Fund sells securities and agrees to
repurchase them at a mutually agreed date and price. Reverse repurchase
agreements involve the risk that the market value of the securities sold by the
Fund may decline below the price at which the Fund is obligated to repurchase
such securities. In the event the buyer of securities under a reverse repurchase
agreement files for bankruptcy or becomes insolvent, such buyer or its trustee
or receiver may receive an extension of time to determine whether to enforce the
Fund's obligation to repurchase the securities, and the Fund's use of the
proceeds of the reverse repurchase agreement may effectively be restricted
pending such decisions. Reverse repurchase agreements create leverage, a
speculative factor, and are considered borrowings for purposes of the Fund's
limitation on borrowing.
DURATION
The Adviser will attempt to maintain an average effective duration for the
Fund's portfolio of one to four years. Effective duration estimates the interest
rate risk (price volatility) of a security, i.e., how much the value of the
security is expected to change with a given change in interest rates. The longer
a security's effective duration, the more sensitive its price is to changes in
interest rates. For example, if interest rates were to increase by 1%, the
market price of a bond with an effective duration of five years would decrease
by about 5%, with all other factors being constant.
It is important to understand that, while a valuable measure, effective duration
is based on certain assumptions and has several limitations. It is most useful
as a measure of interest rate risk when interest rate changes are small, rapid
and occur equally across all the different points of the yield curve. In
addition, effective duration is difficult to calculate precisely for bonds with
prepayment options, such as mortgage-backed securities, because the calculation
requires assumptions about prepayment rates. For example, when interest rates go
down, homeowners may prepay their mortgages at a higher rate than assumed in the
initial effective duration calculation, thereby shortening the effective
duration of the Fund's mortgage-backed securities. Conversely, if rates
increase, prepayments may decrease to a greater extent than assumed, extending
the effective duration of such securities. For these reasons, the effective
durations of funds which invest a significant portion of their assets in
mortgage-backed securities can be greatly affected by changes in interest rates.
INVESTMENT RESTRICTIONS
The Fund has adopted certain investment restrictions, which are set forth in
detail in the Statement of Additional Information under "Investment Objective,
Policies and Restrictions." Fundamental restrictions which may not be changed
without a majority vote of shareholders include, among others, the following:
(1) The Fund will not invest 25% or more of its total assets in the securities
of issuers conducting their principal business activities in the same industry,
except that, under normal market conditions, the Fund will invest 25% or more of
the value of its total assets in ARMS issued or guaranteed by the U.S.
Government or its agencies or instrumentalities or by private organizations.
Except for the requirement that the Fund invest 25% or more of its total assets
in ARMS, the foregoing restriction does not apply to securities of the U.S.
Government or its agencies or instrumentalities or repurchase agreements
relating thereto. The Fund will determine the industry classification of
Asset-Backed Securities in its portfolio based on the type of collateral
underlying the securities and will consider ARMS issued by the U.S. Government
or its agencies or instrumentalities and ARMS issued by private organizations to
be securities of issuers in the same industry. (2) With respect to 75% of its
total assets, the Fund will not invest more than 5% of the value of its total
assets (taken at market value at the time of purchase) in the outstanding
securities of any one issuer, or own more than 10% of the outstanding voting
securities of any one issuer, in each case other than securities issued or
guaranteed by the U.S. Government or any agency or instrumentality thereof.
PORTFOLIO TURNOVER
The Fund actively uses trading to benefit from yield disparities among different
issues of securities or otherwise to achieve its investment objective and
policies. This strategy may result in a greater degree of portfolio turnover
and, thus, a higher incidence of short-term capital gain than might be expected
from investment companies that invest substantially all of their funds on a
long-term basis. Such a strategy will also result in higher transaction costs.
The Fund's portfolio turnover rate is set forth above under "Financial
Highlights." The method of calculating portfolio turnover rate is set forth in
the Statement of Additional Information under "Investment Objective, Policies
and Restrictions -- Portfolio Turnover."
MANAGEMENT
BOARD OF DIRECTORS
The Company's Board of Directors has the primary responsibility for overseeing
the overall management of the Company and electing its officers.
INVESTMENT ADVISER
Piper Capital Management Incorporated (the "Adviser") has been retained under an
Investment Advisory and Management Agreement with the Company to act as the
Fund's investment adviser subject to the authority of the Board of Directors.
In addition to acting as the investment adviser for the Company, the Adviser,
which was incorporated in 1983, also serves as investment adviser to a number of
other open-end and closed-end investment companies and to various other
concerns, including pension and profit sharing funds, corporate funds and
individuals. As of November 15, 1995, the Adviser rendered investment advice
regarding approximately $9 billion of assets. The Adviser is a wholly owned
subsidiary of Piper Jaffray Companies Inc., a publicly held corporation which is
engaged through its subsidiaries in various aspects of the financial services
industry. The address of the Adviser is Piper Jaffray Tower, 222 South Ninth
Street, Minneapolis, Minnesota 55402-3804.
The Adviser furnishes the Fund with investment advice and supervises the
management and investment program of the Fund. The Adviser furnishes at its own
expense all necessary administrative services, office space, equipment and
clerical personnel for servicing the investments of the Fund, and investment
advisory facilities and executive and supervisory personnel for managing the
Fund's investments and effecting its portfolio transactions. In addition, the
Adviser pays the salaries and fees of all officers and directors of the Company
who are affiliated persons of the Adviser.
Under the Investment Advisory and Management Agreement, the Fund pays the
Adviser a monthly fee at an annual rate of .35% on the first $500 million of the
Fund's average daily net assets and .30% on average daily net assets in excess
of $500 million.
PORTFOLIO MANAGEMENT
Thomas S. McGlinch and Wan-Chong Kung are primarily responsible for the
day-to-day management of the Fund's portfolio. Mr. McGlinch has managed the
portfolio since inception and Ms. Kung has been a co-manager since December
1995. Mr. McGlinch is a Senior 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. Ms. Kung is a Vice
President and portfolio manager for the Adviser. Prior to joining the Adviser
in 1993, she was a Senior Consultant at Cytrol Inc. in Edina, Minnesota from
1989 to December 1992. Ms. Kung received a B.S. from the University of the
Philippines in Manila and an M.B.A. from the University of Minnesota.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN
Investors Fiduciary Trust Company ("IFTC"), 210 West Tenth Street, Kansas City,
Missouri 64105, (800) 874-6205, serves as Custodian for the Fund's portfolio
securities and cash and as Transfer Agent and Dividend Disbursing Agent for the
Fund. The Company has entered into a Shareholder Account Servicing Agreement
with the Distributor. Under this agreement, the Distributor provides transfer
agent and dividend disbursing agent services for certain shareholder accounts.
For more information, see "Investment Advisory and Other Services -- Transfer
Agent and Dividend Disbursing Agent" in the Statement of Additional Information.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSION
The Adviser selects brokers and futures commission merchants to use for the
Fund's portfolio transactions. In making its selection, the Adviser may consider
a number of factors, which are more fully discussed in the Statement of
Additional Information, including, but not limited to, research services, the
reasonableness of commissions and quality of services and execution. A broker's
sales of shares may also be considered a factor if the Adviser is satisfied that
the Fund would receive from that broker the most favorable price and execution
then available for a transaction. Portfolio transactions for the Fund may be
effected through the Distributor on a securities exchange in compliance with
Section 17(e) of the Investment Company Act of 1940, as amended (the "1940
Act"). For more information, see "Portfolio Transactions and Allocation of
Brokerage" in the Statement of Additional Information.
DISTRIBUTION OF FUND SHARES
Piper Jaffray acts as the principal distributor of the Fund's shares. The
Company has adopted a Distribution Plan (the "Plan") as required by Rule 12b-1
under the 1940 Act. Pursuant to the provisions of the Plan, the Fund pays a
monthly service fee to the Distributor at an annual rate of .15% of the Fund's
average daily net assets in connection with servicing of the Fund's shareholder
accounts. This fee is intended to compensate the Distributor for the ongoing
servicing and/or maintenance of Fund shareholder accounts and the costs incurred
in connection therewith ("Shareholder Servicing Costs"). Shareholder Servicing
Costs include all expenses of the Distributor incurred in connection with
providing shareholder liaison services, including, but not limited to, an
allocation of the Distributor's overhead and payments made to persons, including
employees of the Distributor, who respond to inquiries of shareholders regarding
their ownership of shares or their accounts with the Fund, and who provide
information on shareholders' investments.
The Distributor uses all or a portion of its Rule 12b-1 service fee to make
payments to Investment Executives of the Distributor and broker-dealers which
have entered into sales agreements with the Distributor. If shares of the Fund
are sold by a representative of a broker-dealer other than the Distributor, the
broker-dealer is paid .15% of the average daily net assets of the Fund
attributable to shares sold by the broker-dealer's representative. If shares of
the Fund are sold by an Investment Executive of the Distributor, compensation is
paid to the Investment Executive in the manner set forth in a written agreement,
in an amount not to exceed .15% of the average daily net assets of the Fund
attributable to shares sold by the Investment Executive. Further information
regarding the Plan is contained in the Statement of Additional Information.
SHAREHOLDER GUIDE TO INVESTING
HOW TO PURCHASE SHARES
GENERAL
The Fund's shares may be purchased at the public offering price from the
Distributor and from other broker-dealers who have sales agreements with the
Distributor. The address of the Distributor is that of the Fund. The Distributor
reserves the right to reject any purchase order. You should be aware that,
because the Fund does not issue stock certificates, Fund shares must be kept in
an account with the Distributor or with IFTC. All investments must be arranged
through your Piper Jaffray Investment Executive or other broker-dealer.
PURCHASE PRICE
You may purchase shares of the Fund at the net asset value per share next
calculated after receipt of your order by your Piper Jaffray Investment
Executive or other broker-dealer, plus a front-end sales charge as follows:
SALES CHARGE SALES CHARGE
AS A PERCENTAGE OF AS A PERCENTAGE OF
AMOUNT OF TRANSACTION AT OFFERING PRICE OFFERING PRICE NET ASSET VALUE
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%
This table sets forth total sales charges or underwriting commissions. The
Distributor may reallow up to the entire sales charge to broker-dealers in
connection with their sales of shares. Broker-dealers who are reallowed 90% or
more of the sales charge may, by virtue of such reallowance, be deemed to be
"underwriters" under the 1933 Act.
The Distributor will make certain payments to its Investment Executives and to
other broker-dealers in connection with their sales of Fund shares. See
"Distribution of Fund Shares" above. In addition, the Distributor or the
Adviser, at their own expense, will provide promotional incentives to Investment
Executives of the Distributor and to broker-dealers who have sales agreements
with the Distributor in connection with sales of shares of the Fund and other
mutual funds for which the Adviser acts as Investment Adviser. In some
instances, these incentives may be made available only to certain Investment
Executives or broker-dealers who have sold or may sell significant amounts of
such shares. The incentives may include payment for travel expenses, including
lodging at luxury resorts, incurred in connection with sales seminars.
PURCHASES OF $500,000 OR MORE
If you make a purchase of $500,000 or more (including purchases made under a
Letter of Intent), a .20% contingent deferred sales charge will be assessed in
the event you redeem shares within 24 months following the purchase. This sales
charge will be paid to the Distributor. For more information, please refer to
the Contingent Deferred Sales Charge section of "How to Redeem Shares." The
Distributor will pay its Investment Executives and other broker-dealers in
connection with these purchases as follows:
FEE AS
A PERCENTAGE
AMOUNT OF TRANSACTION OF OFFERING PRICE
First $3,000,000 .20%
Next $2,000,000 .15%
Next $5,000,000 .10%
Above $10,000,000 .05%
Piper Jaffray Investment Executives and other broker-dealers generally will not
receive a fee in connection with purchases on which the contingent deferred
sales charge is waived. However, the Distributor, in its discretion, may pay a
fee out of its own assets to its Investment Executives and other broker-dealers
in connection with purchases by employee benefit plans on which no sales charge
is imposed. Please see "Special Purchase Plans" below.
MINIMUM INVESTMENTS
A minimum initial investment of $250 is required. There is no minimum for
subsequent investments. The Distributor, in its discretion, may waive the
minimum.
REDUCING YOUR SALES CHARGE
You may qualify for a reduced sales charge through one or more of several plans.
You must notify your Piper Jaffray Investment Executive or broker-dealer at the
time of purchase to take advantage of these plans.
AGGREGATION
Front-end or initial sales charges may be reduced or eliminated by aggregating
your purchase with purchases of certain related personal accounts. In addition,
purchases made by members of certain organized groups will be aggregated for
purposes of determining sales charges. Sales charges are calculated by adding
the dollar amount of your current purchase to the higher of the cost or current
value of shares of any Piper fund sold with a sales charge that are currently
held by you and your related accounts or by other members of your group.
Qualified Groups. You may group purchases in the following personal accounts
together:
* Your individual account.
* Your spouse's account.
* Your children's accounts (if they are under the age of 21).
* Your employee benefit plan accounts if they are exclusively for your
benefit. This includes accounts such as IRAs, individual 403(b) plans or
single-participant Keogh-type plans.
* A single trust estate or single fiduciary account if you are the trustee or
fiduciary.
Additionally, purchases made by members of any organized group meeting the
requirements listed below may be aggregated for purposes of determining sales
charges:
* The group has been in existence for more than six months.
* It is not organized for the purpose of buying redeemable securities of a
registered investment company.
* Purchases must be made through a central administration, or through a
single dealer, or by other means that result in economy of sales effort or
expense.
An organized group does not include a group of individuals whose sole
organizational connection is participation as credit card holders of a company,
policyholders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser.
RIGHT OF ACCUMULATION
Sales charges for purchases of Fund shares into Piper Jaffray accounts will be
automatically calculated taking into account the dollar amount of any new
purchases along with the higher of current value or cost of shares previously
purchased in any other mutual fund managed by the Adviser (except Hercules Funds
Inc.) that was sold with a sales charge. For other broker-dealer accounts, you
should notify your Investment Executive at the time of purchase of additional
Piper fund shares you may own.
LETTER OF INTENT
Your sales charge may be reduced by signing a non-binding Letter of Intent. This
Letter of Intent will state your intention to invest $100,000 or more in any of
the mutual funds managed by the Adviser that are sold with a sales charge
(except Hercules Funds Inc.) over a 13-month period, beginning not earlier than
90 days prior to the date you sign the Letter. You will pay the lower sales
charge applicable to the total amount you plan to invest over the 13-month
period. Part of your shares will be held in escrow to cover additional sales
charges that may be due if you do not invest the planned amount. Please see
"Purchase of Shares" in the Statement of Additional Information for more
details. You can contact your Piper Jaffray Investment Executive or other
broker-dealer for an application.
SPECIAL PURCHASE PLANS
For more information on any of the following special purchase plans, contact
your Piper Jaffray Investment Executive or other broker-dealer.
PURCHASES BY PIPER JAFFRAY COMPANIES INC., ITS SUBSIDIARIES AND ASSOCIATED
PERSONS
Piper Jaffray Companies Inc. and its subsidiaries may buy shares of the Fund
without incurring a sales charge. The following persons associated with such
entities also may buy Fund shares without paying a sales charge:
* Officers, directors and partners.
* Employees and retirees.
* Sales representatives.
* Spouses or children under the age of 21 of any of the above.
* Any trust, pension, profit sharing or other benefit plan for any of the
above.
PURCHASES BY BROKER-DEALERS
Employees of broker-dealers who have entered into sales agreements with the
Distributor, and spouses and children under the age of 21 of such employees, may
buy shares of the Fund without incurring a sales charge.
PURCHASES BY OTHER INDIVIDUALS WITHOUT A SALES CHARGE
The following other individuals and entities may also buy Fund shares without
paying a sales charge:
* Clients of the Adviser may buy shares of the Fund in their advisory
accounts.
* Discretionary accounts at Piper Trust Company and participants in
investment companies exempt from registration under the 1940 Act that are
managed by the Adviser.
* Trust companies and bank trust departments using funds over which they
exercise exclusive discretionary investment authority and which are held in
a fiduciary, agency, advisory, custodial or similar capacity.
* Investors purchasing shares through a Piper Jaffray Investment Executive if
the purchase of such shares is funded by the proceeds from the sale of
shares of any non-money market open-end mutual fund. This privilege is
available for 30 days after the sale.
PURCHASES BY EMPLOYEE BENEFIT PLANS AND TAX-SHELTERED ANNUITIES
* Shares of the Fund will be sold at net asset value, without a sales charge,
to employee benefit plans containing an actively maintained qualified cash
or deferred arrangement under Section 401(k) of the Internal Revenue Code
of 1986, as amended (the "Code") ("401(k) Plan"). In the event a 401(k)
Plan of an employer has purchased shares in the Fund during any calendar
quarter, any other employee benefit plan of such employer that is a
qualified plan under Section 401(a) of the Code also may purchase shares of
the Fund during such quarter without incurring a sales charge.
* Custodial accounts under Section 403(b) of the Code (known as tax-sheltered
annuities) also may buy shares of the Fund without incurring a sales
charge.
PURCHASES USING FINAL TERM TRUST DISTRIBUTIONS
* Prior to the merger of BDJ, CDJ, DDJ and EDJ into the Fund, the
shareholders of BDJ, CDJ and DDJ received special distributions, which were
payable on August 24, 1995, of all of their respective Trust's previously
undistributed net income and net realized capital gains. Shareholders who
received these distributions may use them to purchase shares of the Fund at
net asset value through December 31, 1995, provided the shareholder holds
his or her shares in a Piper Jaffray account or in the account of a
broker-dealer which has a sales agreement with the Distributor.
HOW TO REDEEM SHARES
NORMAL REDEMPTION
You may redeem all or a portion of your shares on any day that the Fund values
its shares. (Please refer to "Valuation of Shares" below for more information.)
Your shares will be redeemed at the net asset value next calculated after the
receipt of your instructions in good form by your Piper Jaffray Investment
Executive or other broker-dealer as explained below.
Piper Jaffray Inc. Accounts. To redeem your shares, please contact your Piper
Jaffray Investment Executive with a verbal request to redeem your shares.
Other Broker-Dealer Accounts. To redeem your shares, you may either contact your
broker-dealer with a verbal request or send a written request directly to the
Fund's transfer agent, IFTC. This request should contain the dollar amount or
number of shares to be redeemed, your Fund account number and either a social
security or tax identification number (as applicable). You should sign your
request in exactly the same way the account is registered. If there is more than
one owner of the shares, all owners must sign. A signature guarantee is required
for redemptions over $25,000. Please contact IFTC or refer to "Redemption of
Shares" in the Statement of Additional Information for more details.
CONTINGENT DEFERRED SALES CHARGE
If you invest $500,000 or more and, as a result, pay no front-end sales charge,
you may incur a contingent deferred sales charge if you redeem within 24 months.
This charge will be equal to .20% of the lesser of the net asset value of the
shares at the time of purchase or at the time of redemption. This charge does
not apply to amounts representing an increase in the value of Fund shares due to
capital appreciation or to shares acquired through reinvestment of dividend or
capital gain distributions. In determining whether a contingent deferred sales
charge is payable, shares that are not subject to any deferred sales charge will
be redeemed first, and other shares will then be redeemed in the order
purchased.
Letter of Intent. In the case of a Letter of Intent, the 24-month period
begins on the date the Letter of Intent is completed.
Special Purchase Plans. If you purchased your shares through one of the plans
described above under "Special Purchase Plans," the contingent deferred sales
charge will be waived. In addition, the contingent deferred sales charge will be
waived in the event of:
* The death or disability (as defined in Section 72(m)(7) of the Code) of the
shareholder. (This waiver will be applied to shares held at the time of
death or the initial determination of disability of either an individual
shareholder or one who owns the shares as a joint tenant with the right of
survivorship or as a tenant in common.)
* A lump sum distribution from an employee benefit plan qualified under
Section 401(a) of the Code, an individual retirement account under Section
408(a) of the Code or a simplified employee pension plan under Section
408(k) of the Code.
* Systematic withdrawals from any such plan or account if the shareholder is
at least 59 1/2 years old.
* A tax-free return of the excess contribution to an individual retirement
account under Section 408(a) of the Code.
* Involuntary redemptions effected pursuant to the right to liquidate
shareholder accounts having an aggregate net asset value of less than $200.
Exchanges. If you exchange your shares, no contingent deferred sales charge will
be imposed. However, the charge will apply if you subsequently redeem the new
shares within 24 months of the original purchase.
Reinstatement Privilege. If you elect to use the Reinstatement Privilege (please
see "Shareholder Services" below), any contingent deferred sales charge you paid
will be credited to your account (proportional to the amount reinvested). Please
see "Redemption of Shares" in the Statement of Additional Information for more
details.
PAYMENT OF REDEMPTION PROCEEDS
After your shares have been redeemed, proceeds will normally be sent to you or
your broker-dealer within three business days. In no event will payment be made
more than seven days after receipt of your order in good form. However, payment
may be postponed or the right of redemption suspended for more than seven days
under unusual circumstances, such as when trading is not taking place on the New
York Stock Exchange. Payment of redemption proceeds may also be delayed if the
shares to be redeemed were purchased by a check drawn on a bank which is not a
member of the Federal Reserve System, until such checks have cleared the banking
system (normally up to 15 days from the purchase date).
INVOLUNTARY REDEMPTION
The Fund reserves the right to redeem your account at any time the net asset
value of the account falls below $200 as the result of a redemption or exchange
request. You will be notified in writing prior to any such redemption and will
be allowed 30 days to make additional investments before the redemption is
processed.
SHAREHOLDER SERVICES
AUTOMATIC MONTHLY INVESTMENT PROGRAM
You may arrange to make additional automated purchases of shares of the Fund or
certain other mutual funds managed by the Adviser. You can automatically
transfer $100 or more per month from your bank, savings and loan or other
financial institution to purchase additional shares. In addition, if you hold
your shares in a Piper Jaffray account you may arrange to make such additional
purchases by having $25 or more automatically transferred each month from any
Piper money market fund. You should contact your Piper Jaffray Investment
Executive or IFTC to obtain authorization forms or for additional information.
REINSTATEMENT PRIVILEGE
If you have redeemed shares of the Fund, you may be eligible to reinvest in
shares of any fund managed by the Adviser without payment of an additional sales
charge (except Hercules Funds Inc.). The reinvestment request must be made
within 30 days of the redemption. This privilege is subject to the eligibility
of share purchases in your state as well as the minimum investment
requirements and any other applicable terms in the prospectus of the fund being
acquired. You may reinvest through a broker-dealer other than the Distributor
only if there is a valid sales agreement between your broker-dealer and the
Distributor for the fund in which you wish to invest.
EXCHANGE PRIVILEGE
If your investment goals change, you may prefer a fund with a different
objective. If you are considering an exchange into another mutual fund managed
by the Adviser, you should carefully read the appropriate prospectus for
additional information about that fund. A prospectus may be obtained through
your Piper Jaffray Investment Executive, your broker-dealer or the Distributor.
To exchange your shares, please contact your Piper Jaffray Investment Executive,
your broker-dealer or IFTC.
You may exchange your shares for shares of any other mutual fund managed by the
Adviser (except Hercules Funds Inc.) that is open to new investors. All
exchanges are subject to the eligibility of share purchases in your state as
well as the minimum investment requirements and any other applicable terms in
the prospectus of the fund being acquired. Exchanges are made on the basis of
the net asset values of the funds involved, except that investors exchanging
into a fund which has a higher sales charge generally must pay the difference.
However, exchanges of Fund shares received in the Merger will be permitted
without payment of an additional sales charge.
If you hold your Fund shares through a broker-dealer other than the Distributor,
the exchange privilege may not be available. Exchanges will be permitted only if
there is a valid sales agreement between your broker-dealer and the Distributor
for the fund into which you wish to exchange.
You may make four exchanges per year without payment of a service charge.
Thereafter you will pay a $5 service charge for each exchange. The Fund reserves
the right to change or discontinue the exchange privilege, or any aspect of the
privilege, upon 60 days' written notice.
TELEPHONE TRANSACTION PRIVILEGES
Piper Jaffray Inc. Accounts. If you hold your shares in a Piper Jaffray
account, you may telephone your Investment Executive to execute any
transaction or to apply for many shareholder services. In some cases, you may
be required to complete a written application.
Other Broker-Dealer Accounts. If you hold your shares in an account with your
broker-dealer or at IFTC, you may authorize telephone privileges by completing
the Account Application and Services Form. Please contact your broker-dealer or
IFTC (800-874-6205) for an application or for more details. The Fund will employ
reasonable procedures to confirm that a telephone request is genuine, including
requiring that payment be made only to the address of record or the bank account
designated on the Account Application and Services Form and requiring certain
means of telephonic identification. If the Fund employs such procedures, it will
not be liable for following instructions communicated by telephone that it
reasonably believes to be genuine. If the Fund does not employ such procedures,
it may be liable for any losses due to unauthorized or fraudulent telephone
instructions. It may be difficult to reach the Fund by telephone during periods
when market or economic conditions lead to an unusually large volume of
telephone requests. If you cannot reach the Fund by telephone, you should
contact your broker-dealer or issue written instructions to IFTC at the address
set forth herein. See "Management -- Transfer Agent, Dividend Disbursing Agent
and Custodian." The Fund reserves the right to suspend or terminate its
telephone services at any time without notice.
DIRECTED DIVIDENDS
You may direct income dividends and capital gains distributions to be invested
in any other mutual fund managed by the Adviser (other than a money market fund
or Hercules Funds Inc.) that is offered in your state. This investment will be
made at net asset value. It will not be subject to a minimum investment amount
except that you must hold shares in such fund (including the shares being
acquired with the dividend or distribution) with a value at least equal to such
fund's minimum initial investment amount. This privilege may not be available if
you hold your Fund shares through a broker-dealer other than the Distributor.
Distributions may be invested in another mutual fund managed by the Adviser only
if there is a valid sales agreement for that fund between your broker-dealer and
the Distributor.
SYSTEMATIC WITHDRAWAL PLAN
If your account has a value of $5,000 or more, you may establish a Systematic
Withdrawal Plan. This plan will allow you to receive regular periodic payments
by redeeming as many shares from your account as necessary. As with other
redemptions, a redemption to make a withdrawal is a sale for federal income tax
purposes. Payments made under a Systematic Withdrawal Plan cannot be considered
as actual yield or income since part of the payments may be a return of capital.
A request to establish a Systematic Withdrawal Plan must be submitted in writing
to your Piper Jaffray Investment Executive or other broker-dealer. There are no
service charges for maintenance; the minimum amount that you may withdraw
each period is $100. You will be required to have any income dividends and any
capital gains distributions reinvested. You may choose to have withdrawals made
monthly, quarterly or semiannually. 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. Please refer to "Redemption of Shares" in the Statement of
Additional Information for additional details.
ACCOUNT PROTECTION
If you purchased your shares of the Fund through a Piper Jaffray Investment
Executive, you may choose from several account options. Your investments in the
Fund held in a Piper Jaffray account (except for non-"PAT" accounts) would be
protected up to $25 million. Investments held in non-"PAT" Piper Jaffray
accounts are protected up to $2.5 million. In each case, the Securities Investor
Protection Corporation ("SIPC") provides $500,000 of protection; the additional
coverage is provided by The Aetna Casualty & Surety Company. This additional
account protection guarantees that if Piper Jaffray were to fail financially,
the securities in your account would be protected. This protection does not
cover any declines in the net asset value of Fund shares.
CONFIRMATION OF TRANSACTIONS AND REPORTING OF OTHER INFORMATION
Each time there is a transaction involving your Fund shares, such as a purchase,
redemption or dividend reinvestment, you will receive a confirmation statement
describing that activity. This information will be provided to you from either
Piper Jaffray, your broker-dealer or IFTC. In addition, you will receive various
IRS forms after the first of each year detailing important tax information and
the Fund is required to supply annual and semiannual reports that list
securities held by the Fund and include the current financial statements of the
Fund.
Householding. If you have multiple accounts with Piper Jaffray, you may receive
some of the above information in combined mailings. This will not only help to
reduce Fund expenses, it will help the environment by saving paper. Please
contact your Piper Jaffray Investment Executive for more information.
DIVIDENDS AND DISTRIBUTIONS
The net investment income of the Fund will be declared as dividends daily and
will be paid monthly. Net realized capital gains, if any, will be distributed at
least once annually. Each daily dividend is payable to Fund shareholders of
record at the time of its declaration. The term "shareholders of record"
includes holders of shares purchased for which payment has been received by the
Distributor or IFTC, as appropriate, and excludes holders of shares redeemed on
that day. Shares redeemed will earn dividends through the day prior to
settlement of the redemption. The Fund will not attempt to stabilize
distributions, and intends to distribute to its shareholders substantially all
of the net investment income earned during any period. Thus, dividends can be
expected to vary from month to month.
Distributions Options. All net investment income dividends and net realized
capital gains distributions for the Fund generally will be payable in additional
shares of the Fund at net asset value ("Reinvestment Option"). If you wish to
receive your distributions in cash, you must notify your Piper Jaffray
Investment Executive or other broker-dealer. You may elect either to receive
income dividends in cash and capital gains distributions in additional shares of
the Fund at net asset value ("Split Option"), or to receive both income
dividends and capital gains distributions in cash ("Cash Option"). You may also
direct income dividends and capital gains distributions to be invested in
another mutual fund managed by the Adviser, subject to certain restrictions. See
"Shareholder Services -- Directed Dividends" above. The taxable status of income
dividends and/or net capital gains distributions is not affected by whether they
are reinvested or paid in cash.
VALUATION OF SHARES
The Fund computes its net asset value on each day the New York Stock Exchange
(the "Exchange") is open for business. The calculation is made as of the regular
close of the Exchange (currently 4:00 p.m. New York time) after the Fund has
declared any applicable dividends.
The net asset value per share for the Fund is determined by dividing the value
of the securities owned by the Fund plus any cash and other assets (including
interest accrued and dividends declared but not collected) less all liabilities
by the number of Fund shares outstanding. For the purposes of determining the
aggregate net assets of the Fund, cash and receivables will be valued at their
face amounts. Interest will be recorded as accrued.
The value of certain fixed-income securities will be provided by an independent
pricing service, which determines these valuations at a time earlier than the
close of the Exchange. Pricing services consider such factors as security
prices, yields, maturities, call features, ratings and developments relating to
specific securities in arriving at securities valuations. Fixed income
securities for which prices are not available from an independent pricing
service but where an active market exists will be valued using market quotations
obtained from one or more dealers that make markets in the securities.
Occasionally events affecting the value of such securities may occur between the
time valuations are determined and the close of the Exchange. If events
materially affecting the value of such securities occur during such period, or
if management determines for any other reason that valuations provided by the
pricing service are inaccurate, such securities will be valued at their fair
value according to procedures decided upon in good faith by the Board of
Directors. In addition, any securities or other assets of the Fund for which
market prices are not readily available will be valued at their fair value in
accordance with such procedures.
TAX STATUS
The Fund intends to qualify for treatment as a regulated investment company
under the Internal Revenue Code of 1986, as amended (the "Code") during its
current taxable year. If so qualified, the Fund will not be liable for federal
income taxes to the extent it distributes its taxable income to shareholders.
Distributions by the Fund are generally taxable to the shareholders, whether
received in cash or additional shares of the Fund (or shares of another mutual
fund managed by the Adviser). Distributions of net capital gains (designated as
"capital gain dividends") are taxable to shareholders as long-term capital
gains, regardless of the length of time the shareholder has held the shares of
the Fund. The Fund will send written notices to shareholders regarding the tax
status of all distributions made during each year.
A shareholder will recognize a capital gain or loss upon the sale or exchange of
shares in the Fund if, as is normally the case, the shares are capital assets in
the shareholder's hands. This capital gain or loss will be long-term if the
shares have been held for more than one year.
The foregoing relates to federal income taxation as in effect as of the date of
this Prospectus. For a more detailed discussion of the federal income tax
consequences of investing in shares of the Fund, see "Taxation" in the Statement
of Additional Information. Before investing in the Fund, you should check the
consequences of your local and state tax laws.
PERFORMANCE COMPARISONS
Advertisements and other sales literature for the Fund may refer to "average
annual total return," "cumulative total return" and "yield". When the Fund
advertises its yield, it will also advertise its total return as required by the
rules of the Securities and Exchange Commission. All such yield and total return
quotations are based upon historical earnings and are not intended to indicate
future performance. The return on and principal value of an investment in the
Fund will fluctuate, so that an investor's shares, when redeemed, may be worth
more or less than their original cost. Total return quotations will be based
upon the performance of DDJ for periods prior to the Merger.
Yield calculations will be based upon a 30-day period stated in the
advertisement and will be calculated by dividing the net investment income per
share (as defined under Securities and Exchange Commission rules and
regulations) earned during the advertised period by the offering price per share
(including the maximum sales charge) on the last day of the period. The result
will then be "annualized" using a formula that provides for semi-annual
compounding of income.
Average annual total return is the average annual compounded rate of return on a
hypothetical $1,000 investment made at the beginning of the advertised period.
Cumulative total return is calculated by subtracting a hypothetical $1,000
payment to the Fund from the redeemable value of such payment at the end of the
advertised period, dividing such difference by $1,000 and multiplying the
quotient by 100. In calculating average annual and cumulative total return, the
maximum sales charge is deducted from the hypothetical investment and all
dividends and distributions are assumed to be reinvested. Such total return
quotations may be accompanied by quotations which do not reflect the reduction
in value of the initial investment due to the sales charge, and which thus will
be higher.
Comparative performance information also may be used from time to time in
advertising the Fund's shares. For example, advertisements may compare the
Fund's performance to that of various unmanaged market indices, or may include
performance data from Lipper Analytical Services, Inc., Morningstar, Inc. or
other entities or organizations which track the performance of investment
companies.
For additional information regarding comparative performance information and the
calculation of yield, average annual total return and cumulative total return,
see "Performance Comparisons" in the Statement of Additional Information.
GENERAL INFORMATION
The Company, which was organized under the laws of the State of Minnesota on
April 10, 1995, is authorized to issue a total of 100 billion shares of common
stock, with a par value of $.01 per share. Ten billion of those shares have been
designated as Series A Common Shares, which are the shares of common stock of
the Fund. Currently, Series A is the only outstanding series of shares of the
Company.
The Board of Directors is empowered under the Company's Articles of
Incorporation to issue additional series of the Company's common stock without
shareholder approval. In addition, the Board of Directors may, without
shareholder approval, create and issue one or more additional classes of shares
within the Fund, as well as within any series of the Company created in the
future. See "Capital Stock and Ownership of Shares" in the Statement of
Additional Information.
All shares, when issued, will be fully paid and nonassessable and will be
redeemable. All shares have equal voting rights. They can be issued as full or
fractional shares. A fractional share has pro rata the same kind of rights and
privileges as a full share. The shares possess no preemptive or conversion
rights.
Each share of a series has one vote (with proportionate voting for fractional
shares) irrespective of the relative net asset values of the series' shares. On
some issues, such as the election of directors, all shares of the Company vote
together as one series. On an issue affecting only a particular series, the
shares of the affected series vote separately. Cumulative voting is not
authorized. This means that the holders of more than 50% of the shares voting
for the election of directors can elect 100% of the directors if they choose to
do so, and, in such event, the holders of the remaining shares will be unable to
elect any directors.
The Bylaws of the Company provide that shareholder meetings be held only with
such frequency as required under Minnesota law. Minnesota corporation law
requires only that the Board of Directors convene shareholder meetings when it
deems appropriate. In addition, Minnesota law provides that if a regular meeting
of shareholders has not been held during the immediately preceding 15 months, a
shareholder or shareholders holding 3% or more of the voting shares of the
Company may demand a regular meeting of shareholders by written notice given to
the chief executive officer or chief financial officer of the Company. Within 30
days after receipt of the demand, the Board of Directors shall cause a regular
meeting of shareholders to be called, which meeting shall be held no later than
90 days after receipt of the demand, at the expense of the Company. In addition,
the 1940 Act requires a shareholder vote for all amendments to fundamental
investment policies and restrictions and for all amendments to investment
advisory contracts and Rule 12b-1 distribution plans. The 1940 Act also provides
that Directors of the Company may be removed by action of the record holders of
two-thirds or more of the outstanding shares of the Company. The Directors are
required to call a meeting of shareholders for the purpose of voting upon the
question of removal of any Director when so requested in writing by the record
holders of at least 10% of the Company's outstanding shares.
PENDING LEGAL PROCEEDINGS
American Adjustable Rate Term Trust Inc. -- 1996 ("BDJ"), American Adjustable
Rate Term Trust Inc. -- 1997 ("CDJ"), American Adjustable Rate Term Trust
Inc. -- 1998 ("DDJ") and American Adjustable Rate Term Trust Inc. -- 1999
("EDJ") (collectively, the "Trusts") merged into the Company on September 1,
1995. The Company may be deemed to be a successor by merger to such Trusts
and, as such, may succeed to their liabilities, including damages sought in
any litigation.
On October 20, 1994, Herman D. Gordon filed a complaint in the U.S. District
Court for the District of Minnesota against DDJ and EDJ, the Adviser, the
Distributor, Piper Jaffray Companies Inc. ("Piper") and certain associated
individuals (the "Gordon Litigation"). A second complaint was filed by Frank
Donio, I.R.A., and other plaintiffs on April 14, 1995, in the U.S. District
Court for the District of Minnesota against BDJ, CDJ, DDJ and EDJ, the Adviser,
the Distributor, Piper and certain associated individuals (the "Donio
Litigation"). Plaintiffs in both actions filed a Consolidated Amended Class
Action Complaint on May 23, 1995. The consolidated complaint, which purports to
be a class action, alleges that the defendants violated certain federal and
state securities laws by making materially misleading statements in prospectuses
and other disclosures concerning risks associated with investing in the Trusts,
compliance with the Trusts' investment policies, and the reasons for proposing
and the benefits to be obtained by shareholders from the Merger and by allegedly
breaching their fiduciary duties. Damages are being sought in an unspecified
amount.
Piper and the Adviser have agreed, pursuant to an indemnification agreement
between and among Piper, the Adviser and the Company, to indemnify the Company
against any losses incurred in connection with the Gordon and Donio Litigations.
In addition to the complaints against the Trusts described above, complaints
have been brought against the Adviser and the Distributor relating to certain
other investment companies for which the Adviser acts or has acted as investment
adviser or subadviser. These lawsuits do not involve the Fund or the Trusts. A
number of complaints have been brought in federal and state court against the
Institutional Government Income Portfolio ("PJIGX") series of Piper Funds Inc.,
the Adviser, the Distributor, and certain individuals affiliated or formerly
affiliated with the Adviser and the Distributor. In addition, complaints have
been filed in federal court relating to a number of closed-end investment
companies managed by the Adviser and two open-end investment companies for which
the Adviser has acted as sub-adviser. The complaints, which ask for rescission
of plaintiff shareholders' purchases or compensatory damages, plus interest,
costs and expenses, generally allege, among other things, certain violations of
federal and/or state securities laws, including the making of materially
misleading statements in propectuses concerning investment policies and risks.
See "Pending Litigation" in the Statement of Additional Information.
A settlement agreement has been reached with respect to one of the complaints
involving PJIGX. An Amended Consolidated Class Action Complaint, which
represents a consolidation of claims previously brought by 11 persons or
entities, was filed on October 5, 1994 in the United States District Court,
District of Minnesota. The named plaintiffs in this putative class action (the
"PJIGX action") purport to represent a class of individuals and groups who
purchased shares of PJIGX during the period from July 1, 1991 through May 9,
1994. The named plaintiffs and defendants have entered into a settlement
agreement which has received preliminary approval from the Court. The terms of
the settlement are set forth in a Settlement Agreement dated July 20, 1995 (as
modified by an Addendum filed on July 28, 1995). The Settlement Agreement
contained a provision which would have permitted the defendants to cancel the
Agreement if shareholders who had incurred a cumulative "loss" (as defined under
the Agreement) of more than 10% of the loss sustained by the entire class had
opted out. The October 2, 1995 deadline for requesting exclusion from the class
has passed, and the loss sustained by persons requesting exclusions is less than
10%. If granted final approval by the Court, the settlement agreement would
provide up to approximately $70 million to class members in payments scheduled
over approximately three years. Such payments would be made by Piper Jaffray
Companies and the Adviser and would not be an obligation of Piper Funds Inc. Six
additional complaints have been brought and a number of actions have been
commenced in arbitration relating to PJIGX.
The Adviser and the Distributor do not believe that the PJIGX settlement or any
outstanding complaint or action in arbitration will have a material adverse
effect on their ability to perform under their agreements with the Company or a
material adverse effect on the Fund, and they intend to defend such lawsuits and
actions vigorously.
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS (AND/OR IN THE STATEMENT OF ADDITIONAL INFORMATION REFERRED TO ON THE
COVER PAGE OF THIS PROSPECTUS), AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR
PIPER JAFFRAY INC. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION
BY ANYONE IN THE STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR
IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO,
OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
PIPER FUNDS INC. -- II
INVESTMENT ADVISER
Piper Capital Management Incorporated
DISTRIBUTOR
Piper Jaffray Inc.
CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
LEGAL COUNSEL
Dorsey & Whitney P.L.L.P.
Table of Contents
PAGE
Introduction 2
Fund Expenses 4
Financial Highlights 5
Investment Objective, Policies and Risk
Factors 6
Management 19
Distribution of Fund Shares 20
SHAREHOLDER GUIDE TO
INVESTING
How to Purchase Shares 21
Reducing Your Sales Charge 22
Special Purchase Plans 23
How to Redeem Shares 24
Shareholder Services 26
Dividends and Distributions 29
Valuation of Shares 30
Tax Status 30
Performance Comparisons 30
General Information 31
PJARX-05
ADJUSTABLE RATE
MORTGAGE
SECURITIES
FUND
PROSPECTUS
DECEMBER 18, 1995
PART B
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
A series of Piper Funds Inc.--II
STATEMENT OF ADDITIONAL INFORMATION
December 18, 1995
Table of Contents
Page
Investment Objective, Policies and Restrictions ................ 2
Directors and Executive Officers ............................... 10
Investment Advisory and Other Services ......................... 14
Portfolio Transactions and Allocation of Brokerage ............. 19
Capital Stock and Ownership of Shares .......................... 21
Net Asset Value and Public Offering Price ...................... 22
Performance Comparisons ........................................ 23
Purchase of Shares ............................................. 25
Redemption of Shares ........................................... 25
Taxation ....................................................... 27
General Information ............................................ 29
Financial Statements ........................................... 30
Pending Litigation ............................................. 30
Appendix A - Corporate Bond and Commercial Paper Ratings ....... A-1
Appendix B - Interest Rate Futures Contracts and Related Options B-1
This Statement of Additional Information is not a prospectus. This Statement of
Additional Information relates to the Prospectus dated December 18, 1995, and
should be read in conjunction therewith. A copy of the Prospectus may be
obtained without charge by mailing a written request to the Fund at Piper
Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402-3804, or by
calling (800) 866-7778.
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
This Statement of Additional Information relates to Adjustable Rate Mortgage
Securities Fund (the "Fund"), the only outstanding series of Piper Funds
Inc.--II (the "Company"). On September 1, 1995, four closed-end investment
companies, American Adjustable Rate Term Trust Inc.--1996, American Adjustable
Rate Term Trust Inc.--1997, American Adjustable Rate Term Trust Inc.--1998 and
American Adjustable Rate Term Trust Inc.--1999, merged into the Fund (the
"Merger"). The Fund has no history of operations prior to the Merger. In this
Statement of Additional Information, certain performance and financial
information is provided for the Fund for periods prior to September 1, 1995.
Such information relates to American Adjustable Rate Term Trust Inc.--1998
("DDJ"), the surviving entity of the Merger for financial reporting purposes.
The investment objective and policies of the Fund are set forth in the
Prospectus. Certain additional investment information is set forth below.
Repurchase Agreements
The Fund may invest in repurchase agreements pertaining to the securities in
which it may invest. The Fund's custodian will hold the securities underlying
any repurchase agreement or such securities will be part of the Federal Reserve
Book Entry System. The market value of the collateral underlying the repurchase
agreement will be determined on each business day. If at any time the market
value of the collateral falls below the repurchase price of the repurchase
agreement (including any accrued interest), the Fund will promptly receive
additional collateral (so the total collateral is an amount at least equal to
the repurchase price plus accrued interest).
The closed-end and open-end investment companies currently managed by Piper
Capital Management Incorporated (the "Adviser") and all future investment
companies advised by the Adviser or its affiliates have received from the
Securities and Exchange Commission an exemptive order permitting them to deposit
uninvested cash balances into a large single joint account to be used to enter
into one or more large repurchase agreements.
Mortgage-Backed Securities
GENERAL. Many Mortgage-Backed Securities (principally collateralized mortgage
obligations ("CMOs") secured by GNMA, FNMA and/or FHLMC Certificates) are issued
by entities that operate under orders from the Securities and Exchange
Commission (the "SEC") exempting such issuers from the provisions of the
Investment Company Act of 1940, as amended (the "1940 Act"). Until recently, the
staff of the Division of Investment Management of the SEC had taken the position
that such issuers were investment companies pursuant to Section 3 of the 1940
Act and that, accordingly, an investment by an investment company (such as the
Fund) in the securities of such issuers was subject to limitations imposed by
Section 12 of the 1940 Act. However, in reliance on a recent SEC staff
interpretation, the Fund may invest in securities issued by certain "exempted
issuers" without regard to the limitations of Section 12 of the 1940 Act. In its
interpretation, the SEC staff defined "exempted issuers" as unmanaged, fixed
asset issuers that (a) invest primarily in Mortgage-Backed Securities, (b) do
not issue redeemable securities as defined in Section 2(a)(32) of the Act, (c)
operate under general exemptive orders exempting them from "all provisions of
the [1940] Act" and (d) are not registered or regulated under the 1940 Act as
investment companies.
PASS-THROUGH SECURITIES. The investments of the Fund in Mortgage-Backed
Securities include government guaranteed pass-through securities. These
obligations are described below.
(1) GNMA Certificates. Certificates of the Government National Mortgage
Association ("GNMA Certificates") are Mortgage-Backed Securities which evidence
an ownership interest in a pool of mortgage loans. GNMA Certificates differ from
bonds in that principal is paid back monthly by the borrower over the term of
the loan rather than returned in a lump sum at maturity.
GNMA Guarantee -- The National Housing Act authorizes GNMA to guarantee the
timely payment of principal and interest on securities backed by a pool of
mortgages insured by the Federal Housing Administration ("FHA") or the Farmers'
Home Administration ("FHA") or guaranteed by the Veterans Administration ("VA").
The GNMA guarantee is backed by the full faith and credit of the United States.
GNMA is also empowered to borrow without limitation from the U.S. Treasury if
necessary to make any payments required under its guarantee.
Life of GNMA Certificates -- The average life of a GNMA Certificate is likely to
be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the greater part of principal
investment long before the maturity of the mortgages in the pool. Foreclosures
impose no risk to principal investment because of the GNMA guarantee.
Because prepayment rates of individual mortgage pools vary widely, it is not
possible to predict accurately the average life of a particular issue of GNMA
Certificates. However, statistics published by the FHA indicate that the average
life of single-family dwelling mortgages with 25- to 30-year maturities, the
type of mortgages backing the vast majority of GNMA Certificates, is
approximately 12 years. Therefore, it is customary to treat GNMA Certificates as
30-year mortgage-backed securities which prepay fully in the twelfth year.
Yield Characteristics of GNMA Certificates -- The coupon rate of interest on
GNMA Certificates is lower than the interest rate paid on the VA-guaranteed or
FHA-insured mortgages underlying the Certificates by the amount of the fees paid
to GNMA and the issuer.
The coupon rate by itself, however, does not indicate the yield which will be
earned on GNMA Certificates. First, GNMA Certificates may be issued at a premium
or discount, rather than at par and, after issuance, GNMA Certificates may trade
in the secondary market at a premium or discount. Second, interest is earned
monthly, rather than semi-annually as with traditional bonds; monthly
compounding raises the effective yield earned. Finally, the actual yield of a
GNMA Certificate is influenced by the prepayment experience of the mortgage pool
underlying it. For example, if the higher-yielding mortgages from the pool are
prepaid, the yield on the remaining pool will be reduced.
(2) FHLMC Securities. The Federal Home Loan Mortgage Corporation ("FHLMC") was
created in 1970 through enactment of Title III of the Emergency Home Finance Act
of 1970. Its purpose is to promote development of a nationwide secondary market
in conventional residential mortgages.
FHLMC issues two types of mortgage pass-through securities, mortgage
participation certificates ("PCs") and guaranteed mortgage certificates
("GMCs"). PCs resemble GNMA Certificates in that each PC represents a pro rata
share of all interest and principal payments made and owed on the underlying
pool. FHLMC guarantees timely payment of interest on PCs and the full return of
principal. Like GNMA Certificates, PCs are assumed to be prepaid fully in their
twelfth year.
GMCs also represent a pro rata interest in a pool of mortgages. However, these
instruments pay interest semi-annually and return principal once a year in
guaranteed minimum payments. The expected average life of these securities is
approximately ten years.
(3) FNMA Securities. The Federal National Mortgage Association was established
in 1938 to create a secondary market in mortgages insured by the FHA.
FNMA issues guaranteed mortgage pass-through certificates ("FNMA Certificates").
FNMA Certificates resemble GNMA Certificates in that each FNMA Certificate
represents a pro rata share of all interest and principal payments made and owed
on the underlying pool. FNMA guarantees timely payment of interest on FNMA
Certificates and the full return of principal. Like GNMA Certificates, FNMA
Certificates are assumed to be prepaid fully in their twelfth year.
CREDIT SUPPORT. To lessen the effect of failures by mortgagors to make payments
on underlying mortgages, ARMS and other Mortgage-Backed Securities may contain
elements of credit support. Such credit support falls into two categories: (a)
liquidity protection and (b) protection against losses resulting from ultimate
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pool of
assets, to ensure that the pass-through of payments due on the underlying pool
occurs in a timely fashion. Protection against losses resulting from ultimate
default enhances the likelihood of ultimate payment of the obligations on at
least a portion of the assets in the pool. Such protection may be provided
through guarantees, insurance policies or letters of credit obtained by the
issuer or sponsor from third parties, through various means of structuring the
transaction or through a combination of such approaches. The Fund will not pay
any additional fees for such credit support, although the existence of credit
support may increase the price of a security.
The ratings of securities for which third-party credit enhancement provides
liquidity protection or protection against losses from default are generally
dependent upon the continued creditworthiness of the enhancement provider. The
ratings of such securities could be subject to reduction in the event of
deterioration in the creditworthiness of the credit enhancement provider even in
cases where the delinquency and loss experience on the underlying pool of assets
is better than expected.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of "reserve
funds" (where cash or investments, sometimes funded from a portion of the
payments on the underlying assets, are held in reserve against future losses)
and "over-collateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceed those required to make payment on the
securities and pay any servicing or other fees). The degree of credit support
provided for each issue is generally based on historical information with
respect to the level of credit risk associated with the underlying assets. Other
information which may be considered includes demographic factors, loan
underwriting practices and general market and economic conditions. Delinquency
or loss in excess of that which is anticipated could adversely affect the return
on an investment in such a security.
RESTRICTIONS ON INVESTMENTS IN MORTGAGE-BACKED SECURITIES. As set forth in the
Prospectus, the Fund will not invest in any inverse floating, interest-only,
principal-only or Z tranches of CMOs or in stripped Mortgage-Backed Securities.
In addition, the Fund will not invest in any other Mortgage-Backed Securities
that are considered "high risk" under applicable supervisory policies of the
Office of the Comptroller of the Currency (the "OCC"). In OCC Banking Circular
228 (Rev.) (January 10, 1992), the OCC defined a "high-risk mortgage security"
as any mortgage derivative product that at the time of purchase, or at a
subsequent testing date, meets any of the following three tests:
(a) Average Life Test. The mortgage derivative product has an expected
weighted average life greater than 10.0 years.
(b) Average Life Sensitivity Test. The expected weighted average life of
the mortgage derivative product:
(i) extends by more than 4.0 years, assuming an immediate and
sustained parallel shift in the yield curve of plus 300 basis
points; or
(ii) shortens by more than 6.0 years, assuming an immediate and
sustained parallel shift in the yield curve of minus 300 basis
points.
(c) Price Sensitivity Test. The estimated change in the price of the
mortgage derivative product is more than 17%, due to an immediate and
sustained parallel shift in the yield curve of plus or minus 300 basis
points.
Examples of certain "high-risk mortgage securities" include interest-only and
principal-only classes of stripped mortgage-backed securities, inverse floating
CMOs and certain zero coupon Treasury securities.
Options
As set forth in the Prospectus, the Fund may write covered put and call options
with respect to the securities in which it may invest. The principal reason for
writing call or put options is to obtain, through receipt of premiums, a greater
current return than would be realized on the underlying securities alone. The
Fund receives premiums from writing call or put options, which it retains
whether or not the option is exercised. The Fund will write only covered
options. This means that so long as the Fund is obligated as the writer of a
call option, it will own the underlying securities subject to the option (or
comparable securities satisfying the cover requirements of securities
exchanges). The Fund will be considered covered with respect to a put option it
writes if, so long as it is obligated as the writer of a put option, it deposits
and maintains in a segregated account with its custodian cash, U.S. Government
securities or other liquid high-grade debt obligations having a value equal to
or greater than the exercise price of the option.
The Fund may wish to protect certain portfolio securities against a decline in
market value at a time when no put options on those particular securities are
available for purchase. The Fund may therefore purchase a put option on
securities other than those it wishes to protect even though it does not hold
such other securities in its portfolio. While the Fund will only purchase put
options on securities where, in the opinion of the Adviser, changes in the value
of the put option should generally offset changes in the value of the securities
to be hedged, the correlation will be less than in transactions in which the
Fund purchases put options on underlying securities it owns.
The writing by the Fund of options on securities will be subject to limitations
established by each of the registered securities exchanges on which such options
are traded. Such limitations govern the maximum number of options in each class
which may be written by a single investor or group of investors acting in
concert, regardless of whether the options are written on the same or different
securities exchanges or are held or written on one or more accounts or through
one or more brokers. Thus, the number of options which the Fund may write may be
affected by options written by other investment companies managed by and other
investment advisory clients of the Adviser. An exchange may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
Illiquid Securities
As set forth in the Prospectus, the Fund may invest in Rule 144A securities and
commercial paper issued pursuant to Rule 4(2) under the Securities Act of 1933,
and treat such securities as liquid when they have been determined to be liquid
by the Board of Directors or by the Adviser subject to the oversight of and
pursuant to procedures adopted by the Board of Directors. Under these
procedures, factors taken into account in determining the liquidity of a
security include (a) the frequency of trades and quotes for the security; (b)
the number of dealers willing to purchase or sell the security and the number of
other potential purchasers; (c) dealer undertakings to make a market in the
security; and (d) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer).
Portfolio Turnover
Portfolio turnover is the ratio of the lesser of annual purchases or sales of
portfolio securities to the average monthly value of portfolio securities, not
including securities maturing in less than 12 months. A 100% portfolio turnover
rate would occur, for example, if the lesser of the value of purchases or sales
of portfolio securities for a particular year were equal to the average monthly
value of the portfolio securities owned during such year.
Investment Restrictions
In addition to the investment objective and policies set forth in the
Prospectus, the Fund is subject to certain fundamental and nonfundamental
investment restrictions, as set forth below. Fundamental investment restrictions
may not be changed without the vote of a majority of the Fund's outstanding
shares. "Majority," as used in the Prospectus and in this Statement of
Additional Information, means the lesser of (a) 67% of the Fund's outstanding
shares present at a meeting of the holders if more than 50% of the outstanding
shares are present in person or by proxy or (b) more than 50% of the Fund's
outstanding shares.
As fundamental investment restrictions, the Fund will not:
1. With respect to 75% of its total assets, invest more than 5% of the
value of its total assets (taken at market value at the time of
purchase) in the outstanding securities of any one issuer, or own more
than 10% of the outstanding voting securities of any one issuer, in
each case other than securities issued or guaranteed by the U. S.
Government or any agency or instrumentality thereof.
2. Invest 25% or more of the value of its total assets in the securities
of issuers conducting their principal business activities in any one
industry, except that, under normal market conditions, the Fund will
invest 25% or more of the value of its total assets in ARMS issued or
guaranteed by the U.S. Government or its agencies or instrumentalities
or by private organizations. Except for the requirement that the Fund
invest 25% or more of its total assets in ARMS, the foregoing
restriction does not apply to securities of the U.S. Government or its
agencies or instrumentalities or repurchase agreements relating
thereto.
3. Issue any senior securities, as defined in the 1940 Act, other than as
set forth in restriction #4 below and except to the extent that using
options and futures contracts or purchasing or selling securities on a
when-issued or forward commitment basis may be deemed to constitute
issuing a senior security.
4. Borrow money, except for temporary or emergency purposes. The amount
of such borrowing (including borrowing through reverse repurchase
agreements) may not exceed 10% of the value of the Fund's total
assets. The Fund will not purchase portfolio securities while
outstanding borrowings exceeds 5% of the value of the Fund's total
assets. The Fund will not borrow for leverage purposes.
5. Mortgage, pledge or hypothecate its assets, except in an amount not
exceeding 10% of the value of its total assets to secure temporary or
emergency borrowing. For purposes of this policy, collateral
arrangements for margin deposits on futures contracts or with respect
to the writing of options are not deemed to be a pledge of assets.
6. Purchase or sell commodities or commodity futures contracts, except
that the Fund may enter into financial futures contracts and engage in
related options transactions.
7. Purchase or sell real estate or interests therein (other than
securities backed by mortgages and similar instruments).
8. Act as an underwriter of securities of other issuers, except insofar
as the Fund may be technically deemed an underwriter under the federal
securities laws in connection with the disposition of portfolio
securities.
9. Make loans of money or property to any person, except through loans of
portfolio securities, the purchase of debt obligations in which the
Fund may invest consistent with the Fund's investment objective and
policies or the acquisition of securities subject to repurchase
agreements.
For purposes of determining compliance with fundamental investment restriction
number 2, relating to industry concentration, the various types of utilities
companies, such as gas, electric, telephone, telegraph, satellite and microwave
communications companies, are considered separate industries and ARMS issued by
private organizations are considered to be securities of issuers in the same
industry. In addition, the industry classification of Asset-Backed Securities
will be determined based on the type of collateral underlying the securities.
For example, Asset-Backed Securities backed by automobile receivables will be
considered to be in a different industry than Asset-Backed Securities backed by
credit card receivables.
As nonfundamental investment restrictions that may be changed at any time
without shareholder approval, the Fund will not:
1. Invest in warrants.
2. Make short sales of securities.
3. Purchase any securities on margin except to obtain such short-term
credits as may be necessary for the clearance of transactions and
except that the Fund may make margin deposits in connection with
futures and options contracts.
4. Purchase or retain the securities of any issuer if, to the Fund's
knowledge, those officers or directors of the Company or its
affiliates or of its investment adviser who individually own
beneficially more than 0.5% of the outstanding securities of such
issuer, together own more than 5% of such outstanding securities.
5. Invest for the purpose of exercising control or management.
6. Purchase or sell oil, gas or other mineral leases, rights or royalty
contracts, except that the Fund may purchase or sell securities of
companies investing in the foregoing.
7. Purchase the securities of other investment companies except as part
of a merger, consolidation or acquisition of assets.
8. Invest in real estate limited partnerships.
9. Invest in the securities of foreign issuers.
10. Invest more than 15% of its net assets in illiquid securities.
In addition, as a nonfundamental policy, the Fund's transactions in options,
futures contracts and options on futures contracts, will be subject to the
following limitations:
a. The Fund will not write puts if, as a result, more than 50% of its
assets would be required to be segregated.
b. The aggregate premiums paid on all put and call options purchased by
the Fund, including options on futures contracts, may not exceed 20%
of the Fund's net assets.
c. The Fund's aggregate margin deposits in connection with futures
contracts and options thereon will not exceed 5% of the Fund's total
assets.
d. The Fund will not purchase or write over-the-counter put and call
options.
Any investment restriction or limitation referred to above or in the Prospectus,
except the borrowing policy, which involves a maximum percentage of securities
or assets, shall not be considered to be violated unless an excess over the
percentage occurs immediately after an acquisition of securities or utilization
of assets and such excess results therefrom.
DIRECTORS AND EXECUTIVE OFFICERS
The names, addresses and principal occupations during the past five years of the
directors and executive officers of the Fund are given below.
Name, Address and Age Position with the Fund
William H. Ellis* (53) Chairman of the Board
Piper Jaffray Tower of Directors
222 South Ninth Street
Minneapolis, Minnesota 55402
David T. Bennett (54) Director
3400 City Center
33 South Sixth Street
Minneapolis, Minnesota 55402
Jaye F. Dyer (68) Director
4670 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402
Karol D. Emmerich (46) Director
7302 Claredon Drive
Edina, MN 55439
Luella G. Goldberg (58) Director
7019 Tupa Drive
Edina, Minnesota 55439
George Latimer (59) Director
754 Linwood Avenue
St. Paul, Minnesota 55105
Paul A. Dow (44) President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
David E. Rosedahl (48) Secretary
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Thomas S. McGlinch (38) Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Robert H. Nelson (31) Senior Vice President
Piper Jaffray Tower and Treasurer
222 South Ninth Street
Minneapolis, Minnesota 55402
Amy K. Johnson (29) Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
* Directors of the Fund who are interested persons (as that term is defined
by the 1940 Act) of Piper Capital Management Incorporated and the Fund.
William H. Ellis has been President of Piper Jaffray Companies Inc. and Piper
Jaffray Inc. (the "Distributor") since September 1982, Chief Operating Officer
of the same two companies since August 1983, Director and Chairman of the Board
of Piper Capital Management Incorporated ("the Adviser") since October 1985 and
President of the Adviser since December 1994.
David T. Bennett is of counsel to the law firm of Gray, Plant, Mooty, Mooty &
Bennett, P.A., located in Minneapolis, Minnesota. Mr. Bennett is chairman of a
group of privately held companies and serves on the board of directors of a
number of nonprofit organizations.
Jaye F. Dyer has been President of Dyer Management Company, a private management
company, since January 1991. Prior to that he was President and Chief Executive
Officer of Dyco Petroleum Corporation, a Minneapolis based oil and natural gas
development company he founded, from 1971 to March 1, 1989, and Chairman of the
Board until December 31, 1990. Mr. Dyer serves on the board of directors of
Northwestern National Life Insurance Company, The ReliaStar Financial Corp. (the
holding company of Northwestern National Life Insurance Company) and various
privately held and nonprofit corporations.
Karol D. Emmerich has been President of The Paraclete Group, a consultant to
nonprofit organizations, since 1993. Prior to that she had been Vice President,
Chief Accounting Officer and Treasurer of Dayton Hudson Corporation from 1980 to
May 1993. Ms. Emmerich is an Executive Fellow at the University of St. Thomas
Graduate School of Business and serves on the board of directors of a number of
privately held and nonprofit organizations.
Luella G. Goldberg has served on the board of directors of Northwestern National
Life Insurance Company (since 1976), The ReliaStar Financial Corp. (since 1989),
TCF Financial Corporation (since 1988), the holding company of TCF Bank Savings
fsb, and Hormel Foods Corp. (since 1993). Ms. Goldberg also serves as a Trustee
of Wellesley College, and as a director of a number of other organizations,
including the University of Minnesota Foundation and the Minnesota Orchestral
Association. Ms. Goldberg was Chairman of the Board of Trustees of Wellesley
College from 1985 to 1993 and acting President from July 1, 1993 to October 1,
1993.
George Latimer has been Chief Executive Officer of National Equity Fund,
Chicago, Illinois since November 1995. Prior to that he was Director, Special
Actions Office, Office of the Secretary, Department of Housing and Urban
Development since 1993 and prior thereto, he had been Dean of Hamline Law
School, Saint Paul, Minnesota from 1990 to 1993. Mr. Latimer also serves on the
board of directors of Digital Biometrics, Inc. and Payless Cashways, Inc.
Paul A. Dow has been a Senior Vice President of the Adviser since 1989 and Chief
Investment Officer of the Adviser since 1989.
David E. Rosedahl has been Secretary and a Director of the Adviser since 1985, a
Managing Director of the Distributor since 1986, a Managing Director of Piper
Jaffray Companies Inc. since 1987, Secretary of the Distributor since 1993 and
General Counsel for the Distributor and Piper Jaffray Companies Inc. since 1979.
Thomas S. McGlinch has been a Senior Vice President of the Adviser since Novembe
1995, prior to which he had been a Vice President of the Adviser since November
1992 and, prior thereto, he had been a specialty products trader at FBS
Investment Services, Inc. from 1988 to January 1992.
Robert H. Nelson joined the Adviser in 1988 and has been a Senior Vice President
of the Adviser since November 1993, prior to which he had been a Vice President
of the Adviser from 1991 to 1993 and Assistant Vice President from 1989 to 1991.
Amy K. Johnson has been a Vice President of the Adviser since November 1994,
Accounting Manager of the Adviser from 1993 to 1994 and an employee of the
Adviser since 1992. Prior to joining the Adviser, she was an audit senior with
KPMG Peat Marwick LLP where she was employed from 1990 to 1992.
Ms. Goldberg and Ms. Emmerich and Mr. Dyer are members of the Audit Committee of
the Board of Directors. Ms. Goldberg acts as the chairperson of such committee.
The Audit Committee oversees the Company's financial reporting process, reviews
audit results and recommends annually to the Company a firm of independent
certified public accountants.
The Board of Directors also has a Committee of the Independent Directors,
consisting of Mr. Bennett, who serves as chairperson, Messrs. Dyer, and Latimer,
Ms. Emmerich and Ms. Goldberg, and a Derivatives Subcommittee consisting of Ms.
Emmerich, who serves as chairperson, Ms. Goldberg and Mr. Dyer.
The functions of the Committee of the Independent Directors are: (a)
recommendation to the full Board of approval of any management, advisory,
sub-advisory and/or administration agreements; (b) recommendation to the full
Board of approval of any underwriting and/or distribution agreements; (c) review
of the fidelity bond and premium allocation; (d) review of errors and omissions
and any other joint insurance policies and premium allocation; (e) review of,
and monitoring of compliance with, procedures adopted pursuant to certain rules
promulgated under the 1940 Act; and (f) such other duties as the independent
directors shall, from time to time, conclude are necessary or appropriate to
carry out their duties under the 1940 Act. The functions of the Derivatives
Committee are: (a) to oversee practices, policies and procedures of the Adviser
in connection with the use of derivatives; (b) to receive periodic reports from
management and independent accountants; and (c) to report periodically to the
Committee of the Independent Directors and the Board of Directors.
The directors of the Company who are officers or employees of the Adviser or any
of its affiliates receive no remuneration from the Company. Each of the other
directors receives from the Company a quarterly retainer of $1,000, plus a fee
of $750 for each regular quarterly Board of Directors meeting attended. (The
per-meeting fee will increase to $1,000 in the event total Company assets exceed
$1 billion, and to $1,500 in the event total Company assets reach $5 billion or
more.) In addition, members of the Audit Committee not affiliated with the
Adviser receive $1,000 for each Audit Committee meeting attended ($2,000 with
respect to the chairperson of the Committee), with such fee being allocated
among the Company and all other publicly-held investment companies managed by
the Adviser on the basis of relative net asset values. Members of the Committee
of the Independent Directors and the Derivatives Subcommittee currently receive
no additional compensation. Directors are also reimbursed for expenses incurred
in connection with attending meetings.
The following table sets forth the total compensation received by each director
from all registered investment companies managed by the Adviser or affiliates of
the Adviser during the calendar year ended December 31, 1994. Mr. Ellis, as an
officer of the Adviser, did not receive any such compensation and is not
included in the table. The directors did not receive any compensation from the
Company or the Fund during the fiscal year ended August 31, 1995. The
compensation received by each director from DDJ for the fiscal year ended August
31, 1995, was received pursuant to a fee schedule substantially different than
that of the Company and the Fund and therefore is not included in the table.
<TABLE>
<CAPTION>
Pension or
Retirement Estimated Total
Benefits Annual Benefits Compensation
Accrued as Part Upon from Fund
Director of Fund Expenses Retirement Complex*
<S> <C> <C> <C>
David T. Bennett None None $57,500
Jaye F. Dyer None None $68,250
Karol D. Emmerich None None $68,250
Luella G. Goldberg None None $71,250
George Latimer None None $65,250
</TABLE>
* Consists of 26 registered investment companies managed by the Adviser or an
affiliate of the Adviser, including the Company. Each director included in
the table, other than Mr. Bennett, served on the board of each such
registered investment company during 1994. Mr. Bennett served on the board
of 24 such companies during 1994.
INVESTMENT ADVISORY AND OTHER SERVICES
The investment adviser for the Fund is Piper Capital Management Incorporated
(the "Adviser"). Its affiliate, Piper Jaffray Inc. (the "Distributor"), acts as
the Fund's distributor. Each acts as such pursuant to a written agreement which
is periodically approved by the directors or the shareholders of the Fund. The
address of both the Adviser and the Distributor is Piper Jaffray Tower, 222
South Ninth Street, Minneapolis, Minnesota 55402-3804.
Control of the Adviser and the Distributor
The Adviser and the Distributor are both wholly owned subsidiaries of Piper
Jaffray Companies Inc., a publicly held corporation which is engaged through its
subsidiaries in various aspects of the financial services industry.
Investment Advisory and Management Agreement
The Adviser acts as the investment adviser of the Fund under an Investment
Advisory and Management Agreement which has been approved by the Board of
Directors (including a majority of the directors who are not parties to the
agreement, or interested persons of any such party, other than as directors of
the Fund) and by the Fund's initial sole shareholder.
The Investment Advisory and Management Agreement will terminate automatically in
the event of its assignment. In addition, the agreement is terminable at any
time, without penalty, by the Board of Directors of the Company or by vote of a
majority of the Company's outstanding voting securities on not more than 60
days' written notice to the Adviser, and by the Adviser on 60 days' written
notice to the Company. The agreement may be terminated at any time by a vote of
the holders of a majority of the outstanding voting securities of the Fund upon
60 days' written notice to the Adviser. Unless sooner terminated, the agreement
shall continue in effect for more than two years after its execution only so
long as such continuance is specifically approved at least annually by either
the Board of Directors or by a vote of a majority of the outstanding voting
securities of the Company, provided that in either event such continuance is
also approved by a vote of a majority of the directors who are not parties to
such agreement, or interested persons of such parties, cast in person at a
meeting called for the purpose of voting on such approval.
Pursuant to the Investment Advisory and Management Agreement, the Fund pays the
Adviser a monthly advisory fee equal on an annual basis to .35% of the first
$500 million of average daily net assets and .30% of average daily net assets in
excess of $500 million.
The Adviser intends, although not required under the Investment Advisory and
Management Agreement, to reimburse the Fund for the amount, if any, by which the
total operating and management expenses of the Fund (including the Adviser's
compensation and amounts paid pursuant to the Fund's Rule 12b-1 plan, but
excluding interest, taxes, brokerage fees and commissions, and extraordinary
expenses) for the fiscal year ending August 31, 1996, exceed .60% of average net
assets. This arrangement is voluntary and may be revised or terminated at any
time after August 31, 1996, at the Adviser's discretion. In the event of
discontinuance of this arrangement, the Fund will still be subject to the laws
of certain states, which require that if a mutual fund's expenses (including
advisory fees but excluding interest, taxes, brokerage commissions and
extraordinary expenses) exceed certain percentages of average net assets, the
fund must be reimbursed for such excess expenses. The Investment Advisory and
Management Agreement provides that the Adviser must make any expense
reimbursements to the Fund required under state law. The laws of California
provide that aggregate annual expenses of a mutual fund shall not normally
exceed 2-1/2% of the first $30 million of the average net assets, 2% of the next
$70 million of the average net assets and 1-1/2% of the remaining average net
assets. Such expenses include the Adviser's compensation, but exclude interest,
taxes, brokerage fees and commissions, extraordinary expenses and amounts paid
under the Fund's Rule 12b-1 plan. The Adviser does not believe that the laws of
any other state in which the Fund's shares may be offered for sale contain
expense reimbursement requirements.
Under the Investment Advisory and Management Agreement, the Adviser provides the
Fund with advice and assistance in the selection and disposition of the Fund's
investments. All investment decisions are subject to review by the Board of
Directors of the Fund. The Adviser is obligated to pay the salaries and fees of
any affiliates of the Adviser serving as officers or directors of the Fund.
The same security may be suitable for the Fund and/or other funds or private
accounts managed by the Adviser or its affiliates. If and when two or more funds
or accounts simultaneously purchase or sell the same security, the transactions
will be allocated as to price and amount in accordance with arrangements
equitable to each fund or account. The simultaneous purchase or sale of the same
securities by the Fund and other funds or accounts may have a detrimental effect
on the Fund, as this may affect the price paid or received by the Fund or the
size of the position obtainable or able to be sold by the Fund.
The Adviser also acted as the investment adviser of DDJ, the surviving entity of
the Merger for financial reporting purposes. Pursuant to the Investment Advisory
and Management Agreement between DDJ and the Adviser, the Adviser received a
monthly management fee at the per annum rate of .35% of DDJ's average weekly net
assets. Under such agreement, the Adviser received compensation of $1,917,671,
$1,857,513 and $1,462,719, respectively, for the fiscal years ended August 31,
1993, 1994 and 1995.
The Adviser also acted as the administrator of DDJ pursuant to an Administration
Agreement under which the Adviser received a monthly administration fee at the
per annum rate of .15% of DDJ's average weekly net assets. Under such agreement,
the Adviser received compensation of $821,859, $796,077 and $626,880,
respectively, for the fiscal years ended August 31, 1993, 1994 and 1995. The
Fund has not entered into an administration agreement with the Adviser.
Expenses
The expenses of the Fund are deducted from its income before dividends are paid.
These expenses include, but are not limited to, organizational costs, fees paid
to the Adviser, fees and expenses of officers and directors who are not
affiliated with the Adviser, taxes, interest, legal fees, transfer agent,
dividend disbursing agent and custodian fees, audit fees, brokerage fees and
commissions, fees and expenses of registering and qualifying the Fund and its
shares for distribution under federal and state securities laws, expenses of
preparing the prospectus and statement of additional information and of printing
and distributing the prospectus and statement of additional information annually
to existing shareholders, the expenses of reports to shareholders, shareholders'
meetings and proxy solicitations, distribution expenses pursuant to the Rule
12b-1 plan, and other expenses which are not expressly assumed by the Adviser
under the Investment Advisory and Management Agreement.
Distribution Plan
Rule 12b-1(b) under the 1940 Act provides that any payments made by the Fund in
connection with financing the distribution of its shares may only be made
pursuant to a written plan describing all aspects of the proposed financing of
distribution, and also requires that all agreements with any person relating to
the implementation of the plan must be in writing.
Rule 12b-1(b)(1) requires that such plan be approved by a majority of the Fund's
outstanding shares, and Rule 12b-1(b)(2) requires that such plan, together with
any related agreements, be approved by a vote of the Board of Directors and of
the directors who are not interested persons of the Company and who have no
direct or indirect interest in the operation of the plan or in the agreements
related to the plan, cast in person at a meeting called for the purpose of
voting on such plan or agreement. The Fund's Distribution Plan has been approved
by the Board of Directors and by the Fund's initial sole shareholder in
accordance with the Rule. Rule 12b-1(b)(3) requires that the plan or agreement
provide, in substance:
(a) that it shall continue in effect for a period of more than one year
from the date of its execution or adoption only so long as such
continuance is specifically approved at least annually in the manner
described in paragraph (b)(2) of Rule 12b-1;
(b) that any person authorized to direct the disposition of moneys paid or
payable by the Fund pursuant to the plan or any related agreement
shall provide to the Board of Directors, and the directors shall
review, at least quarterly, a written report of the amounts so
expended and the purposes for which such expenditures were made; and
(c) in the case of a plan, that it may be terminated at any time by a vote
of a majority of the members of the Board of Directors who are not
interested persons of the Fund and who have no direct or indirect
financial interest in the operation of the plan or in any agreements
related to the plan or by a vote of a majority of the outstanding
voting securities of the Fund.
Rule 12b-1(b)(4) requires that such a plan may not be amended to increase
materially the amount to be spent for distribution without shareholder approval
and that all material amendments of the plan must be approved in the manner
described in paragraph (b)(2) of Rule 12b-1.
Rule 12b-1(c) provides that the Fund may rely upon Rule 12b-1(b) only if the
selection and nomination of the disinterested directors are committed to the
discretion of such disinterested directors. Rule 12b-1(e) provides that the Fund
may implement or continue a plan pursuant to Rule 12b-1(b) only if the directors
who vote to approve such implementation or continuation conclude, in the
exercise of reasonable business judgment and in light of their fiduciary duties
under state law, and under Sections 36(a) and (b) of the 1940 Act, that there is
a reasonable likelihood that the plan will benefit the Fund and its
shareholders. The Board of Directors has concluded that there is a reasonable
likelihood that the Distribution Plan will benefit the Fund and its
shareholders.
Pursuant to the provisions of the Distribution Plan, the Fund pays the
Distributor a monthly service fee equal, on an annual basis, to .15% of the
Fund's average daily net assets in connection with the servicing of the Fund's
shareholder accounts. This fee is intended to compensate the Distributor for
ongoing servicing and/or maintenance of shareholder accounts and the costs
incurred in connection therewith ("Shareholder Servicing Costs"). Shareholder
Servicing Costs include all expenses of the Distributor incurred in connection
with providing shareholder liaison services, including, but not limited to, an
allocation of the Distributor's overhead and payments made to persons, including
employees of the Distributor, who respond to inquiries of shareholders regarding
their ownership of shares or their accounts with the Fund and who provide
information on shareholders' investments.
Underwriting and Distribution Agreement
Pursuant to the Underwriting and Distribution Agreement, the Distributor has
agreed to act as the principal underwriter for the Fund in the sale and
distribution to the public of shares of the Fund, either through dealers or
otherwise. The Distributor has agreed to offer such shares for sale at all times
when such shares are available for sale and may lawfully be offered for sale and
sold. As compensation for its services, in addition to receiving its service
fees pursuant to the Distribution Plan discussed above, the Distributor receives
the sales load on sales of the Fund shares set forth in the Prospectus. The
Agreement was not in effect during the fiscal year ended August 31, 1995.
Transfer Agent and Dividend Disbursing Agent
Investors Fiduciary Trust Company ("IFTC"), the transfer agent for the Company,
maintains certain omnibus shareholder accounts for the Fund. Each such omnibus
account represents the accounts of a number of individual shareholders of the
Fund. The Company has entered into a Shareholder Account Servicing Agreement
with the Distributor, pursuant to which the Distributor provides certain
transfer agent and dividend disbursing agent services for the underlying
individual shareholder accounts. Pursuant to such Agreement, the Distributor has
agreed to perform the usual and ordinary services of transfer agent and dividend
disbursing agent not performed by IFTC with respect to the underlying individual
shareholder accounts, including, without limitation, the following: maintaining
all shareholder accounts, preparing shareholder meeting lists, mailing
shareholder reports and prospectuses, tracking shareholder accounts for blue sky
and Rule l2b-1 purposes, withholding taxes on nonresident alien and foreign
corporation accounts, preparing and mailing checks for disbursement of income
dividends and capital gains distributions, preparing and filing U.S. Treasury
Department Form 1099 for all shareholders, preparing and mailing confirmation
forms to shareholders and dealers with respect to all purchases, exchanges and
liquidations of series shares and other transactions in shareholder accounts for
which confirmations are required, recording reinvestments of dividends and
distributions in series shares, recording redemptions of series shares, and
preparing and mailing checks for payments upon redemption and for disbursements
to withdrawal plan holders. As compensation for such services, the Distributor
will be paid an annual fee of $7.50 per active shareholder account (defined as
an account that has a balance of shares) and $1.60 per closed account (defined
as an account that does not have a balance of shares, but has had activity
within the past 12 months). Such fee is payable on a monthly basis at a rate of
1/12 of the annual per-account charge. Such fee covers all services listed
above, with the exception of preparing shareholder meeting lists and mailing
shareholder reports and prospectuses. These services, along with proxy
processing (if applicable) and other special service requests, are billable as
performed at a mutually agreed upon fee in addition to the annual fee noted
above, provided that such mutually agreed upon fee shall be fair and reasonable
in light of the usual and customary charges made by others for services of the
same nature and quality. The Agreement was not in effect during the fiscal year
ended August 31, 1995.
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
The Adviser is responsible for decisions to buy and sell securities, the
selection of broker-dealers to effect the transactions and the negotiation of
brokerage commissions, if any, with respect to the Fund. In placing orders for
securities transactions, the primary criterion for the selection of a
broker-dealer is the ability of the broker-dealer, in the opinion of the
Adviser, to secure prompt execution of the transactions on favorable terms,
including the reasonableness of the commission and considering the state of the
market at the time.
When consistent with these objectives, business may be placed with
broker-dealers who furnish investment research information and statistical and
other services to the Adviser. Such research or services include advice, both
directly and in writing, as to the value of securities; the advisability of
investing in, purchasing or selling securities; and the availability of
securities, or purchasers or sellers of securities; as well as analyses and
reports concerning issues, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts. This allows the Adviser to
supplement its own investment research activities and enables the Adviser to
obtain the views and information of individuals and research staffs of many
different securities firms prior to making investment decisions for the Fund. To
the extent portfolio transactions are effected with broker-dealers who furnish
research services to the Adviser, the Adviser receives a benefit, not capable of
evaluation in dollar amounts, without providing any direct monetary benefit to
the Fund from these transactions. The Adviser believes that most research
services obtained by it generally benefit several or all of the investment
companies and private accounts which it manages, as opposed to solely benefiting
one specific managed fund or account. Normally, research services obtained
through managed funds or accounts investing in common stocks would primarily
benefit the managed funds or accounts which invest in common stock; similarly,
services obtained from transactions in fixed-income securities would normally be
of greater benefit to the managed funds or accounts which invest in debt
securities.
The Adviser has not entered into any formal or informal agreements with any
broker-dealers, nor does it maintain any "formula" which must be followed in
connection with the placement of the Fund's portfolio transactions in exchange
for research services provided the Adviser. However, the Adviser does maintain
an informal list of broker-dealers, which is used from time to time as a general
guide in the placement of the Fund's business, in order to encourage certain
broker-dealers to provide the Adviser with research services which the Adviser
anticipates will be useful to it. Because the list is merely a general guide,
which is to be used only after the primary criterion for the selection of
broker-dealers (discussed above) has been met, substantial deviations from the
list are permissible and may be expected to occur. The Adviser will authorize
the Fund to pay an amount of commission for effecting a securities transaction
in excess of the amount of commission another broker-dealer would have charged
only if the Adviser determines in good faith that such amount of commission is
reasonable in relation to the value of the brokerage and research services
provided by such broker-dealer, viewed in terms of either that particular
transaction or the Adviser's overall responsibilities with respect to the
accounts as to which it exercises investment discretion. Generally, the Fund
pays higher than the lowest commission rates available. The Fund will not
purchase at a higher price or sell at a lower price in connection with
transactions effected with a director, acting as principal, who furnishes
research services to the Adviser than would be the case if no weight were given
by the Adviser to the dealer's furnishing of such services.
Transactions in securities, options on securities, futures contracts and options
on futures contracts, may be effected through the Distributor. In determining
the commissions to be paid to the Distributor in connection with portfolio
transactions on national securities exchanges or commodity exchanges, it is the
policy of the Fund that such commissions will, in the judgment of the Adviser,
subject to review by the Board of Directors, be both (a) at least as favorable
as those which would be charged by other qualified brokers in connection with
comparable transactions during a comparable period of time, and (b) at least as
favorable as commissions contemporaneously charged by the Distributor on
comparable transactions for its most favored comparable unaffiliated customers.
While the Fund does not deem it practicable and in its best interest to solicit
competitive bids for commission rates on each transaction, consideration will
regularly be given to posted commission rates as well as to other information
concerning the level of commissions charged on comparable transactions by other
qualified brokers.
For the fiscal years ended August 31, 1993, 1994 and 1995, DDJ paid aggregate
brokerage commissions of $40,800, $69,650 and $3,740, respectively. Of such
amounts, $39,525, $63,325 and $1,700, respectively, were paid to the
Distributor. For the fiscal year ended August 31, 1995, 45% of DDJ's aggregate
brokerage commissions were paid to the Distributor, which accounted for 45% of
the aggregate dollar amount of transactions involving the payments of
commissions.
CAPITAL STOCK AND OWNERSHIP OF SHARES
The Board of Directors is empowered under the Company's Articles of
Incorporation to issue additional series of the Company's common stock without
shareholder approval. On an issue affecting only a particular series, the shares
of the affected series vote separately. An example of such an issue would be a
fundamental investment restriction pertaining to only one series. In voting on
the Investment Advisory and Management Agreement (the "Agreement"), approval of
the Agreement by the shareholders of a particular series would make the
Agreement effective as to that series whether or not it had been approved by the
shareholders of any other series.
If the Company issues shares in additional series, the assets received by the
Company for the issue or sale of shares of each series, and all income,
earnings, profits and proceeds thereof, subject only to the rights of creditors,
will be allocated to such series, and constitute the underlying assets of such
series. The underlying assets of each series are required to be segregated on
the books of account, and are to be charged with the expenses relating to such
series and with a share of the general expenses of the Company. Any general
expenses of the Company not readily identifiable as belonging to a particular
series shall be allocated among the series based on the relative net assets of
the series at the time such expenses were accrued.
The Board of Directors may, without shareholder approval, create and issue one
or more additional classes of shares within the Fund, as well as within any
series of the Company created in the future. All classes of shares in a series
would be identical except that each class of shares would be available through a
different distribution channel and certain classes might incur different
expenses for the provision of distribution services or the provision of
shareholder services or administration assistance by institutions. Shares of
each class would share equally in the gross income of a series, but any
variation in expenses would be charged separately against the income of the
particular class incurring such expenses. This would result in variations in net
investment income accrued and dividends paid by and in the net asset value of
the different classes of a series. This ability to create multiple classes of
shares within each series of the Company will allow the Company in the future
the flexibility to better tailor its methods of marketing, administering and
distributing shares of the Fund to the needs of particular investors and to
allocate expenses related to such marketing, administration and distribution
methods to the particular classes of shareholders of the Fund incurring such
expenses.
As of December 7, 1995, no shareholder was known by the Fund to own beneficially
5% or more of the outstanding shares of the Fund. The directors and officers of
the Company as a group owned less than 1% of the outstanding shares of the Fund
as of such date.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the public offering price of Fund shares is
summarized in the Prospectus in the text following the headings "How to Purchase
Shares -- Public Offering Price" and "Valuation of Shares." The net asset value
of the Fund's shares is determined on each day on which the New York Stock
Exchange (the "Exchange") is open, provided that the net asset value need not be
determined on days on which changes in the value of its portfolio securities
will not materially affect the current net asset value of the Fund's shares and
days when no Fund shares are tendered for redemption and no order for Fund
shares is received. The Exchange is not open for business on the following
holidays (or on the nearest Monday or Friday if the holiday falls on a weekend):
New Year's Day, Presidents' Day, Good Friday, Memorial Day, July 4th, Labor Day,
Thanksgiving and Christmas.
On August 31, 1995, the net asset value per share for DDJ was calculated as
follows:
Net Assets ($409,306,125)/ = Net Asset Value Per Share
Shares Outstanding (47,066,117) ($8.70)
In the case of the Fund, a sales charge of 1.52% of the net asset value (in the
case of sales of less than $100,000) will be added to the net asset value per
share to determine the public offering price per share.
PERFORMANCE COMPARISONS
Advertisements and other sales literature for the Fund may refer to "average
annual total return," "cumulative total return" and "yield." The Adviser may
waive or pay certain expenses of the Fund, thereby increasing total return and
yield. These expenses may or may not be waived or paid in the future in the
Adviser's discretion.
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:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end of the period of
a hypothetical $1,000 payment made at the beginning
of such period.
This calculation deducts the maximum sales charge from the initial hypothetical
$1,000 investment, assumes all dividends and capital gains distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus, and includes all recurring fees, such as investment advisory
and management fees, charged to all shareholder accounts.
The Fund's average annual total returns for the one year period ended August 31,
1995 and for the period since inception on January 30, 1992 through August 31,
1995 were 3.85% and 3.42%, respectively.
Cumulative total return is computed by finding the cumulative compounded rate of
return over the period indicated in the advertisement that would equate the
initial amount invested to the ending redeemable value, according to the
following formula:
CTR = [(ERV-P)/P] 100
Where: CTR = Cumulative total return;
ERV = ending redeemable value at the end of
the period of a hypothetical $1,000
payment made at the beginning of such
period; and
P = initial payment of $1,000.
This calculation assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus and includes all recurring fees, such as investment advisory
and management fees, charged to all shareholder accounts.
The cumulative total return for the Fund from inception on January 30, 1992
through August 31, 1995 was 12.81%.
Yield is computed by dividing the net investment income per share (as defined
under Securities and Exchange Commission rules and regulations) earned during
the computation period by the maximum offering price per share on the last day
of the period, according to the following formula:
YIELD = 2[(a-b/cd + 1)(6th power) - 1]
Where: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of
reimbursements);
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends;
and
d = the maximum offering price per share on the last day
of the period.
The Fund's yield was not calculated until October 1995 at which time the yield
for the 30-day period ended October 31, 1995 was 5.73%.
In addition to advertising total return and yield, comparative performance
information may be used from time to time in advertising the Fund's shares,
including data from Lipper Analytical Services, Inc. ("Lipper"), Morningstar,
Inc. and other entities or organizations which track the performance of
investment companies. The Fund's performance may be compared to that of the ARM
Fund Average, as reported by Lipper, and to the performance of the Lehman
Brothers ARM Index, an unmanaged index. Unmanaged indices generally do not
reflect deductions for administrative and management costs and expenses.
PURCHASE OF SHARES
An investor may qualify for a reduced sales charge immediately by signing a
nonbinding Letter of Intent stating the investor's intention to invest within a
13-month period, beginning not earlier than 90 days prior to the date of
execution of the Letter, a specified amount which, if made at one time, would
qualify for a reduced sales charge. Reinvested dividends will be treated as
purchases of additional shares. Any redemptions made during the term of the
Letter of Intent will be subtracted from the amount of purchases in determining
whether the Letter of Intent has been completed. During the term of a Letter of
Intent, IFTC will hold shares representing 5% of the amount that the investor
intends to invest during the 13-month period in escrow for payment of a higher
sales charge if the full amount indicated in the Letter of Intent is not
purchased. Dividends on the escrowed shares will be paid to the shareholder. The
escrowed shares will be released when the full amount indicated has been
purchased. If the full indicated amount is not purchased within the 13-month
period, the investor will be required to pay, either in cash or by liquidating
escrowed shares, an amount equal to the difference in the dollar amount of sales
charge actually paid and the amount of sales charge the investor would have paid
on his or her aggregate purchases if the total of such purchases had been made
at a single time.
REDEMPTION OF SHARES
General
Redemption of shares, or payment, may be suspended at times (a) when the
Exchange is closed for other than customary weekend or holiday closings, (b)
when trading on said Exchange is restricted, (c) when an emergency exists, as a
result of which disposal by the Fund of securities owned by it is not reasonably
practicable, or it is not reasonably practicable for the Fund fairly to
determine the value of its net assets, or (d) during any other period when the
Securities and Exchange Commission, by order, so permits, provided that
applicable rules and regulations of the Securities and Exchange Commission shall
govern as to whether the conditions prescribed in (b) or (c) exist.
Shareholders who purchased Fund shares through a broker-dealer other than the
Distributor may redeem such shares either by oral request to such broker-dealer
or by written request to IFTC at the address set forth in the Prospectus. To be
considered in proper form, written requests for redemption should indicate the
dollar amount or number of shares to be redeemed, refer to the shareholder's
Fund account number, and give either a social security or tax identification
number. The request should be signed in exactly the same way the account is
registered. If there is more than one owner of the shares, all owners must sign.
If shares to be redeemed have a value of $10,000 or more or redemption proceeds
are to be paid to someone other than the shareholder at the shareholder's
address of record, the signature(s) must be guaranteed by an "eligible guarantor
institution," which includes a commercial bank that is a member of the Federal
Deposit Insurance Corporation, a trust company, a member firm of a domestic
stock exchange, a savings association or a credit union that is authorized by
its charter to provide a signature guarantee. IFTC may reject redemption
instructions if the guarantor is neither a member of nor a participant in a
signature guarantee program. Signature guarantees by notaries public are not
acceptable. The purpose of a signature guarantee is to protect shareholders
against the possibility of fraud. Further documentation will be requested from
corporations, administrators, executors, personal representatives, trustees and
custodians. Redemption requests given by facsimile will not be accepted. Unless
other instructions are given in proper form, a check for the proceeds of the
redemption will be sent to the shareholder's address of record.
Reinstatement Privilege
A shareholder who has redeemed shares of the Fund may reinvest all or part of
the redemption proceeds in shares of any Fund managed by the Adviser (except
Hercules Funds Inc.) within 30 days without payment of an additional sales
charge, provided that a shareholder may reinvest in a fund through a
broker-dealer other than the Distributor only if there is a valid sales
agreement for such fund between such broker-dealer and the Distributor. The
Distributor will refund to the shareholder a pro rata amount of any contingent
deferred sales charge paid by such shareholder in connection with a redemption
of Fund shares if and to the extent that the redemption proceeds are reinvested
within 30 days of such redemption in any mutual fund managed by the Adviser
(except Hercules Funds Inc.). Such refund will be based upon the ratio of the
net asset value of shares purchased in the reinvestment to the net asset value
of shares redeemed. Reinvestments will be allowed at net asset value without the
payment of a front-end sales charge, irrespective of the amounts of the
reinvestment, but shall be subject to the same pro rata contingent deferred
sales charge that was applicable to the earlier investment; however, the period
during which the contingent deferred sales charge shall apply on the newly
issued shares shall be the period applicable to the redeemed shares extended by
the number of days between the redemption and the reinvestment dates
(inclusive).
Systematic Withdrawal Plan
To establish a Systematic Withdrawal Plan for the Fund and receive regular
periodic payments, an account must have a value of $5,000 or more. A request to
establish a Systematic Withdrawal Plan must be submitted in writing to an
investor's Piper Jaffray Investment Executive or other broker-dealer. There are
no service charges for maintenance; the minimum amount that may be withdrawn
each period is $100. (This is merely the minimum amount allowed and should not
be interpreted as a recommended amount.) The holder of a Systematic Withdrawal
Plan will have any income dividends and any capital gains distributions
reinvested in full and fractional shares at net asset value. To provide funds
for payment, the Fund will redeem as many full and fractional shares as
necessary at the redemption price, which is net asset value. Redemption of
shares may reduce or possibly exhaust the shares in an account, particularly in
the event of a market decline. As with other redemptions, a redemption to make a
withdrawal payment is a sale for federal income tax purposes. Payments made
pursuant to a Systematic Withdrawal Plan cannot be considered as actual yield or
income since part of such payments may be a return of capital.
The maintenance of a Systematic Withdrawal Plan for the Fund concurrent with
purchases of additional shares of the Fund would be disadvantageous because of
the sales commission involved in the additional purchases. A confirmation of
each transaction showing the sources of the payment and the share and cash
balance remaining in the account will be sent. The plan may be terminated on
written notice by the shareholder or the Fund, and it will terminate
automatically if all shares are liquidated or withdrawn from the account or upon
the death or incapacity of the shareholder. The amount and schedule of
withdrawal payments may be changed or suspended by giving written notice to your
Piper Jaffray Investment Executive or other broker-dealer at least seven
business days prior to the end of the month preceding a scheduled payment.
TAXATION
The Fund intends to qualify each year as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). To
qualify as a regulated investment company the Fund must, among other things,
receive at least 90% of its gross income each year from dividends, interest,
gains from the sale or other disposition of securities and certain other types
of income, including income from options and futures contracts.
If for any taxable year the Fund does not qualify as a regulated investment
company, all of its taxable income will be subject to tax at regular corporate
rates without any deduction for distributions to shareholders, and such
distributions will be taxable to the Fund's shareholders as ordinary dividends
to the extent of the Fund's current or accumulated earnings and profits.
The Code also forbids a regulated investment company from earning 30% or more of
its gross income from the sale or other disposition of securities held less than
three months. This restriction may limit the extent to which the Fund may
purchase futures contracts and options. To the extent the Fund engages in
short-term trading and enters into futures and options transactions, the
likelihood of violating this 30% requirement is increased.
The Code requires a regulated investment company to diversify its holdings. The
Internal Revenue Service has not made its position clear regarding the treatment
of futures contracts and options for purposes of the diversification test, and
the extent to which the Fund can buy or sell futures contracts and options may
be limited by this requirement.
The Fund will be subject to a nondeductible excise tax equal to 4% of the
excess, if any, of the amount required to be distributed pursuant to the Code
for each calendar year over the amount actually distributed. No amount of such
excess, however, will be subject to the excise tax to the extent it is subject
to the corporate-level income tax. In order to avoid the imposition of this
excise tax, the Fund generally must declare dividends by the end of a calendar
year representing 98% of the Fund's ordinary income for the calendar year and
98% of its capital gain net income (both long-term and short-term capital gains)
for the 12-month period ending October 31 of the calendar year.
Gain or loss on futures contracts and options is taken into account when
realized by entering into a closing transaction or by exercise. In addition,
with respect to many types of futures contracts and options held at the end of
the Fund's taxable year, unrealized gain or loss on such contracts is taken into
account at the then current fair market value thereof under a special
"marked-to-market, 60/40 system," and such gain or loss is recognized for tax
purposes. The gain or loss from such futures contracts and options (including
premiums on certain options that expire unexercised) is treated as 60% long-term
and 40% short-term capital gain or loss, regardless of their holding period. The
amount of any capital gain or loss actually realized by the Fund in a subsequent
sale or other disposition of such futures contracts will be adjusted to reflect
any capital gain or loss taken into account by the Fund in a prior year as a
result of the constructive sale under the "marked-to-market, 60/40 system."
Notwithstanding the rules described above, with respect to certain futures
contracts, the Fund may make an election that will have the effect of exempting
all or a part of those identified futures contracts from being treated for
federal income tax purposes as sold on the last business day of the Fund's
taxable year. All or part of any loss realized by the Fund on any closing of a
futures contract may be deferred until all of the Fund's offsetting positions
with respect to the futures contract are closed.
Ordinarily, distributions and redemption proceeds earned by a shareholder are
not subject to withholding of federal income tax. However, 31% of a
shareholder's distributions and redemption proceeds must be withheld if a
shareholder fails to supply the Fund or its agent with such shareholder's
taxpayer identification number or if a shareholder, who is otherwise exempt from
withholding, fails to properly document such shareholder's status as an exempt
recipient.
The Fund may make investments that produce income that is not matched by a
corresponding distribution to the Fund, such as investments in obligations
having original issue discount, such as zero coupon securities, or market
discount (if the Fund elects to accrue the market discount on a current basis
with respect to such instruments). Such income would be treated as income earned
by the Fund and therefore would be subject to the distribution requirements of
the Code. Because such income may not be matched by a corresponding cash
distribution to the Fund, the Fund may be required to borrow money or dispose of
other securities to be able to make distributions to shareholders.
Any loss on the sale or exchange of shares of the Fund generally will be
disallowed to the extent that a shareholder acquires or contracts to acquire
shares of the Fund within 30 days before or after such sale or exchange. In
addition, if a shareholder disposes of shares within 90 days of acquiring such
shares and purchases shares of another mutual fund managed by the Adviser at a
reduced sales charge, the shareholder's tax basis for determining gain or loss
on the shares which are disposed of is reduced by the lesser of the amount of
the sales charge that was paid when the shares disposed of were acquired or the
amount by which the sales charge for the new shares is reduced. If a
shareholder's tax basis is so reduced, the amount of the reduction is treated as
part of the tax basis of the new shares.
Additionally, distributions may be subject to state and local income taxes, and
the treatment thereof may differ from the federal income tax consequences
discussed above.
For federal income tax purposes, the Fund had capital loss carryovers of
$141,672,558 on September 1, 1995. If these loss carryovers are not offset by
subsequent capital gains, they will expire at various times during 1999 through
2002. Because the Fund acquired the loss carryovers as a result of the merger of
the Trusts into the Fund, certain limitations will apply to the Fund's ability
to use the loss carryovers to offset any capital gains it realizes in the
future.
GENERAL INFORMATION
Minnesota has enacted legislation which authorizes corporations to eliminate or
limit the personal liability of a director to the corporation or its
shareholders for monetary damages for breach of the fiduciary duty of "care"
(the duty to act with the care an ordinarily prudent person in a like position
would exercise under similar circumstances). Minnesota law does not, however,
permit a corporation to eliminate or limit the liability of a director (a) for
any breach of the director's duty of "loyalty" to the corporation or its
shareholders (the duty to act in good faith and in a manner reasonably believed
to be in the best interest of the corporation), (b) for acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of law,
(c) for authorizing a dividend, stock repurchase or redemption or other
distribution in violation of Minnesota law or for violation of certain
provisions of Minnesota securities laws, or (d) for any transaction from which
the director derived an improper personal benefit. Minnesota law does not permit
elimination or limitation of a director's liability under the Securities Act of
1933 or the Securities Exchange Act of 1934, and the 1940 Act prohibits
elimination or limitation of a director's liability for acts involving willful
malfeasance, bad faith, gross negligence or reckless disregard of the duties of
a director. The Articles of Incorporation of the Company limit the liability of
directors to the fullest extent permitted by Minnesota law and the 1940 Act.
FINANCIAL STATEMENTS
The audited financial statements and supplementary schedules for the Fund as of
August 31, 1995, contained in the Fund's Annual Report to shareholders are
incorporated by reference into this Statement of Additional Information in
reliance on the independent auditors' report of KPMG Peat Marwick LLP, 4200
Norwest Center, Minneapolis, Minnesota 55402, independent auditors of the Fund,
given on the authority of such firm as experts in accounting and auditing.
PENDING LITIGATION
Complaints have been brought in federal and state court relating to one open-end
and twelve closed-end investment companies managed by the Adviser and to two
open-end funds for which the Adviser has acted as sub-adviser. An Amended
Consolidated Class Action Complaint was filed on October 5, 1994 in the United
States District Court, District of Minnesota, against the Institutional
Government Income Portfolio (a series of Piper Funds Inc.), the Adviser, the
Distributor, William H. Ellis and Edward J. Kohler alleging certain violations
of federal and state securities laws, including the making of materially
misleading statements in the prospectus, common law negligent misrepresentation
and breach of fiduciary duty. This is a consolidated putative class action in
which claims brought by 11 persons or entities have been consolidated under the
title In Re: Piper Funds Inc. Institutional Government Income Portfolio
Litigation. The named plaintiffs in the complaint purport to represent a class
of individuals and groups who purchased shares of Institutional Government
Income Portfolio during the putative class period of July 1, 1991 through May 9,
1994. The named plaintiffs and defendants have entered into a settlement
agreement which has received preliminary approval from the Court. The terms of
the settlement are set forth in a Settlement Agreement dated July 20, 1995 (as
modified by an Addendum filed on July 28, 1995). The Settlement Agreement
contained a provision which would have permitted the defendants to cancel the
Agreement if shareholders who had incurred a cumulative "Loss" (as defined under
the Agreement) of more than 10% of the Loss sustained by the entire class had
opted out. The deadline for requesting exclusion from the class has passed, and
the Loss sustained by persons requesting exclusion is less than 10%. If granted
final approval by the Court, the Settlement Agreement would provide up to
approximately $70 million, together with interest earned, less certain
disbursements and attorneys fees as approved by the Court, to class members in
payments scheduled over approximately three years. Such payments would be made
by Piper Jaffray Companies Inc. and the Adviser and would not be an obligation
of the Institutional Government Income Portfolio or Piper Funds Inc.
Six additional complaints, which are based on claims similar to those asserted
in the first complaint, have been brought relating to the Institutional
Government Income Portfolio. The first of such complaints was filed in the same
court against the same parties on October 21, 1994, by Eltrax Systems, Inc. A
second additional complaint was filed against Piper Funds Inc., the Adviser, the
Distributor and Piper Jaffray Companies Inc. on September 30, 1994 in the United
States District Court, District of Colorado. Plaintiffs in the complaint are
Gary Pashel and Gregg S. Hayutin, Trustees of the Mae Pashel Trust; Mae Pashel,
individually; Gary Pashel and Michael H. Feinstein, Trustees of the Robert
Hayutin Insurance Trust; and Dennis E. Hayutin, Gregg S. Hayutin and Gary
Pashel, Trustees of the Marie Ellen Hayutin Trust. The third additional
complaint, a putative class action, was filed on November 1, 1994 in the United
States District Court, District of Idaho by the Idaho Association of Realtors,
Inc., a non-profit Idaho corporation. The complaint was filed against the
Institutional Government Income Portfolio, the Adviser, the Distributor, Piper
Jaffray Companies Inc., William H. Ellis and Edward J. Kohler. The fourth
complaint, also a putative class action, was filed in the United States District
Court for the District of Minnesota, Third Division, on January 25, 1995. The
Complaint was brought by Louise S. Maher and John A. Raetz against Piper Funds
Inc., the Institutional Government Income Portfolio, the Adviser, the
Distributor, Piper Jaffray Companies Inc., William H. Ellis and Edward J.
Kohler. The fifth complaint was brought on April 11, 1995, and in the future may
be filed in the Minnesota State District Court, Hennepin County. The plaintiff,
Frank R. Berman, Trustee of Frank R. Berman Professional CP Pension Plan Trust,
sued individually and not on behalf of any putative class. Defendants are the
Distributor, Piper Funds Inc., Morton Silverman and Worth Bruntjen. A sixth
complaint relating to the Institutional Government Income Portfolio was filed on
June 22, 1995 in the Montana Thirteenth Judicial District Court, Yellowstone
County by Beverly Muth against the Distributor and Teresa L. Darnielle. In
addition to the above complaints, a number of actions have been commenced in
arbitration by individual investors in the Institutional Government Income
Portfolio. The complaints discussed in this paragraph generally have been
consolidated with the In Re: Piper Funds Inc. action for pretrial purposes and
the arbitrations and litigation have been stayed pending entry of an order by
the Court permitting those class members who have requested exclusion to proceed
with their actions.
A complaint was filed by Herman D. Gordon on October 20, 1994, in the United
States District Court, District of Minnesota, against American Adjustable Rate
Term Trust Inc.--1998, American Adjustable Rate Term Trust Inc.--1999, the
Adviser, the Distributor, Piper Jaffray Companies Inc., Benjamin Rinkey, Jeffrey
Griffin, Charles N. Hayssen and Edward J. Kohler. A second complaint was filed
by Frank Donio, I.R.A. and other plaintiffs on April 14, 1995, in the United
States District Court, District of Minnesota, against American Adjustable Rate
Term Trust Inc.--1996, American Adjustable Rate Term Trust Inc.--1997, American
Adjustable Rate Term Trust Inc.--1998, American Adjustable Rate Term Trust
Inc.--1999, the Adviser, the Distributor, Piper Jaffray Companies Inc. and
certain associated individuals. Plaintiffs in both actions filed a Consolidated
Amended Class Action Complaint on May 23, 1995 and by Order dated June 8, 1995,
the Court consolidated the two putative class actions. The consolidated amended
complaint, which purports to be a class action, alleges certain violations of
federal and state securities laws, breach of fiduciary duty and negligent
misrepresentation.
A complaint was filed by Carson H. Bradley on February 3, 1995 in the Sixth
Judicial District of the State of Idaho against American Government Income Fund
Inc., American Government Income Portfolio Inc., the Adviser, the Distributor
and Worth Bruntjen. The complaint alleges negligent misrepresentation, breach of
fiduciary duty and breach of contract. The action has been removed to Federal
District Court for the District of Idaho.
A complaint was filed by Gary E. Nelson on June 28, 1995 in the United States
District Court for the Western District of Washington at Seattle against
American Strategic Income Portfolio Inc. -- II, the Adviser, the Distributor,
Piper Jaffray Companies Inc., Worth Bruntjen, Charles N. Hayssen, Michael
Jansen, William H. Ellis and Edward J. Kohler. A second complaint was filed by
the same individual in the same court on July 12, 1995 against American
Opportunity Income Fund Inc., the Adviser, the Distributor, Piper Jaffray
Companies Inc., Worth Bruntjen, Charles N. Hayssen, Michael Jansen, William H.
Ellis and Edward J. Kohler. On September 7, 1995, Christian Fellowship
Foundation Peace United Church of Christ, Gary E. Nelson and Lloyd Schmidt filed
an amended complaint purporting to be a class action in the United States
District Court for the District of Washington. The complaint was filed against
American Government Income Portfolio, Inc., American Government Income Fund
Inc., American Government Term Trust, Inc., American Strategic Income Portfolio
Inc., American Strategic Income Portfolio Inc. -- II, American Strategic Income
Portfolio Inc. -- III, American Opportunity Income Fund Inc., American Select
Portfolio Inc., Piper Jaffray Companies Inc., Piper Jaffray Inc., the Adviser
and certain associated individuals. By Order filed October 5, 1995, the
complaints were consolidated. The amended complaint alleges generally that the
prospectus and financial statements of each investment company were false and
misleading. Specific violations of various federal securities laws are alleged
with respect to each investment company. The complaint also alleges that the
defendants violated the Racketeer Influenced and Corrupt Organizations Act, the
Washington State Securities Act and the Washington Consumer Protection Act.
Complaints have also been filed relating to two open-end funds for which the
Adviser has acted as sub-adviser, Managers Intermediate Mortgage Fund and
Managers Short Government Fund. A complaint was filed on September 26, 1994 in
the United States District Court, District of Connecticut, by Florence R. Hosea,
Bobby W. Hosea, Getrud B. Dale and Peter M. Dale, Andrew Poffel and Diane Poffel
as tenants by the Entireties, Myrone Sarone, Donna M. DiPalo, Bernard B. Geltner
and Gail Geltner and Paul Delman. The complaint was filed against The Managers
Funds, The Managers Funds, L.P., Robert P. Watson, the Adviser, the Distributor,
an individual associated with the Adviser, Evaluation Associates, Inc. and
Managers Intermediate Mortgage Fund. The complaint, which is a putative class
action, alleges certain violations of federal securities laws, including the
making of false and misleading statements in the prospectus, and alleges
negligent misrepresentation, breach of fiduciary duty and common law fraud. A
similar complaint was filed as a putative class action in the same court on
November 4, 1994. The complaint was filed by Karen E. Kopelman against The
Managers Fund, The Managers Funds, L.P., Robert P. Watson, the Adviser, the
Distributor, Worth Bruntjen, Evaluation Associates, Inc. and Managers
Intermediate Mortgage Fund. The two putative class actions were consolidated by
court order on December 13, 1994. Plaintiffs filed an Amended and Restated
Complaint on July 19, 1995. A complaint relating to the Managers Short
Government Fund was filed on November 18, 1994 in the United States District
Court, District of Minnesota. The complaint was filed by Robert Fleck as a
putative class action against The Managers Funds, The Managers Funds, L.P., the
Adviser, the Distributor, Worth Bruntjen, Evaluation Associates, Inc., Robert P.
Watson, John E. Rosati, William M. Graulty, Madeline H. McWhinney, Steven J.
Pasggioli, Thomas R. Schneeweis and Managers Short Government Fund, F/K/A/
Managers Short Government Income Fund. The complaint alleges certain violations
of federal securities laws, including the making of false and misleading
statements in the prospectus, and negligent misrepresentation. A third complaint
relating to both the Managers Intermediate Mortgage Fund and the Managers Short
Government Fund was filed on October 26, 1995 in Connecticut State Superior
Court, Stamford/Norwalk District. The complaint was filed by First Commercial
Trust Company, N.A. against the Managers Funds, Managers Short Government Fund,
Managers Intermediate Mortgage Fund, Managers Short and Intermediate Bond Fund,
The Managers Funds, L.P., EAIMC Holdings Corporation, Evaluation Associates
Holding Corporation, EAI Partners, L.P., Evaluation Associates, Inc., Robert P.
Watson, William W. Graulty, Madeline H. McWhinney, Steven J. Paggioli, Thomas R.
Schneeweis, William J. Crerend, Piper Capital Management Inc., Piper Jaffray
Companies Inc., Worth Bruntjen, Standish, Ayer & Wood, Inc., TCW Funds
Managements, Inc., and TCW Management Company. The complaint alleges claims
under Connecticut common law and violation of the Connecticut Securities Act and
the Connecticut Unfair and Deceptive Trade Practices Act.
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.
A-1
APPENDIX A
CORPORATE BOND AND
COMMERCIAL PAPER RATINGS
Commercial Paper Ratings
Standard & Poor's Ratings Services. Commercial paper ratings are graded into
four categories, ranging from "A" for the highest quality obligations to "D" for
the lowest. Issues assigned the A rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
designation 1, 2 and 3 to indicate the relative degree of safety. The "A-1"
designation indicates that the degree of safety regarding timely payment is very
strong. Those issues determined to possess overwhelming safety characteristics
will be denoted with a plus sign designation.
Moody's Investors Service, Inc. Moody's commercial paper ratings are opinions of
the ability of the issuers to repay punctually promissory obligations not having
an original maturity in excess of nine months. Moody's makes no representation
that such obligations are exempt from registration under the Securities Act of
1933, nor does it represent that any specific note is a valid obligation of a
rated issuer or issued in conformity with any applicable law. Moody's employs
the following three designations, all judged to be investment grade, to indicate
the relative repayment capacity of rated issuers:
Prime-1 Superior capacity for repayment of short-term promissory
obligations
Prime-2 Strong capacity for repayment of short-term promissory
obligations
Prime-3 Acceptable capacity for repayment of short-term promissory
obligations
Corporate Bond Ratings
Standard & Poor's Ratings Services. Standard & Poor's ratings for corporate
bonds have the following definitions:
Debt rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity
to pay interest and repay principal is extremely strong.
Debt rated "AA" has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in a small degree.
Debt rated "A" has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
Debt rated "BBB" is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
Moody's Investors Service, Inc. Moody's ratings for corporate bonds include the
following:
Bonds which are rated "Aaa" are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Bonds which are rated "Aa" are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than in Aaa securities.
Bonds which are rated "A" possess many favorable attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Bonds which are rated "Baa" are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
B-1
APPENDIX B
INTEREST RATE FUTURES CONTRACTS AND RELATED OPTIONS
Interest Rate Futures Contracts
The Fund may purchase and sell interest rate futures contracts and options
thereon. An interest rate futures contract creates an obligation on the part of
the seller (the "short") to deliver, and an offsetting obligation on the part of
the purchaser (the "long") to accept delivery of, the type of financial
instrument called for in the contract in a specified delivery month for a stated
price. A majority of transactions in interest rate futures contracts, however,
do not result in the actual delivery of the underlying instrument, but are
settled through liquidation, i.e., by entering into an offsetting transaction.
The interest rate futures contracts to be traded by the Fund are traded only on
commodity exchanges--known as "contract markets"--approved for such trading by
the Commodity Futures Trading Commission and must be executed through a futures
commission merchant or brokerage firm which is a member of the relevant contract
market. These contract markets, through their clearing corporations, guarantee
that the contracts will be performed. Presently, futures contracts are based
upon such debt securities as long-term U.S. Treasury bonds, Treasury notes,
Government National Mortgage Association modified pass-through mortgage-backed
securities, three-month U.S. Treasury bills and bank certificates of deposit. In
addition, futures contracts are traded in the Moody's Investment Grade Corporate
Bond Index and the Long Term Corporate Bond Index.
Although most futures contracts by their terms call for actual delivery or
acceptance of commodities or securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out a short position is effected by purchasing a futures contract for the same
aggregate amount of the specific type of financial instrument or commodity and
the same delivery month. If the price of the initial sale of the futures
contract exceeds the price of the offsetting purchase, the seller is paid the
difference and realizes a gain. Conversely, if the price of the offsetting
purchase exceeds the price of the initial sale, the trader realizes a loss.
Similarly, the closing out of a long position is effected by the purchaser
entering into a futures contract sale. If the offsetting sale price exceeds the
purchase price, the purchaser realizes a gain and, if the purchase price exceeds
the offsetting sale price, the purchaser realizes a loss.
The purchase or sale of a futures contract differs from the purchase or sale of
a security in that no price or premium is paid or received. Instead, an amount
of cash or securities acceptable to the Adviser and the relevant contract
market, which varies but is generally about 2% of the contract amount, must be
deposited with the custodian in the name of the broker. This amount is known as
"initial margin," and represents a "good faith" deposit assuring the performance
of both the purchaser and the seller under the futures contract. Subsequent
payments to and from the broker, known as "variation margin," are required to be
made on a daily basis as the price of the futures contract fluctuates, making
the long or short positions in the futures contract more or less valuable, a
process known as "marking to the market." Prior to the settlement date of the
futures contract, the position may be closed out by taking an opposite position
which will operate to terminate the position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the broker, and the purchaser realizes a loss or gain.
In addition, a commission is paid on each completed purchase and sale
transaction.
The purpose of the acquisition or sale of a futures contract by the Fund, as the
holder of long-term fixed-income securities, is to hedge against fluctuations in
rates on such securities without actually buying or selling long-term
fixed-income securities. For example, if the Fund owns long-term bonds and
interest rates are expected to increase, the Fund might sell futures contracts.
Such a sale would have much the same effect as selling some of the long-term
bonds in the Fund's portfolio. If interest rates increase as anticipated by the
Adviser, the value of certain long-term securities in the portfolio would
decline, but the value of the Fund's futures contracts would increase at
approximately the same rate, thereby keeping the net asset value of the Fund
from declining as much as it otherwise would have. Of course, since the value of
the securities in the Fund's portfolio will far exceed the value of the futures
contracts sold by the Fund, an increase in the value of the futures contracts
could only mitigate--but not totally offset--the decline in the value of the
portfolio.
Similarly, when it is expected that interest rates may decline, futures
contracts could be purchased to hedge against the Fund's anticipated purchases
of long-term fixed-income securities, such as bonds, at higher prices. Since the
rate of fluctuation in the value of futures contracts should be similar to that
of long-term bonds, the Fund could take advantage of the anticipated rise in the
value of long-term bonds without actually buying them until the market had
stabilized. At that time, the futures contracts could be liquidated and the
Fund's cash could then be used to buy long-term bonds on the cash market. The
Fund could accomplish similar results by selling bonds with long maturities and
investing in bonds with short maturities when interest rates are expected to
increase or by buying bonds with long maturities and selling bonds with short
maturities when interest rates are expected to decline. However, in
circumstances when the market for bonds may not be as liquid as that for futures
contracts, the ability to invest in such contracts could enable the Fund to
react more quickly to anticipated changes in market conditions or interest
rates.
Options on Interest Rate Futures Contracts
The Fund may purchase and sell put and call options on interest rate futures
contracts which are traded on a United States exchange or board of trade as a
hedge against changes in interest rates, and will enter into closing
transactions with respect to such options to terminate existing positions. An
interest rate futures contract provides for the future sale by one party and the
purchase by the other party of a certain amount of a specific financial
instrument (debt security) at a specified price, date, time and place. An option
on an interest rate futures contract, as contrasted with the direct investment
in such a contract, gives the purchaser the right, in return for the premium
paid, to assume a position in an interest rate futures contract at a specified
exercise price at any time prior to the expiration date of the option. Options
on interest rate futures contracts are similar to options on securities, which
give the purchaser the right, in return for the premium paid, to purchase or
sell securities. A call option gives the purchaser of such option the right to
buy, and obliges its writer to sell, a specified underlying futures contract at
a specified exercise price at any time prior to the expiration date of the
option. A purchaser of a put option has the right to sell, and the writer has
the obligation to buy, such contract at the exercise price during the option
period. Upon exercise of an option, the delivery of the futures position by the
writer of the option to the holder of the option will be accompanied by delivery
of the accumulated balance in the writer's future margin account, which
represents the amount by which the market price of the futures contract exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option on the futures contract. If an option is exercised on the last
trading day prior to the expiration date of the option, the settlement will be
made entirely in cash equal to the difference between the exercise price of the
option and the closing price of the interest rate futures contract on the
expiration date. A Fund will pay a premium for purchasing options on interest
rate futures contracts. Because the value of the option is fixed at the point of
sale, there are no daily cash payments to reflect changes in the value of the
underlying contract; however, the value of the option does change daily and that
change would be reflected in the net asset value of the Fund. In connection with
the writing of options on interest rate futures contracts, a Fund will make
initial margin deposits and make or receive maintenance margin payments that
reflect changes in the market value of such options. Premiums received from the
writing of an option are included in initial margin deposits.
Purchase of Put Options on Futures Contracts. The Fund will purchase put options
on interest rate futures contracts if the Adviser anticipates a rise in interest
rates. Because the value of an interest rate futures contract moves inversely in
relation to changes in interest rates, a put option on such a contract becomes
more valuable as interest rates rise. By purchasing put options on interest rate
futures contracts at a time when the Adviser expects interest rates to rise, the
Fund will seek to realize a profit to offset the loss in value of its portfolio
securities.
Purchase of Call Options on Futures Contracts. The Fund will purchase call
options on interest rate futures contracts if the Adviser anticipates a decline
in interest rates. The purchase of a call option on an interest rate futures
contract represents a means of obtaining temporary exposure to market
appreciation at limited risk. Because the value of an interest rate futures
contract moves inversely in relation to changes to interest rates, a call option
on such a contract becomes more valuable as interest rates decline. The Fund
will purchase a call option on an interest rate futures contract to hedge
against a decline in interest rates in a market advance when the Fund is holding
cash. The Fund can take advantage of the anticipated rise in the value of
long-term securities without actually buying them until the market is
stabilized. At that time, the options can be liquidated and the Fund's cash can
be used to buy long-term securities.
Writing Call Options on Futures Contracts. The Fund will write call options on
interest rate futures contracts if the Adviser anticipates a rise in interest
rates. As interest rates rise, a call option on such a contract becomes less
valuable. If the futures contract price at expiration of the option is below the
exercise price, the option will not be exercised and the Fund will retain the
full amount of the option premium. Such amount provides a partial hedge against
any decline that may have occurred in the Fund's portfolio securities.
Writing Put Options on Futures Contracts. The Fund will write put options on
interest rate futures contracts if the Adviser anticipates a decline in interest
rates. As interest rates decline, a put option on an interest rate futures
contract becomes less valuable. If the futures contract price at expiration of
the option has risen due to declining interest rates and is above the exercise
price, the option will not be exercised and the Fund will retain the full amount
of the option premium. Such amount can then be used by the Fund to buy long-term
securities when the market has stabilized.
Risks of Transactions in Futures Contracts and Options on Futures Contracts
Hedging Risks in Futures Contracts Transactions. There are several risks in
using futures contracts as hedging devices. One risk arises because the prices
of futures contracts may not correlate perfectly with movements in the
underlying fixed-income security due to certain market distortions. First, all
participants in the futures market are subject to initial margin and variation
margin requirements. Rather than making additional variation margin payments,
investors may close the contracts through offsetting transactions which could
distort the normal relationship between the security and the futures market.
Second, the margin requirements in the futures market are lower than margin
requirements in the securities market, and as a result the futures market may
attract more speculators than does the securities market. Increased
participation by speculators in the futures market may also cause temporary
price distortions. Because of possible price distortion in the futures market
and because of imperfect correlation between movements in securities and
movements in the prices of futures contracts, even a correct forecast of general
market trends may not result in a successful hedging transaction over a very
short period. Another risk arises because of imperfect correlation between
movements in the value of the futures contracts and movements in the value of
securities subject to the hedge.
Successful use of futures contracts by the Fund is subject to the ability of the
Adviser to predict correctly movements in the direction of interest rates. If
the Fund has hedged against the possibility of an increase in interest rates
adversely affecting the value of fixed-income securities held in its portfolio
and interest rates decrease instead, the Fund will lose part or all of the
benefit of the increased value of its security which it has hedged because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell securities to
meet daily variation margin requirements. Such sales of securities may, but will
not necessarily, be at increased prices which reflect the decline in interest
rates. The Fund may have to sell securities at a time when it may be
disadvantageous to do so.
Liquidity of Futures Contracts. The Fund may elect to close some or all of its
contracts prior to expiration. The purpose of making such a move would be to
reduce or eliminate the hedge position held by the Fund. The Fund may close its
positions by taking opposite positions. Final determinations of variation margin
are then made, additional cash as required is paid by or to the Fund, and the
Fund realizes a loss or a gain.
Positions in futures contracts may be closed only on an exchange or board of
trade providing a secondary market for such futures contracts. Although the Fund
intend to enter into futures contracts only on exchanges or boards of trade
where there appears to be an active secondary market, there is no assurance that
a liquid secondary market will exist for any particular contract at any
particular time.
In addition, most domestic futures exchanges and boards of trade limit the
amount of fluctuation permitted in futures contract prices during a single
trading day. The daily limit establishes the maximum amount that the price of a
futures contract may vary either up or down from the previous day's settlement
price at the end of a trading session. Once the daily limit has been reached in
a particular contract, no trades may be made that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses because the limit may prevent
the liquidation of unfavorable positions. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses. In such event, it
will not be possible to close a futures position and, in the event of adverse
price movements, the Fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the portion
of the portfolio being hedged, if any, may partially or completely offset losses
on the futures contract. However, as described above, there is no guarantee that
the price of the securities being hedged will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on a
futures contract.
Risks of Options on Futures Contracts. The use of options on futures contracts
also involves additional risk. Compared to the purchase or sale of futures
contracts, the purchase of call or put options on futures contracts involves
less potential risk to a Fund because the maximum amount at risk is the premium
paid for the options (plus transactions costs). The writing of a call option on
a futures contract generates a premium which may partially offset a decline in
the value of the Fund's portfolio assets. By writing a call option, the Fund
becomes obligated to sell a futures contract, which may have a value higher than
the exercise price. Conversely, the writing of a put option on a futures
contract generates a premium, but the Fund becomes obligated to purchase a
futures contract, which may have a value lower than the exercise price. Thus,
the loss incurred by the Fund in writing options on futures contracts may exceed
the amount of the premium received.
The effective use of options strategies is dependent, among other things, on a
Fund's ability to terminate options positions at a time when the Adviser deems
it desirable to do so. Although the Fund will enter into option positions only
if the Adviser believes that a liquid secondary market exists for such options,
there is no assurance that the Fund will be able to effect closing transactions
at any particular time or at an acceptable price. The Fund's transactions
involving options on futures contracts will be conducted only on recognized
exchanges. The Fund's purchase or sale of put or call options on futures
contracts will be based upon predictions as to anticipated interest rates by the
Adviser, which could prove to be inaccurate. Even if the expectations of the
Adviser are correct, there may be an imperfect correlation between the change in
the value of the options and of the Fund's portfolio securities.
Regulatory Matters
To the extent required to comply with applicable Securities and Exchange
Commission releases and staff positions, when entering into futures contracts,
the Fund will maintain, in a segregated account, cash or liquid high-grade debt
securities equal to the value of such contracts.
The Commodity Futures Trading Commission (the "CFTC"), a federal agency,
regulates trading activity on the exchanges pursuant to the Commodity Exchange
Act, as amended. The CFTC requires the registration of "commodity pool
operators," defined as any person engaged in a business which is of the nature
of an investment company, syndicate or a similar form of enterprise, and who, in
connection therewith, solicits, accepts or receives from others, funds,
securities or property for the purpose of trading in any commodity for future
delivery on or subject to the rules of any contract market. The CFTC has adopted
Rule 4.5, which provides an exclusion from the definition of commodity pool
operator for any registered investment company which meets the requirements of
the Rule. Rule 4.5 requires, among other things, that an investment company
wishing to avoid commodity pool operator status use futures and options
positions only (a) for "bona fide hedging purposes" (as defined in CFTC
regulations) or (b) for other purposes so long as aggregate initial margins and
premiums required in connection with non-hedging positions do not exceed 5% of
the liquidation value of the investment company's portfolio. Any investment
company wishing to claim the exclusion provided in Rule 4.5 must file a notice
of eligibility with both the CFTC and the National Futures Association. Before
engaging in transactions involving interest rate futures contracts, the Funds
will file such notices and meet the requirements of Rule 4.5, or such other
requirements as the CFTC or its staff may from time to time issue, in order to
render registration as a commodity pool operator unnecessary.
PART C
PIPER FUNDS INC. -- II
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial statements -- Financial statements are incorporated by
reference to the Registrant's financial statements and independent
auditors' report filed with the Commission on October 31, 1995.
(b) Exhibits:
1.1 Articles of Incorporation (1)
1.2 Amendment to Articles of Incorporation (1)
2 Bylaws (1)
5 Investment Advisory and Management Agreement (2)
6.1 Underwriting and Distribution Agreement (2)
6.2 Dealer Agreement (2)
8 Custody and Investment Accounting Agreement (2)
9.1 Agency Agreement (2)
9.2 Shareholder Account Servicing Agreement (4)
10 Opinion and Consent of Dorsey & Whitney P.L.L.P. (2)
11 Consent of KPMG Peat Marwick LLP (4)
15 Plan of Distribution (1)
16 Computation of Performance Quotations (3)
25 Power of Attorney (2)
17.2 Financial Data Schedule filed electronically as Exhibit 27
pursuant to Rule 401 of Regulation S-T (4)
(1) Incorporated by reference to the Registrant's Registration Statement on
Form N-14, File No. 33-58849.
(2) Incorporated by reference to Registrant's initial Registration Statement on
Form N-1A filed June 23, 1995.
(3) Incorporated by reference to Post-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A filed September 5, 1995.
(4) Filed herewith.
Item 25. Persons Controlled by or Under Common Control with Registrant
No person is directly or indirectly controlled by or under common control with
the Registrant.
Item 26. Number of Holders of Securities
As of December 1, 1995:
Number of
Title of Class Record Holders
Adjustable Rate Mortgage Securities Fund Common Shares 28,024
Item 27. Indemnification
The Articles of Incorporation and Bylaws of the Registrant provide that the
Registrant shall indemnify such persons for such expenses and liabilities, in
such manner and under such circumstances, to the full extent permitted by
Section 302A.521, Minnesota Statutes, as now enacted or hereafter amended,
provided that no such indemnification may be made if it would be in violation of
Section 17(h) of the Investment Company Act of 1940, as now enacted or hereafter
amended. Section 302A.521 of the Minnesota Statutes, as now enacted, provides
that a corporation shall indemnify a person made or threatened to be made a
party to a proceeding of the person against judgments, penalties, fines,
settlements, and reasonable expenses, including attorneys' fees and
disbursements, incurred by the person in connection with the proceeding if, with
respect to the acts or omissions of the person complained of in the proceeding,
the person has not been indemnified by another organization for the same
judgments, penalties, fines, settlements, and reasonable expenses incurred by
the person in connection with the proceeding with respect to the same acts or
omissions; acted in good faith, received no improper personal benefit and the
Minnesota Statutes dealing with directors' conflicts of interest, if applicable,
have been satisfied; in the case of a criminal proceeding, had no reasonable
cause to believe that the conduct was unlawful; and reasonably believed that the
conduct was in the best interests of the corporation or, in certain
circumstances, reasonably believed that the conduct was not opposed to the best
interests of the corporation.
Insofar as the indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The Registrant will comply with the indemnification requirements of Investment
Company Act Releases 7221 (June 9, 1972) and 11330 (September 2, 1980).
Item 28. Business and Other Connections of Investment Adviser
Information on the business of the Adviser is described in the section of the
Prospectus, incorporated by reference in this Registration Statement, entitled
"Management -- Investment Adviser."
The officers and directors of the Adviser and their titles are as follow:
Name Title
William H. Ellis President, Director and Chairman of the Board
David E. Rosedahl Director, Secretary and General Counsel
Bruce C. Huber Director
DeLos V. Steenson Director
Momchilo Vucenich Director
Beverly J. Zimmer Director
Paul A. Dow Senior Vice President and Chief
Investment Officer
James A. Berman Senior Vice President
Worth Bruntjen Senior Vice President
Michael C. Derck Senior Vice President
Richard W. Filippone Senior Vice President
John J. Gibas Senior Vice President
Marijo A. Goldstein Senior Vice President
Mark R. Grotte Senior Vice President
Jerry Gudmundson Senior Vice President
Robert Hannah Senior Vice President
Lynne Harrington Senior Vice President
Lisa A. Kenyon Senior Vice President
Mark S. Lee Senior Vice President
Thomas S. McGlinch Senior Vice President
Curt D. McLeod Senior Vice President
Steven V. Markusen Senior Vice President
Paula Meyer Senior Vice President
Robert H. Nelson Senior Vice President
Edward P. Nicoski Senior Vice President
Gary Norstrem Senior Vice President
Nancy S. Olsen Senior Vice President
Ronald R. Reuss Senior Vice President
Maxine D. Rossini Senior Vice President
Bruce D. Salvog Senior Vice President
John K. Schonberg Senior Vice President
Sandra K. Shrewsbury Senior Vice President
David M. Steele Senior Vice President
J. Bradley Stone Senior Vice President
Robert H. Weidenhammer Senior Vice President
John G. Wenker Senior Vice President
Douglas J. White Senior Vice President
Cynthia K. Castle Vice President
Richard Daly Vice President
Molly Destro Vice President
Julie Deutz Vice President
Joan L. Harrod Vice President
Newby Herrod Vice President
Amy K. Johnson Vice President
Kimberly F. Kaul Vice President
Russell Kappenman Vice President
John D. Kightlinger Vice President
Wan-Chong Kung Vice President
Steven Meyer Vice President
Thomas Moore Vice President
Siobann Nelson Vice President
Paul Pearson Vice President
Daniel Phillips Vice President
Eric L. Siedband Vice President
Catherine M. Stienstra Vice President
Shaista Tajamal Vice President
Bonnie L. Theis Vice President
Michael Wallace Vice President
Jane K. Welter Vice President
John G. Wenker Vice President
Marcy K. Winson Vice President
Fong P. Woo Vice President
Principal occupations of Messrs. Ellis, Dow, Rosedahl, McGlinch and Nelson, and
Ms. Johnson are set forth in the Statement of Additional Information under the
heading "Directors and Officers." Mr. Huber has been a Director of the Adviser
since October 1985 and was a Vice President of the Adviser from October 1985
until April 1992, and a Managing Director of Piper Jaffray Inc. ("Piper
Jaffray") since November 1986. Mr. Steenson has been a Director of the Adviser
since December 1994 and a Managing Director of the Underwriter since 1982. Mr.
Vucenich has been a Director of the Adviser since December 1994 and a managing
director of regional sales for Piper Jaffray Companies Inc. since February 1993.
Ms. Zimmer has been a Director of the Adviser since December 1994, prior to
which she was Chief Operating Officer of the Adviser from May 1992 to December
1994 and Senior Vice President of the Adviser from December 1990 to December
1994.
Mr. Berman has been a Senior Vice President of the Adviser since 1993; prior to
which he was a Managing Director of Piper Jaffray Inc. from 1992 to 1993, Vice
President of Acquisitions at Sandia Mortgage Corporation from 1991 to 1992 and a
Director of Investment Analysis and Acquisitions for Larken Properties, Inc.
from 1987 to 1991. Mr. Bruntjen has been a Senior Vice President of the Adviser
since January 1988. Mr. Derck has been a Vice President of the Adviser since
November 1992, prior to which he had been a manager of Advisory Accounts
Services with the Adviser since April 1992 and, before that, an Assistant Vice
President at First Trust since 1976. Mr. Filippone has been a Senior Vice
President of the Adviser since November 1991, prior to which he had been a Vice
President of the Adviser from 1987 to 1991. Mr. Gibas has been a Senior Vice
President of the Adviser since November 1992, prior to which he had been a Vice
President of the Adviser from 1987 to 1992. Ms. Goldstein has been a Senior Vice
President of the Adviser since November 1993, prior to which she was a Vice
President of the Adviser from 1991 to 1993 and a fixed income analyst of the
Adviser since 1988. Mr. Grotte has been a Senior Vice President of the Adviser
since November 1992, prior to which he had been a Vice President of the Adviser
from 1988 to 1992. Mr. Gudmundson has been a Senior Vice President of the
Adviser since August 1995, prior to which he was an Executive Vice President at
Resource Capital Advisers from 1991 to May 1995. Mr. Hannah has been a Senior
Vice President of the Adviser since May 1995, prior to which he was manager of
Craig and Associates in Seattle, Washington from September 1993 to November
1994, and prior thereto, he was manager of Exvere in Seattle from January 1993
to August 1993 and a registered representative at Geneva in Irvine, California
from Janaury 1991 to December 1992. Ms. Harrington has been a Senior Vice
President of the Adviser since March 1995, prior to which she was a Managing
Director at Piper Jaffray Inc. in the Public Finance Department. Ms. Kenyon has
been a Senior Vice President of the Adviser since January 1992, prior to which
she had been a financial adviser for a private family in Los Angeles. Mr. Lee
has been a Senior Vice President of the Adviser since November 1995, prior to
which he had been a Vice President of the Adivser since 1990. Mr. Markusen has
been a Senior Vice President of the Adviser since December 1993, prior to which
had been a senior vice president of Investment Advisers, Inc., in Minneapolis,
Minnesota from 1989 to 1993. Mr. McLeod has been a Senior Vice President of the
Adviser since November 1995, prior to which he had been an analyst at the
Adviser since 1988. Ms. Meyer has been a Senior Vice President of the Adviser
since December 1994, prior to which she had been a Vice President of Secura
Insurance, Appleton, Wisconsin from 1988 to 1994. Mr. Nicoski is a Senior Vice
President of the Adviser and has been a Managing Director of the Distributor
since November 1986. Mr. Norstrem has been a Senior Vice President of the
Adviser since 1993, prior to which he was Treasurer of the City of Saint Paul,
Minnesota for twenty-eight years. Ms. Olsen has been a Senior Vice President of
the Adviser since November 1991, prior to which she had been a Vice President of
the Adviser from 1987 to 1991. Mr. Reuss has been a Senior Vice President of the
Adviser since January 1989. Ms. Rossini has been a Senior Vice President of the
Adviser since September 1993, prior to which she had been a managing Director of
the Distributor since November 1989. Mr. Salvog has been a Senior Vice President
of the Adviser since January 1992, prior to which he had been a portfolio
manager at Kennedy & Associates in Seattle, Washington from 1984 to 1992. Mr.
Schonberg has been a Senior Vice President of the Adviser since November 1995,
prior to which he was a Vice President of the Adviser from November 1992 to
November 1995 and a portfolio manager for the Adviser since July 1989. Ms.
Shrewsbury has been a Senior Vice President of the Adviser since September 1993,
prior to which she had been a Managing Director of Piper Jaffray since November
1992, a Vice President of Piper Jaffray since November 1990. Mr. Steele has been
a Senior Vice President of the Adviser since January 1992, prior to which he had
been a portfolio manager at Kennedy & Associates in Seattle, Washington from
1987 to 1992. Mr. Stone has been a Vice President of the Adviser since November
1991 and a fixed-income analyst of the Adviser since March 1990. Mr.
Weidenhammer has been a Senior Vice President of the Adviser since November
1991, prior to which he had been a Vice President of the Adviser from 1987 to
1991. Mr. Wenker has been a Senior Vice President of the Adviser since October
1993, prior to which he was a Managing Director of Piper Jaffray from 1992 to
1993 and the Director of Revitalization Resources of the Minneapolis Community
Development Agency from 1990 to 1992. Mr. White has been a Senior Vice President
of the Adviser since November 1991, prior to which he had been a Vice President
of the Adviser from 1989 to 1991.
Ms. Castle has been a Vice President of the Adviser since November 1994, prior
to which she was a client service asociate of the Adviser since 1990. Mr. Daly
has been a Vice President of the Adviser since 1992, prior to which he was an
Assistant Vice President of Piper Jaffray since 1990 and a broker with Piper
Jaffray from 1987 to 1992. Ms. Destro has been a Vice President of the Adviser
since 1994, prior to which she was Accounting Manager from 1993 to 1994 and
mutual fund accountant from 1991 to 1993 with the Adviser, and prior thereto,
mutual fund accountant at Voyageur Fund Managers in Minneapolis from 1989 to
1991. Ms. Duetz has been a Vice President of the Adviser since September 1995,
prior to which she was an Assistant Vice President at Daiwa Bank, Ltd. from
November 1992 to September 1995 and a manager of financial reporting at The
Churchill Companies from September 1991 to October 1992. Ms. Harrod has been a
Vice President of the Adviser since November 1992 and has been a trader for the
Adviser since October 1989. Mr. Herrod has been a Vice President of the Adviser
since 1992, prior to which he was a Vice President of Capital Markets at
Washington Square Capital Management from 1987 to 1992. Mr. Kappenman has been a
Vice President of the Adviser since 1991. Ms. Kaul has been a Vice President and
Director of Corporate Communications of the Adviser since November 1991, prior
to which she was Copy Director and Assistant Vice President in the advertising
department of Piper Jaffray since 1986. Mr. Kightlinger has been a Vice
President of the Adviser since 1991, prior to which he had been a department
head and portfolio manager for TCF Bank Savings. Ms. Kung has been a Vice
President of the Adviser since May 1993, prior to which she had been a Senior
Consultant at Cytrol Inc. from 1989 to December 1992. Mr. Meyer has been a Vice
President of the Adviser since November 1994 and manager of Systmes Integration
for the Adviser since 1991. Mr. Moore has been a Vice President of the Adviser
since 1992, prior to which he was a Portfolio Manager at Alpine Capital
Management from 1990 to 1992 and a broker at Hanifen Capital Management from
1990 to 1992. Ms. Nelson has been a Vice President of the Adviser since November
1994, prior to which she was a supervisor for the Adviser since 1991 and an
operations coordinator for the Adviser from 1990 to 1991. Mr. Pearson has been a
Vice President of the Adviser since November 1995, prior to which he was a
Mutual Funds Accounting Manager of the Adviser since February 1994 and prior to
that he was the Director of Fund Operations at Norwest Bank in Minneapolis from
1992 to 1994. Mr. Phillips has been a Vice President of the Adviser since 1993
and has been an insurance product manager at Piper Jaffray since 1987. Mr.
Siedband has been a Vice President of the Adviser since 1992. Ms. Stienstra has
been a Vice President of the Adviser since November 1995 and a municipal bond
trader of the Adviser since June 1995, prior to which she was an assistant
analyst of the Adviser from 1991 to 1994. Ms. Tajamal has been a Vice President
of the Adviser since November 1995 and a portfolio manager of the Adviser since
1993, prior to which she was a money market analyst of the Adviser from 1990 to
1993. Ms. Theis has been a Vice President of the Adviser since November 1992,
prior to which she had been an Assistant Vice President of the Adviser since
1989. Mr. Wallace has been a Vice President of the Adviser since November 1995,
prior to which he was an Assistant Vice President of the Adviser since November
1994 and prior to that he was an Equity Analyst at the Adviser from June 1993 to
November 1994. Ms. Welter has been a Vice President of the Adviser since
November 1994, prior to which she was a client service associate of the Adviser
since 1993 and a mutual fund accountant with the Adviser from 1990 to 1993. Mr.
Wenker has been a Vice President of the Adviser since November 1994 and a
Managing Director of Piper Jaffray since 1995, prior to which he had been a
Managing Director of Piper Jaffray from 1992 to 1993, and prior thereto, a
Director of Revitalization Resources of the Minneapolis Community Development
Agency from 1990 to 1992. Ms. Winson has been a Vice President of the Adviser
since November 1993, prior to which she was an Assistant Vice President of the
Adviser since March 1993 and an educator from 1990 to 1992. Mr. Woo has been a
Vice President of the Adviser since November 1994, prior to which he was a
municipal credit analyst of the Adviser since 1992 and prior to that he was a
credit specialist at a commercial trading firm from 1991 to 1992.
Item 29. Principal Underwriters
(a) Piper Jaffray Inc. acts as principal underwriter for the Registrant and also
for three other open-end investment companies, Piper Institutional Funds Inc.,
the shares of which are currently offered in two series, Piper Funds Inc., the
shares of which are currently offered in thirteen series and Piper Global Funds
Inc., the shares of which are currently offered in one series. Piper Jaffray has
acted as principal underwriter in connection with the initial public offering of
shares of 23 closed-end investment companies.
(b) The name, positions and offices with Piper Jaffray Inc., and positions and
offices with the Registrant of each director and officer of Piper Jaffray Inc.
are as follow:
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
Addison L. Piper Chairman of the Board None
of Directors and Chief
Executive Officer
William H. Ellis President, Chief Operating Chairman of
Officer and Member of the Board of
Board of Directors Directors
Ralph W. Burnet Member of the Board None
of Directors
John L. McElroy, Jr. Member of the Board None
of Directors
Kathy Halbreich Member of the Board None
of Directors
Robert S. Slifka Member of the Board None
of Directors
David Stanley Member of the Board None
of Directors
James J. Bellus Managing Director None
AnnDrea M. Benson Managing Director None
Lloyd K. Benson Managing Director None
James L. Bergtold Managing Director None
Peter A. Bessette Managing Director None
Gary J. Blauer Managing Director None
Karen M. Bohn Managing Director None
Sean K. Boyea Managing Director None
Ronald O. Braun Managing Director None
Paul E. Brodsky Managing Director None
Jay A. Brunkhorst Managing Director None
Kenneth S. Cameranesi Managing Director None
Stephen M. Carnes Managing Director None
Joseph V. Caruso Managing Director None
Joyce E. Chaney Managing Director None
Antonio J. Cecin Managing Director None
Kenneth P. Clark Managing Director None
Linda A. Clark Managing Director None
Stephen B. Clark Managing Director None
David P. Crosby Managing Director None
Mark A. Curran Managing Director None
George S. Dahlman Managing Director None
Jack C. Dillingham Managing Director None
Mark T. Donahoe Managing Director None
Andrew W. Dunleavy Managing Director None
Philip S. Dow Managing Director None
Andrew S. Duff Managing Director None
Richard A. Edstrom Managing Director None
Fred R. Eoff, Jr. Managing Director None
Richard D. Estenson Managing Director None
Francis E. Fairman IV Managing Director None
John R. Farrish Managing Director None
Gordon R. Ferguson Managing Director None
Paul Ferry Managing Director None
Mark E. Fisler Managing Director None
Michael W. Follett Managing Director None
Daniel P. Gallaher Managing Director None
Peter M. Gill Managing Director None
Kevin D. Grahek Managing Director None
Paul D. Grangaard Managing Director None
R. Hunt Greene Managing Director None
Daniel J. Hagen Managing Director None
James S. Harrington Managing Director None
Charles N. Hayssen Managing Director None
William P. Henderson Managing Director None
Allan F. Hickok Managing Director None
Richard L. Hines Managing Director None
David B. Holden Managing Director None
Charles E. Howell Managing Director None
Bruce C. Huber Managing Director None
Elizabeth A. Huey Managing Director None
John R. Jacobs Managing Director None
Earl L. Johnson Managing Director None
Richard L. Johnson Managing Director None
Nicholas P. Karos Managing Director None
Richard G. Kiss Managing Director None
Jerome P. Kohl Managing Director None
Charles B. Lannin Managing Director None
Eric W. Larson Managing Director None
Dan L. Lastavich Managing Director None
Robert J. Magnuson Managing Director None
James M. Manire Jr. Managing Director None
Robert E. Mapes Managing Director None
Peter T. Mavroulis Managing Director None
Michael P. McMahon Managing Director None
Gregory T. McNellis Managing Director None
Thomas A. Medlin Managing Director None
Darryl L. Meyers Managing Director None
Joseph E. Meyers Managing Director None
John V. Miller Managing Director None
Dennis V. Mitchell Managing Director None
Susan D. Musselman Managing Director None
Edward P. Nicoski Managing Director None
Barry J. Nordstrand Managing Director None
Benjamin S. Oehler Managing Director None
Brooks G. O'Neil Managing Director None
John P. O'Neill Managing Director None
John Otterlei Managing Director None
Robin C. Pfister Managing Director None
Laurence S. Podobinski Managing Director None
Steven J. Proeschel Managing Director None
Rex W. Ramsay Managing Director None
Brian J. Ranallo Managing Director None
Roger W. Redmond Managing Director None
Ronald N. Reiches Managing Director None
Robert P. Rinek Managing Director None
Jim M. Roane Managing Director None
Deborah K. Roesler Managing Director None
Ross E. Rogers Managing Director None
David E. Rosedahl Managing Director, General Secretary
Counsel and Secretary
Thomas P. Schnettler Managing Director None
Steven R. Schroll Managing Director None
Joyce Nelson Schuette Managing Director None
Morton D. Silverman Managing Director None
Linda E. Singer Managing Director None
David P. Sirianni Managing Director None
Robert L. Sonnek Managing Director None
Thomas E. Stanberry Managing Director None
DeLos V. Steenson Managing Director None
Richard J. Stream Managing Director None
D. Greg Sundberg Managing Director None
William H. Teeter Managing Director None
Ann C. Tillotson Managing Director None
Momchilo Vucenich Managing Director None
John G. Wenker Managing Director None
Darrell L. Westby Managing Director None
David R. Westcott Managing Director None
Douglas R. Whitaker Managing Director None
Douglas H. Wilford Managing Director None
Stephen W. Woodard Managing Director None
Mark Wren Managing Director None
Saul Yaari Managing Director None
The principal business address of each of the individuals listed above is Piper
Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402-3804.
Item 30. Location of Accounts and Records
The physical possession of the accounts, books, and other documents required to
be maintained by Section 31(a) of the Investment Company Act of 1940 and Rules
3la-1 to 3la-3 promulgated thereunder is maintained by the Registrant at Piper
Jaffray Tower, 222
South Ninth Street, Minneapolis, Minnesota 55402-3804, except that the physical
possession of certain accounts, books and other documents related to the custody
of the Registrant's securities is maintained by Investors Fiduciary Trust
Company, 127 West Tenth Street, Kansas City, Missouri 64105.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
(a) Not applicable.
(b) Not applicable.
(c) Each recipient of a prospectus of any series of the Registrant may request
the latest Annual Report and such Annual Report will be furnished by the
Registrant without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement on Form N-1A pursuant to Rule 485(b) under the Securities
Act of 1933 and has duly caused this Registration Statement on Form N-1A to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Minneapolis and State of Minnesota on the 11th day of December 1995.
PIPER FUNDS INC. -- II
(Registrant)
By /s/ Paul A. Dow
Paul A. Dow
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
/s/ Paul A. Dow President (principal December 11, 1995
Paul A. Dow executive officer)
/s/ Charles N. Hayssen Treasurer (principal December 11, 1995
Charles N. Hayssen financial and
accounting officer)
David T. Bennett* Director
Jaye F. Dyer* Director
William H. Ellis* Director
Karol D. Emmerich* Director
Luella G. Goldberg* Director
George Latimer* Director
*By /s/ William H. Ellis December 11, 1995
William H. Ellis
Attorney-in-Fact
EXHIBIT INDEX
TO
REGISTRATION STATEMENT
OF
PIPER FUNDS INC. -- II
Exhibit Page No.
9.2 Shareholder Account Servicing Agreement
11 Consent of KPMG Peat Marwick LLP
17.2 Financial Data Schedule filed electronically as Exhibit 27
pursuant to Rule 401 of Regulation S-T
SHAREHOLDER ACCOUNT SERVICING AGREEMENT
THIS AGREEMENT, made this 13th day of December 1995, by and between Piper Funds
Inc.--II, a Minnesota corporation (the "Company"), on behalf of Adjustable Rate
Mortgage Securities Fund, the Company's sole series of common stock, and Piper
Jaffray Inc., a Delaware corporation ("Piper Jaffray").
WITNESSETH:
WHEREAS, the Company has entered into an Agency Agreement with Investors
Fiduciary Trust Company ("IFTC") pursuant to which IFTC was appointed as
Transfer Agent and Dividend Disbursing Agent for the Funds; and
WHEREAS, management of the Company has determined that it would be in the best
interests of each Fund and its shareholders to maintain with IFTC certain
omnibus accounts, with each such account representing the accounts of a number
of individual shareholders who maintain accounts with Piper Jaffray, and to have
Piper Jaffray provide transfer agent and dividend disbursing agent services for
such underlying individual shareholder accounts.
NOW, THEREFORE, in consideration of the premises and mutual covenants contained
herein, the parties hereto agree as follows:
1. Scope of Appointment.
(a) Subject to the conditions set forth in this Agreement, the Company
hereby appoints Piper Jaffray to perform certain transfer agent and
dividend disbursing agent services, and Piper Jaffray accepts such
appointment.
(b) Such services shall be provided with respect to all individual
shareholder accounts encompassed within the omnibus accounts
referenced above.
(c) Piper Jaffray agrees to provide the necessary facilities, equipment
and personnel to perform its duties and obligations hereunder in
accordance with industry practice.
(d) Piper Jaffray agrees to perform the usual and ordinary services of
transfer agent and dividend disbursing agent not performed by IFTC
with respect to the shareholder accounts outlined in Section 1(b),
including, without limitation, the following: maintaining all
shareholder accounts; preparing shareholder meeting lists; mailing
shareholder reports and prospectuses; tracking shareholder accounts
for blue sky and Rule 12b-1 purposes; withholding taxes on
non-resident alien and foreign corporation accounts; preparing and
mailing checks for disbursement of income dividends and capital gains
distributions; preparing and filing U.S. Treasury Department Form 1099
for all shareholders; preparing and mailing confirmation forms to
shareholders and dealers with respect to all purchases, exchanges and
liquidations of Fund shares and other transactions in shareholder
accounts for which confirmations are required; recording reinvestments
of dividends and distributions in Fund shares; recording redemptions
of Fund shares; and preparing and mailing checks for payments upon
redemption and for disbursements to withdrawal plan holders.
(e) Piper Jaffray shall perform all services relating to shareholder
transactions, share redemptions and maintaining shareholder accounts
on the same business day as the request for the transaction is
received. Piper Jaffray shall perform all services relating to payouts
of monies no later than three business days following the date of
receipt of the request for the transaction. Piper Jaffray shall
perform all services relating to the provision of confirmations no
later than three business days following the transaction. Any
activities not enumerated will be fulfilled no later than the time
required by applicable law. In each case the time standards will be
adjusted to meet any applicable requirements of law. The time frames
above include not only the performance of the activity, but the
appropriate quality control and mailing of the related checks,
confirms, letters or other documents.
Piper Jaffray will maintain records of its performance, available to the Company
for inspection upon reasonable notice.
2. Compensation. As compensation for the services to be provided by Piper
Jaffray hereunder, each Fund will pay to Piper Jaffray an annual per-account fee
as set forth in Exhibit A hereto. Such fee shall be payable on a monthly basis
at a rate of 1/12th of the annual per-account charge, with payment being made
within ten business days following the end of the month covered by such payment.
Such fee covers all services outlined in Section 1(d) with the exception of
preparing shareholder meeting lists and mailing shareholder reports and
prospectuses. These services, along with proxy processing (if applicable) and
other special service requests, will be billable as performed at a mutually
agreed upon fee in addition to the annual fee as noted, provided that such
mutually agreed upon fee shall be fair and reasonable in light of the usual and
customary charges made by others for services of the same nature and quality.
3. Records.
(a) Piper Jaffray will maintain customary records in connection with its
agency appointment hereunder, and in particular will maintain those
records required to be maintained pursuant to subparagraph 2(iv) of
paragraph (b) of Rule 31a-1 under the Investment Company Act of 1940,
as amended (the "1940 Act").
(b) To the extent required by Section 31 of the 1940 Act and the rules and
regulations thereunder, Piper Jaffray agrees that all records
maintained by Piper Jaffray relating to the services to be performed
by it under this Agreement are the property of the Company and will be
preserved in accordance with Rule 31a-2 under the 1940 Act and will be
surrendered promptly to the Company upon request.
4. Complaints and Regulatory Actions. Piper Jaffray and the Company shall
cooperate fully in any securities regulatory investigation or proceeding or
judicial proceeding with respect to Piper Jaffray, the Company, their affiliates
(as defined in the 1940 Act) and/or their agents, representatives or employees
to the extent that such investigation or proceeding is in connection with the
services subject to this Agreement. Without limiting the foregoing, the parties
shall notify each other promptly of the receipt of notice of any such
investigation or proceeding and of any customer complaint relating to or learned
of in the course of the provision of services subject to this Agreement.
In the case of any such customer complaint, Piper Jaffray and the Company and
their affiliates shall cooperate in investigating such complaint. Any response
to a customer complaint relating to the Company must be approved in writing by
the Company prior to it being sent to the customer or any regulatory authority.
The Company agrees to review any such response to such substantive complaint
prepared by Piper Jaffray within three (3) business days of its receipt by the
Company, except that, if a more prompt response is required, the Company shall
review such response within the required shorter time period. Any response by
Piper Jaffray to a customer complaint which relates to Piper Jaffray or its
affiliates shall be provided to the Company no later than the time it is
provided to the customer or any regulatory authority.
5. Fund Shares Held on Behalf of Piper Jaffray Clients. Fund shares held by
Piper Jaffray on behalf of a client of Piper Jaffray shall be carried in a
custody account for the exclusive benefit of clients of Piper Jaffray and shall
not be subject to any right, charge, security interest, lien or other claim
against Piper Jaffray in favor of the Company or any Fund.
6. Indemnification.
(a) Piper Jaffray will not be responsible for, and the Company will hold
harmless and indemnify Piper Jaffray from and against, any loss by or
liability to the Company or a third party, including attorneys' fees,
in connection with any claim or suit asserting any such liability
arising out of or attributable to actions taken by Piper Jaffray
pursuant to this Agreement, unless Piper Jaffray has acted negligently
or in bad faith. Without limitation of the foregoing:
(i) at any time Piper Jaffray may apply to any officer of the Company
for instructions, and may consult with legal counsel for the
Company or its own legal counsel at the expense of the Company,
with respect to any matter arising in connection with its agency,
and Piper Jaffray will not be liable for any action taken or
omitted by it in good faith reliance upon such instructions or
upon the opinion of such counsel; and
(ii) Piper Jaffray may rely upon and will be protected in acting upon
any paper or document reasonably believed by it to be genuine and
to have been signed by the proper person or persons and will not
be held to have notice of any change of authority of any person
until receipt of written notice thereof from the Company.
(b) Piper Jaffray will hold harmless and indemnify the Company from and
against any loss or liability arising out of Piper Jaffray's failure
to comply with the terms of this Agreement or arising out of Piper
Jaffray's negligence, misconduct or bad faith.
7. Interpretation; Governing Law. This Agreement shall be subject to and
interpreted in accordance with all applicable provisions of law, including,
without limitation, the 1940 Act and the rules and regulations promulgated
thereunder. To the extent the provisions herein contained conflict with any such
applicable provisions of law, the latter shall control. The laws of the State of
Minnesota shall otherwise govern the construction, validity and effect of this
Agreement.
8. Effective Date; Duration; Termination.
(a) This Agreement shall be effective as of the date first set forth
above.
(b) Unless sooner terminated as hereinafter provided, this Agreement shall
continue in effect from year to year but only so long as such
continuance is specifically approved at least annually by the Board of
Directors of the Company, including a majority of the Directors who
are not parties to this Agreement or "interested persons" of any such
party (as defined in the 1940 Act), by vote cast in person at a
meeting called for the purpose of voting on such approval.
(c) This Agreement may be terminated at any time without the payment of
any penalty by either party upon not less than 60 days' written notice
to the other party. Upon the effective termination date, Piper Jaffray
shall make available to the Company or its designated record keeping
successor all of the records of the Company maintained under this
Agreement then in Piper Jaffray's possession.
(d) This Agreement shall automatically terminate in the event of its
assignment (as defined by the provisions of the 1940 Act) unless such
assignment is approved in advance by the Board of Directors, including
a majority of the directors of the Company who are not parties to this
Agreement or "interested persons" of any such party (as defined in the
1940 Act).
9. Amendments. No material amendment to this Agreement shall be effective until
approved by Piper Jaffray and by a vote of the Board of Directors of the
Company, including a majority of the Directors who are not parties to this
Agreement or "interested persons" of any such party (as defined in the 1940
Act).
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed
by their duly authorized officers as of the day and year first above written.
ATTEST: PIPER FUNDS INC.--II
/s/ Brian Patterson By /s/ Robert H. Nelson
Its Senior Vice President
ATTEST: PIPER JAFFRAY INC.
/s/ Brian Patterson By /s/ William H. Ellis
Its President
EXHIBIT A TO SHAREHOLDER ACCOUNT SERVICING AGREEMENT
SCHEDULE OF CHARGES
Fund Per Account Charge
Adjustable Rate Mortgage $7.50 per active account
Securities Fund $1.60 per closed account
An active account is defined as an account that has a balance of shares. A
closed account is defined as an account that does not have a balance of shares
but has had activity within the past 12 months.
Independent Auditors' Consent
The Board of Directors
Piper Funds Inc. -- II:
We consent to the use of our report dated October 13, 1995 incorporated by
reference herein and to the references to our Firm under the headings "FINANCIAL
HIGHLIGHTS" in Part A and "FINANCIAL STATEMENTS" in Part B of the Registration
Statement.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Minneapolis, Minnesota
December 18, 1995
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-END> AUG-31-1995
<INVESTMENTS-AT-COST> 426,348,437
<INVESTMENTS-AT-VALUE> 422,173,937
<RECEIVABLES> 12,313,836
<ASSETS-OTHER> 101,944
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 434,589,717
<PAYABLE-FOR-SECURITIES> 25,109,375
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 174,217
<TOTAL-LIABILITIES> 25,283,592
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 460,575,492
<SHARES-COMMON-STOCK> 47,066,117
<SHARES-COMMON-PRIOR> 56,689,836
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (49,785,764)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (4,174,500)
<NET-ASSETS> 409,306,125
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 29,208,596
<OTHER-INCOME> 300,962
<EXPENSES-NET> 2,625,900
<NET-INVESTMENT-INCOME> 23,497,426
<REALIZED-GAINS-CURRENT> (20,761,474)
<APPREC-INCREASE-CURRENT> 17,558,315
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</TABLE>
